Corpo Case Digest-Atty. Leynes (G01-Batch3-Dlsulaw) PDF

CORPORATION LAW
Case Digest
CORPORATION LAW
ATTY. NESTOR M. LEYNES, III
(Based on the Outline of J. Jose Campos, Jr. and Prof. Ma. Clara L. Campos)
I. Introduction
Definition and Attributes of a Corporation
Kinds of Business Organizations and their Differences
Sole Proprietorship – Excellent Quality Apparel, Inc. v. Win Multiple-Rich Builders, Inc., 578 SCRA 272
(2009)
Partnerships – Articles 1767 and 1768 of Civil Code
Defect in Forming a Corporation - Pioneer Insurance v. CA, 175 SCRA 668 (1989)
Corporation by Estoppel - Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999)
Joint Venture – Kilosbayan v Guingona, 232 SCRA 110 (1994)
Cooperatives – Article 3, RA No. 6938
Jurisdiction of the SEC
Union Glass v. SEC, 126 SCRA 32 (1983)

Abejo v. De la Cruz, 149 SCRA 654 (1987)
SEC v. CA, 246 SCRA 738 (1995)
Magalad v. Premiere Financing, 209 SCRA 266 (1992)
II. Classification of Private Corporations
Stock v. Non-Stock Corporations
CIR v. Club Filipino, 5 SCRA 321 (1962)
Other Matters
NDC v. Phil. Veterans Bank, 192 SCRA 257 (1990)

Pioneer Insurance v. CA, 175 SCRA 668 (1989)
III. Formation and Organization of Corporation
Requirements in the Formation of a Corporation
Steps in the Formation of a Corporation
(a) Promotion
(b) Drafting of Articles of Incorporation
(i) Corporate Name
Lyceum of the Phils. v. CA, 219 SCRA 610 (1993)
G01, Batch 3, DLSU Law

Atty. Nestor Leynes III’s Corporation Law Syllabus
CORPORATION LAW
Case Digest
(ii) Purpose Clause
(iii) Principal Office
(iv) Term of Existence
(v) Incorporators and Directors; Numbers and Qualifications
(vi) Capital Stock; Subscription; Payment
(c) Filing of Articles; Payment of Fees
(d) Examination of Articles; Approval or Rejection by SEC
(e) Issuance of Certificate of Incorporation
De Facto Corporations: Requisites
(a) User of Corporate Powers
(b) Formation under apparently Valid Statute
Municipality of Malabang v. Benito, 27 SCRA 533 (1969)
(c) Colorable Compliance with the Legal Requirements in Good Faith
Bergeron v. Hobbs, 96 Wis 641 (1897)

Harril v. Davis, 168 F 187 (1909)
Hall v. Piccio, 86 Phil 603 (1950)
Corporation by Estoppel
Empire Mfg. v. Stuart, 9 N.W. 527 (1881)

Lowell-Woodward v. GR Woods, 104 Kan 729 (1919)
Asia Banking Corp. v. Standard Products, 46 Phil 145 (1924)
Cranson v. IBM, 234 Md 477 (1964)
Salvatierra v. Garlitos, 103 Phil 757 (1958)
Albert v. University Publishing Co., Inc. ,13 SCRA 84 (1965)
Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999)
(4) Internal Organization: By-Laws
Fleischer v. Botica Nolasco, 47 Phil 583 (1925)

Gov’t of the Phils. v. El Hogar, 50 Phil 399 (1927)
IV. The Corporate Entity
The Theory of Corporate Entity
Stockholders of T. Guanzon v. Register of Deeds, 6 SCRA 373 (1962)

Caram v. CA, 151 SCRA 372 (1987)
Palay v. Clave, 124 SCRA 640 (1983)
Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005)
Magsaysay v. Labrador, 180 SCRA, 266 (1989)
Application of Theory
(a) Interlocking Directors and Same Shareholders

CORPORATION LAW
Case Digest
Sunio v. NLRC, 127 SCRA 390 (1984)
Laguio v. NLRC, 262 SCRA 715 (1996)
(b) Corporate Officers
Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991)

Intestate Estate of Alexander T. Ty v. CA, 356 SCRA 61 (2001)
(c) Dealings between Corporation and Stockholder
LBP v. CA, 364 SCRA 375 (2001)
(d) Obligations
Traders Royal Bank v. CA, 177 SCRA 788 (1989)

CKH Industrial and Dev. Corp. v. CA, 272 SCRA 333 (1997)
Piercing the Corporate Veil
Source: US v. Milwaukee Refrigerator Transit Co., 142 Fed. 247
(a) Contrary to Law / Public Policy; Evasion of Liability to Government
State v. Standard Oil, 142 Fed 247 (1905)

Laguna Trans. v. SSS, 107 Phil 833 (1960)
Marvel Bldg. Corp. v. David, 94 Phil 376 (1954)
(b) Evasion of Liability to Creditors
Tan Boon Bee v. Jarencio, 163 SCRA 205 (1975)

Namarco v. Associated Financing, 19 SCRA 962 (1967)
Jacinto v. CA, 198 SCRA 211 (1991)
(c) Evasion of Liability / Obligation to Employees
Claparols v. CIR, 65 SCRA 613 (1975)

Indophil Textile Mills v. Calica, 205 SCRA 697 (1992)
NAFLU v. Ople, 143 SCRA 125 (1986)
(d) Evasion of Liability on Contract
Villa-Rey Transit v. Ferrer, 25 SCRA 845 (1968)
(e) Close Corporations
Cease v. CA, 93 SCRA 483 (1979)

Delpher Trades v. CA, 157 SCRA 349(1988)
(f) As a Remedy
PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001)

Umali v. CA, 189 SCRA 529 (1990)
DBP v. CA, 363 SCRA 307 (2001)
General Credit Corp v. Alsons Dev & Investment Corp., 513 SCRA 225 (2007)

CORPORATION LAW
Case Digest
Parent-Subsidiary Relationship
Garrett v. Southern Railway, 173 F.Supp E.d. Tenn (1959)

Koppel (Phils.) v. Yatco, 77 Phil 496 (1946)
Liddell v. CIR, 2 SCRA 632 (1961)
Yutivo v. CTA, 1 SCRA 160 (1961)
Philvidec v. CA, 181 SCRA 669 (1990)
La Campana Coffee Factory v. Kaisahan, 93 Phil 160 (1953)
V. Promoter’s Contracts Prior to Incorporation
Liability of Corporation for Promoter’s Contracts
McArthur v. Times Printing Co., 51 N.W. 216 (1892)

Clifton v. Tomb, 21 F 2d 893 (1921)
Cagayan Fishing Co. v. Sandiko, 65 Phil 223 (1937)
Corporate Rights under Promoter’s Contracts
Builders’ Duntile v. Dunn, 229 K.Y. 569 (1929)

Rizal Light & Ice Co. v. PSC and Morong Electric, 25 SCRA 258 (1968)
Pioneer Insurance v. CA, 175 SCRA 668 (1989)
Personal Liability of Promoter on Pre-Incorporation Contracts
Wells v. Fay & Egan, 143 GA 732 (1915)

How & Associates, Inc. v. Boss, 222 F. Supp 939 (1963)
Quaker Hill v. Parr, 148 Colo 45 (1909)
Compensation of Promoters
Fiduciary Relationship between Corporation and Promoter
• Old Dominion v. Bigelow, 203 Mass 159 (1909)
VI. Corporate Powers
General Powers of Corporation

Specific Powers of Corporation
Implied Powers
The Ultra Vires Doctrine
Republic of the Phils. v. Acoje Mining Co., 7 SCRA 361 (1963)

Carlos v. Mindoro Sugar Co., 57 Phil 343 (1932)
Govt. of the Phils. v. El Hogar, 50 Phil 399 (1927)
Bissel v. Michigan Southern, 22 N.Y. 258 (1860)
Pirovano v. De la Rama Steamship, 96 Phil 385 (1954)
Harden v. Benguet Consolidated Mining, 58 Phil 141 (1933)
VII. Control and Management of Corporation
Allocation of Power and Control
Citibank NA v. Chua, 220 SCRA 75 (1993)

Filipinas Port Services v. Go, 518 SCRA 453 (2007)

CORPORATION LAW
Case Digest
Who Exercises Corporate Powers
(a) Board of Directors or Trustees
Ramirez v. Orientalist Co. and Fernandez, 38 Phil 634 (1918)

Lopez v. Ericta, 45 SCRA 539 (1972)
Zachary v. Milin, 294 Mic 662 (1940)
PNB v. CA, 83 SCRA 237 (1978)
(b) Corporate Officers and Agents
Yu Chuck v. Kong Li Po, 46 Phil 608 (1924)

The Board of Liquidators v. Heirs of Maximo Kalaw, 20 SCRA 987 (1967)
Zamboanga Transportation v. Bachrach Motor Co., 52 Phil 244 (1928)
Acuna v. Batac Producers Cooperative Marketing Assoc., 20 SCRA 526 (1967)
(c) Board Committees
Hayes v. Canada, Atlantic & Plant S.S. Co., Ltd., 181 F 289 (1910)
(d) Stockholders or Members
BOD and Elec. Comm. of SMB v. Tan, 105 Phil 289 (1959)
Johnston v. Johnston, 61 OG No. 39 (1965)
Ponce v. Encarnacion, 94 Phil 81 (1953)
Detective & Protective Bureau v. Cloribel, 26 SCRA 295(1968)
Gokongwei v. SEC, 89 SCRA 336 (1979)
Roxas v. dela Rosa, 49 Phil 609 (1926)
Angeles v. Santos, 64 Phil 697 (1937)
Campbell v. Loew’s Inc., 134 A. 2d 852 (1957)
Dela Rama v. Ma-ao Sugar Central, 27 SCRA 247 (1969)
Exercise of Corporate Powers
(a) Business Judgment Rule (see also Chapter VIII of this Outline)
Cua Jr. v. Tan, 607 SCRA 645 (2009)
(b) Theory of Estoppel
Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003)
(c) Doctrine of Laches
Rovels Enterprises Inc. v. Ocampo, 391 SCRA 176 (2002)
(d) Doctrine of Apparent Authority
Westmont Bank v. Inland Construction and Dev. Corp., 582 SCRA 230 (2009)
Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991)
Devices Affecting Control
(a) Proxy Device
State ex rel. Everett Trust v. Pacific Waxed Paper, 22 Wash 2d 844 (1945)

CORPORATION LAW
Case Digest
Duffy v. Loft, 17 Del. Ch. 140 (1930)
GSIS v. CA, 585 SCRA 679 (2009)
(i) Who Pays?
• Campbell v. Loew’s Inc., 134 A. 2d 852 (1957)

• Rosenfeld v. Fairchild Engine, 309 N.Y. 168 (1955)
(b) Voting Trust
Abercrombie v. Davies, 36 Del. Ch. 37 (1957)

Everett v. Asia Banking, 49 Phil 512 (1927)
Mackin v. Nicollet Hotel, Inc., 25 F. 29 783 (1928)
NIDC v. Aquino, 163 SCRA 153 (1988)
(c) Pooling and Voting Agreements
Ringling v. Ringling Bros., 29 Del. Ch. 318 (1948)

Buck Retail Store v. Harkert, 157 Neb 867 (1954)
McQuade v. Stoneham, 263 N.Y. 323 (1934)
Clark v. Dodge, 269 N.Y. 410 (1936)
(d) Cumulative Voting
(e) Classification of Shares
Gottschalk v. Avalon Realty, 249 Wis 78 (1946)
(f) Restriction on Transfer of Shares
(g) Prescribing Qualifications for Directors; Founder’s Shares
cf. Gokongwei v. SEC, 89 SCRA 336 (1979)
(h) Management Contracts
Sherman & Ellis, Inc. V. Indiana Mutual Casualty, 41 F. 2d 588 (1930)
(i) Unusual Voting and Quorum Requirements
Benintendi v. Kenton Hotel, 294 N.Y. 112 (1945)
VIII. Duties of Directors and Controlling Stockholders
Duties of Directors
Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2000)
Duty of Diligence: Business Judgment Rule
Cua Jr. v. Tan, 607 SCRA 645 (2009)

Otis & Co. v. Pennsylvania Railroad, 61 F Supp 905 (1945)
Montelibano v. Bacolod-Murcia Milling, 5 SCRA 36 (1962)
Litwin v. Allen, 25 N.Y.S. 2d 667 (1940)
Walker v. Man, 253 N.Y.S. 2d 458 (1931)
Steinberg v. Velasco, 52 Phil 1953 (1929)
Barnes v. Andrews, 298 F. 614 (1924)
CORPORATION LAW
Case Digest
Pool v. Pool, 22 SO. 2d 131 (1945)
Foster v. Bowen, 311 Mass 359 (1942)
Lowell Hoit & Co. v. Detig, 50 N.E. 2d 602 (1943)
Bates v. Dresser, 251 US. 524, 64 L.Ed 388, 40 S. Ct. 247 (1919)
Carag v. NLRC, 520 SCRA 28 (2007)
Sanchez v. Republic, 603 SCRA 229 (2009)
(a) The Self-Dealing Director
Palting v. San Jose Petroleum, Inc., 18 SCRA 924 (1966)

Mead v. McCullough, 21 Phil 95 (1911)
Piccard v. Sperry Corporation, 90 L.O. 943 (1946)
(b) Fixing Compensation of Directors and Officers
Govt. v. El Hogar, 50 Phil 399 (1927)

Barretto v. La Previsora, 57 Phil 649 (1932)
Central Coop Exchange v. Tibe, 33 SCRA 596 (1970)
Fogelson v. American Woolen Co., 170 F 2d 660 (1948)
Kerbs v. California Eastern Airways, 90 A 2d 652 (1952)
(c) Using Inside Information
Strong v. Repide, 41 Phil 947 (1909)

Taylor v. Wright, 159 P. 2d 980 (1945)
(d) Seizing Corporate Opportunity
Singer v. Carlisle, 27 NYS 2d 190 (1941)

Irving Trust v. Deutsch, 79 L.Ed 1243 (1935)
Litwin v. Allen, 25 NYS 2d 667 (1940)
(e) Interlocking Drectors
Globe Woolen Co. V. Utica Gas & Electric, 121 NE 378 (1918)
DBP v. CA, 363 SCRA 307 (2001)
(2) Close Corporation
(3) Duty of Controlling Interest
Insuranshares Corp. v. Northern Fiscal Corporation, 35 F. Supp 22 (1940)
(4) Duty to Creditors
IX. The Right Of Inspection
(1) Basis of Right
(2) What Records Covered
(3) Extent of and Limitations on Right – Africa v. PCGG, 205 SCRA 39 (1992)
(4) Who May Exercise Right
(5) Remedies Available if Inspection Refused

CORPORATION LAW
Case Digest
Pardo v. Hercules Lumber, 47 Phil 964 (1924)
Gonzales v. PNB, 122 SCRA 489 (1983)
Veraguth v. Isabela Sugar Co., 57 Phil 266 (1932)
Cojuangco v. Roxas, 195 SCRA 797 (1991)
IX. Derivative Suits
Nature and Basis of Derivative Suit: Distinguished from Individual and Representative Suit
Hi-Yield Realty, Inc. v. CA, 590 SCRA 548 (2009)
(2) Requirements Relating to Derivative Suits
Evangelista v. Santos, 86 Phil 387 (1950)

Republic Bank v. Cuaderno, 19 SCRA 671 (1967)
Reyes v. Tan, 3 SCRA 198 (1961)
SMC v. Kahn, 176 SCRA 447 (1989)
X. Financing the Corporation
Sources of Financing
Capital Structure
Capital and Capital Stock Distinguished
Shares of Stock: Kinds
(a) Common Stocks
(b) Preferred Stocks
(i) Preference as to Dividends
Participating v. Non-participating
Cumulative v. Non-Cumulative
Discretionary Dividend Type
Mandatory Dividend Type
Earned Cumulative or Dividend Credit Type
(ii) As to Voting Right
Ellingwood v. Wolf’s Head Oil Refining, 30 A. 2d 743 (1944)

Gamboa v. Teves, G.R. 176579, 28 June 2011
(iii) Preference upon Liquidation
Hay v. Hay, 230 P. 2d 791 (1951)
(iv) Preferred Stockholder is Not a Creditor
Augusta Trust Co. v. Augusta Hallowell, 134 Me. 314 (1938)
(c) Par or No Par Shares

CORPORATION LAW
Case Digest
(d) Treasury Shares
(e) Redeemable Shares
(f) Founder’s Shares
Nature of Subscription Contract
Garcia v. Lim Chu Sing, 59 Phil 565 (1934)
(a) Pre-incorporation Subscription
Utah Hotel Co. V. Madsen, 134 Pac 557 (1913)

Wallace v. Eclipse Pocahontas Coal Co., 98 SE. 293 (1919)
(b) Post-incorporation subscription
Bayla v. Silang Traffic Co., 73 Phil 557 (1942)
The Pre-Emptive Right to Shares
(a) Basis of Right
(b) Extent and Limitations under Code
(c) In Close Corporations
(d) Waiver of Pre-emptive Right
(e) When Issue is in Breach of Trust
(f) Remedies when Denied
Stokes v. Continental Turst Co., 186 NY 285 (1906)

Thom v. Baltimore Trust Co., 148 AH 234 (1930)
Fuller v. Krogh, 113 N.N. 2d 25 (1962)
Dunslay v. Avenue M. Garage & Repair, 170 N.E. 917 (1930)
Ross Transport Inc. v. Crothers, 45 A.2d 267 (1946)
Debt Securities
(a) Form of Borrowings
(b) Bonds and Debentures
(c) Convertible Securities; Stock Options
Meritt-Chapman & Scott Corp. v. New York Trust Co., 184 F. 2d 954 (1950)
(d) Hybrid Securities
John Kelley Co. v. CIR, 90 L.Ed 278 (1946)

Jordan Co. v. Allen, 85 F. Supp 437 (1949)
(e) The Trust Indenture
Aladdin Hotel Co. v. Bloom, 200 F.2d 627 (1953)

CORPORATION LAW
Case Digest
XI. Consideration for Issuance of Shares
Form of Consideration
Liability on Watered Stocks
Triplex Shoe Co. v. Rice & Hutchins, Inc., 72 A.L.R 932 (1930)
McCarty v. Langdeau, 337 S.W. 2d 407 (1960)
Rhode v. Dock-hop Co., 12 A.L.R 437 (1920)
Bing Crosby Minute Maid Corp. v. Eaton, 297 P. 2d5 (1950)
How Payment of Shares Enforced
(a) Delinquency Sale; Requisites
(b) Court Action
Velasco v. Poizat, 37 Phil 802 (1918)

Lingayen Gulf Electric v. Baltazar, 14 SCRA 522 (1965)
Miranda v. Tarlac Rice Mill Co., G.R. No. L-35961 02 December 1932
Da Silva v. Aboitiz, 44 Phil 755 (1923)
National Exchange v. Dexter, 57 Phil 601(1928)
Lumanlan v. Cura, 59 Phil 746 (1934)
Effect of Delinquency
Rights and Obligations of Holders of Unpaid but Non-delinquent Stock
Fua Cun v. Summers, 44 Phil 704 (1923)

Baltazar v. Lingayen Gulf Electric Power, 14 SCRA 522 (1965)
Nava v. Peers Marketing, 74 SCRA 65 (1970)
Certificate of Stock
Makati Sports Club, Inc. v. Cheng, 621 SCRA 103 (2010)

Republic v. Estate of Hans Menzi, 475 SCRA 20 (2005)
Lost or Destroyed Certificate
See SEC Opinion dated 28 January 1999 addressed to Ms. Ma. Cecilia Salazar-Santos
XII. Dividends and Purchase by Corporation of its Own Shares
Form of Dividends
Nielson & Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540 (1968)
Source of Dividends
Berks Broadcasting Co. v. Crammer, 52 A. 2d 571 (1947)

Lich v. United States Rubber, 39 F. Supp 675 (1941)
Dividend Declaration Discretionary with Board
Keough v. St. Paul Milk Co., 285 N.W. 809 (1939)

Dodge v. Ford Motor Co., 170 N.W. 668 (1919)

CORPORATION LAW
Case Digest
Preference as to Dividends
Wabash Railway Co. V. Barclay, 67 A.L.R. 762 (1930)

Burk v. Ottawa Gas & Electric Co., 123 Pac 875 (1912)
When Right to Dividends Vests; Rights of Transferee
McClaran v. Crescent Planning Mill, 93 S.W. 819 (1906)

Cojuangco v. Sandiganbayan, 586 SCRA 790 (2009)
Liability for Illegal Dividends
Purchase by Corporation of its Own Shares
XIII. Amendments of Charter
Amendment by Legislature
Amendment by Stockholders
(a) Limitations on Power
(b) Grounds for Rejection of Amendment
(c) Amendment Changing Stockholder’s Rights
Marcus v. RH Macy, 74 N.E. 2d 228 (1947)
(d) Effectivity of Amendment
(e) Special Amendments
(1) Increase of Capital Stock
(2) Decrease of Capital Stock
Philippine Trust Co. v. Rivera, 44 Phil 469 (1923)
(3) Change in Corporate Term
(f) Amendments in Close Corporations
XIV. Transfer of Shares
Manner and Effectivity of Transfer
(a) Indorsement of Stock Certificate; Registration in Corporate Books
Batangas Laguna Tayabas Bus Co. v. Bitanga, 362 SCRA 635 (2001)
(b) Effect of Lack of Registration
Uson v. Diosomito, 61 Phil 535 (1935)
(c) No Registration of Transfer of Unpaid Shares
(d) Remedy if Registration Refused

CORPORATION LAW
Case Digest
Rivera v. Florendo, 144 SCRA 647 (1986)
Restrictions on Transfer; Close Corporations
(a) General Rule: Free Transferability of Shares
(b) Exceptions: In Close corporations
(c) Intrinsic Validity of Various kinds of Restrictions
(1) Consent Restriction
(2) Option Restriction
(3) Prescribing Qualifications of Stockholders
(4) Redeemable Common Stock
(d) Formal Validity of Restrictions
Unauthorized Transfers
(a) Certificate Indorsed in Blank; When Quasi-negotiable
(b) Forged Transfers
Santamaria v. Hongkong & Shanghai Banking, 89 Phil 780 (1951)

De los Santos v. McGrath, Atty. General, 96 Phil 577 (1955)
Collateral Transfers
Chua Guan v. Samahang Magsasaka, 62 Phil 473 (1935)
Non-transferability and Termination of Membership in Non-stock Corporations
XV. Dissolution
Cause of Dissolution
(a) Expiration of Original, Extended or Shortened Term
(b) Voluntary Dissolution when no Creditors Affected
(c) Voluntary Dissolution when Creditors Affected
(d) Dissolution by Minority in Close Corporations
Financing Corporation v. Teodoro, 93 Phil 404 (1953)

(e) Failure to Organize and Commence Business; Cessation of Business for 5 years
Benguet Consolidated Mining Co. v. Pineda, 98 Phil 771 (1956) (defining “organize”)
Chung Ka Bio v. IAC, 163 SCRA 534 (1988)
(f) Involuntary Dissolution
(1) Revocation of Certificate of Registration by SEC

CORPORATION LAW
Case Digest
(2) Quo Warranto Proceedings
Republic v. Bisaya Land Trans. Co., 81 SCRA 9 (1978)
Effects of Dissolution; Winding up and liquidation
(a) Loss of Juridical Personality
National Abaca Corp. v. Pore, 2 SCRA 989 (1961)

Paramount Insurance Corp. v. AC Ordonez Corp., 561 SCRA 327 (2008)
(b) Executory Contracts
(c) Methods of Liquidation
(d) Distribution of Assets after Payment of Debts
China Banking Corp. v. Michelin & Co., 58 Phil 261 (1933)

Republic v. Marsman Development, 44 SCRA 418 (1972)
Tan Chiong Bio v. CIR, 4 SCRA 986 (1962)
Pepsi-Cola Products Phils., Inc. v. CA, 443 SCRA 571 (2004)
(3) Distribution of Assets of Non-stock corporations
XVII. Corporate Combinations
(1) Purposes of Combinations; Methods
(2) Merger and Consolidation
(a) Nature and Distinction
(b) Only De Facto Merger under Corporation Law
(c) Express Authority to Merge Granted by Code; Requirements
(d) Remedies of Creditors and Dissenting Stockholders; Appraisal Right
(3) Sale of Substantially all Assets
(a) Legal requirements
(b) No Assumption of Liabilities; Exceptions
(c) Remedies of Dissenting Stockholders; Appraisal Right
(d) Compared with Merger and Consolidation
Reyes v. Blouse, 91 Phil 305 (1952)

Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415 (1965)
PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002)
XVIII. Foreign Corporations
Definition, Status

CORPORATION LAW
Case Digest
Methods of Entry of Investment
Permitted Areas of Investment

(a) Partially Nationalized Areas
(b) Preferred Areas; Incentives for Investment
(c) Non-preferred Areas of Investment
Legal Requirements Prior to Transaction of Business
(a) BOI Certificate
(b) SEC License to do Business
(c) Certificate from Appropriate Government Agency
Effects of Failure to Secure SEC license
Marshall Wells v. Elser, 46 Phil 71 (1924)

Atlantic Mutual v. Cebu Stevedoring, 17 SCRA 1037 (1966)
General Garments Corp. v. Director of Patents, 41 SCRA 50 (1971)
Le Chemise Lacoste v. Fernandez, 129 SCRA 377 (1984)
Home Insurance v. Eastern Shipping, 123 SCRA 424 (1983)
What Constitutes Transacting Business
Mentholatum v. Mangaliman, 72 Phil 525 (1941)

Facilities Management Corp. v. de la Osa, 89 SCRA 131 (1979)
Merryl Lynch Futures v. CA, 211 SCRA 824 (1992)
Pacific Vegetable Oil v. Singson, G.R. No. 7917 (1955)
Aetna Casualty & Surety Co. v. Pacific Star Line, 80 SCRA 635 (1977)
Topweld Manuel v. ECED, 138 SCRA 120 (1985)
Antam Consolidated v. CA, 143 SCRA 289 (1980)
Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010)
How Courts Acquire Jurisdiction over Foreign Corporations
General Corp. of the Phils. v. Union Insurance, 87 Phil 313 (1950)
Laws Governing Licensed Foreign Corporations
Merger of Licensed Foreign Corporation
Withdrawal of Foreign Corporation
Revocation and Suspension of License
Existing Licensed Foreign Corporations
XIX. Special and Miscellaneous Provisions
Educational Corporations
(a) Stock or Non-stock
(b) Temporary Permit

CORPORATION LAW
Case Digest
(c) Government Recognition
(d) Special Requirement to be University
(e) Incorporation under the Code
(f) Educational Foundations
Religious Corporations
(a) Corporation Sole
(b) Religious Societies
Close Corporations
Miscellaneous Provisions
Note: Prescribed book will be the Campos

CORPORATION LAW
Case Digest
001 Excellent Quality Apparel, Inc. v. Win Multiple- AUTHOR: Arthur Archie Tiu
Rich Builders, Inc., -case involves a claim for a sum of money which arose from
February 10, 2009, G.R. No. 175048 a construction dispute.
TOPIC: Sole Proprietorship - would’ve continued if there was deed of assignment
PONTENTE: TINGA, J.
FACTS
1. On 26 March 1996, petitioner Excellent Quality Apparel, Inc. (petitioner) then represented by Max L.F. Ying, Vice-
President for Productions, and Alfiero R. Orden, Treasurer, entered into a contract with Multi-Rich Builders (Multi-Rich)
represented by Wilson G. Chua (Chua), its President and General Manager, for the construction of a garment factory
2. The construction of the factory building was completed on 27 November 1996.
3. Respondent Win Multi-Rich Builders, Inc. (Win) was incorporated with the (SEC) on 20 February 1997 with Chua as
its President and General Manager. On 26 January 2004, Win filed a complaint for a sum of money against petitioner and
Mr. Ying amounting to P8,634,448.20. It also prayed for the issuance of a writ of attachment claiming that Mr. Ying was
about to abscond and that petitioner was about to close.
4. Petitioner filed an Omnibus Motion claiming that it was neither about to close. It also denied owing anything to Win,
as it had already paid all its obligations to it. Lastly, it questioned the jurisdiction of the trial court from taking cognizance
of the case. Petitioner pointed to the presence of the Arbitration Clause and it asserted that the case should be referred to
the Construction Industry Arbitration Commission (CIAC) pursuant to Executive Order (E.O.) No. 1008.
5. on 10 February 2004, the counsel of Win moved that its name in the case be changed from “Win Multi-Rich Builders,
Inc.” to “Multi-Rich Builders, Inc.” It was only then that petitioner apparently became aware of the variance in the name of
the plaintiff. In the Reply[15] filed by petitioner, it moved to dismiss the case since Win was not the contractor and neither
a party to the contract, thus it cannot institute the case.
6. Win admitted that it was only incorporated on 20 February 1997 while the construction contract was executed on 26
March 1996. Likewise, it admitted that at the time of execution of the contract, Multi-Rich was a registered sole
proprietorship and was issued a business permit by the Office of the Mayor of Manila.
7. the RTC denied the motion and stated that the issues can be answered in a full-blown trial. Upon its denial, petitioner
filed its Answer and prayed for the dismissal of the case.
8. Petitioner filed a Motion for Reconsideration [29] which was subsequently denied in a resolution.
ISSUE: does Win have a legal personality to institute the present case;
HELD: No
RATIO:
- Win admitted that the contract was executed between Multi-Rich and petitioner. It further admitted that Multi-Rich
was a sole proprietorship with a business permit issued by the Office of the Mayor of Manila. A sole
proprietorship is the oldest, simplest, and most prevalent form of business enterprise.It is an unorganized business
owned by one person. The sole proprietor is personally liable for all the debts and obligations of the business.
- The original petition was instituted by Win, which is a SEC-registered corporation. It filed a collection of sum of
money suit which involved a construction contract entered into by petitioner and Multi-Rich, a sole proprietorship.
The counsel of Win wanted to change the name of the plaintiff in the suit to Multi-Rich. The change cannot be
countenanced. The plaintiff in the collection suit is a corporation. The name cannot be changed to that of a sole
proprietorship. Again, a sole proprietorship is not vested with juridical personality to file or defend an action.
- In order for a corporation to be able to file suit and claim the receivables of its predecessor in business, in this case
a sole proprietorship, it must show proof that the corporation had acquired the assets and liabilities of the sole
proprietorship. Win could have easily presented or attached any document e.g., deed of assignment which will
show whether the assets, liabilities and receivables of Multi-Rich were acquired by Win. Having been given the
opportunity to rebut the allegations made by petitioner, Win failed to use that opportunity. Thus, we cannot
presume that Multi-Rich is the predecessor-in-business of Win and hold that the latter has standing to institute the
collection suit.

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CASE LAW/ DOCTRINE:
1. A suit may only be instituted by the real party in interest. Section 2, Rule 3 of the Rules of Court defines “parties
in interest” in this manner: A real party in interest is the party who stands to be benefited or injured by the
judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise authorized by law or these
Rules, every action must be prosecuted or defended in the name of the real party in interest.

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Case Digest
002 Pioneer Insurance & Surety Corporation vs. Court AUTHOR: Chedelle Florido
of Appeals *Agreements have the force of law between the parties.
July 28, 1989 G.R. 84197 and G.R. 84157 (Herrera vs. Petrophil Corp., 146 SCRA 385)
TOPIC: Defect in forming a Corporation *The fact that there was a misunderstanding does not
PONENTE: GUTIERREZ, JR. convert the partnership into a sham organization.
(Monasque vs. CA, 139 SCRA 533)
FACTS
1. Jacob S. Lim owned (single proprietorship) Southern Air Lines (SAL).
2. On May 17, 1965, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract for the sale and
purchase of 2 DC-3A Type aircrafts and 1 set of necessary spare parts for the total agreed price of US $109,000.00 to be
paid in installments. Both aircrafts came in June and July 1965.
3. On May 22, 1965, Pioneer Insurance and Surety Corporation as surety executed and issued its Surety Bond No. 6639 in
favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts.
4. It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes
(Cervanteses) and Constancio Maglana contributed some funds used in the purchase of the above aircrafts and spare parts.
The funds were supposed to be their contributions to a new corporation proposed by Lim to expand his airline business.
5. They executed 2 separate indemnity agreements in favor of Pioneer, one signed by Maglana and the other jointly signed
by Lim for SAL, Bormaheco and the Cervanteses (stipulated that the indemnitors principally agree and bind themselves
jointly and severally to indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs,
damages, taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may incur in consequence of
having become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its successors and assigns, all
sums and amounts of money which it or its representatives should or may pay or cause to be paid or become liable to pay
on them of whatever kind and nature).
6. On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer a deed of chattel
mortgage as security for the suretyship (stipulated therein that Lim transfer and convey to the surety the two aircrafts). The
deed was duly registered with the Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics
Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law.
7. Lim defaulted on his subsequent installment payments. JDA requested payments from the surety. Pioneer paid a total
sum of P298,626.12.
8. On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary attachment
against Lim and respondents, the Cervanteses, Bormaheco and Maglana.
9. In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they were not
privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to litigation and
for recovery of the sums of money they advanced to Lim for the purchase of the aircrafts in question.
CFI - decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against all other
defendants.
CA - modified the trial court's decision in that the plaintiff’s complaint against all the defendants was dismissed. In all
other respects the trial court's decision was affirmed.
ISSUE: #1 WON a de facto partnership was formed by the parties (Lim, Cervanteses, Bormaheco and Maglana).
#2 WON persons who attempt, but fail, to form a corporation creates a partnership inter se.
HELD: : #1 NO.
#2 YES.

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RATIO:
#1 The record shows that the petitioner was acting on his own and not in behalf of his other would-be incorporators in
transacting the sale of the airplanes and spare parts. Hence, no de facto partnership was created among the parties which
would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation.
#2 While it has been held that as between themselves the rights of the stockholders in a defectively incorporated
association should be governed by the supposed charter and the laws of the state relating thereto and not by the rules
governing partners, it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on business
under the corporate name occupy the position of partners inter se. Thus, where persons associate themselves together under
articles to purchase property to carry on a business, and their organization is so defective as to come short of creating a
corporation within the statute, they become in legal effect partners inter se, and their rights as members of the company to
the property acquired by the company will be recognized.
** However, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their purpose is that no partnership shall exist (London Assur. Corp. v. Drennen,
Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be implied only when necessary to do justice between
the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally
formed does not become a partner with other subscribers who engage in business under the name of the pretended
corporation, so as to be liable as such in an action for settlement of the alleged partnership and contribution (Ward v.
Brigham, 127 Mass. 24).
CASE LAW/ DOCTRINE:
*Agreements have the force of law between the parties. (Herrera vs. Petrophil Corp., 146 SCRA 385)
*The fact that there was a misunderstanding does not convert the partnership into a sham organization. (Monasque vs. CA,
139 SCRA 533)
* A partnership relation between certain stockholders and other stockholders, who were also directors, will not be implied
in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally contracted by
the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).

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Case Digest
003 Lim Tong Lim v. Philippine Fishing Gear AUTHOR: De Silva, Denison
Industries, Inc. Note: Corporation by Estoppel: Those who act or purport to
(November 3, 1999, G.R. No. 136448) act as the representatives or agents of an ostensible (sham)
TOPIC: Corporation by Estoppel entity who is prove to be legally inexistent do so without
PONENTE: Panganiban, J. authority and at their own risk.
FACTS:
1. Antonio Chua and Peter Yao entered into a Contract for the purchase of fishing nets of various sizes from the Philippine
Fishing Gear Industries, Inc. (respondent). They claimed that they were engaged in a business venture with Petitioner Lim
Tong Lim, who however was not a signatory to the agreement. The total price of the nets amounted to P532, 045.
2. The buyers, failed to pay for the fishing nets and the floats; hence, private respondent filed a collection suit against
Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment.
3. The suit was brought against the three in their capacities as general partners, on the allegation that “Ocean Quest Fishing
Corporation” was a nonexistent corporation as shown by a Certification from the Securities and Exchange Commission.
4. The lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on
board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.
5. Chua filed a Manifestation admitting his liability and requesting a reasonable time within which to pay, while Peter Yao
filed an Answer, after which he was deemed to have waived his right to cross-examine witnesses and to present evidence
on his behalf.
6. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and Crossclaim and moved for the lifting of the
Writ of Attachment. The trial court maintained the Writ, and upon motion of private respondent, ordered the sale of the
fishing nets at a public auction. Respondent won the public bidding. The trial court ruled that the three were liable jointly.
7. The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint
liability could be presumed from the equal distribution of the profit and loss.
8. Lim appealed to the Court of Appeals (CA) which affirmed the decision of the RTC. ( CA found that they undertook a
partnership)
9. Petitioner Lim appealed to the Supreme Court
ISSUE:
1. Whether or not Petitioner Lim Tong Lim, Chua and Yao could be deemed to have entered into a partnership?
2. Whether Chua and Yao are the only parties liable by reason of the doctrine of corporation by estoppel?
HELD:
1. Yes, the facts as found by the two lower courts clearly showed that there existed a partnership among Chua, Yao
and him, pursuant to Article 1767 of the Civil Code.
2. No, one who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the
ground that there was in fact no corporation.
RATIO:
1. Facts of the existence of a partnership:
• Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to join him, while
Antonio Chua was already Yao’s partner.
• Lim, Chua, and Yao verbally agreed to acquire two fishing boats, the FB Lourdes and the FB Nelson for
the sum of P3.35 million.
• They bought the boats from CMF Fishing Corporation.
• In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the
proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the
purchase and the repair of which were financed with borrowed money, fell under the term “common fund”
under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an
intangible like credit or industry.
2. Corporation by Estoppel
• Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua
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and Yao, and not to him.
• The Court held that under Section 21 of the Corporation Code, “One who assumes an obligation to an
ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no
corporation.”
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred
or arising as a result thereof: Provided however, That when any such ostensible corporation is sued on any
transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to
use as a defense its lack of corporate personality.
• As it is an elementary principle of law that a person who acts as an agent without authority or without a
principal is himself regarded as the principal, possessed of all the right and subject to all the liabilities of a
principal, a person acting or purporting to act on behalf of a corporation which has no valid existence
assumes such privileges and obligations and becomes personally liable for contracts entered into or for
other acts performed as such agent.
• Petitioner Lim having reaped the benefits of the contract entered into by persons with whom he previously
had an existing relationship, he is deemed to be part of said association and is covered by the scope of the
doctrine of corporation by estoppel.
• Petition DENIED.
CASE LAW/ DOCTRINE: Even if the ostensible corporate entity is proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. “The reason behind this doctrine is obvious - an unincorporated association
has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as
provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to
act as its representatives or agents do so without authority and at their own risk.”
DISSENTING/CONCURRING OPINION: Vitug, J.(Concurring)
“The association formed by Chua, Yao and Lim, should be, as it has been deemed, a de facto partnership with all the
consequent obligations for the purpose of enforcing the rights of third persons. The liability of general partners (in a
general partnership as so opposed to a limited partnership) is laid down in Article 1816 which posits that all partners shall
be liable pro rata beyond the partnership assets for all the contracts which may have been entered into in its name, under
its signature, and by a person authorized to act for the partnership. - consistently with the rules on the nature of civil
liability in delicts and quasi-delicts.”

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Case Digest
004 KILOSBAYAN V GUINGONA AUTHOR: Gelene Guevara
May 5, 1994, G.R. No. 113375 *Joint venture is defined as an association of persons or
TOPIC: Joint Venture companies jointly undertaking some commercial enterprise;
PONENTE: DAVIDE, JR., J. generally all contribute assets and share risks. It requires a
community of interest in the performance of the subject
matter, a right to direct and govern the policy in connection
therewith, and duty, which may be altered by agreement to
share both in profit and losses.
FACTS
1. In 1993, the Philippine Charity Sweepstakes Office decided to put up an on-line lottery system which will establish a
national network system that will in turn expand PCSO’s source of income.
2. A bidding was conducted where Philippine Gaming Management Corporation (PGMC) won. A contract of lease was
awarded in favor of PGMC.
3. Kilosbayan opposed the said agreement between PCSO and PGMC as it alleged that: (a) PGMC does not meet the
nationality requirement because it is 75% foreign owned (owned by a Malaysian firm Berjaya Group Berhad); (b)
PCSO, under Section 1 of its charter (RA 1169), is prohibited from holding and conducting lotteries “in
collaboration, association or joint venture with any person, association, company or entity”; (c) the network system
sought to be built by PGMC for PCSO is a telecommunications network. Under the law (Act No. 3846), a franchise
is needed to be granted by the Congress before any person may be allowed to set up such; and, (d) PGMC’s articles
of incorporation, as well as the Foreign Investments Act (R.A. No. 7042) does not allow it to install, establish and
operate the on-line lotto and telecommunications systems.
4. PGMC and PCSO, through Teofisto Guingona, Jr. and Renato Corona, Executive Secretary and Asst. Executive
Secretary respectively, alleged that PGMC is not a collaborator but merely a contractor for a piece of work, i.e., the
building of the network; that PGMC is a mere lessor of the network it will build as evidenced by the nature of the
contract agreed upon, i.e., Contract of Lease.
ISSUE: Whether or not the contract of lease is legal and valid.
HELD: The Court held that the challenged contract is not a contract of lease but a joint venture between PCSO and PGMC. It
is illegal and invalid for being contrary to law as it violates the exception provided for in paragraph B, Section 1 of R.A.
No. 1169, as amended by B.P. Blg. 42 which prohibits the PCSO from holding and conducting lotteries “in collaboration,
association or joint venture with any person, association, company or entity, whether domestic or foreign.”
RATIO:
The so-called Contract of Lease is not, therefore, what it purports to be. Its denomination as such is a crafty device,
carefully conceived, to provide a built-in defense in the event that the agreement is questioned as violative of the exception
in Section 1 (B) of the PCSO's charter. The acuity or skill of its draftsmen to accomplish that purpose easily manifests
itself in the Contract of Lease. It is outstanding for its careful and meticulous drafting designed to give an immediate
impression that it is a contract of lease. Yet, woven therein are provisions which negate its title and betray the true
intention of the parties to be in or to have a joint venture for a period of eight years in the operation and maintenance of the
on-line lottery system.
Consistent with the above observations on the RFP, the PCSO has only its franchise to offer, while the PGMC represents
and warrants that it has access to all managerial and technical expertise to promptly and effectively carry out the terms of
the contract. And, for a period of eight years, the PGMC is under obligation to keep all the Facilities in safe condition and
if necessary, upgrade, replace, and improve them from time to time as new technology develops to make the on-line lottery
system more cost-effective and competitive; exclusively bear all costs and expenses relating to the printing, manpower,
salaries and wages, advertising and promotion, maintenance, expansion and replacement, security and insurance, and all
other related expenses needed to operate the on-line lottery system; undertake a positive advertising and promotions
campaign for both institutional and product lines without engaging in negative advertising against other lessors; bear the
salaries and related costs of skilled and qualified personnel for administrative and technical operations; comply with
procedural and coordinating rules issued by the PCSO; and to train PCSO and other local personnel and to effect the
transfer of technology and other expertise, such that at the end of the term of the contract, the PCSO will be able to
effectively take over the Facilities and efficiently operate the on-line lottery system. The latter simply means that, indeed,
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the managers, technicians or employees who shall operate the on-line lottery system are not managers, technicians or
employees of the PCSO, but of the PGMC and that it is only after the expiration of the contract that the PCSO will operate
the system. After eight years, the PCSO would automatically become the owner of the Facilities without any other further
consideration.
For these reasons, too, the PGMC has the initial prerogative to prepare the detailed plan of all games and the
marketing thereof, and determine the number of players, value of winnings, and the logistics required to introduce the
games, including the Master Games Plan. Of course, the PCSO has the reserved authority to disapprove them. 68 And,
while the PCSO has the sole responsibility over the appointment of dealers and retailers throughout the country, the PGMC
may, nevertheless, recommend for appointment dealers and retailers which shall be acted upon by the PCSO within forty-
eight hours and collect and retain, for its own account, a security deposit from dealers and retailers in respect of equipment
supplied by it.
This joint venture is further established by the following:
(a) Rent is defined in the lease contract as the amount to be paid to the PGMC as compensation for the fulfillment of its
obligations under the contract, including, but not limited to the lease of the Facilities. However, this rent is not actually a
fixed amount. Although it is stated to be 4.9% of gross receipts from ticket sales, payable net of taxes required by law to be
withheld, it may be drastically reduced or, in extreme cases, nothing may be due or demandable at all because the PGMC
binds itself to "bear all risks if the revenue from the ticket sales, on an annualized basis, are insufficient to pay the entire
prize money." This risk-bearing provision is unusual in a lessor-lessee relationship, but inherent in a joint venture.
(b) In the event of pre-termination of the contract by the PCSO, or its suspension of operation of the on-line lottery system
in breach of the contract and through no fault of the PGMC, the PCSO binds itself "to promptly, and in any event not later
than sixty (60) days, reimburse the Lessor the amount of its total investment cost associated with the On-Line Lottery
System, including but not limited to the cost of the Facilities, and further compensate the LESSOR for loss of expected net
profit after tax, computed over the unexpired term of the lease." If the contract were indeed one of lease, the payment of
the expected profits or rentals for the unexpired portion of the term of the contract would be enough.
(c) The PGMC cannot "directly or indirectly undertake any activity or business in competition with or adverse to the On-
Line Lottery System of PCSO unless it obtains the latter's prior written consent." If the PGMC is engaged in the business
of leasing equipment and technology for an on-line lottery system, we fail to see any acceptable reason why it should allow
a restriction on the pursuit of such business.
(d) The PGMC shall provide the PCSO the audited Annual Report sent to its stockholders, and within two years from the
effectivity of the contract, cause itself to be listed in the local stock exchange and offer at least 25% of its equity to the
public. If the PGMC is merely a lessor, this imposition is unreasonable and whimsical, and could only be tied up to the fact
that the PGMC will actually operate and manage the system; hence, increasing public participation in the corporation
would enhance public interest.
(e) The PGMC shall put up an Escrow Deposit of P300,000,000.00 pursuant to the requirements of the RFP, which it may,
at its option, maintain as its initial performance bond required to ensure its faithful compliance with the terms of the
contract.
(f) The PCSO shall designate the necessary personnel to monitor and audit the daily performance of the on-line lottery
system; and promulgate procedural and coordinating rules governing all activities relating to the on-line lottery system.
The first further confirms that it is the PGMC which will operate the system and the PCSO may, for the protection of its
interest, monitor and audit the daily performance of the system. The second admits the coordinating and cooperative
powers and functions of the parties.
(g) The PCSO may validly terminate the contract if the PGMC becomes insolvent or bankrupt or is unable to pay its debts,
or if it stops or suspends or threatens to stop or suspend payment of all or a material part of its debts.

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Case Digest
005 Union Glass v. SEC and Carolina Holifeña AUTHOR: Myk Bercasio
November 28, 1983 G.R. No. L-64013 NOTES: Carolina Hofileña was a stockholder of Pioneer
TOPIC: Jurisdiction of the SEC Glass and the complainant in the case lodged before the
PONENTE: Escolin, J. SEC.
The Pioneer Glass was engaged in silica mines operation,
glass and glassware manufacturing.
FACTS
1. In 1967, Pioneer Glass obtained various loan accommodations from Development Bank of the Philippines (DBP) and
other local and foreign sources which DBP guaranteed.
2. As securities Pioneer Glass mortgaged and/or assigned its real and personal assets to DBP. Some of its corporate officers
also made loans over their personal assets for the company.
3. The proceeds of the loans were used in the construction of a glass plant in Rosario, Cavite and the operation of 7 silica
mining claims owned by the corporation.
4. The accumulated unpaid interests on various loans amounted to P5.4 million in January 1975 which increased by another
P2.2 million in 1976.
5. DBP was able to control the outstanding shares of common stocks of Pioneer Glass earning them 3 regular seats in the
corporation’s board of directors.
6. March 1978 - Pioneer Glass could no longer meet its financial obligations with DBP.
7. It entered into a dacion en pago agreement with DBP, whereby all its mortgaged assets, including the glass plant in
Cavite, were relinquished to DBP to satisfy Pioneer Glass’ obligation amounting to P59 million.
8. DBP sold the glass plant to Union Glass.
9. On 1 April 1981, Carolina Hofileña filed a complaint before the respondent Securities and Exchange Commission (SEC)
against the DBP, Union Glass and Pioneer Glass for the alleged illegality of the dacion en pago on the following
grounds:
[1] unilateral and unsupported undervaluation of the assets of Pioneer Glass covered by the agreement;
[2] self-dealing of DBP for acting both as stockholder/director and secured creditor of Pioneer Glass; and
[3] wrongful inclusion by DBP in its statement of account of P26M as due from Pioneer Glass when the same had
already been converted into equity.
10. There are 5 causes of action but Union Glass is concerned only with the first cause of action as transferee and
possessor of the glass plant.
11. Pioneer Glass moved for the dismissal of the case on the ground that SEC had no jurisdiction.
12. Reyes, the hearing officer, granted the motion to dismiss the case.
13. However, upon the motion for reconsideration of Hofileña he reversed his earlier decision.
14. Hence this petition.
ISSUE: Whether or not the Securities and Exchange Commission has jurisdiction over the case.
HELD: No. The joinder of Union Glass in the cause of action asserted against it brought it outside the jurisdiction of the
SEC because it has no intra-corporate relation with either the complainant or the DBP.
RATIO:
1.) Administrative agencies are tribunals of limited jurisdiction and must act only upon the power granted to them by
their enabling statutes.
2.) The jurisdiction of the SEC (Section 5) must be viewed in the light of the nature and function of SEC (Section 3).
3.) Taken together, the law specifies that the jurisdiction of the SEC are on matters connected with the regulation of
corporations, partnerships, and associations and those dealing with the internal affairs of these entities.
4.) The controversies that should be brought before it must pertain to any of the following relationships:
a) between the corporation, partnership or association and the public;
b) between the corporation, partnership or association and its stockholders, partners, members, or officers;
c) between the corporation, partnership or association and the state in so far as its franchise, permit or license
to operate is concerned; and
d) among the stockholders, partners or associates themselves.
5.) Even though the Rules of Court applies suppletorily to proceedings before the SEC (which allows the joinder of
cause of action) it is still subject to the rules regarding jurisdiction, venue, and joinder of parties.
6.) Union Glass has no intra-corporate relation with Hofileña which places the suit under the jurisdiction of the
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Case Digest
Regional Trial Court and not with the SEC. It cannot be joined as party-defendant in the case.
7.) WHAT SHOULD HAVE BEEN DONE ACCORDING TO THE SC: Hofileñas should have filed the
complaint against petitioner for cancellation of the sale of the glass plant before the Regional Trial Courts.
However, this would only be decided upon resolution of the SEC Case No. 2035 for the issue of the validity of
the dacion en pago because it is the logical antecedent of the issue against Union Glass.
CASE LAW/ DOCTRINE:
The principal function of the SEC is the supervision and control over corporations, partnerships and associations with the
end in view that investment in these entities may be encouraged and protected, and their activities pursued for the
promotion of economic development.
P.D. No. 902-A:

Section 3.
“absolute jurisdiction, supervision, and control over all corporations, partnerships or associations, who are grantees of
primary franchise and/or license or permit issued by the government to operate in the Philippines ...”
Section 5:
In addition to the regulatory and adjudicative function of the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as expressly granted under existing laws and devices, it shall
have original and exclusive jurisdiction to hear and decide cases involving:
a) Devices and schemes employed by or any acts, of the board of directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or
the stockholders, partners, members of associations or organizations registered with the Commission
b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members or
associates; between any or all of them and the corporation, partnership, or association of which they are
stockholders, members or associates, respectively; and between such corporation, partnership or association and
the state insofar as it concerns their individual franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations,
partnerships or associations.
DISSENTING/CONCURRING OPINION:
Aquino, J.
1) The petitioners are guilty of laches and non-exhaustion of the remedy of appeal with the Securities and Exchange
Commission en banc.
2) The joinder of Union Glass does not divest the SEC of jurisdiction over the case because as its transfer the
defenses of Union Glass are tied up with the defenses of the DBP in the intra-corporate dispute. Hofileñas cause of
action should not be split.
3) It would not be judicious and expedient to require Hofileña to sue the DBP and Union Glass in the Regional Trial
Court.
4) The SEC is more competent than the said court to decide the intra-corporate dispute.

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Case Digest
006 ABEJO v. DE LA CRUZ AUTHOR: Jelena
May 19, 1987, No. L-63558 Intra-corporate disputes are under the SEC’s jurisdiction.
TOPIC: Jurisdiction of the SEC
PONENTE: TEEHANKEE, C.J.
FACTS (2 consolidated cases)
1. Pocket Bell Philippines, Inc. (Pocket Bell) a tone and voice paging corporation.
2. Petitioner spouses Jose Abejo and Aurora Abejo (Abejos) are its principal stockholders.
3. Telectronic Systems, Inc. (Telectronics) purchased their 133,000 minority shareholdings for P5 million and 63,000
shares registered in the name of Virginia Braga which were covered by five stock certificates endorsed in blank by her for
P1,674,450.00.
4. Spouses Agapito Braga and Virginia Braga (Bargas) were the majority stockholders, but with the said purchases,
Telectronics would become the majority stockholder, holding 56% of the outstanding stock and voting power of Pocket
Bell.
5. With the said purchases, Telectronics requested the corporate secretary of the corporation, Norberto Braga (son of the
Bargas), to register and transfer to its name, and those of its nominees the total 196,000 Pocket Bell shares in the
corporation's transfer book, cancel the surrendered certificates of stock and issue the corresponding new certificates of
stock.
6. Braga refused to do so asserting and claiming pre-emptive rights over the 133,000 Abejo shares and that Virginia Braga
never transferred her 63,000 shares to Telectronics but had lost the five stock certificates representing those shares.
7. The parties filed independent actions with different jurisdictions.
8. The Bragas assert that the regular civil court has original and exclusive jurisdiction as against the Securities and
Exchange Commission, while the Abejos claim the contrary. (see RATIO for the actions filed**).
ISSUE: Who, between the CFI (now RTC) and the SEC, has original and exclusive jurisdiction over the dispute?
HELD: The SEC.

Disputes involving controversies between and among stockholders fall within the original and exclusive jurisdiction of the
SEC under Section 5 of PD 902-A. The dispute at bar is and intracorporate dispute that has arisen between and among the
principal stockholders of Pocket Bell Corporation. Filing of action for rescission and annulment of sale of stocks before the
RTC will in no way deprive the SEC of its primary and exclusive jurisdiction to grant or not the writ of mandamus
ordering the registration of shares so transferred. Stockholders need not be a registered one before SEC can take
cognizance of a suit seeking to enforce his right as stockholders.
RATIO:
1. The SEC has jurisdiction over the matter as supported by the applicable provisions of P.D. No. 902-A which
reorganized the SEC with additional powers including a more active public participation in the affairs of private
corporations and enterprises through which desirable activities may be pursued for the promotion of economic
development.
2. Nowhere does the law empower any CFI to interfere with the orders of the Commission and consequently any
ruling by the trial court on the issue of ownership of the shares of stock is not binding on the Commission for want
of jurisdiction.
3. A petition for mandamus in the SEC to compel the corporate secretary to register the transfers and issue new
certificates in favor of Telectronics and its nominees was properly resorted to under Rule XXI, Section 1 of the
SEC's New Rules of Procedure, which provides for the filing of such petitions with the SEC. Section 3 of said
Rules further authorizes the SEC to issue orders expediting the proceedings and to grant a preliminary injunction
for the preservation of the rights of the parties pending such proceedings.
4. The dispute falls within the general classification of cases within the SEC's original and exclusive jurisdiction to
hear and decide, under Section 5 of the said law.
5. Insofar as the Bragas and their corporate secretary's refusal on behalf of the corporation Pocket Bell to record the
transfer of the 56% majority shares to Telectronics may be deemed a device or scheme amounting to fraud and
misrepresentation employed by them to keep themselves in control of the corporation to the detriment of
Telectronics (as buyer and substantial investor in the corporate stock) and the Abejos (as substantial stockholders-
CORPORATION LAW
Case Digest
sellers), the case falls under paragraph (a).
6. The dispute is likewise an intra-corporate controversy between and among the majority and minority stockholders
as to the transfer and disposition of the controlling shares of the corporation, failing under paragraph (b).
7. An intra-corporate controversy is one, which arises between a stockholder and the corporation. There is no
distinction, qualification, nor any exemption whatsoever.
8. The provision is broad and covers all kinds of controversies between stockholders and corporations. The issue of
whether or not a corporation is bound to replace a stockholder's lost certificate of stock is a matter purely between
a stockholder and the corporation. It is a typical intra-corporate dispute.
** ACTIONS FILED:
A. ABEJOS' ACTIONS IN SEC
1. The Abejos and Telectronics and the latter's nominees, as new majority shareholders, filed SEC Cases against the
Bragas on December 17, 1982 and February 14, 1983.
2. In the first case, they prayed for mandamus from the SEC ordering Norberto Braga, to register in their names the
transfer and sale of the 196,000 Pocket Bell shares.
3. In the other case, they prayed for injunction and a temporary restraining order to enjoin the Bragas from disbursing or
disposing funds and assets of Pocket Bell and from performing functions of corporate officers.
4. Norberto Braga (Pocket Bell corporate secretary), filed a Motion to Dismiss the mandamus case contending that the
SEC has no jurisdiction over the nature of the action since it does not involve an intracorporate controversy
between stockholders, as Telectronics is not a stockholder of record of Pocket Bell.
5. SEC denied the motion. The corporate secretary filed a Motion for Reconsideration, which was granted.
6. The Bragas filed their Motion to Dismiss the injunction case.
7. The SEC three-man committee (created upon Abejo’s ex parte motion) issued an order reconsidering the dismissal of
the mandamus petition and directed Norberto Braga to file his answer to the petitioner therein.
B. BRAGAS' ACTION IN SEC
8. The Bragas filed a petition for certiorari, prohibition and mandamus with the SEC claiming that there was lack of
jurisdiction.
9. The SEC en banc issued an order dismissing the Bragas' petition for lack of merit and at the same time ordering the SEC
Hearing Committee to continue with the hearings, ruling that the "issue is not the ownership of shares but rather the non-
performance by the Corporate Secretary of the ministerial duty of recording transfers of shares of stock of the corporation
of which he is secretary."
10. Bargas’ motion for reconsideration was denied.
C. BRAGAS' ACTION IN CFI (NOW RTC)
11. The Bragas filed a complaint against the Abejos and Telectronics in the CFI of Pasig for: (a) rescission and annulment
of the sale of the shares of stock in Pocket Bell made by the Abejos in favor of Telectronics (ground: it violated the Bragas'
alleged pre-emptive right over the Abejos' shareholdings and an alleged perfected contract with the Abejos to sell those
shares in their favor), (1st cause of action); plus damages for bad faith; and (b) declaration of nullity of any transfer,
assignment or endorsement of Virginia Bragas' stock certificates for 63,000 shares in Pocket
Bell to Telectronics for want of consent and consideration, alleging that said stock certificates, which were intended as
security for a loan application and were thus endorsed by her in blank, had been lost (2nd cause of action).
12. The Abejos filed a Motion to Dismiss the complaint (ground: the SEC has original and exclusive jurisdiction and that
the Bragas' suit is such a controversy as the issues involved therein are the stockholders" alleged pre-emptive rights, the
validity of the transfer and endorsement of certificates of stock, the election of corporate officers and the management and
control of the corporation's operations. (Granted).
13. The Bragas filed a motion for reconsideration. The Abejos opposed.
14. Respondent Judge de la Cruz issued an order rescinding the order and reviving the temporary restraining order
restraining Telectronics' agents or representatives from assuming control Pocket Bell and discharging their functions.
15. The Abejos filed a motion for reconsideration, which was denied.
D. ABEJOS' PETITION AT BAR
16. The Abejos, allege that the acts of respondent Judge in refusing to dismiss the complaint despite clear lack of
jurisdiction over the action and in refusing to reconsider his erroneous position were performed without
jurisdiction and with grave abuse of discretion (and to cancel the motions he already granted).
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Case Digest
E. BRAGAS' PETITION AT BAR
17.The Bragas, alleging in turn that the SEC has no jurisdiction over the cases.
CASE LAW/ DOCTRINE:

The SEC by express mandate has "absolute jurisdiction, supervision and control over all corporations" and is called upon
to enforce the provisions of the Corporation Code, among which is the stock purchaser's right to secure the corresponding
certificate in his name under the provisions of Section 63 of the Code. Needless to say, any problem encountered in
securing the certificates of stock representing the investment made by the buyer must be expeditiously dealt with through
administrative mandamus proceedings with the SEC, rather than through the usual tedious regular court procedure.
Furthermore, as stated in the SEC order of April 13, 1983, notice given to the corporation of the sale of the shares and
presentation of the certificates for transfer is, equivalent to registration: "Whether the refusal of the (corporation) to effect
the same is invalid or not is still subject to the outcome of the hearing on the merits of the case.
As the SEC maintains, "There is no requirement that a stockholder of a corporation must be a registered one in order that,
the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder."

CORPORATION LAW
Case Digest

CORPORATION LAW
007 SEC v CA & CUALOPING Case Digest
SECURITIES AUTHOR: Dolina, Leon Chad Anthony Dolina
CORPORATION AND FIDELITY STOCK Note: The petition before this Court relates to the exercise
TRANSFERS, INC by the SEC of its powers in a case involving a stockbroker
July 21, 1995, G.R. Nos. 106425 & 106431-32 (CUALOPING) and a stock transfer agency (FIDELITY).
TOPIC: Jurisdiction of the SEC
PONENTE: Vitug, J.
FACTS:
1. Cualoping Securities Corporation (CUALOPING for brevity) is a stockbroker, Fidelity Stock Transfer, Inc. (FIDELITY
for brevity), on the other hand, is the stock transfer agent of Philex Mining Corporation (PHILEX for brevity).
2. On or about the first half of 1988, certificates of stock of PHILEX representing one million four hundred [thousand]
(1,400,000) shares were stolen from the premises of FIDELITY. These stock certificates consisting of stock dividends of
certain PHILEX shareholders had been returned to FIDELITY for lack of forwarding addresses of the shareholders
concerned.
3. Later, the stolen stock certificates ended in the hands of a certain Agustin Lopez, a messenger of New World Security
Inc., an entirely different stock brokerage firm. In the first half of 1989, Agustin Lopez brought the stolen stock certificates
to CUALOPING for trading and sale with the stock exchange. When the said stocks were brought to CUALOPING, all of
the said stock certificates bore the "apparent" indorsement (signature) in blank of the owners (the stockholders to whom
the stocks were issued by PHILEX) thereof. At the side of these indorsements (signatures), the words "Signature Verified"
apparently of FIDELITY were stamped on each and every certificate. Further, on the words "Signature Verified" showed
the usual initials of the officers of FIDELITY.
4. Upon receipt of the said certificates from Agustin Lopez, CUALOPING stamped each and every certificate with the
words "Indorsement Guaranteed," and thereafter traded the same with the stock exchange. After the stock exchange
awarded and confirmed the sale of the stocks represented by said certificates to different buyers, the same were delivered
to FIDELITY for the cancellation of the stocks certificates and for issuance of new certificates in the name of the new
buyers. Agustin Lopez on the other hand was paid by CUALOPING with several checks for Four Hundred Thousand
(P400,000.00) Pesos for the value of the stocks.
5. After acquiring knowledge of the pilferage, FIDELITY conducted an investigation with assistance of the National
Bureau of Investigation (NBI) and found that two of its employees were involved and signed the certificates. After two (2)
months from receipt of said stock certificates, FIDELITY rejected the issuance of new certificates in favor of the buyers
for reasons that the signatures of the owners of the certificates were allegedly forged and thus the cancellation and new
issuance thereof cannot be effected.
6. FIDELITY sought an opinion on the matter from SEC. On 26 October 1988, the Brokers and Exchange Department
("BED") of the SEC disposed of the matter in this manner:
“WHEREFORE, Fidelity Stock Transfers, Inc., is hereby ordered to replace all the subject shares and to cause the transfer
thereof in the names of the buyers within ten days from actual receipt hereof. Cualoping Securities, INC., for having
violated Section 29 a(3) of the Revised Securities Act is hereby ordered to pay a fine of P50,000.00 within five (5) days
from actual receipt hereof.”
7. From the above resolution, as well as that which denied a motion for reconsideration, both CUALOPING and
FIDELITY appealed to the Commission En Banc. On 14 December 1989, the Commission rendered its decision and
concluded:
“WHEREFORE, premises considered, the Commission en banc finding both Cualoping Securities Corporation and
Fidelity Stock Transfers, Inc. equally negligent in the performance of their duties hereby orders them to (1) jointly replace
the subject shares and for Fidelity to cause the transfer thereof in the names of the buyers and (2) to pay a fine of
P50,000,00 each for hav[ing] violated Section 29 (a) of the Revised Securities Act. 48. RTC – ordered Jardine Davies and
others to pay JRB Reaty Inc.”
9. CA reversed the SEC and set aside SEC's order "without prejudice to the right of persons injured to file the proper action
for damages."
ISSUE: Whether or not the SEC can exercise original and exclusive jurisdiction over the case?
HELD: No. The stockholders who have been deprived of their certificates of stock or the persons to whom the forged
certificates have ultimately been transferred by the supposed indorsee thereof are yet to initiate, if minded, an appropriate

CORPORATION LAW
Case Digest
adversarial action. Neither have they been made parties to the proceedings.
RATIO:
1. The Court held that a justiciable controversy such as would occasion an exercise of SEC's exclusive jurisdiction
would require an assertion of a right by a proper party against another who, in turn, contests it.
2. In the case at bench, the proper parties that can bring the controversy and can cause an exercise by the SEC of its
original and exclusive jurisdiction would be all or any of those who are adversely affected by the transfer of the
pilfered certificates of stock. Any peremptory judgment by the SEC, without such proceedings having first been
initiated, would be precipitate. The Court held that there was nothing erroneous in the decision of the Court of
Appeals, albeit not for the reason given by it, to set aside the SEC's adjudication "without prejudice" to the right of
persons injured to file the necessary proceedings for appropriate relief.
3. The other issue, i.e., the question on the legal propriety of the imposition by the SEC of a P50,000 fine on each of
FIDELITY and CUALOPING, is an entirely different matter. This time, it is the regulatory power of the SEC
which is involved.
4.
5. To this end, The Court concluded that both FIDELITY and CUALOPING have been guilty of negligence in the
conduct of their affairs involving the questioned certificates of stock. To constitute, however, a violation of the
Revised Securities Act that can warrant an imposition of a fine under Section 29(3), in relation to Section 46 of the
Act, fraud or deceit, not mere negligence, on the part of the offender must be established. Php 50,00 fine imposed
by SEC on FIDELITY and CUALOPING is set aside.
CASE LAW/ DOCTRINE: The Securities and Exchange Commission ("SEC") has both regulatory and adjudicative
functions.
Under its regulatory responsibilities, the SEC may pass upon applications for, or may suspend or revoke (after due notice
and hearing), certificates of registration of corporations, partnerships and associations (excluding cooperatives,
homeowners' associations, and labor unions); compel legal and regulatory compliances; conduct inspections; and impose
fines or other penalties for violations of the Revised Securities Act, as well as implementing rules and directives of the
SEC, such as may be warranted.
Relative to its adjudicative authority, the SEC has original and exclusive jurisdiction to hear and decide controversies and
cases involving —
a. Intra-corporate and partnership relations between or among the corporation, officers and stockholders and partners,
including their elections or appointments;
b. State and corporate affairs in relation to the legal existence of corporations, partnerships and associations or to
their franchises; and
c. Investors and corporate affairs, particularly in respect of devices and schemes, such as fraudulent practices,
employed by directors, officers, business associates, and/or other stockholders, partners, or members of registered firms; as
well as
d. Petitions for suspension of payments filed by corporations, partnerships or associations possessing sufficient
property to cover all their debts but which foresee the impossibility of meeting them when they respectively fall due, or
possessing insufficient assets to cover their liabilities and said entities are upon petition or motu proprio, placed under the
management of a Rehabilitation Receiver or Management Committee.

CORPORATION LAW
008 MAGALAD v. PREMIERE FINANCING Case Digest
AUTHOR: Rhona Burce
May 22, 1992 G.R. No. 87135
TOPIC: Jurisdiction of the SEC Jurisdiction of the SEC in cases of fraud and
PONTENTE: PARAS, J. misrepresentation committed by the Board of
Directors, business associates, its officers or partners
FACTS
1. Premiere is a financing company engaged in soliciting and accepting money market placements or deposits.
2. On September 12, 1983 Premiere induced and misled Magalad into making a money market placement of P50,000.00
at 22% interest per annum for which it issued a receipt.
3. Premier likewise issued two (2) post-dated checks in the total sum of P51,079.00 and assigned to Magalad its
receivable from a certain David Saman for the same amount.
4. Note: Premiere’s permit to issue commercial papers was already expired at that time.
5. When the said checks were presented for payment on their due dates, the drawee bank dishonored the checks for lack
of sufficient funds to cover the amount.
6. Premiere, for no valid reason, failed and refused to honor the demands of Magalad for payment.
7. On January 10, 1984, Magalad filed a complaint for damages with prayer for writ of preliminary attachment with the
RTC. The lower court rendered a default judgment against Premiere.
8. Premiere then filed a motion for reconsideration alleging that the SEC has exclusive jurisdiction over a corporation
under a state of suspension of payments. RTC denied the said motion.
9. On appeal by Premiere, the CA certified the case to the SC as it contains purely questions of law.
Contention of Magalad: The legal suit, which she has brought against Premiere, is an ordinary action for damages with
the preliminary attachment cognizable solely by the RTC.
Premiere, on the other hand, espouses the original and exclusive jurisdiction of the Securities and Exchange
Commission.
ISSUE:
Whether or not the RTC has jurisdiction to try the case?
HELD:
No. The Securities and Exchange Commission has jurisdiction because Magalad’s complaint alleges that Premiere
resorted to devices or schemes amounting fraud and misrepresentation. Sec. 5(a) of PD 902-A provides that “in addition
to the regulatory and adjudicative functions, SEC shall have original and exclusive jurisdiction over cases involving
(a) Devises or schemes employed by the BOD, business associates, officers/partners amounting to fraud and
misrepresentation which may be detrimental to the public…”
RATIO:
1. In this case, the recitals of the complaint sufficiently allege that Premiere Corporation has resorted to devices or
schemes amounting to fraud and misrepresentation detrimental to the interest of the public. It cannot but be conceded,
therefore, that the SEC may exercise its adjudicative powers pursuant to Sec. 5(a) of Pres. Decree No. 902-A.
Presidential Decree No. 902-A, Section 3, provides:
Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations,
partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued by the
government to operate in the Philippines; and in the exercise of its authority, it shall have the power to enlist the
aid and support of and to deputize any and all enforcement agencies of the government, civil or military as well as

CORPORATION LAW
Case Digest
any private institution, corporation, firm, association or person. (As amended by Presidential Decree No. 1758).
Sec. 3 of Pres. Decree No. 902-A should also be read in conjunction with Sec. 5 of the same law, providing:
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission
over corporations, partnerships and other forms of associations registered with it as expressly granted under the
existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:
a) Devises or schemes employed by or any acts of the Board of Directors, business associates, its
officers or partners, amounting to fraud and misrepresentation which may be detrimental to the public and/or
to the stockholders, partners, members of associations or organizations registered with the Commission.
2. The fact that Premiere's authority to engage in financing already expired will not have the effect of divesting the SEC
of its original and exclusive jurisdiction.
3. The Court stated that SEC can take cognizance of controversies pertaining to the following relationships between
corporation, partnership or association and (a) the public, (b) its stockholders, partners, members or officers, (c) the State
so far as its franchise, permit or license to operate is concerned; and (d) among the stockholders, partners or associates
themselves.
4. The Court also held that SEC has jurisdiction because the said agency had already appointed a Rehabilitation Receiver
for Premiere. Under PD 902-A Sec 6c, “upon appointment of a… rehabilitation receiver… all actions for claims against
corporations… under receivership pending before any court shall be suspended” By doing so, SEC has exercised its
original and exclusive jurisdiction to hear and decide cases involving:
a) Petitions of corporations, partnerships or associations to be declared in the state of suspension of

payments in cases where the corporation, partnership or association possesses sufficient property to cover all its
debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the
corporation, partnership or association has no sufficient assets to cover its liabilities but is under the
management of a Rehabilitation Receiver or Management of a Rehabilitation Receiver or Management
Committee created pursuant to this Decree.
CASE LAW/ DOCTRINE:
The Securities and Exchange Commission (SEC) shall have original and exclusive jurisdiction to hear and decide cases
involving devises or schemes employed by or any acts of the Board of Directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which may be detrimental to the public
**Note: PD 902-A : SEC Reorganization Act.

CORPORATION LAW
Case Digest
009 The Collector of Internal Revenue vs. Club Filipino AUTHOR: Bea
May 31, 1962/ GR No. L-12719 For a stock corporation to exist, two requisites must be
TOPIC: Stock vs. Non-Stock Corporation complied with, to wit: (1) a capital stock divided into shares
PONTENTE: Regalado, J. and (2) an authority to distribute to the holders of such
shares, dividends or allotments of the surplus profits on the
basis of the shares held (Sec. 3, Act No. 1459).
FACTS
1. This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector of Internal
Revenue, assessing against and demanding from the "Club Filipino, Inc. de Cebu", the sum of P12,068.84 as fixed and
percentage taxes, surcharge allegedly due from it as a keeper of bar and restaurant.
2. As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," is a civic corporation organized under the laws
of the Philippines with an original authorized capital stock of P22,000.00, which was subsequently increased to
P200,000.00.
3. Neither in the articles or by-laws is there a provision relative to dividends and their distribution, although it is
covenanted that upon its dissolution, the Club's remaining assets, after paying debts, shall be donated to a charitable
Philippine Institution in Cebu.
4. The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the government), and a
bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its members and their guests. The bar-
restaurant was a necessary incident to the operation of the club and its golf-course. The club is operated mainly with funds
derived from membership fees and dues.
5. In 1952, a BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and
restaurant.
6. In a letter dated December 22, 1852, the Collector of Internal Revenue assessed against and demanded from the Club:
As percentage tax on its gross receipts during the tax years 1946 to 1955: P9,599.07
Surcharge therein: 2,399.77
As fixed tax for the years 1946 to 1952: 70.00
Compromise penalty: 500.00
7. The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been denied, the
Club filed the instant petition for review.
ISSUE: W/N the appellee club is a stock corporation
W/N the appellee club is liable to pay for the fixed and percentage taxes and for the penalties
HELD: In both issues, the answer is NO. The club is a non-stock corporation. The club is also not liable to pay taxes and
penalties.
RATIO: The facts that the capital stock of the respondent Club is divided into shares, does not detract from the finding of
the trial court that it is not engaged in the business of operator of bar and restaurant. What is determinative of whether or
not the Club is engaged in such business is its object or purpose, as stated in its articles and by-laws. It is a familiar
rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the business
prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation. From the
extrinsic evidence adduced, the Tax Court concluded that the Club is not engaged in the business as a barkeeper and
restaurateur.
Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into
shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the
basis of the shares held (sec. 3, Act No. 1459). In the case at bar, nowhere in its articles of incorporation or by-laws
could be found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot,
therefore, be considered a stock corporation, within the contemplation of the corporation law.
A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, nonstock organizations,
unless the intent to the contrary is manifest and patent" which is not the case in the present appeal. Having arrived at the
conclusion that respondent Club is not engaged in the business as an operator of a bar and restaurant, and therefore, not
CORPORATION LAW
Case Digest
liable for fixed and percentage taxes, it follows that it is not liable for any penalty, much less of a compromise penalty.
CASE LAW/ DOCTRINE: For a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital
stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the
surplus profits on the basis of the shares held (Sec. 3, Act No. 1459).
DISSENTING/CONCURRING OPINION: N/A

CORPORATION LAW
010 NATIONAL DEVELOPMENT COMPANYCase
AND Digest
AUTHOR: Mercado, Christoher Dann C.
NEW AGRIX, INC., Petitioners, vs. PHILIPPINE
VETERANS BANK, THE EX-OFFICIO SHERIFF and The Congress may create government-owned or controlled
GODOFREDO QUILING, in his capacity as Deputy corporations (GOCCS) or government instrumentalities
Sheriff of Calamba, Laguna, pursuant to SEC. 16, ART. XII, 1987 CONSTITUTION.
Respondents.
TOPIC: Classification of Private Corporation: other
matters
PONENTE:MEDIALDEA, J.
FACTS
1. PD 1717 was issued by Marcos stating that “all mortgages and other liens presently attaching to any of the assets
of the dissolved corporations are hereby extinguished."
2. Agrix Marketing, Inc. (AGRIX) had executed in favor of private respondent Philippine Veterans Bank a real estate
mortgage dated July 7, 1978, over three (3) parcels of land situated in Los Baños, Laguna. During the existence of
the mortgage, AGRIX went bankrupt. It was for the expressed purpose of salvaging this and the other Agrix
companies that the PD was issued by Pres Marcos.
3. Phil Veterans then filed a claim for the payment of its credit but the new Agrix Corp filed a petition for the
cancellation of the mortgage pursuant to the PD. Another case was filed regarding the extrajudicial foreclosure of
the property.
4. The RTC then rendered a decision rendering the PD unconstitutional for the following reasons:
1) residential exercise of legislative power was a violation of the principle of separation of powers;
2) the pthe law impaired the obligation of contracts; and (3) the decree violated the equal protection clause.
5. NDC states that PVB is estopped from questioning the validity of the PD since its constitutionality was raised in a
previous case but was not resolved.
ISSUE:
1.) Whether or not the PD was constitutional?
2.) Whether or not the principle of estoppel is applicable?
HELD:
1.) It was unconstitutional. A legislative act based on the police power requires the concurrence of a lawful subject and a
lawful method. In more familiar words, a) the interests of the public generally, as distinguished from those of a particular
class, should justify the interference of the state; and b) the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon individuals.
2.) No. Estoppel is not applicable since at the time of the enactment of the decree, Marcos was the ruler of the land. To rule
now that the private respondent is estopped for having abided with the decree instead of boldly assailing it is to close our
eyes to a cynical fact of life during

CORPORATION LAW
Case Digest
RATIO:
1.) Applying these criteria to the case at bar, the Court finds first of all that the interests of the public are not sufficiently
involved to warrant the interference of the government with the private contracts of AGRIX. The decree speaks vaguely of
the "public, particularly the small investors," who would be prejudiced if the corporation were not to be assisted. However,
the record does not state how many there are of such investors, and who they are, and why they are being preferred to the
private respondent and other creditors of AGRIX with vested property rights.
The public interest supposedly involved is not identified or explained. It has not been shown that by the creation of the
New Agrix, Inc. and the extinction of the property rights of the creditors of AGRIX, the interests of the public as a whole,
as distinguished from those of a particular class, would be promoted or protected. The indispensable link to the welfare of
the greater number has not been established. On the contrary, it would appear that the decree was issued only to favor a
special group of investors who, for reasons not given, have been preferred to the legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court still finds that the means employed to rehabilitate AGRIX fall
far short of the requirement that they shall not be unduly oppressive. The oppressiveness is patent on the face of the decree.
The right to property in all mortgages, liens, interests, penalties and charges owing to the creditors of AGRIX is arbitrarily
destroyed. No consideration is paid for the extinction of the mortgage rights. The accrued interests and other charges are
simply rejected by the decree. The right to property is dissolved by legislative fiat without regard to the private interest
violated and, worse, in favor of another private interest.
2.) The Court does not agree that the principle of estoppel is applicable.
It is not denied that the private respondent did file a claim with the AGRIX Claims Committee pursuant to this decree. It
must be noted, however, that this was done in 1980, when President Marcos was the absolute ruler of this country and his
decrees were the absolute law. Any judicial challenge to them would have been futile, not to say foolhardy. The private
respondent, no less than the rest of the nation, was aware of that reality and knew it had no choice under the circumstances
but to conform.: nad
ON TOP OF ALL THIS, New Agrix, Inc. was CREATED BY SPECIAL DECREE notwithstanding the provision of
Article XIV, Section 4 of the 1973 Constitution(NOW, SEC. 16, ART. XII, 1987 CONSTITUTION), then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the formation, organization, or
regulation of private corporations, unless such corporations are owned or controlled by the Government or
any subdivision or instrumentality thereof. 4
The new corporation is NEITHER OWNED NOR CONTROL BY THE GOVERNMENT. The National Development
Corporation was merely required to extend a loan of not more than P10,000,000.00 to New Agrix, Inc. Pending payment
thereof, NDC would undertake the management of the corporation, but with the obligation of making periodic reports to
the Agrix board of directors. After payment of the loan, the said board can then appoint its own management. The stocks of
the new corporation are to be issued to the old investors and stockholders of AGRIX upon proof of their claims against the
abolished corporation. They shall then be the owners of the new corporation. New Agrix, Inc. is entirely private and so
SHOULD HAVE BEEN ORGANIZED UNDER THE CORPORATION LAW IN ACCORDANCE WITH THE ABOVE-
CITED CONSTITUTIONAL PROVISION.
CASE LAW/ DOCTRINE:

The Congress may create government-owned or controlled corporations (GOCCS) or government instrumentalities
pursuant to SEC. 16, ART. XII, 1987 CONSTITUTION:
Section 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private
corporations. Government-owned or controlled corporations may be created or established by special charters in the
interest of the common good and subject to the test of economic viability.

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Case Digest
011 Pioneer Insurance v. CA, 175 SCRA 668 AUTHOR:
(July 28, 1989, G.R. No. 84197 and G.R. 84157) • SUPRA case.
TOPIC: Classification of Private Corporation (Other • Relate the case on STOCK vs. NON-STOCK
Matters) • The TABLE for the difference in the ratio is NOT
PONTENTE: GUTIERREZ, JR., J. seen in the case.
STOCK NON-STOCK
Corporations which have All other private
capital stock divided into corporations (§3)
shares and
are authorized to distribute One where no part of its
to the holders of shares income is distributable as
dividends or allotments of dividends to its members,
the surplus profits on the trustees or officers. (§87)
basis of the shares (§3)
FACTS
1. In 1965, Jacob S. Lim was the owner-operator of Southern Air Lines (SAL) a single proprietorship.
2. On May 17, 1965, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract.
3. It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto
Cervantes (Cervanteses) and Constancio Maglana contributed some funds used in the purchase of aircrafts and
spare parts. The funds were supposed to be their contributions to a new corporation proposed by Lim to expand his
airline business.
4. They executed two (2) separate indemnity agreements in favor of Pioneer, one signed by Maglana and the other
jointly signed by Lim for SAL, Bormaheco and the Cervanteses.
5. The indemnity agreements stipulated that the indemnitors principally agree and bind themselves jointly and
severally to indemnify and hold and save harmless Pioneer from and against any/all damages.
6. Lim defaulted on his subsequent installment payments. JDA requested payments from the surety. Pioneer paid a
total sum of P298,626.12.
7. On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary
attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.
8. In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they were
not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to
litigation and for recovery of the sums of money they advanced to Lim for the purchase of the aircrafts in question.
9. CFI - decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against all other
defendants.
10. CA - modified the trial court's decision in that the plaintiff’s complaint against all the defendants was dismissed. In
all other respects the trial court's decision was affirmed.
ISSUE:
1. WON the Corporation being formed by the defendants can be classified as a stock or non-stock corporation
HELD: Yes, non-stock

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RATIO:
B.P 68 Sec. 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-
stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to
the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock
corporations. All other corporations are non-stock corporations.
Sec. 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part of its income is
distributable as dividends to its members, trustees, or officers…
Following the definition of a non-stock corporation, it can be construed that the parties herein, invested to the business but
never stated any desire to distribute its income. To wit:
… that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to expand his airline
business. Lim was to procure two DC-3's from Japan and secure the necessary certificates of public convenience
and necessity as well as the required permits for the operation thereof. Maglana sometime in May 1965, gave
Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in an undertaking sometime on or about August
9,1965, promised to incorporate his airline in accordance with their agreement and proceeded to acquire the planes
on his own account.
The following are classification under STOCK and NON-STOCK:
STOCK NON-STOCK
Purpose
Primarily to make profits for its May be formed or organized for
shareholders charitable, religious, educational,
professional, cultural, fraternal,
literary, scientific, social, civic
service, or similar purposes like
trade, industry, agricultural and like
chambers, or any combination
thereof. (§88)
Distribution of Profits Profit is distributed to shareholders Whatever incidental profit made is

not distributed among its members
but is used for furtherance of its
purpose. AOI or by-laws may
provide for the distribution of its
assets among its members upon its
dissolution. Before then, no profit
may be made by members.
Composition Stockholders Members
Scope of right to vote Each stockholder votes according to Each member, regardless of class, is
the proportion of his shares in the entitled to one (1) vote UNLESS
corporation. No shares may be such right to vote has been limited,
deprived of voting rights except broadened, or denied in the AOI or
those classified and issued as by-laws. (Sec. 89)
"preferred" or "redeemable" shares,
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and as otherwise provided by the
Code. (Sec. 6)
Voting by proxy Stockholders and members may Unless otherwise provided in the
vote in person or by proxy in all articles of incorporation or the by-
meetings of stockholders or laws, a member may vote by proxy
members. (Sec. 58) in accordance with the provisions of
May be denied by the AOI or the this Code. (Sec. 89)
by-laws. (Sec. 89)
Voting by mail May be authorized by the by-laws, Voting by mail or other similar
with the approval of and under the means by members of non-stock
conditions prescribed by the SEC. corporations may be authorized by
(Sec. 89) the by-laws of non-stock
corporations with the approval of,
and under such conditions which
may be prescribed by, the Securities
and Exchange Commission. (Sec.
89)
Who exercises Corporate Board of Directors or Trustees Members of the corporation

Powers §23
Governing Board Board of Directors or Trustees, Board of Trustees, which may

consisting of 5-15 directors / consist of more than 15 trustees
trustees. unless otherwise provided by the
AOI or by-laws. (Sec, 92)
Term of directors or Directors / trustees shall hold office Board classified in such a way that
trustees for 1 year and until their successors the term of office of 1/3 of their
are elected and qualified (Sec. 23). number shall expire every year.
Subsequent elections of trustees
comprising 1/3 of the board shall be
held annually, and trustees so
elected shall have a term of 3 years.
(Sec. 92)
Election of officers Officers are elected by the Board of Officers may directly elected by the
Directors (Sec. 25), except in close members UNLESS the AOI or by-
corporations where the stockholders laws provide otherwise. (Sec. 92)
themselves may elect the officers.
(Sec. 97)
Place of meetings Any place within the Philippines, if Generally, the meetings must be
provided for by the by-laws (Sec. held at the principal office of the
93) corporation, if practicable. If not,
then anyplace in the city or
municipality where the principal
office of the corporation is located.
(Sec. 51)

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Transferability of interest Transferable. Generally non-transferable since
or membership membership and all rights arising
therefrom are personal. However,
the AOI or by-laws can provide
otherwise. (Sec. 90)
Distribution of assets in See Sec. 94.

case of dissolution
CASE LAW/ DOCTRINE:

CORPORATION LAW
Case Digest
012 LYCEUM OF THE PHILIPPINES v. CA, AUTHOR: JANNA
March 5, 1994, G.R. No. 101897 ***Lyceum of the Philippines wanted to bar all other
TOPIC: Corporate Name educational institutions from using the word “Lyceum” in
PONENTE: Feliciano, J. their names.***
FACTS
1. Sept. 21, 1950 - Petitioner , an educational institution, registered with Securities and Exchange Commission (SEC)
under the corporate name “Lyceum of the Philippines, Inc.” and has used the name ever since.
2. Sometime in the 70’s, Petitioner filed a case against Lyceum of Baguio.
3. April 20, 1977 – Decision in SEC-Case No. 1241 rendered in favor of Petitioner. Lyceum of Baguio, Inc. (LBI)
ordered to change its corporate name, and to adopt a name not similar or identical to petitioner.
4. Julio Sulit, Associate Commissioner, held: Corporate name = substantially identical due to "dominant" word,
"Lyceum," and the geographical name is the only distinguishing word + Petitioner registered ahead of LBI
5. LBI filed petition for review with SC = denied for lack of merit. Entry of judgment: Oct. 21, 1977.
6. Armed with SC Resolution in G.R. No. L-46595, petitioner wrote all educational institutions it could find with
"Lyceum" as part of their corporate name, and advised them to discontinue such use.
7. Feb. 24, 1984 – Petitioner filed before SEC to compel private respondents to delete the word "Lyceum" from their
corporate names and permanently to enjoin them from using "Lyceum" as part of their respective names.
8. Some private respondents who actively participated in the proceedings before SEC are the following, including
their SEC registration dates: (1) Western Pangasinan Lyceum — 27 October 1950; (2) Lyceum of Cabagan — 31
October 1962; Lyceum of Lallo, Inc. — 26 March 1972; (3) Lyceum of Aparri — 28 March 1972; (4) Lyceum of
Tuao, Inc. — 28 March 1972; (5) Lyceum of Camalaniugan — 28 March 1972
Those declared in default: (1) Buhi Lyceum; (2) Central Lyceum of Catanduanes; (3) Lyceum of Eastern
Mindanao, Inc.; and (4) Lyceum of Southern Philippines
Withdrawn for failure to serve summons: (1) The Lyceum of Malacanay; (2) The Lyceum of Marbel
Dismissed: (1) The Lyceum of Araullo changed name to “Pamantasan ng Araullo”
9. The SEC hearing officer relied on earlier SEC ruling LBI’s case, and decided in favor of petitioner.
Held that: (1) Word "Lyceum" was capable of appropriation; and (2) petitioner acquired an enforceable exclusive
right to the use of that word.
10. On appeal to the SEC En Banc: REVERSED and SET ASIDE. Held that: word "Lyceum" had not become so
identified with petitioner as to render use thereof by other institutions as productive of confusion about the identity
of the schools in the mind of the general public.
Attaching of geographical names = held sufficient to distinguish one from another + they are far from petitioner.
11. June 28, 1991: CA affirmed the questioned Orders of the SEC En Banc + held Western Pangasinan Lyceum
incorporated earlier than petitioner. Motion for reconsideration, failed.
ISSUE: Whether or not petitioner institution is entitled to legally enforceable exclusive right to use the word “Lyceum” in
its corporate name.
HELD: NO, other institutions may use "Lyceum" as part of their corporate names. SC does not consider corporate names
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Case Digest
of private respondents as "identical with, or deceptively or confusingly similar" to that of the petitioner institution.
RATIO:
1. The policy underlying the prohibition in Section 18 against the registration of a corporate name which is "identical
or deceptively or confusingly similar" to that of any existing corporation or which is "patently deceptive" or
"patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have
occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of
difficulties of administration and supervision over corporations.
2. Corporate names of private respondent entities all carry the word "Lyceum" but confusion and deception are
effectively precluded by the appending of geographic names to the word "Lyceum." SC does not believe that the
"Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the Philippines, etc.
3. Since "Lyceum" or "Liceo" denotes a school or institution of learning, it is not unnatural to use this word to
designate an entity which is organized and operating as an educational institution.
4. While the appellant may have proved that it had been using the word 'Lyceum' for a long period of time, this fact
alone did not amount to acquiring secondary meaning in its favor. Appellant failed to prove that it had been using
the same word all by itself to the exclusion of others.
5. The number alone of the private respondents in the case at bar suggests strongly that petitioner's use of the word
"Lyceum" has not been attended with the exclusivity essential for applicability of the doctrine of secondary
meaning.
6. There was no evidence presented to prove that confusion will surely arise if the same word were to be used by
other educational institutions.
CASE LAW/ DOCTRINE:
“To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's
corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate
corporate names in their entirety and when the name of petitioner is juxtaposed with the names of private respondents, they
are not reasonably regarded as "identical" or "confusingly or deceptively similar" with each other.”
"SECTION 18. Corporate name. — No corporate name may be allowed by the Securities an Exchange Commission if the
proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name
already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate
name is approved, the Commission shall issue an amended certificate of incorporation under the amended name."
“Doctrine of Secondary Meaning” – " . . . a word or phrase originally incapable of exclusive appropriation with reference
to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long
and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing
public, the word or phrase has come to mean that the article was his product." Originated in the field of trademark law,
application has extended to corporate names sine the right to use a corporate name to the exclusion of others is based upon
the same principle which underlies the right to use a particular trademark or tradename.

CORPORATION LAW
Case Digest
013 Municipality of Malabang v. Benito AUTHOR: twinkle
1969-03-28, GR No. L-28113 A municipality organized at a time when the statute
TOPIC: Formation under apparently Valid Statute creating it was still valid and was invalidated later is not a
PONENTE: Castro, J de facto corporation
Balindog – Mayor of Malabang
Benito – Mayor of Balabagan
FACTS
1. The Municipality of Balabagan, Lanao del Sur (formerly a part of Malabang) was created on March 15, 1960 by EO
386 by Pres. Garcia
2. In 1965, Pelaez case invalidated EO 386 rendering it unconstitutional because it gives the President the power to
create municipalities because it constitutes an undue delegation of legislative power and is violative of Section 10 (1) of
Article VII of the Constitution, which limits the President's power over local governments to mere supervision.
3. The Municipality of Malabang brought this action for prohibition to nullify Executive Order 386 and to restrain the
respondent municipal officials from performing the functions of their respective offices, relying on the ruling of this
Court in Pelaez v. Auditor General.
4. Respondents contends that the Pelaez case cannot apply because the municipality of Balabagan is at least a de facto
corporation, having been organized under color of a statute before it was declared unconstitutional, its officers having
been either elected or appointed, and the municipality itself having discharged its corporate functions for the past five
years preceding the institution of this action and its existence cannot be collaterally attacked although it may be inquired
into directly in an action for quo warranto at the instance of the State and not of an individual like the petitioner
Balindong
MAIN ISSUE: WON the municipality of Balabagan is a de facto corporation
HELD: NO. Though it was created before Sec 68 of the Administrative Code was invalidated, it is still not a de facto
corporation, for an unconstitutional act is not a law and it vests no rights.
Sub issue: whether a statute can lend color of validity to an attempted organization of a municipality despite the fact that
such statute is subsequently declared unconstitutional.
Held: No. There can be no color of authority in an unconstitutional statute alone, the invalidity of which is
apparent on its face.
RATIO:
As a result of this analysis of the cases the following principles may be deduced which seem to reconcile the apparently
conflicting decisions:
I. The color of authority requisite to the organization of a de facto municipal corporation may be:
1. A valid law enacted by the legislature.
2. An unconstitutional law, valid on its face, which has either: (a) been upheld for a time by the courts; or (b) not yet
been declared void; provided that a warrant for its creation can be found in some other valid law or in the recognition of
its potential existence by the general laws or constitution of the state.
II. There can be no de facto municipal corporation unless either directly or potentially, such a de jure corporation is
authorized by some legislative fiat.
III. There can be no color of authority in an unconstitutional statute alone, the invalidity of which is apparent on its face.
IV. There can be no de facto corporation created to take place of an existing de jure corporation, as such organization
would clearly be a usurper."
In the case at bar, the mere fact that Balabagan was organized at a time when the statute had not been invalidated cannot
conceivably make it a de facto corporation, as, independently of the Administrative Code provision in question, there is
no other valid statute to give color of authority to its creation. An unconstitutional act is not a law; it confers no rights; it
imposes no duties; it affords no protection; it creates no office; it is, in legal contemplation, as inoperative as though it
CORPORATION LAW
Case Digest
had never been passed.
Executive Order 386 "created no office." This is not to say, however, that the acts done by the municipality of Balabagan
in the exercise of its corporate powers are a nullity because the executive order "is, in legal contemplation, as inoperative
as though it had never been passed." For the existence of Executive Order 386 is "an operative fact which cannot justly
be ignored." There is then no basis for the respondents' apprehension that the invalidation of the executive order creating
Balabagan would have the effect of unsettling many an act done in reliance upon the validity of the creation of that
municipality.
CORPO related ratio:
Generally, an inquiry into the legal existence of a municipality is reserved to the State in a proceeding for quo warranto
or other direct proceeding, and that only in a few exceptions may a private person exercise this function of government.
But the rule disallowing collateral attacks applies only where the municipal corporation is at least a de facto corporation.
For where it is neither a corporation de jure nor de facto, but a nullity, the rule is that its existence may be questioned
collaterally or directly in any action or proceeding by anyone whose rights or interests are affected thereby, including the
citizens of the territory incorporated unless they are estopped by their conduct from doing so.
CASE LAW/ DOCTRINE: A municipality organized at a time when the statute creating it was still valid and was
invalidated later is not a de facto corporation.
CONCURRING OPINION:
Today we decide that such a doctrine extends to a Presidential act held void not only on the ground of unconstitutional
infirmity but also because in excess of the statutory power conferred. That to me is the more significant aspect of this
decision. Once we accept the basic doctrine that each department as a coordinate agency of government is entitled to the
respect of the other two, it would seem to follow that at the very least, there is a presumption of the validity of the act
performed by it, unless subsequently declared void in accordance with legally accepted principles. The rule of law
cannot be satisfied with anything less.

CORPORATION LAW
Case Digest
014 Bergeron v. Hobbs AUTHOR: N. Manalo
(96 Wis 641 (1897))
TOPIC: Colorable Compliance with the legal Requirement in
Good Faith
PONTENTE: Newman J.,
FACTS
1. The members of the defendant corporation (Bayfield Agricultural Association) recorded their association's articles of
incorporation and certificate of election of officers in the office of the county register of deeds but removed those
documents from that office after their recordation.
2. The defendants, under the name of Bayfield Agricultural Association, employed several persons to perform labor in
improving their grounds and in erecting fences and buildings.
** Certain laborers performed work for the association and received time checks representing their wages.
3. Time checks given by the defendants to such laborers, for such labor, were assigned to the plaintiff.
4. The plaintiff brings this action to recover their amount, alleging that the defendants were a copartnership.
5. The defendants alleged that they were members of a corporation, and denied that they were copartners, or liable as
such.
ISSUE:
If the recording was not sufficient for that purpose, are the defendants liable to the plaintiff only as a de facto corporation?
HELD: NO.
The mere recording of the certificate of organization, without intention to leave the papers with him and they being in fact
withdrawn after being recorded, is not a "filing" thereof within the meaning of sec. 1460, R. S. The filing of said papers is
a condition precedent to the vesting of corporate powers, and acting as the corporation under color of right, so as to
relieve them from individual liability.
General rule: Where an attempt to organize a corporation fails by omission of some substantial step or proceeding
required by the statute, its members or stockholders are liable as partners for its acts and contracts
Exception: If they are considered as a de facto a corporation, and their right to be a corporation cannot be inquired into in
a collateral action, but only in a direct action for that purpose by the state.
RATIO:
The infirmity of the defendants' contention is in the assumption that they are de facto a corporation. In order to secure
this immunity from inquiry into its right to be a corporation in a collateral action, its action, as a corporation,
must be under a color, at least, of right. It is immaterial that they have carried on business under the supposed authority
to act as a body corporate, in entire good faith. If they had not color of legal right, they have obtained no immunity
from individual liability for the debts of the supposed corporation. Until the articles of incorporation are filed in
the office of the register of deeds of the county, there is no color of legal right to act as a corporation.
The filing of such paper is a condition precedent to the right to so act. So long as an act, required as a condition precedent,
remains undone, no immunity from individual liability is secured.

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CASE LAW/ DOCTRINE:
The mere recording of the certificate of organization, without intention to leave the papers with him and they being in fact
withdrawn after being recorded, is not a "filing" thereof within the meaning of sec. 1460, R. S. The filing of said papers is
a condition precedent to the vesting of corporate powers, and acting as the corporation under color of right, so as to
relieve them from individual liability.
General rule: Where an attempt to organize a corporation fails by omission of some substantial step or proceeding
required by the statute, its members or stockholders are liable as partners for its acts and contracts
Exception: If they are considered as a de facto a corporation, and their right to be a corporation cannot be inquired into in
a collateral action, but only in a direct action for that purpose by the state.
DISSENTING OPINION: Marshall J.,

The judgment of the circuit court, holding the defendants liable as partners, was wrong, and that it should be reversed, and
the cause remanded for a new trial.
The agricultural association with whom plaintiff contracted was a de facto corporation. Every element necessary to make
it such appears clearly by the record. There was a law under which it might have existed. The association prepared their
constitution, and adopted it in the form of ordinary articles of organization, under the general incorporating act, and by
mistake they filed it for record, and it was recorded and returned, instead of filing it to be left in the office, as the law
requires. They supposed that they had corporate existence by reason of the recording of their articles of organization.
They assumed to act as a corporation, and exercised corporate powers for a considerable length of time, and, for aught
that appears, in the utmost good faith. Certainly, the existence of the law, the making and recording of articles of
organization in an honest attempt to become a corporation, and the honest assumption and exercise of corporate
powers, prima facie, establishes good faith. Plaintiff supposed that the corporation was a corporate body till long after his
contract relations with the association ceased. Now to allow him to come in and say that the corporation did not exist
which all supposed had legal existence; that, though the officers of the association and plaintiff contracted for a corporate
liability on the part of the former, it shall be held, nevertheless, that the members of such association are bound as
partners, in direct violation of the well-settled law that such an association, under the circumstances, was a de
facto corporate body; and that, as between the parties, the relations are the same in all respects as though the corporation
had a de jure existence, and contrary to the settled doctrine, as I believe, of this and most other courts,--is what the
judgment in this case does.

CORPORATION LAW
Case Digest
015 Harril v. Davis, 168 F 187 (1909) Author: Sarah Calica
02 March 1909, 168 F 187 Note: No color nor incorporation until the necessary articles are
Topic: Colorable Compliance with the Legal filed.
Requirements in Good Faith
Ponente: Sanborn
Facts:
From 12 June 1902 until 12 December 1902, defendants actively engaged in purchasing lumber, material and labor of
plaintiff and in constructing cotton gin under the name “The Coweta Gin Company” and in conducting the business of
buying, selling, and ginning cotton for profit under the name "The Coweta Cotton & Milling Company". They incurred
than $4,700 of the indebtedness.
On 22 December 1902, they made their first real attempt to incorporate, and for the first time took on the color or
appearance of a corporation. They filed articles of incorporation in the clerk of CA. But they failed to file any duplicate
of them with the clerk of the judicial district in which their place of business was located. (Note: filing of the duplicate
of the articles of incorporation is necessary requirement by the statutes in order to constitute them a legal corporation;
Arkansas Law requires filing in the clerk of CA AND clerk of court in the judicial district)
Issues:
(1) Whether or not colorable compliance was enough to give the corporation the status of a “de facto” corporation
(2) Whether or not defendants are individually liable for the $4,700 debt on the ground that the “Coweta Cotton &
Milling Company” was a corporation de facto
(3) Whether or not plaintiff is estopped from denying the existence of defendants’ corporation
Held:
(1) No, because defendant failed to comply with the statutes of Arkansas law
(2) Yes.
(3) No, because plaintiff was in good faith.
Ratio:
(1) Neither the hope, the belief, nor the statement by parties that they are incorporated, nor the signing of the articles of
incorporation which are not filed, where filing is requisite to create the corporation, nor the use of the pretended
franchise of the nonexistent corporation, will constitute such a corporation de facto as will exempt those who actively
and knowingly use s name to incur legal obligations from their individual liability to pay them. There could be no
incorporation or color of it under the law until the articles were filed.
The filing of articles of incorporation with the clerk of the Court of Appeals was a sine qua non of any color of a legal
corporation. Without that there was not, and there could not be, an apparent corporation or the color of a corporation.
(2)
General Rule: Parties who associate themselves together and actively engage in business for profit under any name are
liable as partners for the debts they incur under that name.
Exception: Associates may escape individual liability for such debts by a compliance with incorporation laws or by a
real attempt to comply with them which gives the color of a legal corporation, and by the user of the franchise of such
a corporation in the honest belief that it is duly incorporated.
Parties who actively engage in business for profit under the name and pretense of a corporation which they know
neither exists nor has any color of existence may not escape individual liability because strangers are led by their
pretense to contract with their pretended entity as a corporation.
Hence, defendants cannot escape individual liability for the $4,700 on the ground that the Coweta Cotton & Milling
Company was a corporation de facto when that portion of the plaintiff's claim was incurred, because it then had no
color of incorporation, and they knew it and yet actively used its name to incur the obligation.
(3) The fact that the plaintiff dealt with and treated the Coweta Cotton & Milling Company as a corporation did not
estop it from denying that it was such before the defendants filed their articles of incorporation, because it was not a
corporation de facto before that time and because the indispensable elements of an estoppel in pais, ignorance of the
truth and absence of equal means of knowledge of it by the party who claims the estoppel, and action by the latter
induced by the misrepresentation of the party against whom the estoppel is invoked, do not exist in the case at bar.

CORPORATION LAW
Case Digest
016 Hall v. Piccio AUTHOR: De Guzman, Bien
(June 29,1950, 86 Phil 603 (1950) Lumber Business not registered SEC cannot claim “good
TOPIC: Colorable Compliance with the Legal faith” to be a corporation
Requirements in Good Faith
PONENTE: Bengzon, J;
FACTS
1. On May 28, 1947, the petitioners Arnold and Bradley Hall, and the respondents Fred and Emma Brown, Hipolita D.
Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, the article of incorporation of the Far Eastern
Lumber and Commercial Co., Inc., organized to engage in a general lumber business to carry on as general
contractors, operators and managers, etc. Attached to the article was an affidavit of the treasurer stating that 23,428
shares of stock had been subscribed and fully paid with certain properties transferred to the corporation described in
a list appended thereto.
2. Immediately after the execution of said articles of incorporation, the corporation proceeded to do business with the
adoption of by-laws and the election of its officers.
3. On December 2, 1947, the said articles of incorporation were filed in the office of the Securities and Exchange
Commissioner, for the issuance of the corresponding certificate of incorporation.
4. On March 22, 1948, pending action on the articles of incorporation by the aforesaid governmental office, the
respondents filed before the CFI of Leyte the civil case alleging among other things that the Far Eastern Lumber and
Commercial Co. was an unregistered partnership; that they wished to have it dissolved because of bitter dissension
among the members, mismanagement and fraud by the managers and heavy financial losses. The defendants
(now petitioners) in the suit, namely. Arnold and Bradley. Hall, filed a motion to dismiss, contesting the court's
jurisdiction and the sufficiently of the cause of action.
5. After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; and at the request of
plaintiffs, appointed of the properties thereof, upon the filing of a P20,000 bond.
6. The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of the receiver, but the
respondent judge refused to accept the offer and to discharge the receiver.
7. Whereupon, the present special civil action was instituted in this court
ISSUES:
(a.) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company, because it being a de facto
corporation, dissolution thereof may only be ordered in a quo warranto proceeding instituted in accordance with section 19
of the Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of incorporation thereby they are
estopped.
HELD:
(a) Yes, the Court has jurisdiction since The Securities and Exchange Commission has not issued the corresponding
certificate of incorporation. The personality of a corporation begins to exist only from the moment such certificate is issued
— not before.
(b) No, All the parties are informed that the Securities and Exchange Commission has not, so far, issued the corresponding
certificate of incorporation.

CORPORATION LAW
Case Digest
RATIO:
(a) The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern Lumber and Commercial
Co., is a de facto corporation, section 19 of the Corporation Law applies, and therefore the court had not jurisdiction to
take cognizance of said civil case number 381.
There are least two reasons why this section does not govern the situation.
1. Not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its
stockholders — may not probably claim "in good faith" to be a corporation. Under our statue it is to be noted
(Corporation Law, sec. 11) that it is the issuance of a certificate of incorporation by the Director of the Bureau
of Commerce and Industry which calls a corporation into being. The immunity if collateral attack is granted to
corporations "claiming in good faith to be a corporation under this act." Such a claim is compatible with the
existence of errors and irregularities; but not with a total or substantial disregard of the law. Unless there has been
an evident attempt to comply with the law the claim to be a corporation "under this act" could not be made "in
good faith."
2. Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders of the
alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be
terminated in a private suit for its dissolution between stockholders, without the intervention of the state.
(b) All of them know, or sought to know, that the personality of a corporation begins to exist only from the moment such
certificate is issued — not before (sec. 11, Corporation Law).
The complaining associates have not represented to the others that they were incorporated any more than the latter had
made similar representations to them. And as nobody was led to believe anything to his prejudice and damage, the
principle of estoppel does not apply. Obviously this is not an instance requiring the enforcement of contracts with the
corporation through the rule of estoppel
CASE LAW/ DOCTRINE: The Securities and Exchange Commission has not issued the corresponding certificate of
incorporation. The personality of a corporation begins to exist only from the moment such certificate is issued — not
before. Not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its
stockholders — may not probably claim "in good faith" to be a corporation.

CORPORATION LAW
Case Digest
017 EMPIRE MFG. V. STUART AUTHOR: Danna Laura Zerrudo
1 July 1881, 9 N.W. 527
TOPIC: Corporation by Estoppel Liability on paper issued in a corporate name.
PONENTE: Marston, C.J. Dissolution of a company that wasn’t regularly
incorporated, but supposed itself to be so, WILL NOT
*U.S. case, State of Michigan prevent creditors from looking to the old organization
for payment.
FACTS
1. Plaintiff is being sued upon a promissory note (PN) it issued under its corporate name.
2. At the time the PN was issued, the company, by mistake, was not properly organized under Michigan law.
3. Upon ascertaining this, the corporation was dissolved and a new one was formed under a different name.
4. The holder brought an action against the corporation to recover on the note.
5. Plaintiff’s defense: Since the old corporation wasn’t properly organized when the PN was issued, and the corporation
had been dissolved, it cannot be held liable for the PN.
Trial Court: In favor of holder

Upon Appeal: still in favor of holder
ISSUE: W/N the dissolution of the old corporation deprived the holder of its right to look to the corporation for payment
HELD: No, the corporation cannot evade its responsibility by setting up, as defense, ITS OWN MISTAKE
(siya na nga yung nagkamali so di pwedeng yung sarili niyang mistake pa yung gamitin niya as defense :p)
RATIO:
1. The dissolution would not deprive the creditors of still following and looking to the old organization for payment.
2. The old corporation could have been legally organized under laws existing at the time of its formation.
- The business for which it was organized, manufacturing, was authorized by law.
- The corporation attempted to organize in good faith.
3. Therefore, the corporation cannot rely on its own mistake to avoid responsibility on the PN.
CASE LAW/ DOCTRINE:
Dissolution of a company not regularly incorporated, but supposing itself to be so, does not prevent creditors from looking
to the old organization for payment.
Note #1: Michigan law allows three years after dissolution, for certain purposes, in winding up the affairs.
Note #2: The sufficiency of the (handwritten) endorsements in the PN was questioned.
Execution of the note was not denied but it was still insisted that this did not dispense with the proof of
the endorsements thereon. Proof was presented and the only question relates to their sufficiency.
Evidence: witness of plaintiff who had correspondence with the endorser through letters.
Held: Evidence was competent. The testimony of one who swears that he knows another’s
handwriting either from having seen him make his signature, or from business
correspondence apparently signed by him, is competent in proving the latter’s
indorsement.

CORPORATION LAW
Case Digest
018 THE LOWELL-WOODWARD HARDWARE AUTHOR: Ernesto C. Palomique III
COMPANY v. G. R. WOODS et al., Partners as THE
SUPERIOR LEASING COMPANY (ED. SEMKE, • Corporation sued a partnership on a promissory
Appellant). note. The latter as defense alleged that the plaintiff
104 Kan. 729; 180 P. 734; 1919 was not a corporation.
TOPIC: Corporation by estoppel
PONENTE: Mason, J.
FACTS
1. Lowell-Woodward Hardware Company (Plaintiff), describing itself as a Colorado corporation, brought an action
against several persons alleged to constitute a partnership, upon a promissory note.
2. On appeal, one of the defendants, Ed. Semke; denied the plaintiff’s corporate existence, or him being a member of
the partnership described.
3. A witness for the plaintiff testified that it was a corporation. He said that the plaintiff was running a hardware store
and that he inferred it was a corporation from its name and its mode of doing business.
4. Apparently, the defendant in this case issued a promissory note in favor of the payee indicated as “The Lowell-
Woodward Hardware Company.”
ISSUE: Whether the defendant can deny the existence of the corporation in order to escape his liability from the
promissory note.
HELD: No. One who enters into a contract with a party described therein as a corporation is precluded, in an action
brought thereon by such party under the same designation, from denying its corporate existence.
RATIO:
1. In accordance with modern views of good practice and to promote substantial justice, the court ruled that one who
has signed a promissory note running to a payee described by a name appropriate to a corporation, although not
employing that term, cannot, in an action brought against him thereon by such payee, in which it alleges itself to be
a corporation, be heard to question the plaintiff's corporate existence, unless upon a showing that his obligation to
make payment would be thereby affected.
2. The payee was styled in the note, "The Lowell-Woodward Hardware Company," a title which prima facie imports
a corporation.
3. There is some difference of opinion as to whether one contracting with an organization styling itself a "company,"
there being nothing further in the language used to indicate its character, the term "corporation" not being
employed, can be heard to deny its corporate capacity when sued by it upon the contract.
4. The defendant, having given his promise to pay the sum indicated to the payee named, should not be permitted to
escape or delay performance by raising an issue as to the character of the organization to which he is indebted,
unless his substantial rights might be thereby affected, which would only be under exceptional conditions.
5. It is thoroughly settled that in such a situation the defendant cannot attack the regularity of the plaintiff's
organization, or take any advantage of the fact that it has no legal standing as a corporation. No good reason is
apparent why, having explicitly promised to make payment to the concern by which he is sued, he should be
permitted to question its de facto, any more than its de jure, character--to inject into the case an issue having no
bearing on his obligation to make payment.

CORPORATION LAW
Case Digest
019 ASIA BANKING CORP v. STANDARD PRODUCTS AUTHOR: Keith Meridores
September 11, 1924, G.R. No. 22106 Be mindful of the words “Inc.” and “Corp”, as they
TOPIC: Corporation by Estoppel indicate the type of organization.
PONTENTE: OSTRAND, J.
FACTS
1. On Nov. 28, 1921, Standard Products, Inc. (note the inclusion of “Inc. as an indication of a corporation) issued a
promissory note amounting to P24, 736.47 to Asia Banking Corporation.
2. Asian Banking filed a case to recover the said amount plus 10% interest.
3. The lower court, on Nov. 1, 1923 ruled in favor of Asia Banking Corp.
(No mention where appeal was brought, presumably to SC)
4. But, Standard Products, Inc. (appellant) contended that Asia Banking Corp (plaintiff) failed to prove affirmatively the
corporate existence of the parties. Appellant also assigned this as a reversible error.
ISSUE:
Whether or not the failure of Asia Banking Corp to prove corporate existence of both parties is fatal to its suit to recover?
HELD:
No. The defendant having recognized the corporate existence of the plaintiff by making a promissory note in its favor
and making partial payments on the same is therefore estopped to deny said plaintiff's corporate existence.
RATIO:
1. There is no merit whatever in the appellant's contention. The general rule is that in the absence of fraud a person who
has contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence
as a corporate body is thereby estopped to deny its corporate existence in any action leading out of or involving such
contract or dealing, unless its existence is attacked for cause which have arisen since making the contract or other dealing
relied on as an estoppel and this applies to foreign as well as to domestic corporations.
2. The defendant having recognized the corporate existence of the plaintiff by making a promissory note in its favor and
making partial payments on the same is therefore estopped to deny said plaintiff's corporate existence. It is, of course,
also estopped from denying its own corporate existence. Under these circumstances it was unnecessary for the plaintiff to
present other evidence of the corporate existence of either of the parties. It may be noted that there is no evidence
showing circumstances taking the case out of the rules stated.
CASE LAW/ DOCTRINE:

Absent any fraud, any person who recognized and in effect admitted its legal existence as a corporate body is estopped to
deny its corporate existence, unless its existence is attacked since making the contract or dealings.

CORPORATION LAW
Case Digest
020 CRANSON vs. INTERNATIONAL BUSINESS AUTHOR: Marvin C. De Leon
MACHINES CORPORATION • IBM, having dealt with the defectively organized
234 Md. 477 (1964) company as if it were properly organized and
200 A.2d 33 having relied on its credit instead of Cranson‘s, is
TOPIC: Corporation by estoppel estopped from asserting that it was not incorporated.
PONTENTE: HORNEY, J. It cannot sue Cranson personally.
• Real Estate Service Bureau was neither a de
jure nor a de facto corporation
FACTS
1. On April 1961, Real Estate Service Bureau was incorporated.
2. Albion C. Cranson, Jr was elected president and all transactions conducted by him for the corporation, were made as an
officer of the corporation. At no time did he assume any personal obligation or pledge his individual credit.
3. Due to an oversight on the part of the attorney, of which Cranson was not aware, the certificate of incorporation, which
had been signed and acknowledged prior to May 1, 1961, was not filed until November 24, 1961.
4. Between May 17 and November 8, the Bureau purchased eight typewriters from I.B.M., on account of which partial
payments were made, leaving a balance due of $4,333.40.
5. On the theory that the Real Estate Service Bureau was neither a de jure nor a de facto corporation and that Albion C.
Cranson, Jr., was a partner in the business conducted by the Bureau and as such was personally liable for its debts, the
International Business Machines Corporation brought this action against Cranson for the balance due on electric
typewriters purchased by the Bureau.
6. In due course, Cranson filed a general issue plea and an affidavit in opposition to summary judgment in which he
asserted in effect that the Bureau was a de facto corporation and that he was not personally liable for its debts.
ISSUE: Whether an officer of a defectively incorporated association may be subjected to personal liability under the
circumstances of this case
HELD: No. IBM, having dealt with the defectively organized company as if it were properly organized and having relied
on its credit instead of Cranson‘s, is estopped from asserting that it was not incorporated. It cannot sue Cranson personally.
RATIO:
1. Traditionally, two doctrines have been used by the courts to clothe an officer of a defectively incorporated association
with the corporate attribute of limited liability. The first, often referred to as the doctrine of de facto corporations, has been
applied in those cases where there are elements showing: (1) the existence of law authorizing incorporation: (2) an effort in
good faith to incorporate under the existing law; and (3) actual user or exercise of corporate powers. The second, the
doctrine of estoppel to deny the corporate existence, is generally employed where the person seeking to hold the officer
personally liable has contracted or otherwise dealt with the association in such a manner as to recognize and in effect admit
its existence as a corporate body.
2. In cases similar to the one at bar, involving a failure to file articles of incorporation, the courts of other jurisdictions
have held that where one has recognized the corporate existence of an association, he is estopped to assert the contrary
with respect to a claim arising out of such dealings. The estoppel theory is applied only to the facts of each particular case
and may be invoked even where there is no corporation de facto. Accordingly, even though one or more of the requisites of
a de facto corporation are absent, we think that this factor does not preclude the application of the estoppel doctrine in a
proper case, such as the one at bar.
3. I.B.M. having dealt with the Bureau as if it were a corporation and relied on its credit rather than that of Cranson, is
estopped to assert that the Bureau was not incorporated at the time the typewriters were purchased. For this reason, we
hold that Cranson was not liable for the balance due on account of the typewriters.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
“The doctrine of estoppel cannot be invoked unless a corporation has at least a de facto existence” is now overruled. Even
though one or more of the requisites of a de facto corporation are absent, this factor does not preclude the application of
the estoppel doctrine in a proper case.
The “de facto doctrine differs from the estoppel doctrine in that where all the requisites of a “de facto corporation are
present, then the defectively organized corporation will have the status of a “de jure corporation in all cases brought by
and against it, except only as to the State in a direct proceeding. On the other hand, if any of the requisites are absent, then
the estoppel doctrine can apply only if under the circumstances of the particular case then before the court, either the
defendant association is estopped from defending on the ground of lack of capacity to be sued, or the defendant third party
had dealt with the plaintiff as a corporation and is deemed to have admitted its existence.

CORPORATION LAW
Case Digest
021 Salvatierra v. Garlitos AUTHOR: Pat
May 23, 1958, G.R. No. L-11442
TOPIC: Corporation by Estoppel
PONENTE: Felix, J.
FACTS:
1. Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at Burauen, Leyte.
2. Manuela entered into a contract of lease with Philippine Fibers Producers Co, Inc. (PFPC), allegedly a corporation
“duly organized and existing under the laws of the Philippines, domiciled at Burauen, Leyte, and represented by Mr.
Segundino Q. Refuerzo, the President.”
3. The contract indicated:
- a period of 10 years for the lifetime of the lease
- kenaf, ramie or other crops suitable to the soil would be planted
- lessor would be entitled to 30% of net income accruing from the harvest of any, crop without being responsible for
the cost of production
- every harvest, the lessee was bound to declare at the earliest possible time the income derived therefrom
- to deliver the corresponding share due the lessor
4. The alleged corporation, PFPC, did not comply with said obligations
5. Alanuela T. Vda. de Salvatierra filed with the CFI a complaint against PFPC and Segundino, for accounting, rescission
and damages.
6. Alanuela averred that:
- Defendants planted kenaf on 3 has. of the leased property which was, at the time of the commencement of the
action, already harvested, processed and sold by defendants
- Defendants refused to render an accounting of the income derived therefrom and to deliver lessor’s share
- That the estimated gross income was P4,500, and deductible expenses of P1,000
- Defendants’ refusal to do so was a violation of the contract, therefore, a rescission was proper
7. Defendants failed to file their answer to the complaint so the Court declared them in default
8. Lower court granted plaintiff’s prayer and required defendants to render a complete accounting of the harvest of the
land w/in 15 days from receipt of the decision and to deliver 30% of the net income realized from the last harvest to
plaintiff, with legal interest
- It was further provided that upon defendants’ failure to abide by the said requirement, the gross income would be
fixed at P4,200 or a net income of P3,200 after deducting the expenses for production, 30% of which of P960 was
held to be due pursuant to the contract of lease, which was declared rescinded.
9. The court issued a writ of execution and caused the attachment of 3 parcels of land registered under Segundino
10. No property PFPC was found available for attachment
11. Segundino filed a motion claiming that the decision rendered in Civil Case no. 1912 was null and void, there being no
allegation in the complaint pointing to his personal liability, and thus prayed that an order be issued limiting such
liability to PFPC
12. Upon Segundino’s motion, the lower court amended its decision and granted Segundino’s motion. It ordered the
release of all properties of Segundino that were attached.
13. Manuela assailed the decision of lower court on the ground that she sued PFPC without impleading Segundino because
she initially believed the PFPC was a legitimate corporation but later found out that said corporation was not registered
in the SEC.
ISSUE:
3. Whether or not the lower court’s amended judgment of releasing Segundino’s properties from attachment is
correct.
4. Whether or not Segundino can be held personally liable.
HELD:
3. No, the Supreme Court set aside and nullified the amended judgment of the lower court.
4. Yes, because Segundino, as president of the unregistered corporation PFPC was the moving spirit behind the
consummation of the lease agreement by acting as its representative, his liability cannot be limited.
CORPORATION LAW
Case Digest
RATIO:
3. While as a general rule a person who has contracted or dealt with an association in such a way as to recognize its
existence as a corporate body is estopped from denying the same in an action arising out of such transaction or
dealing, yet this doctrine may not be held to be applicable where fraud takes a part in the said transaction.
• In the instant case, on plaintiff's charge that she was unaware of the fact that PFPC had no juridical
personality, defendant Segundino gave no confirmation or denial and the circumstances surrounding the
execution of the contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was
really made to believe that such corporation was duly organized in accordance with law.
4. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of reaping the
consequential damages.
• A person who acts as an agent without authority or without a principal is himself regarded as the principal,
possessed of all the rights and subject to all the liabilities of a principal, a person acting or purporting to act on
behalf of a corporation which has no valid existence assumes such privileges and obligations and comes
personally liable for contracts entered into or for other acts performed as such, agent.
CASE LAW/ DOCTRINE: There can be no question that a corporation with registered has a juridical personality
separate and distinct from its component members or stockholders and officers such that a corporation cannot be held
liable for the personal indebtedness of a stockholder even if he should be its president and conversely, a stockholder or
member cannot be held personally liable for any financial obligation be, the corporation in excess of his unpaid
subscription. But this rule is understood to refer merely to registered corporations and cannot be made applicable to the
liability of members of an unincorporated association.
The reason behind this doctrine is obvious-since an organization which before the law is non-existent has no personality
and would be incompetent to act and appropriate for itself the powers and attribute of a corporation as provided by law; it
cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk.

CORPORATION LAW
Case Digest
022 ALBERT v. UNIVERSITY PUBLISHING CO., AUTHOR: Yayie Lanting
INC. Corporation-by-estoppel: was not invoked and not
January 30, 1965 G.R No. L-19118 applicable to the case
TOPIC: Corporation-by-Estoppel
PONENTE: Bengzon, J.P., J
FACTS
1. July 19, 1948: Defendant University Publishing Co., Inc., through Jose M. Aruego, its President, entered into a contract
with Mariano Albert to pay the latter P30, 000 for the exclusive right to publish Albert’s revised Commentaries on the
Revised Penal Code; that defendant had undertaken to pay in 8 quarterly installments of P3, 750.00 starting July 15, 1948;
that per contract failure to pay one installment would render the rest due.
2. Defendant had failed to pay the second installment
3. September 24, 1949: Mariano A. Albert sued University Publishing Co., Inc. Plaintiff alleged that defendant was a
corporation duly organized and existing under the laws of the Philippines
4. Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960, the Court held that the judgment for
P15,000.00 which had become final and executor.
5. July 22, 1961: the Court ordered issuance of an execution writ against University Publishing Co., Inc.
6. August 10, 1961: Albert petitioned for a writ of execution against Jose M. Aruego, as the real defendant, stating that
there is no such entity as University Publishing Co., Inc. Plaintiff annexed to his petition a certification from the SEC
attesting: "The records of this Commission do not show the registration of UNIVERSITY PUBLISHING CO., INC., either
as a corporation or partnership."
7. The court denied the petition by order of September 9, 1961. Plaintiff appealed.
ISSUE:
1. Whether or not the corporation-by-estoppel may be invoked?
2. Whether or not Jose Aruego may be held liable?
HELD:
1. No. Corporation-by-estoppel was not invoked and even it was, it will not be applicable to the case.
2.Yes. University Publishing Co., Inc. has no independent personality; it is just a name. Jose M. Aruego was, in
reality, the one who answered and litigated, through his own law firm as counsel. He was in fact, if not, in name, the
defendant.
RATIO:
1. Aruego represented a non-existent entity and induced not only the plaintiff but even the court to believe in such
representation. He signed the contract as "President" of "University Publishing Co., Inc.," stating that this was "a
corporation duly organized and existing under the laws of the Philippines," and obviously misled plaintiff into believing
the same.
2.The evidence is patently clear that Jose M. Aruego, acting as representative of a non-existent principal, was the real party
to the contract sued upon; that he was the one who reaped the benefits resulting from it, so much so that partial payments
of the consideration were made by him; that he violated its terms, thereby precipitating the suit in question; and that in the
litigation he was the real defendant. Perforce, in line with the ends of justice, responsibility under the judgment falls on
him.
3.Case is remanded ordering the lower court to hold supplementary proceedings for the purpose of carrying the judgment
into effect against University Publishing Co., Inc. and/or Jose M. Aruego.
CASE LAW/ DOCTRINE:

One who has induced another to act upon his willful misrepresentation that a corporation was duly organized and existing
under the law, cannot thereafter set up against his victim the principle of corporation by estoppel (Salvatiera vs. Garlitos,
56 O.G. 3069).

CORPORATION LAW
Case Digest
023 LIM TONG LIM v PHILIPPINE FISHING GEAR AUTHOR: Jade
INDUSTRIES, INC. (PFGI) Ocean Quest Fishing Corporation was a fishing ventured
November 3, 1999 GR # 136448 entered into by Antonio Chua, Peter Yao and Lim Tong
TOPIC: Corporation by Estoppel Lim.
PONTENTE: Panganiban, J. It was established that what they had was a general
partnership where they are to be held jointly liable for all
debts, liabilities, and damages incurred
FACTS
• On 7 February 1990, Antonio Chua and Peter Yao, on behalf of the Ocean Quest Fishing Corporation, entered into
a contract for the purchase of fishing nets worth P532,045.00 and 400 pieces of floats worth P68,000.00 from the
Philippine Fishing Gear Industries, Inc. They claimed that they were engaged in a business venture with Lim Tong
Lim though he was not a signatory on the agreement.
• The buyers failed to pay for the nets and the floats so PFGI filed a collection suit against Chua, Yao and Lim with
a prayer for a Writ of Preliminary Attachment. The suit was filed against the three for they were general partners
even if Ocean Quest Fishing Corporation was a non-existent corporation as shown by a certification from the
Securities and Exchange Commission.
• On 20 September 1990, the Lower Court issued a Writ of Preliminary Attachment. The sheriff enforced the order
by attaching the nets on board F/B Lourdes which was docked at the Fisheries Port in Navotas.
• Chua filed a manifestation admitting his liability and requesting for a reasonable time for payment. He also
turned-over the nets which are still in his possession. Yao filed an answer but failed to appear in subsequent
hearings, therefore deemed to have waived his rights to cross-examine and to present evidences. Lim Tong Lim
filed an answer with a counter-claim and cross-claim and moved for the lifting of the Writ of Attachment. The
trialcourt maintained the Writ and ordered the public auction of the fishing nets which was won by PFGI.
• On 18 November 1992, the trial court ruled that PFGI was entitled to the Writ of Attachment and that Chua, Yao
and Lim were jointly liable to pay PFGI as general partners.
• Lim appealed to the Court of Appeals which held that he was a partner of Chua and Yao as manifested by
evidencethat the 3 entered into a fishing business as partners and agreed to divide the profit among them.
• Lim brought the issue to the Supreme Court and insisted that he cannot be held jointly liable with Chua and Yao.
ISSUE:
Whether or not Lim Tong Lim is jointly liable with Chua and Yao
HELD:
The petition was dismissed. Lim Tong Lim is jointly liable with Chua and Yao.
RATIO:
It was already established by the lower courts that Chua, Yao and Lim are partners. Lim requested Chua and Yao, who
were already partners in a fishing business to join him and borrowed money from Jesus Lim, petitioner’s brother, to
finance their venture and that they had a verbal agreement to acquire 2 fishing boats. They had a Compromise Agreement
stating their intention to pay their loan with the proceeds of the sales of the boats and to divide equally among them the
excess or the loss. Their partnership is extended to the purchase of the nets and the floats which are both essential to
fishing and acquired to aid them in their business.
While Lim claims that his name did not appear on any of the contracts with PFGI and that he did not transact with PFGI
Directly, he benefited from the use of the nets found inside F/B Lourdes. He even stopped the attachment of the nets
because it effectively stopped his use of the fishing boat.
Although their corporation was not legally formed due to unknown reasons, this does not preclude the liabilities of Chua,
Yao and Lim as contracting parties. According to the doctrine of corporation by estoppel, Lim is jointly liable with Chua
and Yao because he also benefited from the fishing they have entered.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
Sec 21 of the Corporation Code
CORPORATION BY ESTOPPEL – All persons who assume to act as a corporation knowing it to be without authority to
do so shall be liable as general partners for all debts, liabilities, and damages incurred or arising as a result thereof
Separate Opinion – Vitug, J
The association formed by Chua, Yao and Lim should be a de facto partnership. Article 1816 of the New Civil Code
provides that all partners shall be liable pro rata beyond the partnership assets for all the contracts which may have been
entered into in its name, under its signature, and by a person authorized to act for the partnership.

CORPORATION LAW
Case Digest
024 FLEISCHER v. BOTICA NOLASCO, INC., AUTHOR: Krystelle
March 14, 1925; G.R. No. L-23241
TOPIC: Internal Organization: By- Laws Section 13, paragraph 7of Act No. 1459 empowers a
Ponente: Justice Johnson corporation to make by-laws, not inconsistent with any
existing law, for the transferring of its stock. The only
restraint by the Corporation Law upon transfer of shares is
found in section 35 of Act No. 1459.
FACTS
1. This action was commenced in the Court of First Instance of the Province of Oriental Negros on the 14th day of
August, 1923, against the board of directors of the Botica Nolasco, Inc., a corporation duly organized and existing
under the laws of the Philippine Islands.
2. A certain Manuel Gonzalez was the original owner of the five shares of stock in question, Nos. 16, 17, 18, 19 and 20
of the Botica Nolasco, Inc.
3. On March 11, 1923, he assigned and delivered said five shares to the plaintiff, Henry Fleischer, by accomplishing
the form of endorsement provided on the back thereof, together with other credits, in consideration of a large sum of
money owed by Gonzalez to Fleischer.
4. On March 13, 1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said corporation, offered to buy from
Henry Fleischer, on behalf of the corporation, said shares of stock, at their par value of P100 a share, for P500.
5. By virtue of article 12 of the by-laws of Botica Nolasco, Inc., said corporation had the preferential right to buy from
Manuel Gonzalez said shares; that the plaintiff refused to sell them to the defendant; that the plaintiff requested
Doctor Miciano to register said shares in his name; that Doctor Miciano refused to do so, saying that it would be in
contravention of the by-laws of the corporation.
6. It also appears from the record that on the 13th day of March, 1923, two days after the assignment of the shares to
the plaintiff, Manuel Gonzales made a written statement to the Botica Nolasco, Inc., requesting that the five shares of
stock sold by him to Henry Fleischer be noted transferred to Fleischer's name.
7. He also acknowledged in said written statement the preferential right of the corporation to buy said five shares. On
June 14, 1923, Gonzalez wrote a letter to the Botica Nolasco, withdrawing and cancelling his written statement of
March 13, 1923, to which letter the Botica Nolasco on June 15, 1923, replied, declaring that his written statement
was in conformity with the by-laws of the corporation; that his letter of June 14th was of no effect, and that the
shares in question had been registered in the name of the Botica Nolasco, Inc.
8. The plaintiff filed an action against Botica Nolasco, Inc.
9. The plaintiff prayed that said board of directors be ordered to register in the books of the corporation five shares of
its stock in the name of Henry Fleischer, the plaintiff, and to pay him the sum of P500 for damages sustained by him
resulting from the refusal of said body to register the shares of stock in question.
10. The defendant filed a demurrer on the ground that the facts alleged in the complaint did not constitute sufficient
cause of action, and that the action was not brought against the proper party, which was the Botica Nolasco, Inc. The
demurrer was sustained, and the plaintiff was granted five days to amend his complaint.
11. On November 15, 1923, the plaintiff filed an amended complaint against the Botica Nolasco, Inc., alleging that he
became the owner of five shares of stock of said corporation, by purchase from their original owner, one Manuel
Gonzalez; that the said shares were fully paid; and that the defendant refused to register said shares in his name in
the books of the corporation in spite of repeated demands to that effect made by him upon said corporation, which
refusal caused him damages amounting to P500.
12. Plaintiff prayed for a judgment ordering the Botica Nolasco, Inc. to register in his name in the books of the
corporation the five shares of stock recorded in said books in the name of Manuel Gonzalez, and to indemnify him in
the sum of P500 as damages, and to pay the costs. The defendant again filed a demurrer on the ground that the
amended complaint did not state facts sufficient to constitute a cause of action, and that said amended complaint was
ambiguous, unintelligible, uncertain, which demurrer was overruled by the court.
13. The defendant answered the amended complaint denying generally and specifically each and every one of the
material allegations thereof, and, as a special defense, alleged that the defendant, pursuant to article 12 of its by-
laws, had preferential right to buy from the plaintiff said shares at the par value of P100 a share, plus P90 as
dividends corresponding to the year 1922, and that said offer was refused by the plaintiff. The defendant prayed for a
judgment absolving it from all liability under the complaint and directing the plaintiff to deliver to the defendant the
CORPORATION LAW
Case Digest
five shares of stock in question, and to pay damages in the sum of P500, and the costs.
14. RTC ruled in favour of the plaintiff. It ruled that article 12 of the by-laws of the corporation which gives it
preferential right to buy its shares from retiring stockholders, is in conflict with Act No. 1459 (Corporation Law),
especially with section 35 thereof; and rendered a judgment ordering the defendant corporation, through its board of
directors, to register in the books of said corporation the said five shares of stock in the name of the plaintiff, Henry
Fleischer, as the shareholder or owner thereof, instead of the original owner, Manuel Gonzalez, with costs against
the defendant.
15. The defendant appealed from said judgment, hence, this preent action.
ISSUE: Whether or not article 12 of the by-laws of the Botica Nolasco, Inc., is in conflict with the provisions of the
Corporation Law (Act No. 1459).
HELD: YES. The by-law in question was adopted under the power conferred upon the corporation by section 13,
paragraph 7 of Act No. 1459 but in adopting said by-law the corporation has transcended the limits fixed by law in the
same section, and has not taken into consideration the provisions of section 35 of Act No. 1459.
RATIO:
Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not inconsistent with any
existing law, for the transferring of its stock. It follows from said provision, that a by-law adopted by a corporation relating
to transfer of stock should be in harmony with the law on the subject of transfer of stock. The law on this subject is found
in section 35 of Act No. 1459 above quoted. Said section specifically provides that the shares of stock "are personal
property and may be transferred by delivery of the certificate indorsed by the owner, etc." Said section 35 defines the
nature, character and transferability of shares of stock. Under said section they are personal property and may be
transferred as therein provided. Said section contemplates no restriction as to whom they may be transferred or sold. It
does not suggest that any discrimination may be created by the corporation in favor or against a certain purchaser. The
holder of shares, as owner of personal property, is at liberty, under said section, to dispose of them in favor of whomsoever
he pleases, without any other limitation in this respect, than the general provisions of law. Therefore, a stock corporation in
adopting a by-law governing transfer of shares of stock should take into consideration the specific provisions of section 35
of Act No. 1459, and said by-law should be made to harmonize with said provisions. It should not be inconsistent
therewith.
As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect
the objects of the corporation, and are not contradictory to the general policy of the laws of the land. On the other hand, it
is equally well settled that by-laws of a corporation must be reasonable and for a corporate purpose, and always within the
charter limits. They must always be strictly subordinate to the constitution and the general laws of the land. They must not
infringe the policy of the state, nor be hostile to public welfare. They must not disturb vested rights or impair the obligation
of a contract, take away or abridge the substantial rights of stockholder or member, affect rights of property or create
obligations unknown to the law.
The power of a corporation to enact by-laws restraining the sale and transfer of shares, should not only be in
harmony with the law or charter of the corporation, but such power should be expressly granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No. 1459,
quoted above, as follows: "No transfer, however, shall be valid, except as between the parties, until the transfer is entered
and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the
transfer, the number of the certificate, and the number of shares transferred." This restriction is necessary in order that the
officers of the corporation may know who are the stockholders, which is essential in conducting elections of officers, in
calling meeting of stockholders, and for other purposes. but any restriction of the nature of that imposed in the by-law now
in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade.
And moreover, the by-laws now in question cannot have any effect on the appellee. He had no knowledge of
such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable consideration.
He was not a privy to the contract created by said by-law between the shareholder Manuel Gonzalez and the Botica
Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the corporation for a
period of thirty days is not binding upon an assignee of the stock as a personal contract, although his assignor knew of the
by-law and took part in its adoption. When no restriction is placed by public law on the transfer of corporate stock, a
purchaser is not affected by any contractual restriction of which he had no notice
CORPORATION LAW
Case Digest
The assignment of shares of stock in a corporation by one who has assented to an unauthorized by-law has only the
effect of a contract by, and enforceable against, the assignor; the assignee is not bound by such by-law by virtue of the
assignment alone. 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.
CASE LAW/ DOCTRINE:

As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects
of the corporation, and are not contradictory to the general policy of the laws of the land. On the other hand, it is equally
well settled that by-laws of a corporation must be reasonable and for a corporate purpose, and always within the charter
limits. They must always be strictly subordinate to the constitution and the general laws of the land. They must not infringe
the policy of the state, nor be hostile to public welfare. They must not disturb vested rights or impair the obligation of a
contract, take away or abridge the substantial rights of stockholder or member, affect rights of property or create
obligations unknown to the law.

CORPORATION LAW
Case Digest
025 THE GOVERNMENT OF THE PHILIPPINE AUTHOR: Revy Medrick dR. Neri
ISLANDS (on relation of the Attorney-General),
plaintiff, vs. EL HOGAR FILIPINO, defendant.
G.R. No. L-26649 - July 13, 1927
TOPIC: Internal Organization: By-Laws
PONENTE: Street, J.
FACTS:
1. A quo warranty proceeding instituted originally by the Government of the Philippine Islands on the relation of the
Attorney-General against the building and loan association known as El Hogar Filipino, for the purpose of depriving it of
its corporate franchise, excluding it from all corporate rights and privileges, effecting a final dissolution of said
corporation.
2. On March 1, 1906, the Philippine Commission enacted Corporation Law or Act No. 1459 and section 171 to 190 are
devoted to the building and loan associations.
3. The respondent, El Hogar Filipino, was the first corporation organized in the Philippines under the said provisions.
4. Under the law then, the capital of an association was not permitted to exceed 3M but then amended to 10M.
5. The by-laws of the corporation states a provision that: the BOD, by vote of absolute majority of its members, is
empowered to cancel shares and return to the owner thereof the balance resulting from the liquidation thereof, whenever,
by reason of their conduct of any other motive, the continuation as members of the owners of such shares is not desirable.
6. There is also a provision in the by-laws that the directors shall elect from among the shareholder members to fill the
vacancies that may occur in the BOD until the election at the general meeting.
7. Third cause of action is the fact that directors of El Hogar have been receiving large compensation because the by-laws
provide 5% of the net profit shown by the annual balance sheet to be distributed to the directors in proportion to their
attendance at the meetings of the board.
8. Fourth cause of action: procedure to adopt when one is elected as a BOD =P5000 pay-up of shares as security- only the
rich can be BOD and the waiver to receive loans from the corporation.
9. The Government questioned the validity because it conflicts with the Corporation Law.
ISSUE:
Whether or not El Hogar may be dissolved on such grounds
HELD:
No.

CORPORATION LAW
Case Digest
RATIO:
1. The by-law (1st) is a mere nullity and could not be enforced if the directors attempt to do so.
2. In the second cause of action, unless the law or the charter of the corporation expressly provides that an office shall
become at the expiration of the term of office for which the officer was elected, the general rule is to allow the
officer to hold over until his successor is duly qualified. MERE FAILURE OF ACORPO TO ELECT OFFICERS
DOES NOT TERMINATE THE TERM OF EXISTINGOFFICERS AND DISSOLVE THE CORPORATION.
3. On the third cause of action as to the compensation of the BOD= the question must be of the validity of the
measure and not the propriety and wisdom of the measure adopted. The power to fix the compensation they shall
receive, if any, is left to the corporation to be determined by the by-laws. The remedy is in the hands of the
stockholders.
4. On the fourth cause of action: The Corporation Law expressly gives the power to the corporation to provide in its
by-laws for the qualifications of directors and the requirement of security from them for the proper discharge of
the duties of their office.
CASE LAW/ DOCTRINE:
The circumstances that one of the provisions contained in the by-laws of a building and loan association is invalid as
conflicting with the express provision of statute is not a misdemeanor on the part of the corporation for which the
association can be penalized by the forfeiture of its character.

CORPORATION LAW
Case Digest
026 STOCKERHOLDER OF T.GUANZON V. AUTHOR: Gelene Guevara
REGISTER OF DEEDS
October 30, 1962, G.R. No. L-18216
TOPIC: The Theory of Corporate Entity
PONENTE: BAUTISTA ANGELO, J.
FACTS
1. On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of liquidation
of the assets of the corporation reciting, among other things, that by virtue of a resolution of the stockholders
adopted on September 17, 1960, dissolving the corporation, they have distributed among themselves in proportion
to their shareholdings, as liquidating dividends, the assets of said corporation, including real properties located in
Manila.
2. The certificate of liquidation was denied by the Register of Deeds because of the following grounds: (3) the
number of parcels not certified to in the acknowledgment; (5) P430.50 Reg. fees need be paid; (6) P940.45
documentary stamps need be attached to the document; and, (7) the judgment of the Court approving the
dissolution and directing the disposition of the assets of the corporation need be presented.
3. Deciding the consulta elevated by the stockholders, the Commissioner of Land Registration overruled ground No.
7 and sustained requirements Nos. 3, 5 and 6.
ISSUE: Whether or not the certificate of liquidation merely involves a distribution of the corporation's assets or should be
considered a transfer or conveyance.
Petitioner’s Argument: certificate of liquidation is not a conveyance or transfer but merely a distribution of the assets of
the corporation which has ceased to exist for having been dissolved. This is apparent in the minutes for dissolution
attached to the document. Not being a conveyance the certificate need not contain a statement of the number of parcel of
land involved in the distribution in the acknowledgment appearing therein. Hence the amount of documentary stamps to be
affixed thereon should only be P0.30 and not P940.45, as required by the register of deeds. Neither is it correct to require
appellants to pay the amount of P430.50 as registration fee.
Commissioner of Land Registration’s Argument: it agreed with the view expressed by the register of deed to the effect that
the certificate of liquidation in question, though it involves a distribution of the corporation's assets, represents a transfer of
said assets from the corporation to the stockholders. Hence, in substance it is a transfer or conveyance.
HELD: The Court held that the act of liquidation made by the stockholders of the F. Guanzon and Sons, Inc. of the latter's
assets is a transfer or conveyance of the title of its assets to the individual stockholders
RATIO:
Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members.
While shares of stock constitute personal property, they do not represent property of the corporation. A share of stock only
typifies an aliquot part of the corporation's property or the right to share in its proceeds to that extent when distributed
according to law and equity, but its holder is not the owner of any part of the capital of the corporation. Nor is he entitled
to the possession of any definite portion of its property or assets.
The act of liquidation made by the stockholders of the corporation of the latter’s assets is not and cannot be considered a
partition of community property, but rather a transfer or conveyance of the title of its assets to the individual stockholders.
Since the purpose of the liquidation, as well as the distribution of the assets, is to transfer their title from the corporation to
the stockholders in proportion to their shareholdings, that transfer cannot be effected without the corresponding deed of
conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of
liquidation as one in the nature of a transfer or conveyance.

CORPORATION LAW
Case Digest
027 Caram v. CA., AUTHOR: Arthur Archie Tiu
June 30, 1987, G.R. No. L-48627 -Corporation Law; Contracts; Liability of stockholders;
TOPIC: The Corporate Entity, Theories. Petitioners cannot be held personally liable for the
PONTENTE: CRUZ, J. compensation claimed by private respondent for services
performed by him in the organization of the corporation
since petitioners did not contract such services.
-A bona fide corporation should alone be liable for its

corporate acts duly authorized by its officers and directors
Note: Guys, walang ibang facts nakalagay kaya medyo

magulo basahin
FACTS
1. question of the solidary liability of the petitioners with their co-defendants
2. CA: Defendants are hereby ordered to jointly and severally pay the plaintiff the amount of P50,000.00 for the
preparation of the project study and his technical services that led to the organization of the defendant corporation,
plus P10,000.00 attorney's fees
3. petitioners claim that this order has no support in fact and law because they had no contract whatsoever with the
private respondent regarding the above-mentioned services
4. Petitioners claim they are mere private investors in the corporation and that they should not be held solidarily
liable with the company as they are a separate enity and that Co-defendants Barretto and Garcia are the ones who
requested the services of respondent.
ISSUE: whether or not the petitioners themselves are also and personally liable for such expenses and, if so, to what
extent
HELD: No, petitioners cannot be held personally liable for compensation claimed by respondent.
RATIO:
- Petitioners were not really involved in the initial steps that finally led to the incorporation of the Filipinas Orient
Airways. Elsewhere in the decision, Barretto was described as "the moving spirit."
- petitioners were merely among the financiers whose interest was to be invited and who were in fact persuaded, on
the strength of the project study, to invest in the proposed airline.
- there was no showing that the Filipinas Orient Airways was a fictitious corporation and did not have a separate
juridical personality, to justify making the petitioners, as principal stockholders thereof, responsible for its
obligations. As a bona fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts
as duly authorized by its officers and directors.

CORPORATION LAW
Case Digest
028 PALAY, INC. and ALBERT ONSTOTT, vs. AUTHOR: Chedelle Florido
JACOBO C. CLAVE, SUPREME COURT
September 21, 1983, G.R. No. L-56076
TOPIC: The Theory of Corporate Entity
PONENTE: Melencio-Herrera
FACTS
1. On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor of private respondent,
Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the Crestview Heights Subdivision in
Antipolo, Rizal (The sale price was P23,300.00 with 9% interest per annum, payable with a downpayment of P4,660.00
and monthly installments of P246.42 until fully paid).
2. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly
installment after the lapse of 90 days from the expiration of the grace period of one month, without need of notice and with
forfeiture of all installments paid.
3. Dumpit paid the downpayment and several installments amounting to P13,722.50. The last payment was made on
December 5, 1967 for installments up to September 1967.
4. On May 10, 1973, or almost 6 years later, private respondent wrote petitioner offering to update all his overdue accounts
with interest, and seeking its written consent to the assignment of his rights to Lourdes Dizon. He followed this up with
another letter dated June 20, 1973 reiterating the same request.
5. In their reply, petitioners informed respondent that his Contract to Sell had long been rescinded pursuant to paragraph 6
of the contract, and that the lot had already been resold.
6. Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the National Housing
Authority (NHA) for reconveyance with an altenative prayer for refund.
NHA - finding the rescission void in the absence of either judicial or notarial demand, ordered Palay, Inc. and Alberto
Onstott in his capacity as President of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the
amount of P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974 (MOR was denied on Oct.
23, 1979).
OFFICE OF THE PRESIDENT – (appeal) Presidential Executive Assistant, on May 2, 1980, affirmed the Resolution of
the NHA. Reconsideration sought by petitioners was denied for lack of merit.
ISSUE: WON Onstott is liable for the refund of the installment payments made by respondent Nazario M. Dumpit.
WON Whether the doctrine of piercing the veil of corporate fiction has application to the case at bar.
HELD: NO.
RATIO:
As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal
entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used
as a shield to further an end subversive of justice; or for purposes that could not have been intended by the law that created
it; or to defeat public convenience, justify wrong, protect fraud, or defend crime; or to perpetuate fraud or confuse
legitimate issues; or to circumvent the law or perpetuate deception; or as an alter ego, adjunct or business conduit for the
sole benefit of the stockholders.
We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on paragraph 6 of its contract
with private respondent when it rescinded the contract to sell extrajudicially and had sold it to a third person.
In this case, petitioner Onstott was made liable because he was then the President of the corporation and he was a
controlling stockholder. No sufficient proof exists on record that said petitioner used the corporation to defraud private
respondent. He cannot, therefore, be made personally liable just because he "appears to be the controlling stockholder".
Mere ownership by a single stockholder or by another corporation is not of itself sufficient ground for disregarding the
separate corporate personality.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
*Mere ownership by a single stockholder or by another corporation is not of itself sufficient ground for disregarding the

CORPORATION LAW
Case Digest
029 Jardine Davies, Inc. v. JRB Realty, Inc. AUTHOR: De Silva, Denison
(July 15, 2005, G.R. No. 151438) Note: Aircon entered into a contract with respondent.
TOPIC: The Theory of Corporate Entity Aircon was a subsidiary of petitioner Jardine Davies Inc.
PONENTE: Callejo, Sr., J. Petitioner does not exercise complete control over Aircon;
nowhere can it be gathered that the petitioner manages the
business affairs of Aircon.
FACTS:
1. Respondent JRB Realty, Inc. built a nine-storey building named Blanco Center on Salcedo Village. An air conditioning
system was needed for the Blanco Law Firm housed at the second floor of the building.
2. The respondent’s Jose R. Blanco accepted the contract of Mr. A.G. Morrison, President of Aircon and Refrigeration
Industries, Inc. (Aircon), for two (2) sets of air conditioning equipment worth P99, 586.00.
3. The two sets of air conditioning equipments could not deliver the desired cooling temperature. The respondent conceded
that Fedders Air Conditioning USA’s technology for rotary compressors for big capacity conditioners like those installed
at the Blanco Center had not yet been perfected. The parties thereby agreed to replace the units with reciprocating/semi-
hermetic compressors instead.
4. Aircon stated that it would be replacing the units currently installed with new ones at the earliest possible time.
However, it could not specify a date when it will deliver.
5. TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance of the units, inclusive of parts
and services.
6. The respondent then learned that Maxim Industrial and Merchandising Corporation (Maxim) was the new and exclusive
licensee of Fedders Air Conditioning USA in the Philippines for the manufacture, distribution, sale, installation and
maintenance of Fedders air conditioners.
7. Respondent requested that Maxim honor the obligation of Aircon, but the latter refused. This prompted respondent to
institute an action for specific performance with damages against Aircon & Refrigeration Industries, Inc., Fedders Air
Conditioning USA, Inc., Maxim Industrial & Merchandising Corporation and petitioner Jardine Davies, Inc. The latter
(Jardine Davies Inc.) was impleaded as defendant, considering that Aircon was a subsidiary of the petitioner.
8. RTC – ordered Jardine Davies and others to pay JRB Reaty Inc.
9. CA (by appeal of Jardine Davies) – affirmed RTC.
ISSUE: Whether or not the petitioner is not a party to a contract and therefore, not liable.
HELD: Yes, it is an elementary and fundamental principle of corporation law that a corporation is an artificial being
invested by law with a personality separate and distinct from its stockholders and from other corporations to which it may
be connected. While a corporation is allowed to exist solely for a lawful purpose, the law will regard it as an association of
persons or in case of two corporations, merge them into one, when this corporate legal entity is used as a cloak for fraud or
illegality.
RATIO:
1. The Court held that while it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that
Aircon’s corporate legal existence can just be disregarded. In Velarde v. Lopez, Inc., the Court categorically held
that a subsidiary has an independent and separate juridical personality, distinct from that of its parent company;
hence, any claim or suit against the latter does not bind the former, and vice versa.
2. The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired Aircon’s majority
of capital stock. It, however, does not exercise complete control over Aircon; nowhere can it be gathered that the
petitioner manages the business affairs of Aircon. Indeed, no management agreement exists between the petitioner
and Aircon, and the latter is an entirely different entity from the petitioner.
3. Articles of Incorporation of Jardine Davies, Inc. - primarily a financial and trading company.
4. Articles of incorporation of Aircon - a manufacturing firm.
5. The existence of interlocking directors, corporate officers and shareholders, which the respondent court
considered, is not enough justification to pierce the veil of corporate fiction, in the absence of fraud or other public
policy considerations.
CORPORATION LAW
Case Digest
6. But even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the veil of corporate
fiction applies only when such fiction is used to defeat public convenience, justify wrong, protect fraud or defend
crime.
7. To warrant resort to this extraordinary remedy, there must be proof that the corporation is being used as a cloak or
cover for fraud or illegality, or to work injustice. Any piercing of the corporate veil has to be done with caution.
The wrongdoing must be clearly and convincingly established. It cannot just be presumed.
8. In the instant case, there is no evidence that Aircon was formed or utilized with the intention of defrauding its
creditors or evading its contracts and obligations. There was nothing fraudulent in the acts of Aircon in this case.
9. The Court sustained the petitioner’s separateness from that of Aircon in this case. It bears stressing that the
petitioner was never a party to the contract. Privity of contracts takes effect only between parties, their successors-
in-interest, heirs and assigns. The petitioner, which has a separate and distinct legal personality from that of
Aircon, cannot, therefore, be held liable.
10. Petition GRANTED.
CASE LAW/ DOCTRINE: The doctrine of piercing the veil of corporate fiction which applies only when such corporate
fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. The rationale behind piercing a
corporation’s identity is to remove the barrier between the corporation from the persons comprising it to thwart the
fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed
activities.

CORPORATION LAW
Case Digest
030 MAGSAYSAY-LABRADOR v. CA AUTHOR:
G.R. No. 58168 December 19, 1989 Rosa Cecilia K. Alfafara
TOPIC: Theory of Corporate Entity
PONENTE: FERNAN, C.J.
FACTS
1. On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and special administratix of the estate of the late Sen.
Magsaysay, filed a complaint (C.F.I. of Olongapo) against Artemio Panganiban, Subic Land Corporation (SUBIC),
Filipinas Manufacturer's Bank (FILMANBANK) and the Register of Deeds of Zambales. She prayed for the annulment of
the Deed of Assignment in favor of SUBIC and the Deed of Mortgage in favor of FILMANBANK; and for the
cancellation of TCT No. 22431 and to issue a new title in her favor.
2. She alleges: (a) in 1958, she and her husband acquired thru conjugal funds, a parcel of land (Pequena Island), covered
by TCT No. 3258; (b) after her husband’s death, she discovered the registration of a Deed of Assignment (6/25/76)
purportedly executed by the late Senator in favor of SUBIC, as a result of which TCT No. 3258 was cancelled and TCT
No. 22431 issued in the name of SUBIC and a Deed of Mortgage (9/28/77) in the amount of P2.7M was executed by
SUBIC in favor of FILMANBANK; and (c) that the following documents were void since it was made without her consent
(Conjugal property) and Sen. Magsaysay did not execute the purported Deed of Assignment, it was made by mistake,
violence and intimidation.
3. On March 7, 1979, petitioners, sisters of the late Sen., filed a motion for intervention in said case on the ground that
their brother conveyed to them 1/2 of his shareholdings in SUBIC or a total of 416,566.6 shares and as assignees of around
41 % of the total outstanding shares of stocks of SUBIC, they have a substantial and legal interest with the pending suit.
4. Pet. alleges: their ownership of 41.66% of the capital stock of SUBIC entitles them to a significant vote in the corporate
affairs and they are affected by the suit for it concerns the only tangible asset of the corporation.
4. TC: Denied the motion for intervention. (Petitioners have no legal interest whatsoever in the matter in litigation and
their being alleged assignees or transferees of certain shares in SUBIC cannot legally entitle them to intervene because
SUBIC has a personality separate and distinct from its stockholders.)
5. CA: Affirmed TC’s ruling. (Motion for Reconsideration also denied.)
ISSUE: Whether or not the petitioners (sisters of the late senator) can intervene in the pending suit where corporate
properties are in dispute.
HELD: No, the petitioners have no legal interest in the subject matter in litigation so as to entitle them to intervene in the
proceedings.
RATIO:
1. As clearly stated in Section 2 of Rule 12 of the Rules of Court, to be permitted to intervene in a pending action, the party
must have a legal interest in the matter in litigation, or in the success of either of the parties or an interest against both, or
he must be so situated as to be adversely affected by a distribution or other disposition of the property in the custody of the
court or an officer thereof.
2. In the case, petitioners’ interest, if it exists at all, is indirect, contingent, remote, conjectural, consequential and
collateral.
3. While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest
the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable
or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the
corporation as a distinct legal person.
4. The petitioners cannot claim the right to intervene on the strength of the transfer of shares allegedly executed by the late
Senator. The corporation did not keep books and records. No transfer was ever recorded, much less effected as to prejudice
third parties. The transfer must be registered in the books of the corporation to affect third persons. The law on
corporations is explicit. Section 63 of the Corporation Code provides: "No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred."

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal
person.

CORPORATION LAW
Case Digest
031 Alberto S. Sunio and Ilocos Commercial AUTHOR: Myk Bercasio
Corporation v. National Labor Relations Commission, EM Ramos & Company, Inc, – EMRACO
Nemesio Valenton, Santos Del Rosario, Vicente Tapucol, Cabugao Ice Plant, Inc. – CIPI
Andres Solis, Crescencio Soller, Cecilio Labuni, Sotero Rizal Development and Finance Corporation – RDFC
L. Tumang, in his capacity as Asst. Regional Director Ilocos Commercial Corporation – ICC
for Arbitration, Regional Office No. 1, Ministry of Sunio is the President and General Manager of ICC
Labor & Employment, and Ambrosio B. Sison, in his
capacity as Acting Regional Sheriff, Regional Office No.
1, Ministry of Labor & Employment
January 31, 1984 G.R. No. L-57767
TOPIC: The Theory of Corporate Entity: Application of
Theory: Interlocking Directors and Same Shareholders
PONENTE: Melencio-Herrera, J.
FACTS
1. EMRACO and CIPI are sister corporations who sold an ice plant to RDFC on 30 July 1973.
2. RDFC constituted a mortgage in favor of EMRACO and CIPI to secure payment of the balance of the purchase
price.
3. EMRACO and CIPI terminated the services of all their employees and gave them their separation pays.
Meanwhile, RDFC hired other employees and operated the plant.
4. 28 November 1973, RDFC sold the ice plant to ICC who hired their employees.
5. The sale was subject to the mortgage in favor of EMRACO and CIPI.
6. When both RDFC and ICC failed to pay the balance of the purchase price EMRACO and CIPI instituted
extrajudicial foreclosure proceedings.
7. The properties were sold at a public auction on 30 August 1974. The highest bidders were EMRACO and CIPI.
8. A Writ of Possession from the CFI of Ilocos Sur was issued in their favor.
9. EMRACO and CIPI sold the ice plant to Nilo Villanueva on 30 August 1974. This sale was subject to the right of
redemption of RDFC.
10. Villanueva re-hired the private respondents who were the former employees of EMRACO and CIPI.
11. On August 27, 1975, RDFC redeemed the ice plant.
12. EMRACO and CIPI were unable to turn over possession to RDFC because Villanueva to.
13. RDFC filed a complaint for recovery of possession against EMRACO and CIPI with the CFI of Ilocos Sur.
14. Nilo Villanueva intervened
15. The court ordered Writ of Preliminary Mandatory Injunction placing RDFC in possession of the ice plant.
16. EMPRACO and CIPI and Villanueva appealed to the Court of Appeals; the CA upheld the Order of the CFI.
17. A Petition for certiorari was brought up to the Supreme Court but it was denied for lack of merit on January 6,
1978.
18. On 1 February 1978, RDFC and petitioners finally obtain possession of the ice plant by virtue of the Mandatory
Injunction worded in this manner: “particularly Nilo C. Villanueva and his agents representatives, or any
person found in the premises to vacate and surrender the property in litigation.”
19. RDFC did not re-employ private respondents.
20. Private respondents filed complaints against petitioners for illegal dismissal with the Regional Office, Ministry of
Labor & Employment, San Fernando, La Union.
21. The Asst. Regional Director ordered CIPI, ICC, and Sunio to reinstate private respondents to their former positions
without loss of seniority privileges and to pay their back wages.
22. Petitioners appealed to the NLRC which affirmed the decision of the Asst. Regional Director.
23. Sunio and ICC deny having an employer-employee relationship on the grounds that they do not have an existing
contract and that they are the employees of Villanueva who re-hired them when he took over the operations of the
ice plant from CIPI. They also aver that there is no succession of rights and obligations between Villanueva and
ICC and Sunio because the transfer of possession was actually a consequence of the exercise of the right of
redemption of RDFC.
24. The NLRC contend that the sale of a business of a going concern does not terminate employer-employee
relationship when the successor continues its business operations in an unchanged manner.
CORPORATION LAW
Case Digest
25. The respondents contended that Sunio was impleaded in the case being the owner of one-half (1/2) interest of said
corporation and for his alleged arbitrary dismissal of private respondents.
ISSUE:
1) Whether or not Sunio can be made jointly and severally responsible with ICC and CIPI for the payment of the
back wages of respondents.
2) Whether or not the private respondents can recover from the petitioners their back wages.
HELD:
1) No, because a corporation is invested by law with its own personality.
2) No, because there was no succession of employment rights and obligations took place between EMRACO-CIPI-
Nilo Villanueva.
RATIO:
A. CORPORATION LAW RELATED
1) Sunio was impleaded in the complaint in his capacity as General Manager of ICC and for being owner of ½
interest of the corporation.
a) But there appears to be no evidence on record that he acted in bad faith in terminating the respondents, the SC
concluded that he was acting within the scope of his authority and his decision was a corporate act.
b) Having majority interest in the company cannot be the basis for impleading Sunio because a corporation is
invested by law with a personality that is separate and distinct from the people who actually own it. Ownership
by one person or majority of the capital stock is not a sufficient ground for disregarding the separate corporate
personality.
B. LABOR LAW RELATED
1) There was no succession of employment rights between the owners.
a) The petitioners reacquired the property by virtue of their exercise of their right of redemption and a Mandatory
Injunction in their favor which ordered Villanueva and any other person found in the premises to vacate.
b) The respondents’ employment was terminated by EMRACO-CIPI and they were given separation pay.
c) When the respondents were rehired by Villanueva because of a resolutory condition their claim against him
also ceased.
2) Right to security of tenure fails.
a) Their employment tenure should not reckon from 1967 since they were terminated in 1973 and were only
rehired in 1974 by Nilo Villanueva.
b) There can be no tenurial security to speak of because from 1974 to 1978 ICC fought against Villanueva to
recover possession of the plant.
CASE LAW/ DOCTRINES:
A corporation is invested by law with personality separate and distinct from those of the persons composing it as well as
from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the

CORPORATION LAW
Case Digest
032 LAGUIO v. NLRC AUTHOR: Jelena
October 4, 1996 G.R. No.108936 Treating two corporations as one to claim for one’s liability
TOPIC: Application of Theory, Interlocking Directors and to its employees-- not applicable in this case.
Same Shareholders
PONENTE: FRANCISCO, J.
FACTS
1. Private respondent April Toy, Inc. (April) is a domestic corporation incorporated on January 6, 1989, for the purpose of
"manufacturing, importing, exporting, buying, selling, sub-contracting or otherwise dealing in, at wholesale and retail,"
stuffed toys, with principal place of business at Parañaque, Manila.
2. On December 20, 1989, or after almost a year of operation, April posted a memorandum within its premises and
circulated a copy of the same among its employees informing them of its dire financial condition.
3. To avert further business reverses, April decided to shorten its corporate term "up to February 28, 1990," submitted a
notice of dissolution to the Securities and Exchange Commission and published the same in a newspaper of general
circulation.
4. April also notified its employees, the Department of Labor and Employment, the Social Security System, the Board of
Investments, the Bureau of Internal Revenue, and the Municipality of Parañaque of its dissolution.
5. In view of April's cessation of operations, petitioners who initially composed of seventy-seven employees below filed a
complaint for "illegal shutdown/retrenchment/dismissal and unfair labor practice."
6. On June 21, 1990, petitioners amended their complaint to implead private respondent Well World Toys, Inc. (Well
World), a corporation also engaged in the manufacture of stuffed toys for export with principal office located at Las Piñas,
Manila.
7. In their complaint, petitioners basically alleged that they were original probationary employees of Well World but were
later laid off in 1989 "for starting to organize themselves into a union".
a. While under the employ of April, Alyansang Likha ng mga Anak ng Bayan (ALAB), won as the exclusive
bargaining agent for the workers.
b. Petitioners submitted a Collective Bargaining Agreement proposal which April rejected in view of its cessation of
operation.
c. The closure, petitioners declared, is April's clever ploy to "defeat their right to self organization".
d. Petitioners further alleged that the original incorporators and principal officers of April were likewise the
original incorporators of Well World, thus both corporations should be treated as one corporation liable for
their claims.
e. Petitioners also insist that the two corporations "are being managed by Mr. Jean Li Wang" and that their articles of
incorporation, general information sheets and certificates of increase of capital stock were notarized by the same
Notary Public.
f. Additionally, petitioners aver that when some of them transferred from Well World to April they were not given
their separation pay, a factor which presumably proves that April is a mere conduit of Well World.
g. Petitioners likewise assert that their transfer from one corporation to another was made at the time that they were on
the process of organizing a union.
h. Finally, petitioners allege that April and Well World were engaged in the same line of business, with the latter also
supplying the former raw materials and machineries.
8. Labor Arbiter found as valid the closure of April, and treated April and Well World as two distinct corporations, and
although the 77 complainants were ruled to be the employees of April, Well World was ordered to give financial assistance
to its former forty-nine probationary employees who were found to have been laid off in 1989 due to business losses.
9. April was ordered to pay its separated employees separation pay and, together with Well World, assessed for attorney's
fees.
10. Petitioners appealed before the NLRC but was denied.
ISSUE: Are the two corporations liable as one?
HELD: NO.
The circumstances, as petitioners claim, make theirs case akin to the case of La Campana Coffee Factory Inc. v. Kaisahan
ng mga Manggagawa sa La Campana (KKM), 93 Phil. 160, where the Court considered two corporations, i.e., La
CORPORATION LAW
Case Digest
Campana Coffee Factory, Inc. and La Campana Gaugau Packing, as one and the same. This is not applicable in the case at
bar.
RATIO:
1. What clearly appears therefrom is that the two corporations have two different set of officers managing their respective
affairs in two separate offices.
2. Mere substantial identity of the incorporators of the two corporations does not necessarily imply fraud, nor warrant the
piercing of the veil of corporate fiction.
3. In the absence of clear and convincing evidence that April and Well World's corporate personalities were used to
perpetuate fraud, or circumvent the law said corporations were rightly treated as distinct and separate from each other.
4. Further, petitioners' emphatic reliance with the case of La Campana is misplaced. In La Campana, unlike in this case, the
two corporations, i.e., La Campana Coffee Factory, Inc. and La Campana Gaugau Packing, were not only owned by the
same person, but moreover have a single management, business office and a single payroll for both businesses. Indeed, the
workers of La Campana Gaugau Packing "were interchangeable, that is, the laborers from gaugau factory were sometimes
transferred to the coffee factory and vice-versa."
5. DISMISSED.
CASE LAW/ DOCTRINE:

The fiction that a corporation was a distinct and separate personality shall not be used as a subterfuge to commit injustice
and circumvent the law does not apply in the present case. There is no conclusive evidence to convince us that respondent
April Toy, Inc. was established and later on closed to defeat the rights of the workers of Well-World Toy, Inc. which
would otherwise support the charge of unfair labor practice. Hence, we find that the two (2) corporations are separate and
distinct entities.

33. GOOD EARTH EMPORIUM INC., and LIM KA AUTHOR: Dolina, Leon Chad Anthony Dolina
PING vs. CA and ROCES-REYES REALTY INC.
February 27, 1991, G.R. No. 82797 CORPORATION LAW
TOPIC: The Theory of Corporate Entity: Application to its
Corporate Officers Case Digest
PONENTE: Paras, J.
FACTS:
1. A Lease Contract, dated October 16, 1981, was entered into by and between ROCES-REYES REALTY, INC., as lessor,
and GOOD EARTH EMPORIUM, INC., as lessee, for a term of three years beginning November 1, 1981 and ending
October 31, 1984 at a monthly rental of P65,000.00. The building which was the subject of the contract of lease is a five-
storey building located at the corner of Rizal Avenue and Bustos Street in Sta. Cruz, Manila.
2. The lessee had defaulted in the payment of rentals, as a consequence of which, private respondent ROCES-REYES
REALTY, INC filed on October 14, 1984, an ejectment case (Unlawful Detainer) against herein petitioners
3. MTC ruled in favor of respondent and ordered petitioners to vacate premises and pay the rentals.
4. RTC of Manila finding that the amount of P1 million evidenced by Exhibit "I" and another P1 million evidenced by the
pacto de retro sale instrument (Exhibit "2") were in full satisfaction of the judgment obligation, reversed the decision of the
Municipal Trial Court.
5. CA reversed decision of RTC and reinstated MTC ruling.
ISSUE: Whether or not the payment to the Roces brothers by petitioners can be considered as payment to respondent
corporation?
HELD: No. The payment to the Roces brothers were in their individual capacities and not as officers of respondent
corporation
RATIO:
1. The Court held that the fact that at the time payment was made to the two Roces brothers, GEE was also indebted
to respondent corporation for a larger amount, is not supportive of the Regional Trial Court's conclusions that the
payment was in favor of the latter, especially in the case at bar where the amount was not receipted for by
respondent corporation and there is absolutely no indication in the receipt from which it can be reasonably
inferred, that said payment was in satisfaction of the judgment debt. Likewise, no such inference can be made from
the execution of the pacto de retro sale which was not made in favor of respondent corporation but in favor of the
two Roces brothers in their individual capacities without any reference to the judgment obligation in favor of
respondent corporation.
2. Article 1240 of the Civil Code of the Philippines provides that:
“Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in
interest, or any person authorized to receive it.”
3. In the case at bar, the supposed payments were not made to Roces-Reyes Realty, Inc. or to its successor in interest
nor is there positive evidence that the payment was made to a person authorized to receive it. No such proof was
submitted but merely inferred by the Regional Trial Court from Marcos Roces having signed the Lease Contract as
President which was witnessed by Jesus Marcos Roces. The latter, however, was no longer President or even an
officer of Roces-Reyes Realty, Inc. at the time he received the money and signed the sale with pacto de retro.
4. On the other hand, Jesus Marcos Roces testified that the amount of P1 million evidenced by the receipt is the
payment for a loan extended by him and Marcos Roces in favor of Lim Ka Ping. The assertion is home by the
receipt itself whereby they acknowledged payment of the loan in their names and in no other capacity.
CASE LAW/ DOCTRINE: A corporation has a personality distinct and separate from its individual stockholders or
members. Being an officer or stockholder of a corporation does not make one's property also of the corporation, and vice-
versa, for they are separate entities. As a consequence of the separate juridical personality of a corporation, the corporate
debt or credit is not the debt or credit of the stockholder, nor is the stockholder's debt or credit that of the corporation.

CORPORATION LAW
034 INESTATE ESTATE OF ALEXANDER T.Case Digest
TY v. CA AUTHOR: Rhona Burce
April 19, 2001 G.R. No. 114672
TOPIC: Corporate Officers It is the regional trial court and no longer the SEC that
PONTENTE: MELO J. takes cognizance of intra-corporate controversies.
FACTS
1. Petitioner Sylvia S. Ty was married to Alexander T. Ty, son of private respondent Alejandro B. Ty, on January 11,
1981. Alexander died of leukemia on May 19, 1988 and was survived by his wife, petitioner Silvia, and only child,
Krizia Katrina. In the settlement of his estate, petitioner was appointed administratrix of her late husband’s intestate
estate.
2. On November 4, 1992, petitioner filed a motion for leave to sell or mortgage estate property in order to generate funds
for the payment of deficiency estate taxes in the sum of P4,714,560.00.
3. Private respondent Alejandro Ty then filed two complaints in the RTC for the recovery of the above-mentioned
property, (1) praying for the declaration of nullity of the deed of absolute sale of the shares of stock executed by private
respondent in favor of the deceased Alexander, and (2) praying for the recovery of the pieces of property that were
placed in the name of deceased Alexander.
4. Alejandro alleged that they were acquired through his money, without any cause or consideration from deceased
Alexander.
5. Motions to dismiss were filed by petitioner. Both motions alleged lack of jurisdiction for the trial court, claiming that
the cases involved intra-corporate disputes cognizable by the Securities and Exchange Commission (SEC).
6. The motions to dismiss were denied. Petitioner then filed petitions for certiorari in the Courts of Appeals, which were
also dismissed for lack of merit.
7. Petitioner raises the issue of jurisdiction of the trial court. She alleges that an intra-corporate dispute is
involved. Hence, under Section 5(b) of Presidential Decree 902-A, the SEC has jurisdiction over the case.
ISSUE:
1. Whether or not the SEC has jurisdiction over the case?
Sub-issue
2. Whether or not an express trust was created by private respondent when he transferred the property to his son?
HELD:
1. No. The relationship of private respondent when he sold his shares of stock to his son was one of vendor and vendee,
nothing else. The question raised in the complaints is whether or not there was indeed a sale in the absence of cause or
consideration. The proper forum for such a dispute is a regular trial court.
2. No. There was only an implied trust.

RATIO:
1st issue
1. It should also be noted that under the newly enacted Securities Regulation Code (Republic Act No. 8799), this
issue is now moot and academic because whether or not the issue is intra-corporate, it is the regional trial court
and no longer the SEC that takes cognizance of the controversy. Under Section 5.2 of Republic Act No. 8799,
original and exclusive jurisdiction to hear and decide cases involving intra-corporate controversies have been transferred
to courts of general jurisdiction or the appropriate regional trial court.
2. Jurisdiction over the subject matter is conferred by law, The nature of an action, as well as which court or body has
jurisdiction over it, is determined based on the allegations contained in the complaint of the plaintiff.
3. Petitioner argues that the present case involves a suit between two stockholders of the same corporation, which is
within the exclusive competence of the SEC by reason of Section 5(b) of Presidential Decree 902-A. However, it does
not necessarily follow that when both parties of a dispute are stockholders of a corporation, the dispute is automatically
considered intra-corporate in nature and jurisdiction consequently falls within the SEC.

CORPORATION LAW
Case Digest
4. Presidential Decree 902-A did not confer upon the SEC absolute jurisdiction and control over all matters affecting
corporations, regardless of the nature of the transaction, which gave rise to such disputes.
5. The better policy in determining which body has jurisdiction over this case would be to consider, not merely the status
of the parties involved, but likewise the nature of the question that is the subject of the controversy. When the nature of
the controversy involves matters that are purely civil in character, it is beyond the ambit of the limited jurisdiction of the
SEC.
2nd issue
6. Petitioner is in error when she contends that private respondent created an express trust when he transferred the
property to his son.
7. “…[e]xpress trust are those that are created by the direct and positive acts of the parties, by some writing or deed or
will or by words evidencing an intention to create a trust. On the other hand, implied trusts are those, which without
being expressed, are deducible from the nature of the transaction by operation of law as matters of equity, independently
of the particular intention of the parties. Thus, if the intention to establish a trust is clear, the trust is express; if the intent
to establish a trust is to be taken from circumstances or other matters indicative of such intent, then the trust is implied.”
8. Private respondent contends that the pieces of property were transferred in the name of the deceased Alexander for the
purpose of taking care of the property for him and his siblings. Such transfer having been effected without cause of
consideration, a resulting trust was created.
9. A resulting trust arises in favor of one who pays the purchase money of an estate and places the title in the name of
another, because of the presumption that he who pays for a thing intends a beneficial interest therein for himself. The
trust is said to result in law from the acts of the parties. Such a trust is implied in fact.
10. If a trust was then created, it was an implied, not an express trust, which may be proven by oral evidence, and it
matters not whether property is real or personal.
CASE LAW/ DOCTRINE:
Under Section 5.2 of Republic Act No. 8799, original and exclusive jurisdiction to hear and decide cases involving intra-
corporate controversies have been transferred to courts of general jurisdiction or the appropriate regional trial court.
Note:
The statue of limitations cannot apply in this case. Resulting trusts generally do not prescribe, except when the trustee
repudiates the trust. Further, an action to reconvey will not prescribe so long as the property stands in the name of the
trustee. To allow prescription would be to permit a trustee to acquire title against his principal and the true owner.

CORPORATION LAW
Case Digest
035 Land Bank of the Philippines vs. The Court of AUTHOR: Bea
Appeals, Eco Management Corporation, and Emmanuel A corporation, upon coming into existence, is invested by
C. Onate law with a personality separate and distinct from those
September 04, 2001, G.R. No. 127181 persons composing it as well as from any other legal entity
TOPIC: Dealings between Corporation and Stockholder to which it may be related. By this attribute, a stockholder
PONTENTE: Quisimbing, J. may not, generally, be made to answer for acts or liabilities
of the said corporation, and vice versa. This separate and
distinct personality is, however, merely a fiction created by
law for convenience and to promote the ends of justice.
FACTS:
1. On various dates in 1980, appellant Land Bank of the Philippines (LBP) extended a series of credit accommodations to
appellee ECO, using the trust funds of the Philippine Virginia Tobacco Administration (PVTA) in the aggregate amount of
P26,109,000.00. The proceeds of the credit accommodations were received on behalf of ECO by appellee Oñate.
2. On the respective maturity dates of the loans, ECO failed to pay the same. Oral and written demands were made, but
ECO was unable to pay. ECO claims that the company was in financial difficulty for it was unable to collect its
investments with companies which were affected by the financial crisis brought about by the Dewey Dee scandal. (The
Dewey Dee Scandal involves well, Dewey Dee!!! He is a Chinoy and he acquired Security Bank. He, together with two
other Chinoys, acquired a huge amount under the Redwood Bank. By January 1981, Dee vanished and he amassed some
gambling debts amounting to deveral million of dollars. It was estimated he left behind debts to the tune of P635 million)
3. On October 20, 1981, ECO proposed and submitted to LBP a “Plan of Payment” whereby the former would set up a
financing company which would absorb the loan obligations. It was proposed that LBP would participate in the scheme
through the conversion of P9,000,000.00 which was part of the total loan, into equity.
4. On the other hand, ECO submitted to LBP a “Revised Plan of Payment” deleting the latter’s (LBP) participation in the
proposed financing company. The Trust Committee deliberated on the “Revised Plan of Payment” and resolved to reject
it. LBP then sent a letter to the PVTA for the latter’s comments. The letter stated that if LBP did not hear from PVTA
within five (5) days from the latter’s receipt of the letter, such silence would be construed to be an approval of LBP’s
intention to file suit against ECO and its corporate officers. PVTA did not respond to the letter.
5. On June 28, 1982, Landbank filed a complaint for Collection of Sum of Money against ECO and Emmanuel C. Oñate
before the Regional Trial Court of Manila.
After trial on the merits, a judgment was rendered in favor of LBP; however, appellee Oñate was absolved from personal
liability for insufficiency of evidence.
Dissatisfied, both parties filed their respective Motions for Reconsideration. LBP claimed that there was an error in
computation in the amounts to be paid. LBP also questioned the dismissal of the case with regard to Oñate.
On the other hand, ECO questioned its being held liable for the amount of the loan. Upon order of the court, both parties
submitted Supplemental Motions for Reconsideration and their respective Oppositions to each other’s Motions.
6. TRIAL COURT: Eco Management will pay Land Bank the sum of 26, 109, 000.00; CA: Affirmed the trial court’s
decision.
ISSUE: W/N the corporate veil of ECO Management Corporation should be pierced;
W/N Emmanuel C. Oñate should be held jointly and severally liable with ECO Management Corporation for the
loans incurred from Land Bank.
HELD: NO, Corporate veil should not be pierced; NO, Emmanuel Onate should not be held liable for the loans incurred
from Land Bank.

CORPORATION LAW
Case Digest
RATIO: The burden is on petitioner to prove that the corporation and its stockholders are, in fact, using the personality of
the corporation as a means to perpetrate fraud and/or escape a liability and responsibility demanded by law. In order to
disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly
established. In the absence of any malice or bad faith, a stockholder or an officer of a corporation cannot be made
personally liable for corporate liabilities.
• The mere fact that Oñate owned the majority of the shares of ECO is not a ground to conclude that Oñate and ECO
is one and the same.
• Mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation is not by itself
sufficient reason for disregarding the fiction of separate corporate personalities. Neither is the fact that the name
“ECO” represents the first three letters of Oñate’s name sufficient reason to pierce the veil. Even if it did, it does
not mean that the said corporation is merely a dummy of Oñate.
• A corporation may assume any name provided it is lawful. There is nothing illegal in a corporation acquiring the
name or as in this case, the initials of one of its shareholders.
• That respondent corporation in this case was being used as a mere alter ego of Oñate to obtain the loans had not
been shown. Bad faith or fraud on the part of ECO and Oñate was not also shown.
• As the Court of Appeals observed, if shareholders of ECO meant to defraud petitioner, then they could have just
easily absconded instead of going out of their way to propose “Plans of Payment.” Likewise, Oñate volunteered to
pay a portion of the corporation’s debt. This offer demonstrated good faith on his part to ease the debt of the
corporation of which he was a part.
• It is understandable that a shareholder would want to help his corporation and in the process, assure that his stakes
in the said corporation are secured. In this case, it was established that the P1 Million did not come solely from
Oñate. It was taken from a trust account which was owned by Oñate and other investors. It was likewise proved
that the P1 Million was a loan granted by Oñate and his co-depositors to alleviate the plight of ECO. This
circumstance should not be construed as an admission that he was really the debtor and not ECO.
CASE LAW/ DOCTRINE: A corporation, upon coming into existence, is invested by law with a personality separate and
distinct from those persons composing it as well as from any other legal entity to which it may be related. By this attribute,
a stockholder may not, generally, be made to answer for acts or liabilities of the said corporation, and vice versa. This
separate and distinct personality is, however, merely a fiction created by law for convenience and to promote the ends of
justice. For this reason, it may not be used or invoked for ends subversive to the policy and purpose behind its creation or
which could not have been intended by law to which it owes its being. This is particularly true when the fiction is used to
defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or judicial issues, perpetrate
deception or otherwise circumvent the law. This is likewise true where the corporate entity is being used as an alter ego,
adjunct, or business conduit for the sole benefit of the stockholders or of another corporate entity. In all these cases, the
notion of corporate entity will be pierced or disregarded with reference to the particular transaction involved.

CORPORATION LAW
Case Digest
036 TRADERS ROYAL BANK, petitioner, AUTHOR: Mercado, Christopher Dann C.
vs.
COURT OF APPEALS, FILRITERS GUARANTY the excuse of piercing the veil of corporate entity, as
ASSURANCE CORPORATION and CENTRAL BANK this merely an equitable remedy, and may be
of the PHILIPPINES, respondents. awarded only in cases when the corporate fiction is
TOPIC: piercing the veil of corporate entity: obligations used to defeat public convenience, justify wrong,
PONTENTE:TORRES, J. protect fraud or defend crime or where a
corporation is a mere alter ego or business conduit
of a person. 1
FACTS
1) Filriters Guaranty Assurance Corporation (Filriters) executed a "Detached Assignment" whereby Filriters, as
registered owner sold and transferred to Philippine Underwriters Finance Corporation (Philfinance) all its
rights and title to Central Bank Certificates of Indebtedness (CBCI).
2) Petit entered into a Repurchase Agreement with PhilFinance where for and in consideration of the sum of PESOS:
FIVE HUNDRED THOUSAND (P500,000.00), PhilFinance sold and transferred and delivered to petitioner the
aforesaid CBCI.
3) Pursuant to the aforesaid Repurchase Agreement, Philfinance agreed to repurchase CBCI.
4) PhilFinance, however, failed to repurchase the CBCI on the agreed date of maturity when the checks it issued in
favor of petitioner were dishonored for insufficient funds;
5) Thus, owing to the default of PhilFinance, it executed a Detached Assignment in favor of the Petitioner to enable
the latter to have its title completed and registered in the books of the respondent. And by means of said
Detachment, Philfinance transferred and assigned all, its rights and title in the said CBCI (Annex "C") to
petitioner.
6) Petitioner presented the CBCI together with the two (2) aforementioned Detached Assignments to the Securities
Servicing Department of the respondent, and requested the latter to effect the transfer of the CBCI on its books and
to issue a new certificate in the name of petitioner as absolute owner thereof;
7) However, Respondent failed and refused to register the transfer as requested, and continues to do so, due to the
following reasons: a).The detached assignment is patently void and inoperative because the assignment is without
the knowledge and consent of directors of Filriters, and not duly authorized in writing by the Board, as requiring
by Article V, Section 3 of CB Circular No. 769; and b.) the assignment of the CBCI to Philfinance is a personal act
of Alfredo Banaria and not the corporate act of Filriters and such null and void;
8) Thus, the petitioner filed this case before the Court.

9) The petitioner argues that Philfinance owns 90% of Filriters equity and the two corporations have identical
corporate officers, thus demanding the application of the doctrine or piercing the veil of corporate fiction, as to
give validity to the transfer of the CBCI from registered owner to petitioner TRB. 14 This renders the payment by
TRB to Philfinance of CBCI, as actual payment to Filriters.
ISSUE: Whether or not the corporate veil of the private respondent-corporation should be pierced because it was used to
defraud the petitioners
HELD: No. Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an equitable remedy,
and may be awarded only in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime or where a corporation is a mere alter ego or business conduit of a person.

CORPORATION LAW
Case Digest
RATIO:
Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders
from liabilities that ordinarily, they could be subject to, or distinguished one corporation from a seemingly separate one,
were it not for the existing corporate fiction. But to do this, the court must be sure that the corporate fiction was misused,
to such an extent that injustice, fraud, or crime was committed upon another, disregarding, thus, his, her, or its rights. It is
the protection of the interests of innocent third persons dealing with the corporate entity which the law aims to protect by
this doctrine.
The corporate separateness between Filriters and Philfinance remains, despite the petitioners insistence on the contrary.
For one, other than the allegation that Filriters is 90% owned by Philfinance, and the identity of one shall be maintained as
to the other, there is nothing else which could lead the court under circumstance to disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a juridical personality
separate from its stockholders and from other corporations may be disregarded, 19 in the absence of such grounds, the
general rule must upheld. The fact that Filfinance owns majority shares in Filriters is not by itself a ground to disregard the
independent corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of Internal Revenue, 20 the mere ownership by
a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a
sufficient reason for disregarding the fiction of separate corporate personalities.
In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it acquired the subject
certificate of indebtedness from Philfinance.
On its face the subject certificates states that it is registered in the name of Filriters. This should have put the petitioner on
notice, and prompted it to inquire from Filriters as to Philfinance's title over the same or its authority to assign the
certificate. As it is, there is no showing to the effect that petitioner had any dealings whatsoever with Filriters, nor did it
make inquiries as to the ownership of the certificate.
CASE LAW/ DOCTRINE:
Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders
from liabilities that ordinarily, they could be subject to, or distinguished one corporation from a seemingly separate one,
were it not for the existing corporate fiction. But to do this, the court must be sure that the corporate fiction was misused,
to such an extent that injustice, fraud, or crime was committed upon another, disregarding, thus, his, her, or its rights. It is
the protection of the interests of innocent third persons dealing with the corporate entity which the law aims to protect by
this doctrine.

CORPORATION LAW
Case Digest
037 CKH Industrial and Dev. Corp. v. CA AUTHOR: Dexter
May 7, 1997 G.R. No. 111890. This case talks about compensation as means of
TOPIC: The Corporate Entity extinguishing an obligation.
(Application of Theory: (d) Obligations)
PONTENTE: TORRES, JR., J.
FACTS
1. Petitioner CKH is the owner of two parcels of land located in Karuhatan, Valenzuela.
2. CKH is a corporation established under Philippine law by the late Cheng Kim Heng (Cheng), an immigrant of
Chinese descent. Upon Cheng's demise, control over the petitioner corporation was transferred to Rubi Saw, also
of Chinese descent, and Cheng's second wife.
3. Before coming to the Philippines, Cheng Kim Heng was married to Hung Yuk Wah (Wah), who lived in
Hongkong together with their children, Chong Tak Kei, (Kei), Chong Tak Choi (Choi), and Chong Tak Yam
(Yam). After Cheng immigrated to the Philippines in 1976, and married Rubi Saw in 1977, he brought his first
wife, Heng, and their children to this country, and established himself and his Chinese family as naturalized
Filipino citizens. Cheng died in 1984.
4. On May 8, 1988, Rubi Saw and Lourdes Chong, the wife of Cheng's son, Kei, met at the 1266 Soler St., Sta. Cruz,
Manila, the residence of Cheng's friend, Uy Chi Kim, and executed a Deed of Absolute Sale, whereby Rubi Saw,
representing CKH, agreed to sell the subject properties to Century-Well, a corporation owned in part by Lourdes
Chong, Kei and Choi.
5. Rubi Saw signed on behalf of CKH, while Lourdes Chong signed for Century Well. The document was notarized
the day after the parties signed the same, i. e., March 9, 1988.
6. Claiming that the consideration for the sale of the subject properties was not paid by the private respondent-vendee
despite several demands to do so, Petitioners CKH and Rubi Saw filed the instant complaint on May 23, 1988,
with the Regional Trial Court of Valenzuela, against Century-Well, Lourdes Chong, Chong Tak Kei and Uy Chi
Kim. Petitioners prayed for the annulment/rescission of the Deed of Absolute Sale, and in the meantime, for the
issuance of a writ of preliminary injunction restraining the Register of Deeds of Valenzuela from registering the
Certificates of Title over the subject properties in the name of the private respondent Century-Well.
TC- Finding that the annulment of the Deed of Absolute Sale was merited, as there was no payment of the stipulated
consideration for the sale of the real properties involved to Rubi Saw. The Deed of Sale itself, which is the best evidence of
the agreement between the parties, did not provide for payment by off-setting a portion of the purchase price with the
outstanding obligation of Cheng Kim Heng to his sons Chong Tak Choi and Chong Tak Kei. On the contrary, it provided
for payment in cash, in the amount of P800,000.00. The evidence presented, however, did not disclose that payment of the
said amount had ever been made by the private respondent.
CA- Court of Appeals reversed the findings and pronouncements of the trial court. That the execution of the Deed of
Absolute Sale was in settlement of a dispute between Rubi Saw and the first family of Cheng Kim Heng, which arose upon
Cheng's death. There was indeed payment of the purchase price, partially in cash for P100,000.00 and partially by
compensation by off-setting the debt of Cheng Kim Heng to his sons Choi and Kei for P500,000.00 and P200,000.00
respectively, against the remainder of the stipulated price. Such mode of payment is recognized under Article 1249 of the
Civil Code.
ISSUE: WON there was a valid compensation of the obligations of Cheng Kim Heng to his sons with the purchase price of
the sale
HELD: NO. Compensation may take place by operation of law (legal compensation), when two persons, in their own
right, are creditors and debtors of each other. Compensation may also be voluntary or conventional, that is, when the
parties, who are mutually creditors and debtors agree to compensate their respective obligations, even though not all the
requisites for legal compensation are present.

CORPORATION LAW
Case Digest
RATIO:
“Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of
the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due
time to the debtor.”
Article 1231 of the Civil Code, an obligation may be extinguished: (1) by payment or performance; (2) by the loss of the
thing due, (3) by the condonation or remission of the debt; (4) by the confusion or merger of the rights of creditor and
debtor, (5) by compensation; or (6) by novation. Other causes of extinguishment of obligations include annulment,
rescission, fulfillment of a resolutory condition and prescription.
•In the instant case, there can be no valid compensation of the purchase price with the obligations of Cheng Kim
Heng reflected in the promissory notes, for the reason that CKH and Century-Well the principal contracting
parties, are not mutually bound as creditors and debtors in their own name. A close scrutiny of the promissory
notes does not indicate the late Cheng, as then president of CKH, acknowledging any indebtedness to Century-
Well. As worded, the promissory notes reveal CKH’s indebtedness to Chong Tak Choi and Chong Tak Kei.
• In fact, there is no indication at all, that such indebtedness was contracted by Cheng from Choi and Kei as
stockholders of Century-Well. Choi and Kei, in turn, are not parties to the Deed of Absolute Sale. They are merely
stockholders of Century-Well, and as such, are not bound principally, not even in a representative capacity, in the
contract of sale. Thus, their interest in the promissory notes cannot be off-set against the obligations
between CKH and Century-Well arising out of the deed of absolute sale, absent any allegation, much less,
even a scintilla of substantiation, that Choi and Kei’s interest in Century-Well are so considerable as to merit a
declaration of unity of their civil personalities.
• Under present law, corporations, such as Century-Well, have personalities separate and distinct from their
stockholders, except only when the law sees it fit to pierce the veil of corporate identity, particularly when the
corporate fiction is shown to be used to defeat public convenience, justify wrong, protect fraud or defend crime, or
where a corporation the mere alter ego or business conduit of a person.
CASE LAW/ DOCTRINE:
• The obligations of a stockholder in one corporation cannot be offset from the obligation of the stockholder in a
second corporation, since the corporation has a separate juridical personality.
• The so-called “parol evidence rule” forbids any addition to or contradiction of the terms of a written instrument by
testimony or other evidence purporting to show that, at or before the execution of the parties’ written agreement,
other or different terms were agreed upon by the parties, varying the purport of the written contract. When an
agreement has been reduced to writing, the parties cannot be permitted to adduce evidence to prove alleged
practices which to all purposes would alter the terms of the written agreement. Whatever is not found in the
writing is understood to have been waived and abandoned.

CORPORATION LAW
Case Digest
038 US v. MILWAUKEE REFRIGERATOR TRANSIT CO. AUTHOR: JANNA
December 28, 1905, 142 F. 247 Brothers create a transit co. to circumvent law and help
TOPIC: Piercing the corporate veil its brewery business. General rule: corporation = legal
PONENTE: Sanborn entity, but iw/illegal operation = association of persons.
FACTS
1. The brewing company, owned and controlled by Pabst brothers is a Wisconsin corporation operating a large
brewery, selling and shipping beer into all states and territories, and to foreign countries.
2. Pabst Brewery habitually received, from many railroads and common carriers which transported its products,
rebates and concessions.
3. Upon passage of the Elkins act, the brewing company was no longer able to directly secure rebates.
4. Pertinent provisions of the Elkins Act are as follows:

• Corporation carriers are made liable to the same extent as were their agents under the earlier statutes, but
subject to fine only, not imprisonment.
• It is made unlawful and punishable for any person or corporation to offer, grant, or give, or to solicit,
accept, or receive, or offer so to do, any rebate, concession, or discrimination in respect of transportation
in interstate or foreign commerce by common carriers within the former statutes, whereby any such
property shall, by any device whatever, be carried at less than the published tariff rate.
• The published rate is made conclusive, and any departure there from punishable.
5. Oct. 7, 1903, the transit company was organized to operate refrigerator cars on defendants' and other lines,
allegedly as a “dummy company” to evade the statute and cover the receiving of rebates, etc. which is about 1/8th
or 1/10th of the published rates. Rebates are paid and accepted under the guise of commissions.
6. On creation of the transit company, the Pabsts as controlling officers, contracted with themselves as executive
officers of the transit company, to give the latter the exclusive control of the shipment of all freight of the brewing
company moving in interstate and foreign commerce.
7. On such shipments, brewing company pays to the carriers the full tarriff rate, and the carriers pay the transit co. for
use of its refrigerator cars, plus an additional 1/8 or 1/10 of sums paid them by the brewing company.
8. In every instance, the property is transported by defendant carriers at 1/8th or 1/10th less than the published tariff
rates, amounting to thousands of dollars.
9. Plaintiff filed a bill in equity for an injunction to prevent the payment of alleged rebates on freight, brought under
Elkins Act Feb. 19, 1903.
10. Defendants made demurrers and a motion to strike out allegations of illegality and claimed that repayments were
made and accepted as compensation for its services.
ISSUE: (1) Whether the payments are intended rebates, against the law; (2) Whether the defendant corporations were so
united in interest, control, and management as to make them substantially the same.
HELD: ; YES, because the bill states several facts showing unlawful purpose such as prior habitual violations of former
laws, the creation of a dummy corporation, and the fact that the transit company solicits no freight.
YES, the transit company and the brewery company, are owned and controlled by the Pabsts brothers, and these serve the
same united interest, control, and management.
CORPORATION LAW
Case Digest
RATIO:
1. Of its 1,500 shares, 1,340 were issued to the two Pabsts, 35 shares to Fred Pabst's wife, and the balance to dummy
directors, to give color to the claim that its stock was not owned by the brewing company.
2. The transit company has entire control of all the shipping business of the brewery, comprising almost the entire
business of the transit company, which it does not solicit; the only possible consideration moving from it to the
carrier being its refraining to divert the business.
3. The bill shows the creation, by the controlling interests of the brewing company, of a dummy corporation, with
dummy directors, and scienter of its character by the carriers, with intent to evade the law.
4. That the transit company is controlled by the managing agents of the brewing company is entirely clear. But is it
controlled by the shipper corporation? The solution of this question depends on whether the brewing corporation,
in a case like this, is an association of individuals, rather than a legal entity apart from those who own and control
it.
5. No doubt the general rule that a corporation is a legal entity, an institution, artificial, intangible, existing only by
legal contemplation, and separate and apart from its constituents, is firmly imbedded in the common law of this
country.”
However, a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the
contrary appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, the law will regard the corporation as an association of persons. A corporation, as
expressive of legal rights and powers, is no more fictitious or intangible than a man's right to his own home or his
own liberty.
6. It clearly appears that the shipper practically controls the transit company, showing a sufficient identity of interest
among the shareholders of both in the repayments to make them rebates, if paid and received with unlawful intent.
7. It is said that the procurement of the shipments through the contract is the mere soliciting of them for the carriers,
for which they are lawfully authorized to pay a part of the rate, in order to get the business;
8. As alleged, the transit company is a mere separate name for the brewing company, being in fact the same
collection of persons and interests.
CASE LAW/ DOCTRINE:
“A corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears;
but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the
law will regard the corporation as an association of persons. A corporation, as expressive of legal rights and powers, is no
more fictitious or intangible than a man's right to his own home or his own liberty.”

CORPORATION LAW
Case Digest
039. State v. Standard Oil AUTHOR: twinkle
49 Ohio St. 137; 30 N.E. 279; 1892 Ohio LEXIS 127 An agreement that would have created a monopoly, even if
March 2, 1892 it reduced prices, is still against public policy because they
TOPIC: Contrary to Law/ Public Policy can raise the prices at exceedingly high rates.
PONTENTE: Minshall, J.
in fictione juris subsistit aequitas - With legal fictions, equity always exists.
FACTS
1. Standard Oil desired to enter into an elaborate agreement that would have consolidated several corporations and
partnerships into one corporation operated as a trust.
2. All of the owners and holders of its capital stock, including all the officers and directors of said defendant company,
signed said agreements, without attaching the corporate name and seal of said defendant company thereto, and the official
designations of its officers.
3. Since the signing of the agreement, the nine trustees have been and still are able to choose and have chosen annually
such boards of directors of defendant company as they (nine trustees) have seen fit and control the action of Standard Oil
in the conduct and management of its business.
3. Plaintiff attorney general brought an action in quo warranto to preclude the furtherance of the transaction.
4. Standard Oil contends that all of the shares of stock of defendant except seven were transferred to the nine trustees, and
these seven were retained only for the qualification of the directory, which the trustees might from time to time select,
either from their own numbers or from others of their choice and the transfers were made by defendant's transferring
officers upon its stock books. And dividends of the company are paid to the holders of its stock as also appearing in its
books.
5. Also, Standard Oil further contends that the nine trustees individually owned majority interests in the stocks of the
various corporations, and that they could exercise the same voting power by virtue of their own stocks.
ISSUE/s:
1.Major: IS the agreement against public policy/ contrary to law?
Sub issues:
2. WON The Standard Oil Company of Ohio acted in their corporate capacity.
3. WON section 6789, Revised Statues which provides: "Nothing in this chapter contained shall authorize an action against
a corporation for forfeiture of charter, unless the same be commenced within five years after the act complained of was
done or committed." Bars this action?
HELD: 1. YES. The agreement creates monopoly which would have been against the public policy of the state. The court
ousted the oil company from the right to make the agreement and of the power to perform it.
2. YES. The property and assets of the corporation could only be transferred by a corporate act, and the agreement could
not in this respect, be carried into effect, other than by such corporate act.
3. NO. The whole of Sec 6789, Revised Statutes, is not quoted by the defendant; it further proceeds: "Nor shall an action
be brought against a corporation for the exercise of a power or franchise under its charter which it has used and exercised
for a term of twenty years."

CORPORATION LAW
Case Digest
RATIO:
1.The law requires that a corporation should be controlled and managed by its directors in the interest of its own stock-
holders, and conformable to the purpose for which it was created by the laws of its state. By this agreement, indirectly it is
true, but none the less effectually, the defendant is controlled and managed by the Standard Oil Trust, an association with
its principal place of business in New York City, and organized for a purpose contrary to the policy of our laws. Its object
was to establish a virtual monopoly of the business of producing petroleum, and of manufacturing, refining and dealing in
it and all its products, throughout the entire country, and by which it might not merely control the production, but the price
at its pleasure. All such associations are contrary to the policy of our state and void.
Monpolies have always been regarded as contrary to the spirit and policy of the common law because:
1. "the price of the same commodity will be raised, for he who has the sole selling of any commodity, may well make the
price as he pleases."
2. "The incident to a monopoly is, that after the monopoly is granted, the commodity is not so good and merchantable as it
was before; for the patentee having the sole trade, regards only his private benefit, and not the commonwealth.
3. "It tends to the impoverishment of divers artificers and others, who before, by the labor of their hands in their art or
trade, had mantained themselves and their families, who will now of necessity be constrained to live in idleness and
beggary." The third objection, though frequently overlooked, is none the less important.
2. The general proposition that a corporation is to be regarded as a legal entity, existing separate and apart from the nat-ural
persons composing it, is not disputed; but that the statement is a mere fiction, existing only in idea, is well under-stood,
and not controverted by anyone who pretends to accurate knowledge on the subject. So long as a proper use is made of the
fiction, that a corporation is an entity apart from its shareholders, it is harmless, and, because convenient, should not be
called in question; but where it is urged to an end subversive of its policy, or such is the issue, the fiction must be ignored,
and the question determined, whether the act in question, though done by shareholders, that is to say, by the persons united
in one body, was done simply as individuals and with respect to their individual interests as shareholders, or was done
ostensibly as such, but, as a matter of fact, to control the corporation and affect the transaction of its business, in the same
manner as if the act had been clothed with all the formalities of a corporate act.
The property and assets of the corporation could only be transferred by a corporate act, and the agreement could not in this
respect, be carried into effect, other than by such corporate act; and clearly indicates that the purpose of the stockholders of
the defendant, in becoming a party to it, was to affect their property and business as a corporation; in other words, was to
act in their corporate, and not in their individual, capacity. The agreement, as performed by the members of the defendant,
as effectually places the property and business of the defendant under the control and management of the Standard Oil
Trust, as if the same had been transferred as provided in the original agreement.
3. Plaintiff avers that the first part does not apply to proceedings instituted on behalf of the state to forfeit charter of a
corporation. Court says the statute gives no exemption and it still applies. However, the next part which provides “Nor
shall an action be brought against a corporation for the exercise of a power or franchise under its charter which it has used
and exercised for a term of twenty years" applies. Therefore within that time such a proceeding may be brought.
CASE LAW/ DOCTRINE: a corporation is an artificial person, or entity, apart from its members, is merely a description,
in figurative language, of a corporation viewed as a collective body; a corporation is really an association of persons, and
no judicial dictum or legislative enactment can alter this fact EXCEPT when there is an urge to an end subversive of its
policy, or such is the issue, then the fiction must be ignored.
DISSENTING/CONCURRING OPINION: none.

CORPORATION LAW
040 Laguna Trans. v. SSS Case Digest
AUTHOR: N. Manalo
(April 28, 1960, G.R. No. L-14606)
TOPIC: Contrary to Law/Public Policy; Evasion of
Liability to Government
PONTENTE: Barrera J.,
FACTS
1. That sometime in 1949, the Biñan Transportation Co., a corporation duly registered with the Securities and Exchange
Commission, sold part of the lines and equipment it operates to Gonzalo Mercado, Artemio Mercado, Florentino Mata and
Dominador Vera Cruz;
2. That after the sale, the said vendees formed an unregistered partnership under the name of Laguna Transportation
Company which continued to operate the lines and equipment bought from the Biñan Transportation Company, in addition
to new lines which it was able to secure from the Public Service Commission
3. That the original partners forming the Laguna Transportation Company, with the addition of two new members,
organized a corporation known as the Laguna Transportation Company, Inc., which was registered with the Securities and
Exchange Commission on June 20, 1956, and which corporation is the plaintiff now in this case
4. That the corporation continued the same transportation business of the unregistered partnership
5. That prior to November 11, 1957, plaintiff requested for exemption from coverage by the System on the ground that it
started operation only on June 20, 1956, when it was registered with the Securities and Exchange Commission but on
November 11, 1957, the Social Security System notified plaintiff that it was covered;
6. On November 14, 1957, plaintiff through counsel sent a letter to the Social Security System contesting the claim of the
System that plaintiff was covered,
7. the trial court rendered a decision declaring the petitioner was an employer engaged in business as common carrier
which had been in operation for at least two years prior to the enactment of Republic Act No. 1161, as amended by
Republic Act 1792 and by virtue thereof, it was subject to compulsory coverage under said law.
8. the petitioner directly appealed to the SC
Petitioner’s contention: lower court erred in holding that it is an employer engaged in business as a common carrier which
had been in operation for at least 2 years prior to the enactment of the Social Security Act and, therefore, subject to
compulsory coverage thereunder. Section 9, provides:
SEC. 9 Compulsory Coverage. — ….That the Commission may not compel any employer to become a member of
the System unless he shall have been in operation for at least two years . . . .
**(SSS enactment: June 18, 1954; Petitioner’s incorporation: June 20, 1956)
ISSUE: WON petitioner is exempted from the coverage
HELD: No
Petitioner's argument would defeat, rather than promote, the ends for which the Social Security Act was enacted. An
employer could easily circumvent the statute by simply changing his form of organization every other year, and then claim
exemption from contribution to the System as required, on the theory that, as a new entity, it has not been in operation for a
period of at least 2 years. the door to fraudulent circumvention of the statute would, thereby, be opened.

CORPORATION LAW
Case Digest
RATIO:
The firm name "Laguna Transportation Company" was not altered, except with the addition of the word "Inc." to indicate
that petitioner was duly incorporated under existing laws. The corporation continued the same transportation business of
the unregistered partnership, using the same lines and equipment. There was, in effect, only a change in the form of the
organization of the entity engaged in the business of transportation of passengers.
Hence, said entity as an employer engaged in business, was already in operation for at least 3 years prior to the enactment
of the Social Security Act on June 18, 1954 and for at least two years prior to the passage of the amendatory act on June
21, 1957. Petitioner argues that, since it was registered as a corporation with the Securities and Exchange Commission
only on June 20, 1956, it must be considered to have been in operation only on said date.
While it is true that a corporation once formed is conferred a juridical personality separate and district from the persons
composing it, it is but a legal fiction introduced for purposes of convenience and to subserve the ends of justice. The
concept cannot be extended to a point beyond its reasons and policy, and when invoked in support of an end subversive of
this policy, will be disregarded by the courts.
CASE LAW/ DOCTRINE:

General rule: it is that a corporation will be looked upon as a legal entity, and until sufficient reason to the contrary appears
Exception: When the motion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of persons.
Where a corporation was formed by, and consisted of members of a partnership whose business and property was
conveyed and transferred to the corporation for the purpose of continuing its business, in payment for which corporate
capital stock was issued, such corporation is presumed to have assumed partnership debts, and is prima facie liable
therefor. The reason for the rule is that the members of the partnership may be said to have simply put on a new coat, or
taken on a corporate cloak, and the corporation is a mere continuation of the partnership.

CORPORATION LAW
Case Digest
041 Marvel Bldg. Corp. v. David Author: Sarah Calica
24 February 1945 G.R. No. L-5081 Note: The corporate fiction has been disregarded because the
Topic: Piercing the Corporate Veil; Contrary to corporation was used to evade taxes. Hence, the effect is personal
Law/Public Policy: Evasion of Liability to liability on the part of stockholders.
Government
Ponente: Labrador
Facts:
1. Plaintiffs, stockholders of Marvel Building Corporation, brought an action to enjoin defendant Collector of Internal
Revenue from selling at public auction properties. It includes three parcels of land, with the buildings situated thereon:
Aguinaldo Building, the Wise Building, and the Dewey Boulevard-Padre Faura Mansion, all registered in the name of the
said corporation.
2. Plaintiffs alleged that the properties belong to the Marvel Building Corporation.
3. Defendant alleged that the properties belong to Maria B. Castro
-evidenced by endorsement in blank of the shares of stock issued in the name of the other incorporators, and the possession
thereof by Maria B. Castro
4. The Articles of Incorporation dated 12 February 1947 and according to it the capital stock is P2,000,000, of which
P1,025,000 was (at the time of incorporation) subscribed and paid for by incorporators which includes Maria B. Castro
(with 250 shares).
5. Maria B. Castro was elected as President and Maximo Cristobal as Secretary Treasurer.
6. On 15 September 1950, the Secretary of Finance, upon consideration of the report of a special committee assigned to
study the war profits tax case of Mrs. Maria B. Castro, recommended the collection of P3,593,950.78 as war profits taxes
for the latter, and on September 22, 1953 the President instructed the Collector that steps be taken to collect the same.
7. Pursuant thereto, properties were seized by the Collector of Internal Revenue on 31 October 1950.
8. The by-laws of the corporation was not presented nor any of its transactions or accounts.
9. CFI of Manila ordered the release of the properties for failure to prove that Maria B. Castro is the true owner of all the
stock certificates of the corporation
10. Hence the appeal of defendant.
Issues: Whether or not Maria B. Castro is the owner of shares of stock of Marvel Building Corporation
Held: Yes. Shareholders are “dummies” of Maria B. Castro
Ratio:
The fact that certificates in possession of Castro were indorsed in blank, Castro had enormous profits and had motive to
hide them, other subscribers had no incomes, and directors never met shows that other shareholders may be considered as
dummies of Castro. Hence, corporate veil may be pierced.
The most important evidence presented by the CIR to prove his claim that Maria B. Castro is the sole and exclusive owner
of the shares of stock of the Marvel Building Corporation is supposed endorsement in blank of the shares of stock issued in
the name of the other incorporators and the possession thereof by Maria B. Castro.
The second most important evidence presented by the CIR is the fact that the other stockholders did not have incomes in
such amounts, during the time of the organization of the corporation in 1947, or immediately thereto, as to enable them to
pay in full for their supposed subscriptions.
Moreover, the failure on the part of the plaintiffs to prove that the shareholders are not dummies of Maria B. Castro is
significant.
-The non-production of evidence that would naturally have been produced by an honest and therefore fearless claimant
permits the inference that its tenor is unfavorable to the party's cause.
Case Law/Doctrine:
The veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice, or for
purposes that could not have been intended by law that created it or to defeat public convenience, justify wrong, protect
fraud or defend crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law or perpetuate deception or
as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.

CORPORATION LAW
Case Digest
042. Tan Boon Bee v. Jarencio AUTHOR: De Guzman, Bien
June 30, 1988, G.R. No. L-41337 Respondent GRAPHIC and PADCO (same BOD and
TOPIC: Evasion of Liability to Creditors officers) wanted to evade of liability by claiming that the
PONENTE: Paras, J; printing machine was PADCO’s property and not
GRAPHIC
FACTS
1. Petitioner herein, doing business under the name and style of Anchor Supply Co., sold on credit to herein private
respondent Graphic Publishing, Inc. (GRAPHIC for short) paper products amounting to P55,214.73.
2. On December 20, 1972, GRAPHIC made partial payment by check to petitioner in the total amount of P24,848.74; and
on December 21, 1972, a promissory note was executed to cover the balance of P30,365.99.
3. In the said promissory note, it was stipulated that the amount will be paid on monthly installments and that failure to
pay any installment would make the amount immediately demandable with an interest of 12% per annum.
4. On September 6, 1973, for failure of GRAPHIC to pay any installment, petitioner filed with the then Court of First
Instance of Manila, presided over by herein respondent judge for a Sum of Money.
5. Respondent judge declared GRAPHIC in default for failure to file its answer within the reglementary period and
plaintiff (petitioner herein) was allowed to present its evidence ex parte.
6. In a Decision dated January 18, 1974, the trial court ordered GRAPHIC to pay the petitioner the sum of
P30,365.99 with 12% interest from March 30, 1973 until fully paid, plus the costs of suit. On motion of petitioner,
a writ of execution was issued by respondent judge; but the aforestated writ having expired without the sheriff finding
any property of GRAPHIC, an alias writ of execution was issued on July 2, 1974.
7. The executing sheriff levied upon one (1) unit printing machine Identified as "Original Heidelberg Cylinder
Press” In a Notice of Sale of Execution of Personal Property dated July 29, 1974, said printing machine was scheduled
for auction sale; but in a letter dated July 19, 1974, herein private respondent, Philippine American Drug Company
(PADCO for short) had informed the sheriff that the printing machine is its property and not that of GRAPHIC,
and accordingly, advised the sheriff to cease and desist from carrying out the scheduled auction sale.
8. Notwithstanding the said letter, the sheriff proceeded with the scheduled auction sale, sold the property to the
petitioner, it being the highest bidder, and issued a Certificate of Sale in favor of petitioner. More than five (5)
hours after the auction sale and the issuance of the certificate of sale, PADCO filed an "Affidavit of Third Party Claim"
with the Office of the City Sheriff .
9. On July 30,1974, PADCO filed with the Court of First Instance of Manila, a Motion to Nullify Sale on Execution which
was opposed by the petitioner.
10. Respondent judge, in an Order dated March 26, 1975 (Ibid., pp. 64-69), ruled in favor of PADCO. The Sheriff is
ordered to return the said machinery to its owner, the Philippine American Drug Co.
11. Petitioner filed a Motion For Reconsideration and an Addendum to Motion for Reconsideration (Ibid., pp. 94-08), but
in an Order dated August 13, 1975, the same was denied for lack of merit. Hence, the instant petition.
ISSUE: Whether or not the veil of corporate fiction should be pierced?
HELD: Yes. PADCO, as its name suggests, is a drug company not engaged in the printing business. So it is dubious that it
really owns the said printing machine regardless of PADCO’s title over it. Further, the printing machine, as shown by
evidence, has been in GPI’s premises even before the date when PADCO alleged that it acquired ownership thereof.
RATIO:
1. It is true that a corporation, upon coming into being, is invested by law with a personality separate and distinct from
that of the persons composing it as well as from any other legal entity to which it may be related.
2. As a matter of fact, the doctrine that a corporation is a legal entity distinct and separate from the members and
stockholders who compose it is recognized and respected in all cases which are within reason and the law.
3. However, this separate and distinct personality is merely a fiction created by law for convenience and to promote
justice. Accordingly, this separate personality of the corporation may be disregarded, or the veil of corporate
fiction pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work an injustice, or
where necessary to achieve equity or when necessary for the protection of creditors.
4. Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for
the commission of injustice and inequity. Likewise, this is true when the corporation is merely an adjunct, business
conduit or alter ego of another corporation. In such case, the fiction of separate and distinct corporation entities should
CORPORATION LAW
Case Digest
be disregarded.
5. In the instant case, petitioner's evidence established that PADCO was never engaged in the printing business; that
the board of directors and the officers of GRAPHIC and PADCO were the same; and that PADCO holds 50%
share of stock of GRAPHIC. Petitioner likewise stressed that PADCO's own evidence shows that the printing machine
in question had been in the premises of GRAPHIC since May, 1965, long before PADCO even acquired its alleged title
on July 11, 1966 from Capitol Publishing. That the said machine was allegedly leased by PADCO to GRAPHIC on
January 24, 1966, even before PADCO purchased it from Capital Publishing on July 11, 1966, only serves to show that
PADCO's claim of ownership over the printing machine is not only farce and sham but also unbelievable.
6. Considering the aforestated principles and the circumstances established in this case, respondent judge should have
pierced PADCO's veil of corporate Identity.
CASE LAW/ DOCTRINE: Separate personality of the corporation may be disregarded, or the veil of corporate fiction
pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work an injustice, or where necessary to
achieve equity or when necessary for the protection of creditors.

CORPORATION LAW
Case Digest
043 NATIONAL MARKETING CORPORATION AUTHOR: Danna Laura Zerrudo
(NAMARCO) v. ASSOCIATED FINANCE
COMPANY, INC. & FRANCISCO SYCIP “Piercing the veil of corporate fiction” is allowed when a
27 April 1967, G.R. No. L-20886 corporation is a mere alter ego of a person, and such person
TOPIC: Piercing the Corporate Veil - Evasion of Liability hides behind the principle that a corporation has a
to Creditors personality distinct and separate from its stockholders, in
PONENTE: Dizon, J. order to commit acts of fraud against others.
FACTS
1. March 25, 1958 - Associated Finance Company, Inc. (ASSOCIATED), through its President, Francisco Sycip, entered
into an agreement to exchange sugar with National Marketing Corporation (NAMARCO) (represented by its then General
Manager, Benjamin Estrella). ASSOCIATED would deliver to NAMARCO 100 pounds of “Victorias” and/or “National”
refined sugar in exchange for 7,732.71 bags of Busilak and 17, 285.08 piculs of “Pasumil” raw sugar belonging to
NAMARCO.
2. May 19, 1958 – In compliance with the agreement, NAMARCO delivered to ASSOCIATED 7,732.71 bags of Busilak
and 17,285.08 piculs of “Pasumil” domestic raw sugar.
3. January 12, 1959 – Because ASSOCIATED failed to deliver to NAMARCO the agreed 100 pounds of Victoria and/or
National refined sugar, NAMARCO demanded in writing from ASSOCIATED to either: (a) immediately deliver the
refined sugar before January 20, or (b) pay its equivalent cash value amounting to P372,639.80.
4. Since ASSOCIATED refused to deliver the raw sugar or pay for the refined sugar NAMARCO delivered to it,
NAMARCO instituted the present action in the lower court to recover the sum of P403,514.28 in payment of the raw sugar
received by defendants.
5. Sycip’s defense: He cannot be held liable because it is a known principle that a corporation has a personality distinct and
separate from that of its stockholders and that the latter are not personally liable for the corporate obligations.
ISSUE: Whether or not Francisco Sycip may be held liable, jointly and severally liable with co-defendant corporation, for
the sums of money adjudged in favor of NAMARCO
HELD: Yes, because when the corporation is the mere alter ego of a person, the principle of corporate fiction may be
disregarded, especially when the person hides behind the said principle in order to commit acts of fraud against others.
RATIO:
1. Sycip was guilty of fraud because through false representations, he succeeded in inducing NAMARCO to enter into the
exchange agreement, with full knowledge, on his part, that ASSOCIATED was in no position to comply with the
obligation.
2. Sycip cannot seek refuge behind the general principle that a corporation has a personality distinct and separate from that
of its stockholders and that the latter are not personally liable for the corporate obligations.
3. The Court felt justified in "piercing the veil of corporate fiction" and holding Sycip personally liable, jointly and
severally with ASSOCIATED, for the sums of money adjudged in favor of appellant since, when the corporation is the
mere alter ego of a person, the corporate fiction may be disregarded; the same being true when the corporation is
controlled, and its affairs are so conducted as to make it merely an instrumentality, agency or conduit of another.
Why Sycip should be liable:

1. Sycip owned P60,000 worth of shares in the defendant corporation, while his wife owned P20,000. The par value of the
subscribed capital stock of ASSOCIATED was only P105,000.00
2. Negotiations related to the subject exchange agreement were EXCLUSIVELY conducted by Sycip in behalf of
ASSOCIATED.
3. At the time of the negotiations, ASSOCIATED was already insolvent.
4. When NAMARCO asked Defendants to comply with the exchange agreement, instead of making delivery of the sugar,
Defendants offered to pay its value (at the rate of P15.30 per bag) instead - a clear indication that they did not have the
sugar contracted for.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
When the corporation is the mere alter ego of a person, the corporate fiction may be disregarded; the same being true when
the corporation is controlled and its affairs are so conducted as to make it merely an instrumentality, agency or conduit of
another.

CORPORATION LAW
Case Digest
044 JACINTO v. HONORABLE COURT OF AUTHOR: Ernesto C. Palomique III
APPEALS and METROPOLITAN BANK AND • Jacinto, president/GM and owner of 52% of corpo,
TRUST COMPANY owes MetroBank sum of money, signs trust receipts
G.R. No. 80043 June 6, 1991 therefor. Jacinto absconds. Jacinto ordered to jointly
and severally pay MetroBank. Corpo veil pierced
TOPIC: Evasion of Liability to Creditors because it was used as a shield to perpetuate fraud
and/or confuse legitimate issues. There was no clear
PONENTE: DAVIDE, JR., J. cut delimitation between the personality of Jacinto
and the corporation.
FACTS
1. Jacinto (petitioner) is the President and General Manager of Inland Industries, Inc. where he owned 52% of the
shares.
2. Jacinto owes MetroBank a sum of money and in order to secure the debt, signs trust receipts therefor.
3. Jacinto, tried to escape liability and shift the entire blame under the trust receipts solely and exclusively on the
corporation. He asserted that he cannot be held solidarily liable with the latter because he just signed said
instruments in his official capacity as president of Inland Industries, Inc. and the latter has a juridical
personality distinct and separate from its officers and stockholders.
4. The Court of Appeals, affirming the decision of the Regional Trial Court, ordered Jacinto to jointly and
severally pay MetroBank.
5. Jacinto appealed, questioning the decision of the Court of Appeals whether it can validly pierce the fiction of
corporate identity of Inland Industries, Inc. even if absolutely no proof was presented in court to serve as legal
justification for it.
ISSUE: Whether or not Jacinto is solidarily liable to MetroBank for the trust receipts.
HELD: Yes, corporate veil should be pierced because there was no clear cut delimitation between the personality of
Jacinto and the corporation. Decision affirmed.
RATIO:
6. As to the liability of Roberto A. Jacinto, it would appear that he is in in fact, the corporation itself known as Inland
Industries, Inc. Aside from the fact that he is admittedly the President and General Manager of the corporation and
a substantial stockholder thereof, it was defendant Roberto A. Jacinto who dealt entirely with MetroBnak in those
transactions. In the Trust Receipts that he signed supposedly in behalf of Inland Industries, Inc., it is not even
mentioned that he did so in this official capacity. Roberto A. Jacinto was practically the corporation itself, the
Inland industries, Inc.
7. It is undisputed that Roberto Jacinto even admitted that he and his wife own 52% of the stocks of the corporation.
Evidence shows that Jacinto in fact acted in his capacity as President/General Manager of the corporation and that
"all the goods covered by the three (3) Letters of Credit and paid for under the Bills of Exchange were delivered to
and received Inland Industries, Inc. through Roberto A. Jacinto, its President and General Manager, who signed for
and in behalf of defendant Inland and agreed to the terms and conditions of three (3) separate trust receipts
covering the same.
8. Supreme Court: ‘… the same is just a clever ruse and a convenient ploy to thwart his personal liability therefor by
taking refuge under the protective mantle of the separate corporate personality of the defendant corporation.”
CASE DOCTRINES:
1. "When the veil of corporate fiction is made as a shield to perpetuate fraud and/or confuse legitimate issues, the
same should be pierced."
2. While on the face of the complaint there is no specific allegation that the corporation is a mere alter ego of
petitioner, subsequent developments, from the stipulation of facts up to the presentation of evidence and the
examination of witnesses, unequivocally show that respondent Metropolitan Bank and Trust Company sought to
prove that petitioner and the corporation are one or that he is the corporation. No serious objection was heard from
petitioner.

CORPORATION LAW
Case Digest
045 CLAPAROLS STEEL AND NAIL PLANT V CIR, AUTHOR: (Keith Meridores)
ALLIED WORKERS’ ASSOCIATION, DEMETRIO Claparols Steel and Nail Plant was dissolved and
GARLITOS, and 9 other workers subsequently, Claparols Steel Corporation was formed.
July 31, 1975, GR No. L-30822 Eduardo Claparol thought that by dissolving the old
TOPIC: Piercing the Corporate Veil; Evasion of Liability/ corporation, its liabilities in paying back wages would also
Obligation to Employees be gone.
PONTENTE: MAKASIAR, J. Note: there’s a separate issue on computation of back
wages in the case, but we’ll not touch on that here.
FACTS
1. On Aug. 6, 1957, a complaint for unfair labor practice was filed by the Allied Workers’ Association and Demetrio
Garlitos, et. Al against Claparols Steel and Nail Plant (Claparols)
2. The Court of Industrial Relations (CIR) ruled in respondent’s favor; it declared Claparols guilty of union busting and
illegal dismissal due to participation of respondents in union activities. The CIR ordered the reinstatement and payment of
back wages.
3. The respondents filed a motion for execution of the decision. The CIR granted the motion for execution of the order. 4.
Several attempts were made by the respondents (accompanied by the Chief of Police of Talisay, Negros Occ) to be
reinstated to their work but Claparols (through its accountant, Francisco Cusi) refused alleging that there was no order
from Eduardo Claparols.
5. Records show that Claparols was already dissolved on June 30, 1957; and Claparols Steel Corporation succeeded it on
July 1, 1957. The latter also eventually stopped operation on Dec. 7, 1962.
6. Petitioners filed an opposition contending that it could not personally reinstate respondent workers alleging that under
the circumstances presently engulfing the company, and assuming the workers are entitled to back wages, it was only
limited to 3 months since Claparols stopped operations in 1962.
ISSUE:
Whether or not Claparols Steel and Nail Plant was one the same with Claparols Steel Corporation?
HELD:
Yes. The latter corporation was a continuation and successor of the first entity, and its emergence was skillfully timed to
avoid the financial liability that already attached to its predecessor.
RATIO:
1. Respondent Court's findings that indeed the Claparols Steel and Nail Plant, which ceased operation of June 30, 1957,
was SUCCEEDED by the Claparols Steel Corporation effective the next day, July 1, 1957 up to December 7, 1962, when
the latter finally ceased to operate, were not disputed by petitioners.
2. It is very clear that the latter corporation was a continuation and successor of the first entity, and its emergence was
skillfully timed to avoid the financial liability that already attached to its predecessor, the Claparols Steel and Nail Plant.
Both predecessors and successor were owned and controlled by the petitioner Eduardo Claparols and there was no break in
the succession and continuity of the same business.
3. This "avoiding-the-liability" scheme is very patent, considering that 90% of the subscribed shares of stocks of the
Claparols Steel Corporation (the second corporation) was owned by respondent (herein petitioner) Claparols himself, and
all the assets of the dissolved Claparols Steel and Nail Plant were turned over to the emerging Claparols Steel Corporation.
4. It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in the
present case could, and should, be pierced as it was deliberately and maliciously designed to evade its financial obligation
to its employees.
CASE LAW/ DOCTRINE:

The case cited several past cases of the SC conveying the message:
1. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the
law will regard the corporation as an association or persons, or, in the case of two corporations, will merge them into one.
(Yutivo and Sons Hardware Co. v Court of Tax Appeals) 1961.
2. Where a corporation is a dummy and serves no business purpose and is intended only as a blind, the corporate fiction
CORPORATION LAW
Case Digest
may be ignored. (Liddel and Co, Inc. v Collector of Internal Revenue) 1961.
3. where a corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and
distinct corporate entities should be disregarded. (Commissioner of Internal Revenue v Norton and Harrison Co.) 1964.

CORPORATION LAW
Case Digest
046. Indophil Textile Mill Workers Union-PTGWO v. AUTHOR: Marvin
Calica Piercing is not allowed unless the remedy sought is to make
1992-02-03 | G.R. No. 96490 the officer or another corporation pecuniarily liable for
TOPIC: Evasion of Liability / Obligation to Employees corporate debts
PONENTE: MEDIALDEA, J.
FACTS
1. Indophil Union is a legitimate labor organization duly registered with the DOLE and the exclusive bargaining unit of all
rank and file employees of Indophil Textile Mills.
2. On April 1987, the Union and Indophil executed a CBA effective April 1, 1987 to March 31, 1990. On November 1987,
Indophil Acrylic was formed and registered with the SEC. In 1998, Acrylic became international and hired
workers according to its criteria and standards.
3. Sometime in July 1989, the workers of Acrylic unionize and a duly certified CBA was executed. In 1990, the Union
claimed that the plant facilities built and set up by Acyrlic should be considered as an extension or expansion of Indophil
pursuant to Sec. 1(c) of Art.1 of the CBA to wit: This agreement shall apply to all companies, facilities, and installations
and to any extension and expansion thereat.
4. The union sough that Acrylic be considered part of the bargaining unit. Their contention is that the articles of
incorporation of the two corporation establish that the two entities are engaged in the same kind of business, which is the
manufacture and sale of yarns of various counts and kinds and of other materials of kindred character or nature.
Furthermore, they emphasize that the two corporations have practically the same incorporators, directors and officers. Also
the two corporation have their facilities in the same compound. That many of Indophil’s own machineries such as dyeing
machines, reeler, broiler, were transferred to and are now being used by the Acrylic plant. That services of a number of
units, departments or sections of private respondents are provided by Acrylic and that the employees of Indophil are the
same persons manning and servicing the units of Acrylic.
5. Both parties submitted the issue to Labor Arbiter Calica. Calica ruled in favor of Indophil and stated that Acrylic is not
extension of Indophil, hence their CBA does not extend to the employees of Acrylic.
6. Union sought to pierce corporate veil alleging that the creation of Acrylic is a devise to evade the application of the
CBA Indophil had with them (or it sought to include the other union in its bargaining leverage).
ISSUE: Whether or not The doctrine of piercing the veil of corporate entity applies.
HELD: No. Legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for
a corporate debt or obligation. Union does not seek to impose such claim against Acrylic. Mere fact that businesses were
related, that some of the employees of Indophil are the same persons manning and providing for auxiliary services to the
other company, and that physical plants, officers and facilities are situated in the same compound - not sufficient to apply
doctrine.
RATIO: Acrylic is not an alter ego or an adjunct or a business conduit of Indophil because it has a separate legitimate
business purpose. Indophil engages in the manufacture of yarns while Acrylic is to manufacture, buy, and sell at wholesale
basis, barter, import, export and otherwise deal in various kinds of yarns. Two corporations cannot be treated as single
bargaining unit just because they have related businesses. The Union seeks to pierce the veil of Acrylic alleging that the
corporation is a device to evade the application of the CBA. However the CA held that said doctrine is only used on the
existence of valid grounds. In the case at bar, the fact that the business of Indophil and Acrylic are related that sometimes
the employees of Indophil are the same persons manning and providing for auxiliary services to the units of Acrylic, and
that the physical plants, offices, and facilities are situated in the same compound. It is the SC’s considered opinion that
these facts are not sufficient to justify the piercing of the corporation veil of Acrylic. Furthermore, the legal entity is
disregarded only if sought to hold the officers and stockholders liable. In the instant case, the Union does not seek relief
from Indophil.
CASE LAW/ DOCTRINE:
The doctrine of piercing the veil of corporate entity applies when corporate fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime, or when it is made as a shield to confuse the legitimate issues or where a
corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

CORPORATION LAW
Case Digest
047 NAFLU v. Ople AUTHOR: Pat
July 22, 1986, G.R. No. L-68661
TOPIC: Evasion of Liability/Obligation to Employees
PONENTE: Gutierrez, Jr., J.
FACTS:
14. September 8, 1982: the National Federation of Labor Union (NAFLU) filed a request for conciliation before the
Bureau of Labor Relations (BLR) requesting for the intervention in its dispute with management involving:
- Money claims
- Refusal to conclude a collective agreement after such has been negotiated
- Run-away shop undertaken by management to bust the union
15. September 15, 1982: Management unilaterally declared a temporary shutdown.
16. September 23, 1982: management of Lawman Industrial promised the union that it will start the normalization of
operations at Lawman effective January 1983
17. October 11, 1982: the union filed its notice of strike
18. January 6, 1983: Lawman failed to resume operations alleging poor business conditions
19. NAFLU filed a complaint for unfair labor practice against the management of Lawman sometime December 1982
(NAFLU vs. Lawman) pending before the Metro Manila Branch of the NLRC.
20. March 17, 1983: the Minister of Labor and Employment issued the Order:
- All employees affected by the extended shutdown which is highly irregular, are ordered to return to work and
management is directed to accept all returning workers under the same terms and conditions prevailing previous to
the illegal shutdown.
- Management is further directed to pay severance compensation including all unpaid wages previous to the
shutdown and after March 15, 1983 in the event that the company cannot resume operations.
- Pending the determination of the charges on illegal lockout runaway-shop and the pending money claims against
the company, Lawman Industrial is hereby enjoined from transferring ownership or otherwise effecting any
encumbrance or any of its existing assets in favor of any third party without a prior clearance from this Office and
timely notice to the union.
- The company is likewise prohibited from terminating the employment of any of its employees pending the
outcome of this dispute. This order automatically enjoins a strike or lockout.
21. May 20, 1983: respondent filed a motion for reconsideration alleging that it had suffered losses shown by its FS, and
informed the Ministry to effect a shutdown effective on September 8, 1982 and to circularize a memorandum on
November 2, 1982 announcing the cessation of operations
- The company alleged further that it had no more plant and building because they were allegedly repossessed by the
Pioneer Texturizing Corporation for the failure of respondent to pay rentals as evidenced by the letter of Mr.
Eugenio Tan dated August 10, 1982 stating that respondent is given fifteen (15) days to settle its accounts,
otherwise an action for repossession and ejectment would be instituted against it.
22. But the actual partial shutdown began in August 1982. It appears moreover that at night, machines were dismantled,
hauled out and then installed at No. 43 Engineering Road, Araneta University compound, Malabon and the name of
Lawman was changed to LIBRA GARMENTS. Under that name, new applicants for employment were called even as
the company continued to manufacture the same products but under the name of LIBRA GARMENTS. When this was
discovered by the workers, LIBRA GARMENTS was changed to DOLPHIN GARMENTS.
23. June 6, 1983: NAFLU submitted a position paper alleging that it was certified by the BLR as the sole and exclusive
bargaining agent of all the rank and file employees of the said factory. The management agreed as follows: Wage
increase, P1.00 for the first year; P1.00 for the second year and P1.00 for the third year of the contract. Vacation and
sick leaves were also granted and other fringe benefits. The collective bargaining agreement was supposed to be
effective September 1982.
24. July 31, 1984: the public respondent modified its earlier order and despite a finding that the private respondent
company was guilty of unfair labor practice, the public respondent did not order the reinstatement of the employees
concerned “because the company has declared that it had already ceased its operations completely.” It is this order for
non-reinstatement which is now before us.

CORPORATION LAW
Case Digest
ISSUE:
5. Whether or not the employees should be reinstated.
HELD:
5. Yes, because after finding that Lawman Industrial Corporation had transferred its business operations to Libra
Garments Enterprises, which later changed its name to Dolphin Garments Enterprises, the public respondent
cannot deny reinstatement to the petitioners simply because Lawman Industrial Corporation has ceased its
operations.
RATIO:
5. It is clear from the records of this case that the company bargained in bad faith with the union when pending the
negotiation of their collective agreement, the company declared a temporary cessation of its operations which in reality
was an illegal lockout. Evidently, the company also maintained run-away shop when it started transferring its machine
first to Libra and then to Dolphin Garments. Failure on the part of the company to comply with the requirements of
notice and due process to the employees and the Labor Ministry one month before the intended ‘closure’ of the firm is
clearly against the law.
There is also evidence on the record that even after the alleged ‘shutdown the company was still operating in the name
of Lawman Industrial although production was being carried out by another firm called Libra Garments (later Dolphin
Garments). The evident bad faith, fraud and deceit committed by the company to the prejudice of both the union and
the employees who have existing wage claims leads us to affirm the union’s position that the veil of corporate fiction
should be pierced in order to safeguard the right to self-organization and certain vested rights which had accrued in
favor of the union.
CASE LAW/ DOCTRINE: It is very obvious from the above findings that the second corporation seeks the protective
shield of a corporate fiction to achieve an illegal purpose. As enunciated in the case of Claparols vs. Court of Industrial
Relations its veil in the present case should, therefore, be pierced as it was deliberately and maliciously designed to evade
its financial obligations to its employees. It is an established principle that when the veil of corporate fiction is made as a
shield to perpetrate a fraud or to confuse legitimate issues (here, the relation of employer-employee), the same should be
pierced.

CORPORATION LAW
Case Digest
048 VILLA-REY TRANSIT v. FERRER AUTHOR: Yayie Lanting
October 29, 1968 G.R. No. L-23893 A seller may not make use of a corporate entity as a means
TOPIC: Evasion of Liability on Contract of evading the obligation of his covenant. Where the
PONENTE:Angeles, J. Corporation is substantially the alter ego of one of the
parties to the covenant or the restrictive agreement, it can be
enjoined from competing with the covenantee.
FACTS
1. Jose M. Villarama was an operator of a bus transportation, under the business name of Villa Rey Transit, pursuant to
certificates of public convenience (CPC) granted him by the Public Service Commission (PSC).
2. On January 8, 1959: he sold the two certificates of public convenience to the Pangasinan Transportation Company, Inc.
(Pantranco) with the condition:
that Villarama "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical
or competing with the buyer."
3. March 6, 1959(3 months after the sale): a corporation called Villa Rey Transit, Inc. was organized, with the wife of Jose
M. Villarama as one of the incorporators and who was subsequently elected as treasurer of the Corporation.
4. A month after its registration with the SEC, Villa Rey Transit, Inc. bought 5 CPCs and 49 buses from Valentin
Fernando, for P249, 000.00, of which P100, 000.00 was paid upon the signing of the contract; P50, 000.00 was payable
upon the final approval of the sale by the PSC; P49, 500.00 one year after the final approval of the sale; and the balance of
P50, 000.00 "shall be paid by the BUYER to the different suppliers of the SELLER.". The parties immediately applied
with the PSC for its approval
5. Before the PSC could take final action on the said application, 2 of the 5 CPCs were levied upon pursuant to a writ of
execution issued by the CFI in favor of Eusebio Ferrer, judgment creditor, against Valentin Fernando, judgment debtor.
During the public sale conducted, Ferrer was the highest bidder, and a certificate of sale was issued in his name.
6. Ferrer then sold the said CPCs to Pantranco, and they jointly submitted their contract of sale to the PSC for approval.
7. The PSC issued an order that pending resolution of the applications, Pantranco shall have the authority to provisionally
operate the service under the 2 CPCS that were the subject of the contract between Ferrer and Pantranco.
8. Villa Rey Transit, Inc. took issue with the ruling of the PSC and elevated the matter to the Supreme Court. The Court
decreed that until the issue on the ownership of the disputed certificates shall have been finally settled by the proper court,
the Villa Rey Transit, Inc. should be the one to operate the lines provisionally.
9. November 4, 1959: Villa Rey Transit filed a complaint for annulment of the sheriff's sale of the 2 CPCs to Ferrer and the
subsequent sale to Pantranco. It prayed that all the orders of the PSC relative to the dispute over the CPCs in question be
annulled.
10. Pantranco filed a third-party complaint against Jose M. Villarama, alleging that Villarama and Villa Rey Transit are
one and the same, and that Villarama and/or the Villa Rey Transit, Inc. is qualified from operating the CPCs by virtue of
the agreement entered into between Villarama and Pantranco.
ISSUE:
Does the stipulation between Villarama and Pantranco, as contained in the deed of sale, that the former " shall not for a
period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer." bind Villa
Rey Transit, Inc.?
HELD:
Yes. Court found that the finances of Villa-Rey, Inc. were managed as if they were the private funds of Villarama and in
such a way and extent that Villarama appeared to be the actual owner of the business without regard to the rights of the
stockholders. Villarama even admitted that he mingled the corporate funds with his own money. These circumstances
negate Villarama's claim that he was only a part-time General Manager, and show beyond doubt that the corporation is his
alter ego. Thus, the restrictive clause with Pantranco applies.

CORPORATION LAW
Case Digest
RATIO:
Upon the foregoing considerations, We are of the opinion, and so hold, that the preponderance of evidence have shown
that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive clause in the contract entered
into by the latter and Pantranco is also enforceable and binding against the said Corporation.
Upon the foregoing considerations, Our conclusion is that the stipulation prohibiting Villarama for a period of 10 years to
"apply" for TPU service along the lines covered by the certificates of public convenience sold by him to Pantranco is valid
and reasonable. Having arrived at this conclusion, and considering that the preponderance of the evidence have shown that
Villa Rey Transit, Inc. is itself the alter ego of Villarama, We hold, as prayed for in Pantranco's third party complaint, that
the said Corporation should, until the expiration of the 1-year period abovementioned, be enjoined from operating the line
subject of the prohibition.
CASE LAW/ DOCTRINE:
The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is
recognized and respected in all cases which are within reason and the law. When the fiction is urged as a means of
perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes,
the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law
covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals. The rule is that a seller or promisor may not make use of a corporate
entity as a means of evading the obligation of his covenant.

CORPORATION LAW
Case Digest
049 CEASE v COURT OF APPEALS AUTHOR: Jade
October 18, 1979, GR # L-33172 Corporations’ separate and distinct identity
TOPIC: Closed Corporations Piercing the veil of corporate identity
PONTENTE: Guerrero, J.
FACTS
1. Sometime in June 1908, Forrest L. Cease and 5 other American citizens organized the Tiaong Milling and Plantation
Company. The company acquired various properties but were bought out by Forrest L. Cease together with his children
Ernesto, Cecilia, Teresita, Benjamin, Florence and another family member named Bonifacia Tirante.
2. The charter of the company lapsed in June 1958 but there were no records of its liquidation. On 13 August 1958, Forrest L.
Cease died.
3. His 2 children, Benjamin and Florence wanted an actual division of the shares among the children while the others
wanted reincorporation. Ernesto, Teresita, Cecila and stockholder Bonifacia Tirante proceeded to incorporate themselves into
the F.L. Cease Plantation Company and registered it with the Securities and Exchange Commission on 9 December 1959.
4. Benjamin and Florence initiated Special Proceeding # 3893 in the Court of First Instance of Tayabas for the settlement
of the estate of Forrest L. Cease on 21 April 1960. On 19 May 1960, they filed Civil Case # 6326 against Ernesto,
Teresita, Cecilia together with stockholder Bonifacia asking that the Tiaong Milling be declared identical to the F. L.
Cease Plantation and that its properties be divided among its children as his intestate heirs.
5. The Civil Case was resisted by Ernesto, Teresita, Cecilia and Bonifacia by filing a bond to remain in possession of the
company.
6. On 21 May 1961, on the eve of the expiry of the 3-year liquidation period, the board of liquidators of the Tiaong Milling
executed an assignment and conveyance of properties and trust agreement in favor of F.L. Cease Plantation as trustee of
the Tiaong Milling. Upon motion of Benjamin and Florence, Judge Manolo Maddela rendered his judgment in favor of
Benjamin and Florence and declared that:
• The assets and properties of Tiaong Milling, now appearing under the name of F.L. Cease Plantation is the
estate also of the deceased Forrest L. Cease, and should be divided share and share alike to his 6 children
in accordance with Rule 69 of the Rules of Court.
• The Resolution to sell dated 12 October 1959 and the Transfer of Conveyance with Trust Agreement is set
aside for it is improper, illegal and therefore, null and void.
• F.L. Cease Plantation is removed as trustee of the Tiaong Milling and ordered to deliver and convey all
properties and assets of Tiaong Milling to whomsoever be appointed as Receiver.
• Special Proceedings # 3893 is terminated and dismissed.
7. Ernesto, Teresita, Cecilia and Bonifacia appealed the decision. Benjamin and Florence moved to dismiss the appeal on
the ground that judgment was interlocutory and not appealable. The judge dismissed the appeal.
8. Ernesto, Teresita, Cecilia and Bonifacia brought the case to the Supreme Court but the case was remanded to the Court
of Appeals. The Court of Appeals dismissed the appeal on 9 December 1970.
9. Ernesto, Teresita, Cecilia and Bonifacia appealed to the Supreme Court because, according to them, the Court of
Appealerred in:
• Hearing and deciding over Special Proceeding # 3893 and Civil Case # 6326
• Affirming that the Tiaong Milling is also the property of the estate of Forrest L. Cease
• Affirming that the decision of the CFI on 27 December 1969 is interlocutory and non-appealable.

CORPORATION LAW
Case Digest
ISSUE: Where or not the Tiaong Milling and its properties are also the properties of the estate of Forrest L. Cease
HELD: The petition was dismissed. Tiaong Milling and its properties are also the properties of the deceased Forrest L.
Cease.
RATIO:
Records showed that although the original incorporators of the Tiaong Milling were aliens, friends and third-parties, it
developed into a close family corporation. The Board of Directors and Stockholders belong to one family headed by
Forrest L. Cease. Only members of his family benefited from the corporation.
The corporation never had any account with any banking institution, or of any account was carried in a bank on its behalf,
it was in the name of Forrest L. Cease. The operation of the corporation is merged with those of the majority stockholders.
Forrest L. Cease used Tiaong Milling as his instrumentality and for the exclusive benefits of his family. The corporation is
only a business conduit and an extension of his personality – this one and the same thing this the assets of the corporation
are also the estate of Forrest L. Cease.
The business of the corporation is largely, if not wholly, the personal venture of Forrest L. Cease. There was no proof
Showing that his children were subscribers or purchases of the stocks they own. Their participation as nominal shareholders
came about from Forrest L. Cease’s gratuitous dole out of his own shares to the benefit of his children and his family.
CASE LAW/ DOCTRINE:

The doctrine of disregarding or piercing the veil of corporate fiction –
Generally, a corporation is invested by law with personality separate and distinct from that of the persons composing it.
Due to this attribute, a corporation may not be made to answer for acts or liabilities of its stockholders or vice versa. This
Separate and distinct personality is merely a fiction created by law for convenience and to promote the ends of justice.
The veil of corporate entity may be pierced when it is used as to shield a public convenience, to justify a wrong, to defend a
crime, to protect or perpetuate a fraud, to confuse legitimate issues, to circumvent the law, or to perpetuate deception or as an
alter ego, adjunct or business conduit for the sole benefit of the stockholders.

CORPORATION LAW
Case Digest
050 DELPHER TRADES v CA AUTHOR: Krystelle
January 26, 1988; G.R. No. L-69259
Topic: Close Corporations The Delpher Trades Corporation is a business conduit of the
Ponente: Justice Gutierrez, Jr. Pachecos. What they really did was to invest their properties
and change the nature of their ownership from
unincorporated to incorporated form by organizing Delpher
Trades Corporation to take control of their properties and at
the same time save on inheritance taxes.
FACTS
1. In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of real estate
Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela), Province of Bulacan (now
Metro Manila) which is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry.
2. On April 3, 1974, the said co-owners leased to Construction Components International Inc. the same property and
providing that during the existence or after the term of this lease the lessor should he decide to sell the property leased
shall first offer the same to the lessee and the letter has the priority to buy under similar conditions.
3. On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and obligations under the
contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of lessors Delfin
Pacheco and Pelagia Pacheco. The contract of lease, as well as the assignment of lease were annotated at the back of
the title, as per stipulation of the parties.
4. On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant
Delpher Trades Corporation whereby the former conveyed to the latter the leased property (TCT No.T-4240) together
with another parcel of land also located in Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares
of stock of defendant corporation with a total value of P1,500,000.00.
5. A certain Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that
Delpher Trades Corporation is a family corporation; that the corporation was organized by the children of the two
spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who
owned in common the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the
property through the corporation and to avoid taxes; that in order to accomplish this end, two pieces of real estate were
transferred to the corporation; that the leased property was transferred to the corporation by virtue of a deed of
exchange of property; that in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value
shares of stock which are equivalent to a 55% majority in the corporation because the other owners only owned 2,000
sharesThe petitioners contend that there was actually no transfer of ownership of the subject parcel of land since the
Pachecos remained in control of the property. The transfer of ownership, if anything, was merely in form but not in
substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the
corporation and the co-owners should be deemed to be the same, there being in substance and in effect an Identity of
interest."
6. The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they
exchanged the land for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or even
spirit of the contract. There is a sale when ownership is transferred for a price certain in money or its equivalent (Art.
1468, Civil Code) while there is a barter or exchange when one thing is given in consideration of another thing (Art.
1638, Civil Code)."
7. On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and
distinct from the Pachecos; hat petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a
separate and distinct corporate entity, is not a party who may allege that this separate corporate existence should be
disregarded. It maintains that there was actual transfer of ownership interests over the leased property when the same
was transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.
8. On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease
agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095
in its favor under conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia
Pacheco and Delphin Pacheco.
CORPORATION LAW
Case Digest
9. RTC: ruled in favour of the plaintiff (Hydro Pipe Phils. Inc.)
10. CA: affirmed the RTC’s decision.
11. Hence, this present action.
ISSUE: Whether or not the "Deed of Exchange" of the properties executed by the Pachecos on the one hand and the
Delpher Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the private
respondent's right of first refusal over the leased property included in the "deed of exchange."
HELD:NO. The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be
considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The
Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands.
Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract.
RATIO:
After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly
from the corporation or from individual owners thereof. In the case at bar, in exchange for their properties, the Pachecos
acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the
Pachecos became stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to
take and pay for original unissued shares of a corporation, formed or to be formed." It is significant that the Pachecos took
no par value shares in exchange for their properties.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the
corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family
group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest
their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher
Trades Corporation to take control of their properties and at the same time save on inheritance taxes.
The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the
Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid
them, by means which the law permits, cannot be doubted."
The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered
a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family
merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the private
respondent has no basis for its claim of a light of first refusal under the lease contract.
CASE LAW/ DOCTRINE:
A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value,
but only an aliquot part of the whole number of such shares of the issuing corporation. The holder of no-par shares may see
from the certificate itself that he is only an aliquot sharer in the assets of the corporation. But this character of
proportionate interest is not hidden beneath a false appearance of a given sum in money, as in the case of par value shares.
The capital stock of a corporation issuing only no-par value shares is not set forth by a stated amount of money, but instead
is expressed to be divided into a stated number of shares, such as, 1,000 shares. This indicates that a shareholder of 100
such shares is an aliquot sharer in the assets of the corporation, no matter what value they may have, to the extent of
100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons interested in the financial condition
of a corporation is focused upon the value of assets and the amount of its debts.

CORPORATION LAW
Case Digest
051 PHILIPPINE NATIONAL BANK, petitioner, AUTHOR: Revy Medrick dR. Neri
vs. RITRATTO GROUP INC., RIATTO PNB-IFL – subsidiary company of PNB
INTERNATIONAL, INC., and DADASAN GENERAL PNB – attorney in fact of PNB-IFL
MERCHANDISE, respondents.
G.R. No. 142616 - July 31, 2001
TOPIC: Piercing the Corporate Veil as a Remedy
PONENTE: Kapunan, J.
Facts:
1. On May 29, 1996 PNB-IFL, a subsidiary company of PNB, organized and doing business in Hongkong, extended a
letter of credit in favor of the respondents in the amount of US $ 300,000.00 secured by real estate mortgages constituted
over 4 parcel of land in Makati City and was later on increased and decreased to US $ 1,421,316.18.
2. Respondents made repayments of the loan incurred by remitting those amounts to their loan account with PNB-IFL in
Hongkong.
3. As of April 30, 1998, their outstanding obligations stood at US $1,497,274.70.
4. PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the real estate mortgages.
5. The subject properties were sold at public auction on May 27, 1999 at the Makati City Hall.
6. On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of a writ of preliminary
injunction and/or temporary restraining order before the the RTC of Makati.
7. RTC of Makati issued a 72hour temporary restraining order.

ISSUE:
Whether or not PNB is privy to the contract of loan entered between PNB-IFL and private respondent, being that PNB-IFL
is a subsidiary company of PNB.
HELD:
No. The contract questioned is one entered into between respondent and PNB-IFL, not PNB. Petitioner is an agent with
limited authority and specific duties under a special power of attorney incorporated in the real estate mortgage. It is not
privy to the loan contracts entered into by respondents and PNB-IFL.
RATIO:
1. A corporation as a personality distinct and separate from its individual stockholders or members, and is not affected by
the personal rights, obligations and transactions of the latter.
2. The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify
their being treated as one entity.
3. A subsidiary's separate existence may be respected, and the liability of the parent corporation as well as the subsidiary
will be confined to those arising in their respective business if used to perform legitimate functions.
CASE LAW/ DOCTRINE:

The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the separate
corporate personality of a corporation is abused or used for wrongful purpose.

CORPORATION LAW
Case Digest
052 UMALI v. CA AUTHOR:
G.R. No. 89561; September 13, 1990 Rosa Cecilia K. Alfafara
TOPIC: Piercing the corporate veil Piercing the veil of corporate entity is not the proper remedy
PONENTE: REGALADO, J. in order that the foreclosure proceeding may be declared a
nullity under the circumstances obtaining in the case.
FACTS
1. Mauricia Castillo was the administratrix over a parcel of land (in Lucena) left by Felipe Castillo. The land was
mortgaged to the DBP and was about to be foreclosed. Thereafter, Santiago Rivera (her nephew) proposed to them the
conversion into subdivision the 4 parcels of land adjacent to the mortgaged property to raise the necessary fund.
2. The proposal was accepted by the Castillos. Thus, a Memorandum of Agreement was executed between Slobec Realty
and Development, Inc., (Slobec) represented by its president (Rivera) and the Castillos. In this agreement, Rivera obliged
himself to pay the Castillos the sum of P70K immediately after the execution of the agreement and to pay the additional
amount of P40OK after the property has been converted into a subdivision. Rivera, armed with the agreement, approached
Mr. Cervantes, President of defendant Bormaheco, and proposed to purchase from Bormaheco 2 tractors.
3. Bormaheco and Slobec executed a Sales Agreement over 1 unit of Caterpillar Tractor, on an installment basis.
4. As security of the unpaid balance, Slobec obtained from Insurance Corporation of the Phil. (ICP) a surety bond, with
ICP as surety and Slobec as principal, in favor of Bormaheco.
5. It was in turn secured by an Agreement of Counter-Guaranty with Real Estate Mortgage executed by Rivera as president
of Slobec and the Castillos, and ICP as mortgagee. (ICP required that the Castillos mortgage to them the 4 parcels of land)
6. Due to violation of the terms and conditions of the Counter-Guaranty Agreement, the properties of the Castillos were
foreclosed by ICP. ICP was also the highest bidder and a Certificate of Sale and TCTs over the properties were issued.
7. Said properties were not redeemed.
8. On April 10, 1975, ICP sold to Phil. Machinery Parts Manufacturing Co. (PM Parts) the 4 parcels of land.
9. PM Parts, through its President, Mr. Cervantes, sent a letter to the plaintiff Mauricia Castillo requesting her and her
children to vacate the property. Mrs. Castillo refused to vacate.
10. On September 29, 1976, the heirs of the late Felipe Castillo, particularly plaintiff Buenaflor M. Castillo Umali as the
appointed administratrix (Mauricia already died) filed an action for annulment of title before the C.F.I. of Quezon.
11. Petitioners seek to pierce the veil of corporate entity of Bormaheco, ICP and PM Parts, alleging that these corporations
employed fraud in causing the foreclosure and subsequent sale of the real properties belonging to petitioners.
12. TC: In favor of plaintiffs, transactions were null & void for being fictitious, spurious, & without consideration.
13. CA: Reversed the TC’s ruling.
ISSUE:
Whether or not there was a valid foreclosure of the mortgaged properties.
Whether or not there was necessity to pierce the veil of corporate existence.
HELD: Both no, the doctrine of piercing the veil of corporate fiction is not applicable in the case.
RATIO:
1. The surety bond expressly provides that ICP shall not be liable for any claim not filed in writing within 30 days from the
expiration of the bond. The court categorically stated that: “no evidence was presented to show that Bormaheco demanded
payment from ICP nor was there any action taken by Bormaheco on the bond posted by ICP to guarantee the payment of
plaintiffs obligation.” The failure of Bormaheco to notify ICP in writing about Slobec's supposed default released ICP from
liability under its surety bond.
2. ICP could not validly foreclose the real estate mortgage executed by petitioners since it never incurred any liability
under the surety bond. (Payment by ICP was not established.)
3. Under the doctrine of piercing the veil of corporate entity, when valid grounds exist, the legal fiction that a corporation
is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such
cases, the corporation will be considered as a mere association of persons. The members or stockholders of the corporation
will be considered as the corporation, that is, liability will attach directly to the officers and stockholders. The doctrine
applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or
when it is made as a shield to confuse the legitimate issues or where a corporation is the mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it
CORPORATION LAW
Case Digest
merely an instrumentality, agency, conduit or adjunct of another corporation.
4. The doctrine of piercing the veil of corporate fiction is not applicable in this case.
5. The mere fact that the businesses of two or more corporations are interrelated is not a justification for disregarding their
separate personalities, absent sufficient showing that the corporate entity was purposely used as a shield to defraud
creditors and third persons of their rights.
6. In the first place, the legal corporate entity is disregarded only if it is sought to hold the officers and stockholders
directly liable for a corporate debt or obligation. Assuming that petitioners were indeed defrauded by private respondents
in the foreclosure of the mortgaged properties, this fact alone is not, under the circumstances, sufficient to justify the
piercing of the corporate fiction, since petitioners do not intend to hold the officers and/or members of respondent
corporations personally liable therefor. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale,
which relief may be obtained without having to disregard the aforesaid corporate fiction attaching to respondent
corporations. Secondly, petitioners failed to establish by clear and convincing evidence that private respondents were
purposely formed and operated, and thereafter transacted with petitioners, with the sole intention of defrauding the latter.
7. It must be noted that Modesto N. Cervantes served as Vice-President of Bormaheco and, later, as President of PM Parts.
It cannot be said that PM Parts had no knowledge of the several transactions executed between Bormaheco and petitioners.
In addition, Atty. de Guzman, who is the Exec. VP of Bormaheco, was also the legal counsel of ICP and PM Parts. Hence,
the defense of good faith may not be resorted to by PM Parts which is charged with knowledge of the true relations
existing between the parties. Accordingly, the TCTs issued in its name, as well as the certificate of sale, must be declared
null and void since they cannot be considered free of the taint of bad faith.
CASE LAW/ DOCTRINE:
Under the doctrine of piercing the veil of corporate entity, when valid grounds exist, the legal fiction that a corporation is
an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such
cases, the corporation will be considered as a mere association of persons.

CORPORATION LAW
Case Digest
053 DBP vs. CA AUTHOR: Arthur Archie Tiu
August 16, 2001 G.R. No. 126200 Corporation Law; “Piercing the Veil of Corporate Fiction”
TOPIC: Piercing the Corporate veil; remedy Doctrine; When the notion of legal entity is used to defeat
PONTENTE: Kapunan, J. public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association
of persons or in case of two corporations, merge them into
one
FACTS
1. Marinduque Mining obtained from the Philippine National Bank (PNB) various loan accommodations. To secure the
loans, Marinduque Mining executed on October 9, 1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of
PNB.
2. covered all the mining’s real properties
3. As of November 1980, Loans extended by PNB amounted to P 4 billion
4. in 1981, Marinudque Mining executed a second mortage in favor of DBP and PNB
5. The mortgage also covered all of Marinduque Mining's chattels, as well as assets of whatever kind, nature and
description which Marinduque Mining may subsequently acquire in substitution or replenishment or in addition to the
properties covered by the previous Deed of Real and Chattel Mortgage dated October 7, 1978. Apparently, Marinduque
Mining had also obtained loans totaling P2 Billion from DBP, exclusive of interest and charges.
6. between 1982 to 1983, Marinduque Mining purchased and caused to be delivered construction materials and other
merchandise from Remington Industrial Sales Corporation (Remington) worth P921,755.95.
7. in 1984, Marinduque mining executed in favor of PNB and DBP an Amendment to Mortgage Trust Agreement, they
included all other real and personal properties acquired by the company
8. Mariunduque mining failed to settle the loans and obigations, PNB and DBP foreclosed the properties and declared as
highest bidders. Pursuant to Proclamation 50, they transferred all their rights and interests over Marinduque mining to the
government.
9. The purchases from Remington remained unpaid as of August 1, 1984 thus Remington filed a complaint for the sum of
money against Marinduque Mining.
10. Remington's original complaint was amended to include PNB and DBP as co-defendants in view of the foreclosure,
they later included Nonoc mining as it is the assignee to all the properties of Marinuque mining
11. 1986, Remington filed a third amended complaint including the Maricalum Mining Corporation (Maricalum Mining)
and Island Cement Corporation (Island Cement) as co-defendants. Remington asserted that Marinduque Mining, PNB,
DBP, Nonoc Mining, Maricalum Mining and Island Cement must be treated in law as one and the same entity by
disregarding the veil of corporate fiction: Codefendants are owned by DBP and PNB. (1) They hurried the foreclosure as to
make it suspicious. (2) The personnel, key officers and rank-and-file workers and employees of co-defendants NMIC,
Maricalum and Island Cement creations of co-defendants PNB and DBP were the personnel of co-defendant MMIC such
that . . . practically there has only been a change of name for all legal purpose and intents (3) The places of business not to
mention the mining claims and project premises of co-defendants NMIC, Maricalum and Island Cement likewise used to
be the places of business, mining claims and project premises of co-defendant MMIC
12. RTC: rendered decision in favor of Plaintiff, CA affirmed the decision
ISSUE: Whether or not Remington has a cause of action against DBP or PNB nor against all co-defendants
HELD: No.

CORPORATION LAW
Case Digest
RATIO:
- This Court has disregarded the separate personality of the corporation where the corporate entity was used to
escape liability to third parties. In this case, however, we do not find any fraud on the part of Marinduque Mining
and its transferees to warrant the piercing of the corporate veil.
- PNB and DBP are mandated to foreclose on the mortgage when the past due account had incurred arrearages of
more than 20% of the total outstanding obligation. Section 1 of Presidential Decree No. 385 (The Law on
Mandatory Foreclosure)
- PNB and DBP did not only have a right, but the duty under said law,
- Court of Appeals made reference to two principles in corporation law. The first pertains to transactions between
corporations with interlocking directors resulting in the prejudice to one of the corporations. This rule does not
apply in this case, however, since the corporation allegedly prejudiced (Remington) is a third party, not one of the
corporations with interlocking directors (Marinduque Mining and DBP)
- The second principle invoked by respondent court involves "directors x x x who are creditors" which is also
inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the directors of Marinduque Mining.
- Neither is there bad faith in any of the Co-defendants
- the doctrine of piercing the veil of corporate fiction applies only when such corporate fiction is used to defeat
public convenience, justify wrong, protect fraud or defend crime.To disregard the separate juridical personality of
a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. In this case,
the Court finds that Remington failed to discharge its burden of proving bad faith on the part of Marinduque
Mining and its transferees in the mortgage and foreclosure of the subject properties to justify the piercing of the
corporate veil.
CASE LAW/ DOCTRINE:
- the doctrine of piercing the veil of corporate fiction applies only when such corporate fiction is used to defeat
public convenience, justify wrong, protect fraud or defend crime. To disregard the separate juridical personality of a
corporation, the wrongdoing must be clearly and convincingly established

CORPORATION LAW
Case Digest
054 GENERAL CREDIT CORPORATION (now AUTHOR: Chedelle Florido
PENTA CAPITAL FINANCE CORPORATION), A corporation is an artificial being vested by law with a
petitioner, vs. ALSONS DEVELOPMENT and personality distinct and separate from those of the persons
INVESTMENT CORPORATION and CCC EQUITY composing it as well as from that of any other entity to
CORPORATION, respondents. which it may be related. The first consequence of the
G.R. No. 154975. January 29, 2007 doctrine of legal entity of the separate personality of the
TOPIC: “piercing the veil of corporate fiction” corporation is that a corporation may not be made to answer
PONENTE: Garcia for acts and liabilities of its stockholders or those of legal
entities to which it may be connected or vice versa. The
notion of separate personality may be disregarded under the
doctrine—“piercing the veil of corporate fiction”—as in fact
the court will often look at the corporation as a mere
collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate
juridical personality of the corporation unifying the group.
Another formulation of this doctrine is that when two (2)
business enterprises are owned, conducted and controlled by
the same parties, both law and equity will, when necessary
to protect the rights of third parties, disregard the legal
fiction that two corporations are distinct entities and treat
them as identical or one and the same.
FACTS
1. After its incorporation in 1957 as a finance and investment company, petitioner General Credit Corporation (GCC), then
known as Commercial Credit Corporation (CCC), established CCC franchise companies in different urban centers of the
country.
2. As early as 1974, GCC had applied for and was able to secure license from the then Central Bank (CB) of the
Philippines and the Securities and Exchange Commission (SEC) to engage in quasi-banking activities.
3. Respondent CCC Equity Corporation (EQUITY), organized (in November 1994) by GCC for the purpose of taking over
the operations and management of the various franchise companies.
4. Respondent Alsons Development and Investment Corporation (ALSONS) and Conrado, Nicasio, Editha and Ladislawa,
all surnamed Alcantara, and Alfredo de Borja (ALCANTARAS), each owned shares in the GCC franchise companies
(CCC Davao and CCC Cebu).
5. In December 1980, ALSONS and the ALCANTARAS, for a consideration of Two Million (P2,000,000.00) Pesos, sold
their shareholdings—a total of 101,953 shares, more or less—in the CCC franchise companies to EQUITY.
6. On January 2, 1981, EQUITY issued ALSONS et al., a “bearer” promissory note for P2,000,000.00 with a one-year
maturity date (18% interest per annum, with provisions for damages and litigation costs in case of default).
7. 4 years later, the ALCANTARAS assigned its rights and interests over the bearer note to ALSONS which became the
holder thereof (but even before the execution of the assignment deal, letters of demand for interest payment were already
sent to EQUITY, through its President Wilfredo Labayen who pleaded inability to pay the stipulated interest, EQUITY no
longer then having assets or property to settle its obligation nor being extended financial support by GCC).
8. On January 14, 1986, ALSONS (upon failing to collect from EQUITY and GCC) filed a complaint for a sum of money
against EQUITY and GCC.
9. 2. Answering with a cross-claim against GCC, EQUITY stated by way of special and affirmative defenses that it
(EQUITY):
a) was purposely organized by GCC for the latter to avoid CB Rules and Regulations on DOSRI (Directors, Officers,
Stockholders and Related Interest) limitations, and that it acted merely as intermediary or bridge for loan transactions and
other dealings of GCC to its franchises and the investing public; and
b) is solely dependent upon GCC for its funding requirements, to settle, among others, equity purchases made by
investors on the franchises; hence, GCC is solely and directly liable to ALSONS, GCC having failed to provide
…EQUITY the necessary funds to meet its obligations to ALSONS.
10. GCC filed its ANSWER to Cross-claim, stressing that it is a distinct and separate entity from EQUITY and alleging, in
essence that the business relationships with each other were always at arm’s length.
CORPORATION LAW
Case Digest
11. ALSONS’ evidences:
a) EQUITY-issued bearer PN and over 60 other documents
b) letter-reply of then GCC Pres. G. Villanueva to EQUITY Pres. Wilfredo Labayen (in said letter, Mr. Villanueva
explained that the GCC Board denied the Alcantaras’ request to be paid out of such proceeds, but nonetheless authorized
EQUITY to pay them interest out of EQUITY’s operation income, in preference over what was due GCC).
12. EQUITY presented its President and adopted the testimony of ALSONS’ witnesses and the documentary exhibits
testified by each of them.
13. GCC called only Wilfredo Labayen to testify. It stuck to its underlying defense of separateness and presented
documentary evidence detailing the organizational structures of both GCC and EQUITY. And in a bid to negate the notion
that it was conducting its business illegally, GCC presented CB and SEC-issued licenses authoring it to engage in
financing and quasi-banking activities. It also adduced evidence to prove that it was never a party to any of the actionable
documents ALSONS and its predecessors-in-interest had in their possession and that the November 27, 1985 deed of
assignment of rights over the promissory note was unenforceable.
RTC – EQUITY was only an instrumentality of GCC. Judgment in favor of ALSONS (EQUITY and GCC ordered to
jointly and severally pay ALSONS 2 Million pesos plus interests).
CA – affirmed RTC.
ISSUE:
Whether or not the piercing of the veil of corporate fiction has basis and was proper.
HELD: Yes.
RATIO:
Whether the separate personality of the corporation should be pierced hinges on obtaining facts, appropriately
pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will
not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice.
The CA found valid grounds to pierce the corporate veil of petitioner GCC, there being justifiable basis for such
action. When the appellate court spoke of a justifying factor, the reference was to what the trial court said in its
decision, namely: the existence of “certain circumstances [which], taken together, gave rise to the ineluctable
conclusion that … [respondent] EQUITY is but an instrumentality or adjunct of [petitioner] GCC.”
Per the Court’s count, the trial court enumerated no less than 20 documented circumstances and transactions,
which, taken as a package, indeed strongly supported the conclusion that respondent EQUITY was but an adjunct,
an instrumentality or business conduit of petitioner GCC.
Foremost of what the trial court referred to as “certain circumstances” are the commonality of directors, officers
and stockholders and even sharing of office between petitioner GCC and respondent EQUITY; certain financing
and management arrangements between the two, allowing the petitioner to handle the funds of the latter; the
virtual domination if not control wielded by the petitioner over the finances, business policies and practices of
respondent EQUITY; and the establishment of respondent EQUITY by the petitioner to circumvent CB rules.
Thru the testimony of EQUITY’s own President … that more than 90% of the stockholders of … EQUITY were
also stockholders of … GCC ….. Disclosed likewise is the fact that when [EQUITY’s President] Labayen sold the
shareholdings of EQUITY in said franchise companies, practically the entire proceeds thereof were surrendered to
GCC, and not received by EQUITY.
As affirmed by EQUITY’s President, … the funds invested by EQUITY in the CCC franchise companies actually
came from CCC Phils. or GCC (Exhibit “Y-5”)…. that, as disclosed by the Auditor’s report for 1982, past due
receivables alone of GCC exceeded P101,000,000.00 mostly to GCC affiliates especially CCC EQUITY. …; that
[CB’s] Report of Examination dated July 14, 1977 shows that … EQUITY which has a paid-up capital of only
P500,000.00 was the biggest borrower of GCC with a total loan of P6.70 Million.
Not only did … GCC cause the incorporation of… EQUITY, but, the latter had grossly inadequate capital for the
pursuit of its line of business to the extent that its business affairs were considered as GCC’s own business
endeavors.
ALSONS has likewise shown … that the bonuses of the officers and directors of … EQUITY was based on its
total financial performance together with all its affiliates… both firms were sharing one and the same office when
CORPORATION LAW
Case Digest
both were still operational … and that the directors and executives of … EQUITY never acted independently …
but took their orders from … GCC.
The evidence has also indubitably established that … EQUITY was organized by … GCC for the purpose of
circumventing [CB] rules and regulations and the Anti-Usury Law (as of March 31, 1977, GCC latter violated
[CB] rules and regulations by: (a) using as a conduit its non-quasi bank affiliates …. (b) issuing without recourse
facilities to enable GCC to extend credit to affiliates like … EQUITY which go beyond the single borrower’s limit
without the need of showing outstanding balance in the book of accounts).
GCC did not adduce any evidence, let alone rebut the testimonies and documents presented by ALSONS, to
establish the prevailing circumstances adverted to that provided the justifying occasion to pierce the veil of
corporate fiction between GCC and EQUITY.
As the relationships binding herein [respondent EQUITY and petitioner GCC] have been that of “parentsubsidiary
corporations” the foregoing principles and doctrines find suitable applicability in the case at bar; and, it having
been satisfactorily and indubitably shown that the said relationships had been used to perform certain functions not
characterized with legitimacy, this Court … feels amply justified to “pierce the veil of corporate entity” and
disregard the separate existence of the percent (sic) and subsidiary the latter having been so controlled by the
parent that its separate identity is hardly discernible thus becoming a mere instrumentality or alter ego of the
former.
GCC was the entity which initiated and benefited immensely from the fraudulent scheme perpetrated in violation
of the law.
CASE LAW/ DOCTRINE:
Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law covers and isolates the
corporation from any other legal entity to which it may be related, is allowed. These are: 1) defeat of public convenience,
as when the corporate fiction is used as vehicle for the evasion of an existing obligation; 2) fraud cases or when the
corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is
merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.

CORPORATION LAW
Case Digest
055 - Garrett v. Southern Railway AUTHOR: De Silva, Denison
(May 8, 1959, 173 F.Supp E.d. Tenn) Note: Lenoir Car Works employed Garrett. The latter was
TOPIC: Parent – Subsidiary Relationship injured. Meanwhile, Southern Railway acquired the entire
PONENTE: Robert L. Taylor, District Judge capital stock of Lenoir. Garrett now claims compensation
under the Federal Employer’s Liability Act against Southern
Railway.
FACTS:
1. W.H. Garrett (plaintiff) was employed as a wheel moulder by Lenoir Car Works, a Tennessee corporation.
2. Plaintiff Garrett claims injuries from silicosis (pneumoconiosis characterized by massive fibrosis of the lungs resulting
in shortness of breath) contracted from silica dust permeating the foundry.
3. Plaintiff contends that all directors and officers of Lenoir are employees of Southern Railway and that defendant owns
all the stock of Lenoir except five qualifying shares. Furthermore, plaintiff contends that all the profits of Lenoir went to
Southern.
4. Defendant Southern Railway contends that although Lenoir sells the majority of its products to Southern or its affiliates,
it does not sell to them exclusively; that Lenoir maintains its offices and business in Lenoir City; that the management of
Lenoir is vested in a manager; that Lenoir makes separate collective bargaining agreements with its employees and there is
no interchange of seniority between operations of Lenoir and the railroad, or vice versa.
ISSUE: Whether Lenoir Car Works is operated as a sham for Southern, or as the instrumentality, or as an adjunct of its
operation, rendering Southern liable to the plaintiff.
HELD: No, the control of Southern Railway over Lenoir Car Works was not such as to constitute the latter an adjunct of
Southern.
RATIO:
1. The Court held that the facts set forth provided the relation between the two companies. The Court finds the
existence of two distinct operations. There is no evidence that Southern dictated the management of Lenoir. In
fact, the evidence indicates that Henry Marius (manager of Lenoir) was in full control of the operation. He
established prices. He handled all negotiations in collective bargaining agreements.
2. Lenoir paid local taxes, had local counsel, maintained Workmen's Compensation. There is no evidence that Lenoir
was run solely for the benefit of Southern. In fact a substantial part of its requirements in the field of operation of
Lenoir were bought elsewhere. Lenoir sold substantial quantities to other companies. It operated no rolling stock
and had nothing to do with the transportation business.
3. Lenoir Car Works was not performing what have been called non-delegable duties of the railroad. It was not an
operator of a terminal, performed no switching or transportation functions at all. It was a manufacturer and
plaintiff was one of its employees. It was hence not an "agent" of Southern in the sense used in some of the cases
cited by the plaintiff, since it performed no common carrier operations.
4. The Court further held that under the indicia of control, only two concur in the case at bar, namely, the ownership
of most of the capital stock of Lenoir by Southern, and possibly subscription by Southern to the capital stock of
Lenoir.
5. Complaint: DISMISSED.
CASE LAW/ DOCTRINE: The general rule is that stock ownership alone by one corporation of the stock of another does
not thereby render the dominant corporation liable for the torts of the subsidiary unless the separate corporate existence
of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of
the dominant corporation.

CORPORATION LAW
Case Digest
056 KOPPEL (PHILS) V. YATCO AUTHOR: Gelene Guevara
October 10, 1946, G.R. No. L-47673
TOPIC:PARENT-SUBSIDIARY RELATIONSHIP
PONTENTE: HILADO, J.
FACTS
1. Plaintiff is a corporation duly is duly licensed to engage in business as a merchant and commercial broker in the
Philippines, the capital stock of which is divided into 1,000 shares of P100 each. The Koppel Industrial Car and
Equipment company, a corporation organized and existing under the laws of the State of Pennsylvania, United
States of America, and not licensed to do business in the Philippines, owned 995 shares out of the total capital
stock of the plaintiff and the remaining 5 shares are owned by each officer of the plaintiff corporation.
2. Plaintiff transacted business in the Philippines in the following manner:
• When a local buyer was interested in the purchase of railway materials, machinery, and supplies, it asked
for price quotations from plaintiff.
• Plaintiff then cabled for the quotation desired for Koppel Industrial Car and Equipment Company
• Koppel Industrial Car and Equipment Company answered by cable quoting its cost price, which was later
followed by a letter of confirmation.
• On the basis of these quotations, orders were placed by the local purchasers.
• A cable was then sent to Koppel Industrial Car and Equipment company giving instructions to ship the
merchandise to Manila forwarding the customer's order.
• The bills of lading were usually made to "order" and indorsed in blank with notation to the effect that the
buyer be notified of the shipment of the goods covered in the bills of lading; commercial invoices were
issued by Koppel Industrial Car and Equipment Company in the names of the purchasers and certificates
of insurance were likewise issued in their names, or in the name of Koppel Industrial Car and Equipment
Company but indorsed in blank and attached to drafts drawn by Koppel Industrial Car and Equipment
Company on the purchasers, which were forwarded through foreign banks to local banks. he purchasers
secured the shipping papers by arrangement with the banks, and thereupon received and cleared the
shipments.
• If the merchandise were of European origin, and if there was not sufficient time to forward the documents
necessary for clearance, through foreign banks to local banks, to the purchasers, the Koppel Industrial Car
and Equipment company did, in many cases, send the documents directly from Europe to plaintiff with
instructions to turn these documents over to the purchasers.
• In many cases, where sales was effected on Manila, duty paid, plaintiff advanced the sums required for the
payment of the duty, and these sums were in every case reimbursed to plaintiff by Koppel Industrial Car
and Equipment Company. The price were payable by drafts agreed upon in each case and drawn by
Koppel Industrial Car and Equipment Company on respective purchasers through local banks, and
payments were made to the banks by the purchasers on presentation and delivery to them of the above-
mentioned shipping documents or copies thereof.
• Plaintiff received by way of compensation a percentage of the profits on the above transactions as in the
plaintiff's contract with Koppel Industrial Car and Equipment Company and suffered its corresponding
share in the losses resulting from some of the transactions.
3. Plaintiff's share in the profits of the transactions is only to P132, 201.30 out of the P3, 772,403.82. The plaintiff
paid the sum of P5, 288.05 as commercial broker’s 4 % tax for the P132, 201.30 it obtained.
4. The defendant Collector of Internal Revenue, represented by Yatco, demanded the sum of P64, 122.51 as the
merchants' sales tax of 1% per cent on the amount of P3, 772,403.82, representing the total gross value of the
sales.
5. The plaintiff paid under protest said sum of P64, 122.51. The defendant refused to return to the sum of P64, 122.51
or any part thereof notwithstanding demands by plaintiff.
ISSUE: Whether Koppel (Phils) is a domestic corporation distinct and separate from Koppel Industrial Car and Equipment
company

CORPORATION LAW
Case Digest
HELD: NO. Koppel (Phils) is a mere branch or subsidiary of Koppel Industrial Car and Equipment company.
RATIO:
1.We find that, in so far as the sales involved herein are concerned, Koppel (Philippines), Inc., and Koppel Industrial Car
and Equipment company are to all intents and purposes one and the same; or, to use another mode of expression, that, as
regards those transactions, the former corporation is a mere branch, subsidiary or agency of the latter. To our mind, this is
conclusively borne out by the fact, among others, that:
• The amount of the so-called "share in the profits" of Koppel (Philippines), Inc., was ultimately left to the sole,
unbridled control of Koppel Industrial Car and Equipment Company. No group of businessmen could be
expected to organize a mercantile corporation - the ultimate end of which could only be profit - if the amount of
that profit were to be subjected to such a unilateral control of another corporation, unless indeed the former has
previously been designed by the incorporators to serve as a mere subsidiary, branch or agency of the latter.
• Koppel Industrial Car and Equipment Company made use of its ownership of the overwhelming majority -
99.5% - of the capital stock of the local corporation to control the operations of Koppel (Phils) to such an extent
that it had the final say even as to how much should be allotted to said local entity in the so-called sharing in the
profits. We can not overlook the fact that in the practical working of corporate organizations of the class to which
these two entities belong, the holder or holders of the controlling part of the capital stock of the corporation,
particularly where the control is determined by the virtual ownership of the totality of the shares, dominate not
only the selection of the Board of Directors but, more often than not, also the action of that Board. Applying this to
the instant case, we can not conceive how the Philippine corporation could effectively go against the policies,
decisions, and desires of the American corporation with regards to the scheme which was devised through the
instrumentality of the petitioner’s contract with Koppel Industrial Car and Equipment company, as well as all the
other details of the system which was adopted in order to avoid paying the 1 per cent merchants sales tax. Neither
can we conceive how the Philippine corporation could avoid following the directions of the American corporation
held 99.5 per cent of the capital stock of the Philippine corporation.
• In the present instance, we note that Koppel (Philippines), Inc., was represented in the Philippines by its
"resident Vice-President." This fact necessarily leads to the inference that the corporation had at least a Vice-
President, and presumably also a President, who were not resident in the Philippines but in America, where the
parent corporation is domiciled. If Koppel (Philippines), Inc., had been intended to operate as a regular domestic
corporation in the Philippines, where it was formed, the record and the evidence do not disclose any reason why all
its officers should not reside and perform their functions in the Philippines.
• Plaintiff was charged by the American corporation with the cost even of the latter's cable quotations - from
ought that appears from the evidence, this can only be comprehended by considering plaintiff as such a
subsidiary, branch or agency of the parent entity, in which case it would be perfectly understandable that for
convenient accounting purposes and the easy determination of the profits or losses of the parent corporation's
Philippines should be charged against the Philippine office and set off against its receipts, thus separating the
accounts of said branch from those which the central organization might have in other countries.
• The reference to plaintiff by local banks, under a standing instruction of the parent corporation, of unpaid drafts
drawn on Philippine customers by said parent corporation, whenever said customers dishonored the drafts, and the
fact that the American corporation had previously advised said banks that plaintiff in those cases was "fully
empowered to instruct (the banks) with regard to the disposition of the drafts and documents" in the
absence of any other satisfactory explanation naturally give rise to the inference that plaintiff was a
subsidiary, branch or agency of the American concern, rather than an independent corporation acting as a
broker. For, without such positive explanation, this delegation of power is indicative of the relations between
central and branch offices of the same business enterprise, with the latter acting under instructions already given
by the former. Far from disclosing a real separation between the two entities, particularly in regard to the
transactions in question, the evidence reveals such commingling and interlacing of their activities as to render even
incomprehensible certain accounting operations between them, except upon the basis that the Philippine
corporation was to all intents and purposes a mere subsidiary, branch, or agency of the American parent entity.

CORPORATION LAW
Case Digest
2. K-Phil was a mere branch or dummy of K-USA, and was therefore liable for merchant sales tax. To allow otherwise
would be to sanction a circumvention of our tax laws and permit a tax evasion of no mean proportion and the consequent
commission of a grave injustice to the Government. Moreover, it would allow the taxpayer to do by indirection what the
tax laws prohibit to be done directly.

CORPORATION LAW
Case Digest
057 Liddell & Co., Inc. v. The Collector of Internal AUTHOR: Myk
Revenue Liddell & Co., Inc. was engaged in importing and retailing
30 June 1961 G.R. No. L-9687 Oldsmobile and Chevrolet cars and GMC and Chevrolet
TOPIC: The Corporate Entity: Parent-Subsidiary trucks.
Relationship
PONENTE: Bengzon, C.J.
FACTS
1. NATURE OF THE CASE: Appeal from the decision of the Court of Tax Appeals imposing tax deficiency
liability on Liddell & Co., Inc.
2. 1 February 1946
a. Liddell & Co., Inc. was established in the Philippines.
b. Authorized capital = P100,000 / 1,000 shares = P100 each
i. Frank Liddell subscribed and paid = 196 shares at P19,600
ii. Kurz, Darras, Manzano, and Serrano = 1 share EACH.
iii. TOTAL PAID IN CAPITAL: 200 shares = P20,000
3. 31 January 1947
a. Declared 90% stock dividend.
i. Frank Liddell’s holding = increased to 1,960 shares
ii. Kurz, Darras, Manzano, and Serrano = increased to 10 shares EACH.
b. A resolution was passed increasing the authorized capital to P1,000,000 which was later on approved by
the SEC.
i. Frank Liddell’s holding = increased to 4,960 shares (paid P300,000 for his 3, 000 share increase)
4. 24 May 1947 (AGREEMENT was referred to in the case as EXHIBIT A)
a. Liddell, Kurz, Darras, Manzano, and Serrano executed an agreement wherein Liddell transferred shares of
stocks to various employees of Liddell & Co., Inc.
b. 40% of the earnings available for dividends accrued to Frank Liddell although at the time of the execution
of aid instrument, Frank Liddell owned all of the shares in said corporation.
c. 45% accrued to the employees, parties thereto; Kurz 12-1/2%; Darras 12-1/2%; A. Manzano 12-1/2% and
Julian Serrano 7-1/2%.
d. The agreement was also made retroactive to 1946.
e. Frank Liddell reserved the right to reapportion the 45% dividends pertaining to the employees in the future
for the purpose of including such other faithful and efficient employees as he may subsequently designate.
5. 2 agreements were forged between them supplementing the previous agreement.
a. EXHIBIT B - contains the employees' definition in detail of the manner by which they sought to prevent
their share-holdings from being transferred to others who may be complete strangers to the business on
Liddell & Co.
b. EXHIBIT C - dated May 13, 1948, the 45% given by Frank Liddell to his employees was reapportioned as
follows: C. Kurz — 12,%; E. J. Darras — 12%; A. Manzano — l2%; J. Serrano — 3-1/2%; G. W. Kernot
— 2%.
6. 9 March 1948
a. Annual meeting of stockholders
b. Declared 100% stock dividend
c. A resolution was passed increasing the authorized capital to P3,000,000 which was later on approved by
the SEC.
d. Frank Liddell subscribed to and paid 20% of the increase of P400,000
e. He paid 25% thereof in the amount of P100,000.
f. The balance of the P3,000,000 was debited to his account and credited to Subscribed Capital Stock on 11
December 1948.
7. 8 March 1949
a. Stock dividends were issued by the company in accordance with the agreements made on May 1947 and
June 1948. The stocks of the company stood as follows:

CORPORATION LAW
Case Digest
No. of
Name Amount Per Cent
Shares
Frank Liddell 13,688 P1,368,800 72.00%
Irene Liddell 1 100 .01%
Mercedes Vecin 1 100 .01%
Charles Kurz 1,225 122,500 6.45%
E.J. Darras 1,225 122,500 6.45%
Angel Manzano 1,150 115,000 6.06%
Julian Serrano 710 71,000 3.74%
E. Hasim 500 50,000 2.64%
G. W. Kernot 500 50,000 2.64%
19,000 P1,900,000 100.00%
8. 15 November 1949
a. Based on a resolution of a special meeting of the BOD of the company stock dividends were reapportioned
in this manner:
No. of
Name Amount Per Cent
Shares
Frank Liddell 19,738 P1,973,800 65.791%
Irene Liddell 1 100 .003%
Mercedes Vecin 1 100 .003%
Charles Kurz 2,215 221,500 7.381%
E.J. Darras 2,215 221,500 7.381%
Angel Manzano 1,810 181,000 6.031%
Julian Serrano 1,700 170,000 5.670%
E. Hasim 830 83,000 2.770%
G. W. Kernot 1,490 149,000 4.970%
30,000 P3,000,000 100.000%
9. 22 November 1948 amended the purpose clause of its Articles of Incorporation limiting its business activities to
importation of automobiles and trucks.
10. 20 December 1948
a. Liddell Motors, Inc. was organized and registered with the SEC.
b. Authorized stock capital = P100,000
c. P20,000 was subscribed and paid for as follows:
i. Irene Liddell (wife of Frank) = 19,996 shares
ii. Marcial P. Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia Silva = 1 share EACH.
11. By the end of 1948, Kurz, Manzano, and Kernot resigned from Liddell & Co. and were employed by Liddell
Motors, Inc. as Treasurer, General Sales Manager for cars, and General Sales Manager for Trucks, respectively.
12. January 1949
a. Liddell & Co., Inc. stopped retailing cars and trucks and conveyed them to Liddell Motors, Inc. which in
turn sold the vehicles to the public with a steep mark-up.
b. Liddell & Co. Inc. paid taxes on the basis of its sales to Liddell Motors, Inc. considering said sales as its
original sales.
13. The Collector of Internal Revenue (CIR) reviewed the transactions made between the 2 companies and determined
CORPORATION LAW
Case Digest
that Liddell Motors was actually the alter ego of Liddell & Co., Inc.
14. The CIR imposed sales tax deficiency amounting to P1,317,629.61.
a. This is based on the gross selling price of Liddell Motors, Inc. to the general public from January 1, 1949
to September 15, 1950, without deducting from the selling price, the taxes already paid by Liddell & Co.
in its sales to the Liddell Motors Inc.
15. The Court of Tax Appeals upheld the decision of the CIR.
16. TAKE NOTE: The law in force at the time of its incorporation the sales tax on original sales of cars progressive.
i.e. 10% of the selling price of the car if it did not exceed P5000, and 15% of the price if more than P5000 but not
more than P7000, etc.
ISSUE: Whether or not Liddell & Co. Inc., and the Liddell Motors, Inc. are (practically) identical corporations, the latter
being merely the alter ego of the former.
HELD: Yes.
RATIO:
1. Frank Liddell complete control over Liddell & Co., Inc. based on the following facts:
a. From the time of its organization 98% of the capital stock belonged to him.
b. The 20% paid-up subscription with which the company began its business was paid by him.
c. The subsequent subscriptions to the capital stock were made by him and paid with his own money.
d. Stipulations and conditions appear in the first agreement:
i. (1) that Frank Liddell had the authority to designate in the future the employee who could receive
earnings of the corporation; to apportion among the stock holders the share in the profits;
ii. (2) that all certificates of stock in the names of the employees should be deposited with Frank
Liddell duly indorsed in blank by the employees concerned;
iii. (3) that each employee was required to sign an agreement with the corporation to the effect that,
upon his death or upon his retirement or separation for any cause whatsoever from the corporation,
the said corporation should, within a period of sixty days therefor, have the absolute and exclusive
option to purchase and acquire the whole of the stock interest of the employees so dying,
resigning, retiring or separating.
2. Frank Liddell as owned Liddell Motors, Inc. based on the following facts:
a. He supplied the original capital funds.
i. His wife failed to sufficiently prove that she had the capacity to be the sole incorporator of Liddell
Motors, Inc.
1. Her income in the US and savings could not be enough to cover the amount of
subscription and operate the business.
2. The alleged sale of her property in Oregon was never shown to have been saved or
deposited so as to be still available at the time of the organization of the Liddell Motors,
Inc.
3. Income tax records showed that she had to independent income of her own. Her salary and
bonuses from the company ended up in the account of Frank Liddell.
ii. Evidence also showed that she did not participate in the operations of the company.
3. Liddell Motors, Inc. and Liddell & Co., Inc. are one and the same.
a. Most of the business transactions of Liddell & Co. were made through Liddell Motors, Inc. Liddell Motors
secured the cars, trucks, spare parts from Liddell & Co. Inc. and then sold them to the public.
b. The movement of sales from the two companies to the public would take place on the same day.
c. The SC said that the cars and trucks merely touched the hands of Liddell Motors, Inc. as a matter of
formality.
d. During the first half of 1949:
i. Liddell & Co. issued ten (10) checks payable to Frank Liddell which were deposited by Frank
Liddell in his personal account with the Philippine National Bank.
ii. He issued in favor of Liddell Motors, Inc. six (6) checks drawn against his personal account with
the same bank.
CORPORATION LAW
Case Digest
iii. The SC concluded that the checks issued by Frank Liddell to the Liddell Motors, Inc. were
significantly for the most part issued on the same day when Liddell & Co. Inc. issued the checks
for Frank Liddell and for the same amounts.
4. The court recognized the fact that one or more corporations are owned and controlled by a single stockholder is not
of itself sufficient ground for disregarding separate corporate entities.
5. It is lawful to obtain a corporation charter, even with a single substantial stockholder, to engage in a specific
activity, and such activity may co-exist with other private activities of the stockholder. If the corporation is a
substantial one, conducted lawfully and without fraud on another, its separate identity is to be respected.
6. The activities and engagements of the companies were the medium to reduce the price and tax liability.
7. Let us illustrate: a car with engine motor no. 212381
a. Sold by Liddell & Co. Inc. to Liddell Motors, Inc. on January 17, 1948 for P4,546,000.00 including tax.
b. the price of the car was P4,133,000.23
c. the tax paid being P413.22 at 10%.
d. The car was sold (on the same day) by Liddell Motors, Inc. to P.V. Luistro for P5500, no more sales tax
was paid.
e. In this price of P5500 was included the P413.32 representing taxes paid by Liddell & Co. Inc. in the sale to
Liddell Motors, Inc.
f. Deducting P413.32 representing taxes paid by Liddell & Co., Inc. the price of P5500, the balance of
P5,087.68 would have been the net selling price of Liddell & Co., Inc. to the general public (had Liddell
Motors, Inc. not participated and intervened in the sale), and 15% sales tax would have been due.
g. In this transaction, P349.68 in the form of taxes was evaded.
8. To allow a taxpayer to deny tax liability on the ground that the sales were made through another and distinct
corporation when it is proved that the latter is virtually owned by the former or that they are practically one and the
same is to sanction a circumvention of our tax laws.
CASE LAW/ DOCTRINE:

It is of course accepted that the mere fact that one or more corporations are owned and controlled by a single stockholder is
not of itself sufficient ground for disregarding separate corporate entities. Authorities10 support the rule that it is lawful to
obtain a corporation charter, even with a single substantial stockholder, to engage in a specific activity, and such activity
may co-exist with other private activities of the stockholder. If the corporation is a substantial one, conducted lawfully and
without fraud on another, its separate identity is to be respected.

CORPORATION LAW
Case Digest
058 YUTIVO v. COURT OF TAX APPEALS AUTHOR: Jelena
January 28, 1961, G.R. No. L-13203 SM-not the mall.
TOPIC: Parent-Subsidiary Relationship Tax Court decided that SM was organized to evade taxes,
PONENTE: GUTIERREZ DAVID, J. SC found no taxed to be evaded, so the 50% surcharge is
improper.
SM and Yutivo may be treated as one entity to pay for taxes.
FACTS
1.Yutivo Sons Hardware Co. (Yutivo), a domestic corporation incorporated under Philippine laws in 1916, was engaged in
the importation and sale of hardware supplies and equipment.
2. After the first world war, it resumed its business and bought a number of cars and trucks from General Motors
Corporation (GM), an American Corporation licensed to do business in the Philippines.
3. GM paid sales tax prescribed by the Tax Code on the basis of its selling price to Yutivo but Yutivo paid no further sales
tax on its sales to the public.
4. On June 13, 1946, the Southern Motors Inc, (SM) was organized to engage in the business of selling cars, trucks and
spare parts. One of the subscribers of stocks during its incorporation was Yu Khe Thai, Yu Khe Siong and Hu Kho Jin,
(sons of Yu Tiong Yee, one of Yutivo’s founders) as well as Yu Eng Poh, and Washington Sycip (sons of Yu Tiong Sin and
Albino Sycip, respectively, also founders of Yutivo).
5. After SM’s incorporation and until the withdrawal of GM from the Philippines, the cars and trucks purchased by Yutivo
from GM were sold by Yutivo to SM which the latter sold to the public.
6. Yutivo was appointed importer for Visayas and Mindanao by the US manufacturer of cars and trucks sold by GM.
Yutivo paid the sales tax prescribed on the basis of selling price to SM. SM paid no sales tax on its sales to the public.
7. An assessment was made upon Yutivo for deficiency sales tax. The Collector of Internal Revenue, contends that the
taxable sales were the retail sales by SM to the public and not the sales at wholesale made by Yutivo to the latter inasmuch
as SM and Yutivo were one and the same corporation, the former being a subsidiary of the latter.
8. The assessment was disputed by petitioner. After reinvestigation, a second assessment was made, sustaining the validity
of the first assessment. Yutivo contested the second assessment, alleging that: (1) there is no valid ground to disregard
the corporate personality of SM and to hold that it is an adjunct of petitioner; (2) assuming the separate personality of
SM may be disregarded, the sales tax already paid by Yutivo should first be deducted from the selling price of SM in
computing the sales tax due on each vehicle; and (3) the surcharge has been erroneously imposed by respondent.
ISSUE: Could the separate corporate personality of SM and Yutivo be disregarded?
HELD: YES, when the corporation is the "mere alter ego or business conduit of a person, it may be disregarded." Southern
Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax Appeals correctly disregarded the
technical defense of separate corporate entity in order to arrive at the true tax liability of Yutivo.
RATIO:
1. The CTA was not justified in finding that SM was organized to defraud the Government. SM was organized in June
1946, from that date until June 30, 1947, GM was the importer of the cars and trucks sold to Yutivo, which in turn was
sold to SM. GM, as importer was the one solely liable for sales taxes. Neither Yutivo nor SM was subject to the sales
taxes. Yutivo’s liability arose only until July 1, 1947 when it became the importer. Hence, there was no tax to evade.
2. The intention to minimize taxes, when used in the context of fraud, must be proved to exist by clear and convincing
evidence amounting to more than mere preponderance, and cannot be justified by a mere speculation. This is because fraud
is never lightly to be presumed.
3. Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to the deficiency
sales tax "in case a false or fraudulent return is willfully made." Although the sales made by SM are in substance by Yutivo
this does not necessarily establish fraud nor the willful filing of a false or fraudulent return.
4. However, the respondent court is correct that SM was actually owned and controlled by petitioner. Consideration of
various circumstances indicate that Yutivo treated SM merely as its department or adjunct:
a. The founders of the corporation are closely related to each other by blood and affinity.
CORPORATION LAW
Case Digest
b. The object and purpose of the business is the same; both are engaged in sale of vehicles, spare parts, hardware
supplies and equipment.
c. The accounting system maintained by Yutivo shows that it maintained high degree of control over SM accounts.
d. Several correspondences have reference to Yutivo as the head office of SM. SM may even freely use forms or
stationery of Yutivo.
e. All cash collections of SM’s branches are remitted directly to Yutivo.
f. The controlling majority of the Board of Directors of Yutivo is also the controlling majority of SM.
g. The principal officers of both corporations are identical. Both corporations have a common comptroller in the
person of Simeon Sy, who is a brother-in-law of Yutivo’s president, Yu Khe Thai.
h. Yutivo, financed principally the business of SM and actually extended all the credit to the latter not only in the form
of starting capital but also in the form of credits extended for the cars and vehicles allegedly sold by Yutivo to SM.
CASE LAW/ DOCTRINE:

It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from
its stockholders and from other corporation petitions to which it may be connected. However, "when the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime," the law will regard the
corporation as an association of persons, or in the case of two corporations merge them into one.

CORPORATION LAW
Case Digest
059 Phividec v CA and Violeta Borres AUTHOR: Dolina, Chad
G.R. No. 85266 January 30, 1990
TOPIC: Parent-Subsidiary Relationship
PONENTE: Cruz, J.
FACTS
1. Violeta M. Borres, private respondent herein, was injured in an accident that was later held by the trial and respondent
courts to be due to the negligence of Phividec Railways, Inc. (PRI).
2. On May 25, 1979, petitioner Philippine Veterans Investment Development Corporation (PHIVIDEC) sold all its rights
and interests in the PRI to the Philippine Sugar Commission (PHILSUCOM). Two days later, PHILSUCOM caused the
creation of a wholly-owned subsidiary, the Panay Railways, Inc., to operate the railway assets acquired from PHIVIDEC.
3. Borres filed a complaint for damages against Phividec Railways Inc. and Panay Railways Inc. Panay disclaimed liability
on the ground that in the Agreement concluded between PHIVIDEC and PHILSUCOM, it was provided that:
“D. With the exception of the Liabilities and Contracts specified in Annexes 4 and 5 of the preceding paragraph,
PHIVIDEC hereby holds PHILSUCOM harmless from and against any action, claim or liability that may arise out of or
result from acts or omissions, contracts or transactions prior to the turn-over.”
4. RTC of Iloilo held that Phividec Railways Inc. is negligent and liable to the private respondent for damages.
5. CA affirmed decision of RTC.
6. Petitioner argues that PHIVIDEC and Phividec Railways Inc. are entirely distinct and separate corporations although the
latter is its subsidiary. The transfer of the shares of stock of PRI to PHILSUCOM did not divest PRI of its juridical
personality or of its capacity to direct its own affairs and conduct its own business under the control of its own board of
directors.
ISSUE: Whether or not PHIVIDEC can be held liable to the plaintiff for damages?
HELD: Yes. PHIVIDEC and PRI regarded as one and the same entity.
RATIO:
1. It is clear from the evidence of record that by virtue of the agreement between PHIVIDEC and PHILSUCOM,
particularly the stipulation exempting the latter from any "claim or liability arising out of any act or transaction" prior to
the turn-over, PHIVIDEC had expressly assumed liability for any claim against PRI. Since the accident happened before
that agreement and PRI ceased to exist after the turn-over, it should follow that PHIVIDEC cannot evade its liability for
the injuries sustained by the private respondent.
2. Besides, PHIVIDEC'S act of selling PRI to PHILSUCOM shows that PHVIDEC had complete control of PRI's
business. This circumstance renders applicable the rule cited by third-party plaintiff-appellee (Costan v. Manila Electric,
24 F 2nd 383) that if a parent- holding company (PHIVIDEC in the present case) assumes complete control of the
operations of its subsidiary's business, the separate corporate existence of the subsidiary must be disregarded, such that the
holding company will be responsible for the negligence of the employees of the subsidiary as if it were the holding
company's own employees.
CASE LAW/ DOCTRINE: A corporation which is merely an adjunct, business conduit or alter ego of another
corporation, the fiction of separate and distinct corporate entities should be disregarded.

CORPORATION LAW
Case Digest
060 LA CAMPANA COFFEE FACTORY, INC., v. KAISAHAN AUTHOR: Rhona Burce
May 25, 1953, G.R. No. L-5677
TOPIC: Parent-Subsidiary Relationship Disregarding corporate entity; industrial disputes;
PONENTE: Reyes, J. factories operating under one management; effect
of one of them being a registered corporation
FACTS
1. Petitioner Tan Tong was engaged in the business of buying and selling gaugau under the trade name La Campana
Gaugau Packing. (since 1932)
2. Later on, Tan Tong and his family members, as sole incorporators and stockholders, organized a family corporation
known as La Campana Coffee Factory Co., Inc. (1950)
3. Prior to this or on July 11, 1949, Tan Tong had entered into a collective bargaining agreement with the Philippine
Legion of Organized Workers, known as PLOW for short, to which the union of Tan Tong's employees was then affiliated.
4. Tan Tong's employees later formed their own organization known as Kaisahan Ng Mga Manggagawa Sa La Campana
(KKM), one of the herein respondents, and applied for registration in the Department of Labor as an independent entity.
Pending consideration of this application, the Department gave the new organization legal standing by issuing it a permit
as an affiliate to the Kalipunan Ng Mga Manggagawa.
5. On July 19, 1951, respondent Kaisahan presented a demand for higher wages and more privileges, the demand being
addressed to La Campana Gaugau and the Coffee Factory.
Note: The Kaisahan has 66 members, which are workers from both La Campana Gaugau Packing and La Campana Coffee
Factory Co., Inc
6. The demand was not granted; Settlement through the mediation of the Conciliation Service of the Department of Labor
gave no result; The said Department then certified the dispute to the Court of Industrial Relations.
7. While the case was pending in the industrial court, the Secretary of Labor revoked the permit of the Kalipunan Ng Mga
Kaisahang Manggagawa as a labor union; The permit of its affiliate, respondent Kaisahan, was also suspended.
8. Following the revocation of the Kaisahan's permit, "La Campana Gaugau and Coffee Factory" (obviously the combined
name of La Campana Gaugau Packing and La Campana Coffee Factory Co., Inc,) and the PLOW, filed separate motions
for the dismissal of the case on several grounds. One of which states that “the action is directed against two different
entities with distinct personalities, with "La Campana Starch Factory" and the "La Campana Coffee Factory, Inc."
9. The Court of Industrial Relations denied the said motions and held that there is only one management for the business of
gaugau and coffee with whom the laborers are dealing regarding their work.
10. Contention of Tan Tong and La Campana Coffee Factory, Inc:
The Court of Industrial Relations has no jurisdiction to take cognizance of the case, because,"(1) that the petitioner La
Campana Coffee Factory, Inc. has only 14 employees, only 5 of whom are members of the respondent union and therefore
the absence of the jurisdictional number (30) as provided by sections 1 and 4 of Commonwealth Act No. 103; and, (2) that
the suspension of respondent union's permit by the Secretary of Labor has the effect of taking away the union's right to
collective bargaining under section 2 of Commonwealth Act No. 213 and consequently, its personality to sue for and in
behalf of its members."
ISSUE: Whether or not the industrial court has jurisdiction to try the case against La Campana Coffee Factory, Inc. as the
latter has only 14 employees, only 5 of whom are members of the respondent union
Note: Jurisdictional number of laborers required for a union to sue in their behalf
HELD: Yes. Although the coffee factory has only 14 laborers and only five of these are members of the labor union, yet as
the gaugau factory has more than the jurisdiction number (31) required by law and the two factories are operating under
one single management, the industrial court has jurisdiction to try the case as against the La Campana Coffee Factory, Inc.

CORPORATION LAW
Case Digest
RATIO:
1. The contention of petitioners that there is absence of jurisdictional number loses force when it is noted that, as found by
the industrial court, La Campana Gaugau Packing and La Campana Coffee Factory Co. Inc., are operating under one single
management, that is, as one business though with two trade names. True, the coffee factory is a corporation and, by legal
fiction, an entity existing separate and apart from the persons composing it, that is, Tan Tong and his family. But it is
settled that this fiction of law, which has been introduced as a matter of convenience and to subserve the ends of justice
cannot be invoked to further an end subversive of that purpose.
2. Tan Tong appears to be the owner of the gaugau factory. And the coffee factory, though an incorporated business, is in
reality owned exclusively by Tan Tong and his family. As found by the Court of industrial Relations, the two factories
have but one office, one management and one payroll, except after July 17, the day the case was certified to the Court of
Industrial Relations, when the person who was discharging the office of cashier for both branches of the business began
preparing separate payrolls for the two.
3. And above all, it should not be overlooked that, as also found by the industrial court, the laborers of the gaugau factory
and the coffee factory were interchangeable, that is, the laborers from the gaugau factory were sometimes transferred to the
coffee factory and vice-versa. In view of all these, the attempt to make the two factories appears as two separate
businesses, when in reality they are but one, is but a device to defeat the ends of the law and should not be permitted to
prevail.
CASE LAW/ DOCTRINE:
Disregarding Corporate Entity. — The doctrine that a corporation is a legal entity existing separate and apart from the
person composing it is a legal theory introduced for purposes of convenience and to subserve the ends of justice. The
concept cannot, therefore, be extended to a point beyond its reason and policy, and when invoked in support of an end
subversive of this policy, will be disregarded by the courts. Thus, in an appropriate case and in furtherance of the ends
of justice, a corporation and the individual or individuals owning all its stocks and assets will be treated as identical,
the corporate entity being disregarded where used as a cloak or cover for fraud or illegality. (13 Am. Jur., 160-161.)
A subsidiary or auxiliary corporation which is created by a parent corporation merely as an agency for the latter
may sometimes be regarded as identical with the parent corporation, especially if the stockholders or officers of the
two corporations are substantially the same or their system of operation unified.

CORPORATION LAW
Case Digest
061 McArthur v. Times Printing Co. AUTHOR: Bea Mationg
51 N.W. 216/ February 05, 1892
TOPIC: Liability of Corporation for Promoter’s Contracts While a corporation is not bound by engagements made on
PONENTE: Mitchell, J. its behalf by its promoters before its organization, it may,
after it is organized, make such engagements its contracts by
adopting them as its own; and this it may do in the same
manner as it might make similar original contracts.
FACTS
1. The complaint alleges that on 1889, the defendant contracted with plaintiff for his services as advertising solicitor for
one year; that in April, 1890, it discharged him, in violation of the contract. The action is to recover damages for the breach
of the contract.
2. The answer sets up two defenses: (1) That plaintiff's employment was not for any stated time, but only from week to
week; (2) that he was discharged for good cause.
3. Upon the trial there was evidence reasonably tending to prove that in September, 1889, one C.A. Nimocks and others
were engaged as promoters in procuring the organization of the defendant company to publish a newspaper;
4. On about September 12th, Nimocks, as such promoter, made a contract with plaintiff, in behalf of the contemplated
company, for his services as advertising solicitor for the period of one year from and after October 1st,-the date at which it
was expected that the company would be organized;
5. That the corporation was not, in fact, organized until October 16th, but that the publication of the paper was
commenced by the promoters October 1st, at which date plaintiff, in pursuance of his arrangement with Nimocks, entered
upon the discharge of his duties as advertising solicitor for the paper; that after the organization of the company he
continued in its employment in the same capacity until discharged, the following April;
6. That defendant's board of directors never took any formal action with reference to the contract made in its behalf by
Nimocks, but all of the stockholders, directors, and officers of the corporation knew of this contract at the time of its
organization, or were informed of it soon afterwards;
7. And none of them objected to or repudiated it, but, on the contrary, retained plaintiff in the employment of the company
without any other or new contract as to his services.
ISSUE: Whether or not the liability of the corporation, in such cases, is to be placed on the grounds of its adoption of the
contract of its promoters, or upon some other ground, such as equitable estoppel.
HELD: NOT NECESSARILY, but it has been held that, while a corporation is not bound by engagements made on its
behalf by its promoters before its organization, it may, after its organization, make such engagements its own contracts.
And this it may do precisely as it might make similar original contracts;
RATIO: It is not requisite that such adoption or acceptance be express, but it may be inferred from acts or acquiescence
on part of the corporation, or its authorized agents, as any similar original contract might be shown.
The right of the corporate agents to adopt an agreement originally made by promoters depends upon the purposes of the
corporation and the nature of the agreement. Of course, the agreement must be one which the corporation itself could
make, and one which the usual agents of the company have express or implied authority to make. That the contract in this
case was of that kind is very clear; and the acts and acquiescence of the corporate officers, after the organization of the
company, fully justified the jury in finding that it had adopted it as its own.
CASE LAW/ DOCTRINE: The act of the corporation in adopting such engagements is not a ratification, which relates
back to the date of the making of the contract by the promoter, but is, in legal effect, the making of a contract as of the date
of the adoption.
Hence, although the contract made in behalf of the contemplated corporation was, by its terms, not to be performed within
one year from the date of the making thereof by the promoter, it is not within the statute of frauds if it be performed within
one year from the date of its adoption by the corporation after its organization.

CORPORATION LAW
Case Digest
While a corporation is not bound by engagements made on its behalf by its promoters before its organization, it may, after
it is organized, make such engagements its contracts by adopting them as its own; and this it may do in the same manner as
it might make similar original contracts.

CORPORATION LAW
Case Digest
062 Clifton et, al, vs, Tomb AUTHOR: Mercado, Christopher Dann C.
TOPIC: Liability of Corporation for Promoter’s Contract
FACTS
5. Tomb had an option to buy all shares of a certain corporation, Virginia Corporation.
6. However, the sold this option to Clifton for a sum of $20,000.
7. But later Tomb and Clifton have later agreed that in lieu of the payment of $20,000, Tomb should receive $20,000
in stock of the West Virginia corporation which is not yet formed, and is still to be incorporated by its promoters
and incorporators, amongst which is Clifton.
8. With that, Tomb issued promissory notes to Clifton to cover the value of the shares which he would get from the
West Virginia Corporation, but with the understanding that he would not be liable on them.
9. Other incorporators and promoters of the West Virginia Corporation did not know of this agreement between
Clifton and Tomb.
10. The West Virginia Corporation was organized as agreed and took over the shares of the Virginia Corporation, but
Tomb did not get the agreed shares in the former corporation.
11. Thus, Tomb brought this action for specific performance against CLIFTON and the WEST VIRGINIA
CORPORATION.
12. The West Virginia Corporation counterclaimed for the value of the notes, which the District Court granted.
13. Thus, this case at bar.
14. The plaintiff contends the corporation should be bound by its contract, as entered into by one of its promoters, that
is, Clifton.
15. He further argued that the knowledge of Clifton of the agreement should be imputed to the corporation.
ISSUE: Whether or not the West Virginia Corporation should be bound by the contract entered into by one of its
promoters
HELD: No. The agreement was a fraud upon the corporation and the other stockholders, and should not be enforced. The
fraudulent taint attending the transaction prevents the plaintiff from enforcing the alleged contract for the payment to him
of the stock of the corporation, and prevents him also from denying his liability upon the notes. Any contract having for its
object or which in effect perpetrates a fraud upon third person is illegal and void, and therefore unenforceable, either in
equity or at law.
RATIO:
In order for the corporation to be bound by the contract of their promoters, it is necessary in all cases that the corporation
should have full knowledge of the facts, or at least should be put upon such notice as would lead, upon reasonable inquiry,
to the knowledge of the facts. If corporations could be held bound by all the secret undisclosed contracts of their
promoters, few men would care to risk subscribing to their capital stock.
As a general rule, the knowledge of a mere promoter is not be imputed to the corporation.
The only theory upon which the Clifton’s knowledge could be imputed to the West Virginia Corporation would be upon
the assumption that he was an agent of the corporation. However, he cannot be an agent of the corporation at that time
when it had not been formed. But even if was assumed that he was an agent thereof, his knowledge could not be imputed
to the corporation, because of his personal interest in the transaction. Where the agent contract with his principal and has a
personal interest in the matter antagonistic to the interest of the principal, the rule does not apply, because in such case
there is no reason to presume that the agent will impart information which it is to his interest to suppress.
There was nothing in the option itself which gave any notice that the original holder, Tomb, was to be paid anything for it.
Clifton’s agreement to pay $20,000 for it was a personal obligation of his own. When he transferred the option to the
corporation, ti would have been against his interest to have disclosed that there was an obligation on his part to pay for it
the sum that had been promised to Tomb. It cannot be presumed, therefore, that he would have disclosed this fact to the
corporation, and certainly cannot be presumed that he would have disclosed to it the secret arrangement which the plaintiff
alleges was had between them whereby Tomb was to receive stock of the corporation in payment for his interest in the
option.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
In order for the corporation to be bound by the contract of their promoters, it is necessary in all cases that the corporation
should have full knowledge of the facts, or at least should be put upon such notice as would lead, upon reasonable inquiry,
to the knowledge of the facts. If corporations could be held bound by all the secret undisclosed contracts of their
promoters, few men would care to risk subscribing to their capital stock.
As a general rule, the knowledge of a mere promoter is not be imputed to the corporation.

CORPORATION LAW
Case Digest
064 BUILDER’S DUNTILLE v. DUNN AUTHOR: JANNA
May 21, 1929, 229 K.Y. 569
TOPIC: Corporate Rights under Promoter’s Contracts Petitioner has a right to sue on contract entered into by one
PONENTE: HOBSON of its promoters.
FACTS
1. W.E. Dunn Manufacturing Company (DUNN Co.) manufactures machinery for making duntile -- a hollow
building tile.
2. B.H. Samuels of Paducah received advertisements that duntiles were fireproof, moisture proof, and cheaper than
other construction materials of equal quality.
3. After some correspondece with DUNN Co., Mr. Gaston was sent to Paducah in April 1925.
4. Samuels told Gaston he was organizing a company to manufacture Duntiles. They visited other promoters of the
proposed corporation and a banker whom they expected to get money from.
5. Samuels wanted to organize the corportion first, but Gaston wanted him o order the machinery first.
6. On April 23, after talking it over with other promoters in the city, Samuels signed a contract which contained the
ff. provision: "W. E. Dunn Manufacturing Company agrees to furnish, free of charge, an experienced service man
for a period of five days to insure proper installation and instruct your force."
7. The order, signed by Samuel was accepted by the company. The machinery was delivered on June 6.
8. On June 16, Mr. Aaron was sent to Paducah to work on the machinery and trained workers on how to operate it.
He stayed there 5 days to get it going, and then left.
9. Meanwhile, On June 20, the articles of incorporation of the Builders' Duntile Company (BDC) were filed by Samuels and
his associates.
10. It turns out that the blocks made were inferior in quality and practically valueless for building purposes.
11. BDC wrote to DUNN Co., and 2 months later, another man by the name of Mr. Terrel was sent.
12. Mr. Terrell found that the machinery was not put up right by Aaron, and that the latter gave the wrong formula as
to the mixing of ingredients. After Terrell set up the machine and properly mixed material, the machinery
produced good results.
13. Action was brought by BDC against DUNN Co. to recover on the written contract made on April 23 by Samuels.
14. Trial court ruled in favor of manufacturer DUNN Co. BDC appealed.
ISSUE: Whether the corporation (BDC) has a right to sue upon a contract made on its behalf by one of its promoters (Samuel)
before it was organized.
HELD: Yes, the Corporation is held entitled to maintain suit on contract entered into by one of its promotors for purchase and
installation of machinery for its benefit.
RATIO:
1. It was clearly understood between Samuels and the other promoters and Gaston (as agent of DUNN), that the contract was
made on behalf of the corporation which Samuels proposed to form.
2. When the corporation was formed the incorporators took over the whole thing, and ratified all that had been done on its
behalf.
3. The corporation was the real party in interest, and the action was properly brought in its name.
4. Samuels did not make the contract for himself, and he personally did not sustain the damages.
5. To deny the corporation the right to sue for damages for the breach of contract and the loss it sustained by reason of the first
agent's negligence and improper acts would be to deny it all remedy for the breach of the contract.
6. The corporation only sustained the damages resulting from the breach of the contract.
7. The form of the transaction was due to the fact that the manufacturer's agent asked that the contract be put in this form.
Gaston insisted that it would take time for the machinery to get there, and it is better to order it and then organize the
corporation.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
“Corporation has power to adopt contract of its promoters, and after such adoption may maintain suit on the contract.”
“Where corporation adopted promoter's contract for purchase of machinery, by taking over plant and issuing promoter stock in
payment, corporation was real party in interest in suit against manufacturer on contract”

CORPORATION LAW
065. Rizal Light & Ice Co. vs PSC AUTHOR: twinkle
Case Digest
1968-09-28 | G.R. No. L-20993 A franchise cannot take effect until the grantee corporation
TOPIC: Corporate Rights under Promoter’s Contracts is organized, the franchise may, nevertheless, be applied for
PONTENTE: Zaldivar, J. before the company is fully organized. A grant of a
franchise is valid although the corporation is not created
until afterwards. The subsequent issuance of a certificate of
incorporation, cures the deficiency.
FACTS
1. These two cases, being interrelated, are decided together:
Case G.R. No. L - 20993 petition to revoke Public Service Commission’s (Commission) cancelling and revoking the
certificate of public convenience and necessity and forfeiting the franchise of said petitioner.
Case G.R. No. L-21221 petition to review Commission’s granting of certificate of public convenience and necessity to
respondent Morong Electric Co., Inc. 2 to operate an electric light, heat and power service in the municipality of Morong,
Rizal.
2. Petitioner Rizal Light & Ice Co., Inc. (RLIC) is a domestic corporation with business address at Morong, Rizal, granted
by the Commission a certificate of public convenience and necessity for the installation, operation and maintenance of an
electric light, heat and power service in the municipality of Morong, Rizal.
3. December 19, 1956, the Commission required the petitioner to appear before it on February 18, 1957 to show cause why
it should not be penalized for violation of the conditions of its certificate of public convenience and the regulations of the
Commission, and for failure to comply with the directives to raise its service voltage.
4. But RLIC failed to appear before the Commission. Hence, the Commission cancelled RLIC’s certification.
5. RLIC moved to reopen the case on the ground that the manager was unaware of the hearing. And true enough, it was
because Francisco (the mngr) was ill. The Commission granted the motion.
6. Meanwhile, inspections had been made of petitioner's electric plant and installations by the engineers of the Commission
for 4 times (1958, 1959, 1960, and 1961) The inspection on 1961 was made upon the request of the petitioner who
manifested during the hearing on December 15, 1960 that improvements have been made on its service since the
inspection on July 12-13, 1960, and that, on the basis of the inspection report to be submitted, it would agree to the
submission of the case for decision without further hearing.
7. When the case was called for hearing on July 5, 1961, petitioner failed to appear. Respondent municipality was then
allowed to present its documentary evidence, and thereafter the case was submitted for decision. But RLIC filed a motion
to reopen on the ground that they were not furnished a copy of the report of which they will base their answer. The
Commission gave the, 10 days to answer but to no avail.
8. The Commission ordered the cancellation and revocation of petitioner's certificate of public convenience and the
forfeiture of its franchise on the ground that RLIC had violated the conditions of its certificate of public convenience as
well as the rules and regulations of the Commission and concluded that it cannot render the efficient, adequate and
satisfactory electric service required by its certificate and that it is against public interest to allow it to continue its
operation."
9. RLIC electric plant burned. They moved for reconsideration on the contention that it had improvements in the plant
prior to the burning of the plant. But was dismissed by the Commission. (1st case)
10. RLIC opposed the application for certificate of public convenience of Morong Electric Co., Inc. because it has no legal
capacity on May 6 1962 when the municipal franchise was granted and it was not financially capable. On the basis of the
evidence adduced, the Commission, in its decision dated March 13, 1963, found that there was absence of electric service
in the municipality of Morong and that applicant Morong Electric, a Filipino-owned corporation duly organized and
existing under the laws of the Philippines, has the financial capacity to maintain said service. These circumstances,
considered together with the denial of the motion for reconsideration filed by petitioner, the Commission approved the
application of Morong Electric and ordered the issuance in its favor of the corresponding certificate of public convenience
and necessity. (2nd case) Hence this petition for review.
MAIN ISSUE/ CORP RELATED: (found in case #2) WON MORONG had juridical personality and legal existence
when the municipal franchise was granted?
HELD: NO. Morong Electric did not yet have a legal personality on May 6, 1962 when a municipal franchise was granted
to it is correct. The juridical personality and legal existence of Morong Electric began only on October 17, 1962 when its

CORPORATION LAW
Case Digest
certificate of incorporation, was issued by the SEC. But the fact that Morong Electric had no corporate existence on the
day the franchise was granted in its name does not render the franchise invalid, because later Morong Electric obtained its
certificate of incorporation and then accepted the franchise in accordance with the terms and conditions thereof. It cured
the flaw.
RATIO: Case #2 (more important case because it is more corp related)
1. Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when a municipal
franchise was granted to it is correct. The juridical personality and legal existence of Morong Electric began only on
October 17, 1962 when its certificate of incorporation, was issued by the SEC. But the fact that Morong Electric had no
corporate existence on the day the franchise was granted in its name does not render the franchise invalid, because later
Morong Electric obtained its certificate of incorporation and then accepted the franchise in accordance with the terms and
conditions thereof. "While a franchise cannot take effect until the grantee corporation is organized, the franchise may,
nevertheless, be applied for before the company is fully organized. A grant of a street franchise is valid although the
corporation is not created until afterwards because a privilege of this character is a mere license to the corporation until it
accepts the grant and complies with its terms and conditions. The incorporation of Morong Electric on October 17, 1962
and its acceptance of the franchise as shown by its action in prosecuting the application filed with the Commission for the
approval of said franchise, not only perfected a contract between the respondent municipality and Morong Electric but also
cured the deficiency pointed out by the petitioner in the application of Morong Electric. Thus, the Commission did not err
in denying petitioner's motion to dismiss said application and in proceeding to hear the same.
2. Petitioner challenges the financial capability of Morong Electric: In this connection it should be stated that on the basis
of the evidence presented on the matter, the Commission has found the Morong Electric to be "financially qualified to
install, maintain and operate the proposed electric light, heat and power service." This is essentially a factual determination
which, in a number of cases, this Court has said it will not disturb unless patently unsupported by evidence. It may be
worthwhile to mention that it was recommended that the requests of Morong Electric (1) for the withdrawal of its deposit
in the amount of P1,000.00 with the Treasurer of the Philippines, and (2) for the approval of Resolution No. 160 of the
Municipal Council of Morong, Rizal, exempting the operator from making the additional P9,000.00 deposit mentioned in
its petition and was granted. This report removes any doubt as to the financial capability of Morong Electric to operate and
maintain an electric light, heat and power service.
3. Naturally, whatever conclusion or finding of fact that the Commission arrived at regarding the quality of petitioner's
service are not borne out by the evidence presented in this case but by evidence in the previous case. , the conclusion,
arrived at by the Commission after weighing the conflicting evidence in the two related cases, is a conclusion of fact which
this Court will not disturb. And it has been held time and again that where the Commission has reached a conclusion of
fact after weighing the conflicting evidence, that conclusion must be respected, and the Supreme Court will not interfere
unless it clearly appears that there is no evidence to support the decision of the Commission."
CASE LAW/ DOCTRINE: a franchise is a contract, at least two competent parties are necessary to the execution thereof,
and parties are not competent except they are in being. Until a corporation has come into being, in this jurisdiction, by the
issuance of a certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter into any
contract as a corporation.
A franchise cannot take effect until the grantee corporation is organized, the franchise may, nevertheless, be applied for
before the company is fully organized. A grant of a franchise is valid although the corporation is not created until
afterwards. The subsequent issuance of a certificate of incorporation, cures the deficiency.
Not so important part case #1:
1. The Commission can only authorize a division chief to hear and investigate a case filed before it if he is a lawyer. The
hearing officer is not a lawyer, but was not objected on time, (it is a procedural matter, therefore it was waived, and the
decision rendered by him is valid).
2. The Commission based its decision on the inspection reports submitted by its engineers who conducted the inspection of
petitioner's electric service upon orders of the Commission. And counsel of RLIC manifested its waiver and decision to
abide by the last inspection which found that RLIC had deficiencies and violations resulting to in inadequacy in service.
3. Petitioner invokes the "protection-of-investment rule" is untenable. The duty of the Commission to protect the
investment of a public utility operator refers only to operators of good standing - those who comply with the laws, rules
and regulations - and not to operators who are unconcerned with the public interest and whose investments have failed or
deteriorated because of their own fault.
CORPORATION LAW
Case Digest
4. Petitioner contends that the imposition of a fine would have been sufficient. Section 16 (n) of Commonwealth Act No.
146, as amended, confers upon the Commission ample power and discretion to order the cancellation and revocation of any
certificate of public convenience issued to an operator who has violated, or has willfully and contumaciously refused to
comply with, any order, rule or regulation of the Commission or any provision of law. It is the discretion of the
Commission as long as there are evidence to support its action.

CORPORATION LAW
Case Digest
066 Pioneer Insurance v CA, SUPRA AUTHOR: N. Manalo
(July 28, 1989 G.R. 84197; G.R. 84157) The facts was copied from digest #2. With all due respect to
TOPIC: Corporate Rights under Promoter’s Contracts digest #11
PONTENTE: GUTIERREZ JR., J.,
FACTS
1. Jacob S. Lim owned (single proprietorship) Southern Air Lines (SAL).
2. On May 17, 1965, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract for the sale and
purchase of 2 DC-3A Type aircrafts and 1 set of necessary spare parts for the total agreed price of US $109,000.00 to be
paid in installments. Both aircrafts came in June and July 1965.
3. On May 22, 1965, Pioneer Insurance and Surety Corporation as surety executed and issued its Surety Bond No. 6639 in
favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts.
4. It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes
(Cervanteses) and ConstancioMaglana contributed some funds used in the purchase of the above aircrafts and spare parts.
The funds were supposed to be their contributions to a new corporation proposed by Lim to expand his airline business.
5. They executed 2 separate indemnity agreements in favor of Pioneer, one signed by Maglana and the other jointly signed
by Lim for SAL, Bormaheco and the Cervanteses (stipulated that the indemnitors principally agree and bind themselves
jointly and severally to indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs,
damages, taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may incur in consequence of
having become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its successors and assigns, all
sums and amounts of money which it or its representatives should or may pay or cause to be paid or become liable to pay
on them of whatever kind and nature).
6. On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer a deed of chattel
mortgage as security for the suretyship (stipulated therein that Lim transfer and convey to the surety the two aircrafts). The
deed was duly registered with the Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics
Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law.
7. Lim defaulted on his subsequent installment payments. JDA requested payments from the surety. Pioneer paid a total
sum of P298,626.12.
8. On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary attachment
against Lim and respondents, the Cervanteses, Bormaheco and Maglana.
9. In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they were not
privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to litigation and
for recovery of the sums of money they advanced to Lim for the purchase of the aircrafts in question.
CFI - decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against all other
defendants.
CA - modified the trial court's decision in that the plaintiff’s complaint against all the defendants was dismissed. In all
other respects the trial court's decision was affirmed.
ISSUE: WON subscription for stock in a proposed corporation results in a partnership with the other subscriber
HELD: NO
Such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners, as
between themselves, when their purpose is that no partnership shall exist and it should be implied only when necessary to
do justice between the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation
which is never legally formed does not become a partner with other subscribers who engage in business under the
name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership
and contribution. A partnership relation between certain stockholders and other stockholders, who were also directors,
will not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts
illegally contracted by the latter.

CORPORATION LAW
Case Digest
RATIO:
It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite his
representations to them. This gives credence to the cross-claims of the respondents to the effect that they were induced and
lured by the petitioner to make contributions to a proposed corporation which was never formed because the petitioner
reneged on their agreement.
Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto partnership was
created among the parties which would entitle the petitioner to a reimbursement of the supposed losses of the proposed
corporation. The record shows that the petitioner was acting on his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes and spare parts.
CASE LAW/ DOCTRINE:
One who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not
become a partner with other subscribers who engage in business under the name of the pretended corporation, so as to be
liable as such in an action for settlement of the alleged partnership and contribution

CORPORATION LAW
Case Digest
067 Wells v. Fay &Egan Author: Sarah
17July1915, 143 GA 732 Note:
Topic: Personal liability of promoter on pre-
incorporation contracts
Ponente: Evans
Facts:
1. Fay & Egan Company (vendee) filed a suit against L.M. Wells et al.,(vendor) alleging that defendants bought
from plaintiff machinery under the partnership name Ficklen Spoke and Handle Company
2. On 23 March 1909, defendants promoted the organization and authorized the purchase of machinery from
plaintiff.
3. The contract of purchase was signed "Ficklen Spoke & Handle Company, by L. M. Wells."
4. Defendants received the machinery and on 22 June 1909, defendants executed notes signed "Ficklen Spoke &
Handle Co., per R. K. Carruth, Sec.& Treas."
5. On 26 August 1909, defendants’ application was granted a charter and later perfected an organization of
corporation.
6. Plaintiff sued for the amount due on the notes; charging defendants with liability on the notes.
7. It was disclosed at the trial that the machinery was destroyed by fire.
8. Defendants alleged that it has no debt to plaintiff invoking that the Ficklen Spoke & Handle Company was a
corporation.
Issue: Whether or not defendant is personally liable on the contract of purchase made on behalf of a corporation to be
formed.
Held: No. Plaintiff is estop from asserting a personal liability against the defendants
Ratio:
GENERAL RRULE: Promoters are personally liable on their contracts made on behalf of a corporation to be formed.
EXCEPTION: If there is an express or implied agreement to the contrary. It must be noted that the fact that the
corporation when formed has adopted or ratified the contract does not release the promoter from responsibility unless a
novation was intended.
Individual promoters cannot escape liability where they buy machinery, receive them in their possession and authorize
one member to issue a note, in contemplation of organizing a corporation which was not formed. The agent is personally
liable for contracts if there is no principal. The making of partial payments by the corporation, when later formed, does
not release the promoters here from liability because the corporation acted as a mere stranger paying the debt of another,
the acceptance of which by the creditor does not release the debtors from liability over the balance. Hence, there is no
adoption or ratification.
Case Law/ Doctrine:
A promoter, though he may assume to act on behalf of the projected corporation and not for himself, cannot be treated as
an agent of the corporation, for it is not yet in existence; and he will be personally liable on his contract, unless the other
party agreed to look to some other person or fund for payment.

CORPORATION LAW
068. How & Associates, Inc. v. Boss Case Digest
AUTHOR: De Guzman, Bien
Oct. 31 1963, 222 F. Supp 939 Defendant erased the words "Boss Hotels Co., Inc." from
TOPIC: Personal Liability of Promoter on Pre- the place for signature and below the line typed the words
Incorporation Contracts "By: Edwin A. Boss, Agent for a Minnesota Corporation
PONENTE: Hanson, J;

CORPORATION LAW
Case Digest
FACTS
1. Early in the year 1960 the defendant and certain business associates, including Edwin R. Hunter, Jr. of Des Moines,
Iowa, became interested in operating a motor hotel to be built at the Southdale Shopping Center in Edina, Minnesota, a
suburb of Minneapolis. Motor Court Systems, Inc., a Minnesota corporation, which had a lease on this land with the
Southdale Holding Company, was to build and construct a motor hotel.
2. In approximately May of 1960, the plaintiff was engaged and employed by Motor Court Systems, Inc. to prepare the
plans, drawings and specifications for said motel. In approximately June of 1960, an agreement was entered into
between Motor Court Systems, Inc. and Edwin R. Hunter, on behalf of a corporation to be formed which would operate
the new motor hotel. These plans were never realized.
3. In the early part of 1961, the lease held by Motor Court Systems, Inc. was terminated. On or about April 20, 1961, the
defendant together with Mr. Hunter and representatives of the owners of Southdale Shopping Center met in the offices
of Southdale at Edina for the purpose of entering into a lease between the promoters of a new corporation to be formed
by the defendant and his associates and owners of Southdale Shopping Center. The plaintiff was also present at that
meeting and the architectural agreement now being sued on was signed during that meeting.
4. At said meeting on April 20, 1961, a lease between Boss Hotel Co., Inc. and Southdale Holding Company was
negotiated and executed. Boss Hotel Co., Inc. was the obligor on that lease. This lease provided that a corporation
would be organized and that the lease would then be assigned to this new corporation.
5. The first page of such contract stated that it was between Boss Hotels Co., Inc. and Stanley J. How & Associates,
Inc., and places for signature in this manner.
6. After completion of the signing of the lease the defendant, Mr. Boss, and his associate, Mr. Hunter, took the prepared
contract to a back room out of the hearing of the plaintiff and discussed it between themselves. At that time the
defendant erased the words "Boss Hotels Co., Inc." from the place for signature and below the line typed the
words "By: Edwin A. Boss, Agent for a Minnesota Corporation to be formed, who will be the Obligor."
7. The defendant and Edwin R. Hunter then took the contract back to Stanley J. How and showed it to him. Mr. Boss then
said, "Is this all right?" or "Is this acceptable, this manner of signing?" or words to that effect. Stanley How said "Yes,"
and the contracts were then signed by the defendant and Stanley J. How.
8. Plaintiff returned to Omaha and complete plans, working drawings, and specifications for the construction of the motel
were prepared by his offices, and sums were expended by the plaintiff for engineering and consultation services.
9. The defendant and his associates caused an Iowa corporation to be formed by the name of Minneapolis-Hunter Hotel
Co. Fifteen Thousand Dollars ($15,000.00) of stock was issued with Edwin R. Hunter receiving ten percent (10%),
John C. Hunter receiving ten percent (10%), Elizabeth T. Woodward receiving five percent (5%) and Boss Hotels
Company receiving the remaining seventy-five percent (75%).
10. In October of 1961 the plans were forwarded to Preston Haglin, a Minneapolis contractor, whom the parties had agreed
to be general contractor so long as his bid was competitive with other general contractors. Haglin gave a preliminary
estimate of Nine Hundred Sixty-five Thousand Dollars ($965,000.00) which exceeded the planned budget; thus, further
attempts were made to reduce the cost of the construction.
11. In November of 1961, Preston Haglin proposed to construct the building, with certain modifications, for Eight Hundred
and Fifty Thousand Dollars ($850,000.00).The plans for the motel were finally completely abandoned by the
promoters.
12. The plaintiff performed said contract and prepared detailed plans and specifications which were completed on or about
October 20, 1961, for a motor hotel and restaurant at 66th and France Streets, Edina, Minnesota; that the estimated cost
of the said motor hotel and restaurant was $850,000.00 and that a firm bid from a general contractor for construction of
said project was received in the sum of $850,000.00; that thereafter, and for reasons unknown to the plaintiff the
defendant proceeded no further with the project; that pursuant to the provisions of said contract plaintiff is entitled to
payment of a fee of 4½% of the said $850,000.00 for performance of architectural services for preparation and
completion of specifications and general working drawings, which amounts to $38,250.00, of which plaintiff has
received from defendant the sum of $14,500.00 on account, leaving a balance of $23,750.00, which remains due and
unpaid.
ISSUE: Whether the contract was an agreement that Defendant was a present obligor.
HELD: Yes, The defendant was the key promoter and as such would be a primary factor in abandoning the project. This
would make the defendant liable.
CORPORATION LAW
Case Digest
RATIO:
The words “who will be the obligor,” are not enough to offset the rule that the person signing for the nonexistent
corporation is normally to be personally liable. In this case, Defendant was the principal promoter, acting for himself
personally and as President of Boss Hotels, Inc.
The promoters abandoned their purpose of forming the corporation. This would make the promoter liable to the plaintiff
unless the contract be construed to mean: 1) that the plaintiff agreed to look solely to the new corporation for payment, and
2) that the promoter did not have any duty toward the plaintiff to form the corporation and give the corporation the
opportunity to assume and pay the liability.
In all situations wherein the promoter is not personally bound, the contracting party is agreeing that the new corporation
should assume the liability. The phrase "content to take the risk of the ultimate incorporation and assumption of his claim"
is the key to the distinction. In some cases, the promoters do not agree that this assumption will take place.
Applying this law to the present case, the court would have to hold that even if the plaintiff had agreed to look to the credit
of the new corporation, the defendant would be liable. The defendant was the key promoter and as such would be a
primary factor in abandoning the project. This would make the defendant liable.
CASE LAW/ DOCTRINE: The promoter though he may assume to act on behalf of the projected corporation and not for
himself, will be personally liable on his contract unless the other party agreed to look to some other person or fund for
payment.

CORPORATION LAW
Case Digest
069 QUAKER HILL v. PARR AUTHOR: Danna
25 September 1961, 364 P.2d 1056
TOPIC: Promoter’s Contracts Prior to Incorporation - Gen. Rule: Promoters are personally liable on their
Personal Liability of Promoter on Pre-Incorporation contracts
Contracts Exception: Contracting party looks solely to the
PONENTE: Doyle corporation for payment (non-intention to make the
promoters liable)
FACTS
1. Parr et al, while in the course of negotiations with Quaker Hill Inc. (whose office is situated in New York) for the
former to purchase nursery stock, undertook to organize a separate corporation to be known as the “Denver Memorial
Nursery Inc.” Thus, Denver Memorial Nursery Inc. was named as the contracting party in the sales contract and as the
maker of the promissory note.
2. Two orders for nursery stock were signed by Parr in behalf of Denver Memorial Nursery, Inc. which, to the knowledge
of Quaker Hill, was not yet formed.
3. The nursery stock was delivered to Parr and was planted with the help of Quaker Hill.
4. A substitute order was sent to Quaker Hill. It was similar to the previous order, except that it contained the name
“Mountain View Nurseries”, instead of "Denver Memorial Nursery, Inc." which never actually came into being.
5. Because of name confusion, the corporation was subsequently called “Mountain View Nurseries, Inc.” Its articles were
executed and subsequently filed with the Secretary of State. However, neither the Denver Memorial Nursery, Inc. nor
the Mountain View Nurseries, Inc. ever functioned as going concerns.
6. After Mountain View Nurseries, Inc. was formed, a new note and contract was submitted to Parr et al, containing the
name “Mountain View Nurseries, Inc.” as contracting party. Quaker Hill thereafter used the designation "Mountain
View Nurseries” in its transactions.
7. Because of Mountain View Nurseries, Inc.’s defunct financial condition, Quaker Hill now seeks to subject Defendants
to personal liability because the corporation was not formed at the time the contract was made and Defendants, as
promoters, were individually liable.
Thus, it is Quaker Hill’s contention that the general rule be applied here. The general rule is that promoters are
personally liable on their contracts, though made on behalf of a corporation to be formed.
ISSUE: Whether or not personal liability can be imposed
HELD: No, there was no intent by Quaker Hill to look to the promoters for the performance of the obligation. This is an
exception to the general rule that promoters are personally liable on their contracts, though made on behalf of a corporation
to be formed.
RATIO:
1. A well recognized exception to the general rule urged by Quaker Hill is that if the contract is made on behalf of the
corporation and the other party agrees to look to the corporation and not to the promoters for payment, the promoters
incur no personal liability.
2. Quaker Hill, acting through its agent, was well aware of the fact that the corporation was not formed and nevertheless
urged that the contract be made in the name of the proposed corporation. There is but little evidence indicating intent
on the part of Quaker Hill to look to the defendants for performance or payment.
3. The single fact supporting plaintiff's theory is the obtaining of an individual balance sheet. On the contrary, the entire
transaction contemplated the corporation as the contracting party. Personal liability does not arise under such
circumstances.
4. The curious form of this transaction is undoubtedly explainable on the basis of the long distance dealing, the great
rush to complete it, the heavy emphasis on completion of the sale rather than on securing payment or a means of
payment. No effort was made to expressly obligate the defendants and this present effort must be regarded as pure
afterthought.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
Personal liability does not attach where the contracting party is shown to be looking solely to the corporation for payment,
and not to the promoters or officers.

CORPORATION LAW
Case Digest
070 OLD DOMINION COPPER MINING AND AUTHOR: Palomique, Ernesto III C.
SMELTING COMPANY v. ALBERT S. BIGELOW
203 Mass 159 (1909) The corporation brought a suit in equity seeking to recover
TOPIC: Fiduciary Relationship between Corporation and secret profits made by the promoter, who had sold certain
Promoter mining properties belonging to him and an associate to the
PONENTE: Rugg, J. corporation.
FACTS
1. Bigelow and Lewisohn were the promoters of Old Dominion Copper.

2. Bigelow and Lewisohn framed a scheme for the capitalization of Old Dominion for $3,750,000.
3. They would sell to the corporation their property worth $1M but having a market value of not over $2M for
$3,250,000
4. After that, they would sell to the general public the remaining $500,000 stocks at par value for cash, and all this
without providing Old Dominion with any independent board of officers while making a huge secret profit.
5. The transactions occurred while the corporation was under the absolute control and management of the promoter and
his associate.
6. The corporation seeks to recover a secret profit made by the promoters in the sale of their own property to the
corporation, basing its claim on the general rule that a promoter cannot lawfully take a secret profit and will be held
to account for it if he does.
7. The lower court has decided in favor of the corporation stating that such transaction creates a liability on the part of
the promoters to account for the secret profits to Old Dominion. The promoter appealed, raising a number of errors.
The court affirmed, holding that as a fiduciary, the promoter owed certain duties regarding business transactions
between himself and the corporation, and that under the circumstances the receipt of profits by the promoter
constituted a breach of those duties.
8. Fundamentally the action is to recover profits obtained by a breach of trust, as promoters have duties as fiduciaries to
the company. A promoter includes those who undertake to form a corporation and to procure for it the rights,
instrumentalities and capital by which it is to carry out the purposes set forth in its charter and to establish it as fully
able to do its business.
ISSUE: WON the corporation is in a position to assert its claim for the secret profits.
HELD: Yes, a promoter stands in a fiduciary relation to the corporation in which he is interested, and that he is charged with
all the duties of good faith which attach to other trusts.
RATIO:
1. In this case, Bigelow and Lewisohn subscribed for only 130K out of 150K shares. They held all the shares issued at
the time of ratification, but not all which it was proposed to issue as part of their promotion scheme.
2. There is a liability of the promoter to the corporation when further original subscribers to capital stock contemplated
as an essential part of the scheme of promotion came in after the transaction complained of, even though that
transaction is known to all the then stockholders at the time—which are the promoters themselves and their
representatives.
3. In the present case, the whole purchase price was paid in stock, issued before any stock was issued to the public
although after a substantial public subscription. In other words, it is the order in which the transaction is carried out,
and not its substantial nature, which makes the difference between liability and immunity of the promoter.
4. It is of no consequence whether in fact the dummy directors know of the terms of sale and the breach of trust of the
promoters. The point is that the directors were selected with the purpose that they should be the mere instruments of
the promoter and they carried out the will of their masters. If the assent of all stockholders is good in one case, by the
same token it should be equally good in the other, and the breach of trust in one is equally a breach of trust in the
other.
5. The starting point is that promoters stand in a fiduciary position toward the corporation, as well as when as part of the
scheme of promotion, uninformed stockholders are expected to come in after the wrong has been perpetrated, as
when at the time there are stockholders to whom no disclosure was made.
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Case Digest
6. Promoters have in their hands the creation and molding of the company, like clay in the hands of a potter. It is not
necessary to inquire how far he may be trustee also for shareholders and associates.
7. In the present case the inquiry relates wholly to his obligation to the corporation. The fiduciary relation must
continue until the promoter has completely established according to his plan the being which he has undertaken to
create. The principle that one cannot rightfully sell property, belonging to him in his private capacity, to himself in a
trust capacity is universal.
CASE LAW/ DOCTRINE:
Notwithstanding this fiduciary relation, the promoter may sell property to the company which he is promoting. In order that
the contract may be absolutely binding, the promoter must pursue one of 4 courses of action:
(1) provide an independent board of officers and make a full disclosure to the corporation through the board;
(2) make a full disclosure of all material facts to each original subscriber of shares
(3) procure a ratification of the contract by vote of the SHs of the established corporation
(4) subscribe himself in all the shares of the capital stock contemplated as part of the promotion scheme

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Case Digest
072 Carlos v. Mindoro Sugar Co. AUTHOR: Marvin
G.R. No. L-36207; October 26, 1932 The term ultra vires should be distinguished
TOPIC: Corporate powers from an illegal act for the former is merely voidable
PONENTE: IMPERIAL, J. which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated.
It being merely voidable, an ultra vires act can be
enforced or validated if there are equitable grounds for
taking such action. Here it is fair that the resolution be
upheld at least on the ground of estoppel.
FACTS
1. This is an action to recover from the defendants the value of four bonds with due and unpaid interest thereon, issued by
the Mindoro Sugar Company and placed in trust with the Philippine Trust Company. Said plaintiff appealed from the
judgment rendered by the Court of First Instance of Manila absolving the defendants from the complaint, excepting the
Mindoro Sugar Company, which was sentenced to pay the value of the four bonds with interest at 8 per cent per annum,
plus costs.
2. Mindoro Sugar Company is a corporation constituted in accordance with the laws of the country. According to its
articles of incorporation one of its principal purposes was to acquire and exercise the franchise granted by Act No. 2720 to
George H. Fairchild, to substitute the organized corporation.
3. Philippine Trust Company is another domestic corporation its principal purpose, then, as its name indicates, is to engage
in the trust business.
4. The board of directors of the Philippine Trust Company, adopted a resolution authorizing its president, among other
things, to purchase the bonds in the Mindoro Sugar Company that was about to issue, and to resell them, with or without
the guarantee of said trust corporation, at a price not less than par, and to guarantee to the Philippine National Bank the
payment of the indebtedness to said bank by the Mindoro Sugar Company.
5. Pursuance of this resolution, the Mindoro Sugar Company executed in favor of the Philippine Trust Company the deed
of trust transferring all of its property to it in consideration of the bonds it had issued. Philippine Trust Company sold
thirteen bonds, to Ramon Diaz. The Philippine Trust Company paid the appellant, upon presentation of the coupons, the
stipulated interest from the date of their maturity then it stopped payments; it alleged that it did not deem itself bound to
pay such interest or to redeem the obligation because the guarantee given for the bonds was illegal and void.
ISSUE: WON PTC has the power to guarantee and does this act constitute an ultra vires act?
HELD: No. It is not ultra vires for a corporation to enter into contracts of guaranty or suretyship where it does so in the
legitimate furtherance of its purposes and business. And it is well settled that where a corporation acquires commercial
paper or bonds in the legitimate transaction of its business it may sell them, and in furtherance of such a sale it may, in
order to make them the more readily marketable, indorse or guarantee their payment.
RATIO:
1. Whenever a corporation has the power to take and dispose of the securities of another corporation, of whatsoever kind, it
may, for the purpose of giving them a marketable quality, guarantee their payment, even though the amount involved in the
guaranty may subject the corporation to liabilities in excess of the limit of indebtedness which it is authorized to incur. A
corporation which has power by its charter to issue its own bonds has power to guarantee the bonds of another corporation,
which has been taken in payment of a debt due to it, and which it sells or transfers in payment of its own debt, the guaranty
being given to enable it to dispose of the bond to better advantage. And so guaranties of payment of bonds taken by a loan
and trust company in the ordinary course of its business, made in connection with their sale, are not ultra vires, and are
binding.
2. When a contract is not on its face necessarily beyond the scope of the power of the corporation by which it was made, it
will, in the absence of proof to the contrary, be presumed to be valid. Corporations are presumed to contract within their
powers. The doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to prevail where it
would defeat the ends of justice or work a legal wrong.
3. The act of guaranty by PTC was well within its corporate powers. Furthermore, having received money or property by
virtue of the contract which is not illegal, it is estopped from denying liability. Even if the then prevailing law (Corp. Law)
prohibited PTC from guaranteeing bonds with a total value in excess of its capital, with all the MSC properties transferred
to PTC based on the deed of trust, sufficient assets were made available to secure the payment of the corresponding
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liabilities brought about by the bonds.
CASE LAW/ DOCTRINE:

Where a transaction is merely ultra vires and not malum in se or malum prohibitum, although it may be
made a basis for forfeiture of the corporate charter or dissolution of the corporation, such transaction is, if performed by
one party, not void as between the parties, and an action may be brought directly upon the transaction and relief had
according to its terms.

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Case Digest
075 PIROVANO v. DE LA RAMA STEAMSHIP AUTHOR: Jade
COMPANY Ultra Vires Doctrine
December 29, 1954 - G.R. No. L-5377
TOPIC: CORPORATE POWERS
PONENTE: J. Bautista Angelo
FACTS
De la Rama Steamship, is a corporation duly organized in accordance with law with an authorized capital of P500,000,
divided into 5,000 shares, with a par value of P100 each share. The stockholders are Don Esteban De la Rama and his
daughters, Leonor and Estefania while the rest were his employees. Estefania de la Rama was married to the late Enrico
Pirovano and to them four children were born who are the plaintiffs in this case.
Don Esteban de la Rama, who practically owned and controlled the stock of the defendant corporation, distributed his
shareholding among his five daughters, namely, Leonor, Estefania, Lourdes, Lolita and Conchita and his wife Natividad
Aguilar. The other stockholders were merely employees of Don Esteban, were given 40 shares each, while Pio Pedrosa,
Marcial P. Lichauco and Rafael Roces, one share each, represented the National Development Company.
Enrico Pirovano became the president of the company and under his management it grew and progressed until it became a
multi-million corporation by the time Pirovano was executed by the Japanese during their occupation.
SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO PIROVANO

In 1941, De la Rama Steamship insured the life of Enrico Pirovano for 1 million pesos. During the Japanese occupation,
the company was unable to pay the insurance premiums to Filipino insurance companies. Consequently, the policies lapsed
but the York Office of the company had kept up small payments of premiums. Enrico Pirovano was killed by the Japanese
in Manila in 1944 and left 4 minor children as his only heirs : Maria Carla, Esteban, Enrico and John Albert
Upon the suggestion of President Roxas, Don Esteban proposed that the P400,000 proceeds of the insurance be set aside
for the minor children of Pirovano and be made convertible to 4,000 shares of stock of the Company (1,000 shares per
child). This was to recognize the what Pirovano contributed to the success of the company during his leadership. Leonor de
la Rama and Lourdes de la Rama agreed to the proposal and therefore it was approved through a resolution on July 10,
1946. The De la Rama family was unaware that they had given the children more than what they intended to give. Lourdes
de la Rama, wife of Sergio Osmena Jr, found out through her husband that because of the said donation, their sister and
mother of the 4 children, Estefania, would have a voting power twice as much as that of her sisters. This made Lourdes de
la Rama write a letter to the corporate secretary, Marcial Lichauco, asking him to cancel the waiver of her pre-emptive
rights. Osmena presented this issue to Don Esteban, who also decided to nullify the donation approved via a resolution last
July 10, 1946. On January 6, 1947, the company resolved to change the form of the donation to the Pirovano children.
Instead of being converted into stocks, the P400,000 will be retained by the company as loan with 5% interest per annum
and payable to the children after the company have settled in full the balance of its present remaining bonded indebtedness
in the sum of approximately P5,000,000 to the National Development Company. As guardian of the children, Estefania
and the company executed a Memorandum of Agreement on January 10, 1947 and June 17, 1947. On June 24, 1947, the
Board of Directors further resolved that instead of payment of the loan once the company settles its bonded indebtedness in
full, the Pirovano children may be paid whenever the company is in a position to meet said obligation.
On February 26, 1948, Estefania formally accepted the donation. In connection to this agreement, Estefania proposed to
buy the house in New Rochelle, New York owned by Demwood Realty (subsidiary of the De la Rama Company) at its
original cost of $75,000 which would be paid using the funds belonging to her children. The company agreed to this
proposition and the transfer of the property was approved by the court in its order dated September 20, 1949.
Sometime in 1950, the president of the company, Sergio Osmena, made an inquiry to the SEC on the validity of the
donations of the proceeds of the insurance policies to the Pirovano children. On June 20, 1950, SEC made an opinion that
the donation was void because the corporation could not dispose of its assets by gift and therefore the corporation acted
beyond the scope of its corporate powers. The Board of Directors made a resolution to annul the donation to the Pirovano
children which they ratified last January 6, 1947 as amended on June 24, 1947 (annulment due to company's failure to
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Case Digest
comply with the conditions of the donation).
Due to the company's failure to comply with the condition set for the effectivity of the donation and revoking it at the same
time, and considering that it was long been perfected and consummated thus cannot be set aside, the minor children
represented by their mother, Estefania, demanded the payment of the credit due to them as of December 31, 1951; amount:
P564,980.89. The company refused to pay so they filed a case in the CFI of Rizal. They prayed that:
1. the company pay the sum of P564,980.89 as of December 31, 1951 with the corresponding interest
2. the company pay the interest on P564,980.89 at the rate of 5% per annum, and the sum of P564,980.89 after the
redemption of the preferred shares of the corporation held by the National Development Company (ALTERNATIVE
RELIEF)
3. the company pay the damages amounting to not less than 20% of the sum that may be adjudged to them and the costs of
action.
The trial court decided in favor of the Pirovanos and after considering the evidences, concluded that the contract or
donation is not ultra vires, but an act executed within the powers of the defendant corporation in accordance with its
articles of incorporation and by-laws, and due demands were made by the plaintiffs and their attorneys and these demands
were rejected for no justifiable or legal grounds.The Pirovanos appealed for modification of the findings of the lower court
ISSUE (related to Corporation Law)
Can defendant corporation give by way of donation the proceeds of said insurance policies to the minor children of the late
Enrico Pirovano under the law or its articles of corporation, or is that donation an ultra vires act?
HELD:
Yes, the corporation can give by way of donation the proceeds of said insurance policies to the minor children of the late
Enrico Pirovano.
RATIO:
A careful review of the articles of incorporation of the De la Rama Company showed that the corporation was given broad
and almost unlimited powers to carry out the purposes for which it was organized among them, (1) "To invest and deal
with the moneys of the company not immediately required, in such manner as from time to time may be determined" and,
(2) "to aid in any other manner any person, association, or corporation of which any obligation or in which any interest is
held by this corporation or in the affairs or prosperity of which this corporation has a lawful interest."
The donation in question undoubtedly comes within the scope of this broad power for it is a fact appearing in the evidence
that the insurance proceeds were not immediately required when they were given away. Second, the company had given
several other donations. All these acts were executed before and after the donation in question have never been questioned
and were willingly and actually carried out. Not much distinction between these acts of generosity or benevolence
extended to some employees of the corporation, and even to some in whom the corporation was merely interested because
of certain moral or political considerations, and the donation which the corporation has seen fit to give to the children of
the late Enrico Pirovano from the point of view of the power of the corporation as expressed in its articles of incorporation.
Since it is not contended that the donation under consideration is illegal, or contrary to any of the express provision of the
articles of incorporation, nor prejudicial to the creditors of the defendant corporation, that the donation, even if ultra vires,
is not void, and if voidable its infirmity has been cured by ratification and subsequent acts of the defendant corporation.
The defendant corporation, is now prevented or estopped from contesting the validity of the donation. To allow the
corporation to undo what it has done would only be most unfair but would contravene the well-settled doctrine that the
defense of ultra vires cannot be set up or availed of in completed transactions
CASE LAW/ DOCTRINE:

Ultra Vires Doctrine - An ultra vires act is one outside the scope of the power conferred by the legislature, and although
the term has been used indiscriminately, it is properly distinguishable from acts which are illegal, in excess or abuse of
power, or executed in an unauthorized manner, or acts within corporate powers but outside the authority of particular
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Case Digest
officers or agents (19 C. J. S. 419). Corporate transactions which are illegal because prohibited by statute or against public
policy are ordinarily void and unenforceable regardless of the part performance, ratification, or estoppel; but general
prohibitions against exceeding corporate powers and prohibitions intended to protect a particular class or specifying the
consequences of violation may not preclude enforcement of the transaction and an action may be had for the part
unaffected by the illegality or for equitable restitution. (19 C.J.S. 421.)

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Case Digest
076 HARDEN v BENGUET CONSOLIDATED AUTHOR: Krystelle
MINING
March 18, 1933 G.R. No. L- 37331 The contract, supposing it to have been unlawful in fact, has
TOPIC: Corporate Powers: The Ultra Vires Doctrine been performed on both sides. Thus, plaintiff have no right
PONENTE: STREET, J. of action against the Benguet Company for the infraction of
the law supposed to have been committed.
FACTS
1. The facts which have given rise this lawsuit are simple, as the financial interests involve are immense. The
Benguet Consolidated Mining Co. was organized in June, 1903, as a sociedad anonima in conformity with the
provisions of Spanish law; while the Balatoc Mining Co. was organized in December 1925, as a corporation, in
conformity with the provisions of the Corporation Law (Act No. 1459). Both entities were organized for the
purpose of engaging in the mining of gold in the Philippine Islands, and their respective properties are located only
a few miles apart in the subprovince of Benguet.
2. The capital stock of the Balatoc Mining Co. consists of one million shares of the par value of one peso (P1) each.
When the Balatoc Mining Co. was first organized the properties acquired by it were largely undeveloped; and the
original stockholders were unable to supply the means needed for profitable operation. For this reason, the board
of directors of the corporation ordered a suspension of all work, effective July 31, 1926.
3. In November of the same year a general meeting of the company's stockholders appointed a committee for the
purpose of interesting outside capital in the mine. Under the authority of this resolution the 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. As a result of the negotiations thus begun, a contract, formally authorized by
the management of both companies, was executed on March 9, 1927, the principal features of which were that the
Benguet Company was to proceed with the development and 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.
4. The Benguet Company also agreed to erect an appropriate powerplant, with the aerial tramlines and such other
surface buildings as might be needed to operate the mine. In return for this it was agreed that the Benguet
Company should receive from the treasurer of the Balatoc Company shares of a par value of P600,000, in payment
for the first P600,000 be thus advanced to it by the Benguet Company.
5. The performance of this contract was speedily begun, and by May 31, 1929, the Benguet Company had spent upon
the development the sum of P1,417,952.15. In compensation for this work a certificate for six hundred thousand
shares of the stock of the Balatoc Company has been delivered to the Benguet Company, and the excess value of
the work in the amount of P817,952.15 has been returned to the Benguet Company in cash.
6. Meanwhile dividends of the Balatoc Company have been enriching its stockholders, and at the time of the filing of
the complaint the value of its shares had increased in the market from a nominal valuation to more than eleven
pesos per share.
7. While the Benguet Company was pouring its million and a half into the Balatoc property, the arrangements made
between the two companies appear to have been viewed by the plaintiff Harden with complacency, he being the
owner of many thousands of the shares of the Balatoc Company. But as soon as the success of the development
had become apparent, he began this litigation in which he has been joined by two others of the eighty shareholders
of the Balatoc Company.
8. When the Philippine Islands passed to the sovereignty of the United States, the Congress of the United States
inserted certain provisions, under the head of Franchises, which were intended to control the lawmaking power in
the Philippine Islands in the matter of granting of franchises, privileges and concessions. These provisions are
found in section 74 and 75 of the Act. The provisions of section 74 have been superseded by section 28 of the Act
of Congress of August 29, 1916, but in section 75 there is a provision referring to mining corporations, which still
remains the law, as amended. This provisions, in its original form, reads as follows: "... it shall be unlawful for any
member of a corporation engaged in agriculture or mining and for any corporation organized for any purpose
except irrigation to be in any wise interested in any other corporation engaged in agriculture or in mining."
9. It was amended by Sec. 7 of Act No. 3518. 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
CORPORATION LAW
Case Digest
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.
10. Briefly, the legal point upon which the action is planted is that it is unlawful for the Benguet Company to hold any
interest in a mining corporation and that the contract by which the interest here in question was acquired must be
annulled, with the consequent obliteration of the certificate issued to the Benguet Company and the corresponding
enrichment of the shareholders of theBalatoc Company
ISSUE:
1. Whether or not the plaintiffs can maintain an action based upon the violation of law supposedly committed by the
Benguet Company in this case.
2. Whether, 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. It is obvious that, if the first question be answered in the negative, it will be
unnecessary to consider the second question in this lawsuit.
HELD:
1. No. 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, by the building of the Balatoc plant by the Benguet Company and the delivery to the
latter of the certificate of 600,000 shares of the Balatoc Company.
2. No. 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 cny discussion of the further question whether a
sociedad anonima created under Spanish law.
RATIO:
1. 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, by the building of the Balatoc plant by the Benguet Company and the delivery to the latter of the
certificate of 600,000 shares of the Balatoc Company. There is no possibility of really undoing what has been
done. Nobody would suggest the demolition of the mill. The Balatoc Company is secure in the possession of that
improvement, and talk about putting the parties in status quo ante by restoring the consideration with interest,
while the Balatoc Company remains in possession of what it obtained by the use of that money, does not quite
meet the case. Also, to mulct the Benguet Company in many millions of dollars in favor of individuals who have
not the slightest equitable right to that money in a proposition to which no court can give a ready assent.
2. 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 cny 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. That important question should, in our opinion, be
left until it is raised in an action brought by the Government.
CASE LAW/ DOCTRINE:
When the Philippine Islands passed to the sovereignty of the United States, the Congress of the United States inserted
certain provisions, under the head of Franchises, which were intended to control the lawmaking power in the Philippine
Islands in the matter of granting of franchises, privileges and concessions. These provisions are found in section 74 and 75
of the Act. The provisions of section 74 have been superseded by section 28 of the Act of Congress of August 29, 1916,
but in section 75 there is a provision referring to mining corporations, which still remains the law, as amended. This
provisions, in its original form, reads as follows: "... it shall be unlawful for any member of a corporation engaged in
agriculture or mining and for any corporation organized for any purpose except irrigation to be in any wise interested in
any other corporation engaged in agriculture or in mining."
CORPORATION LAW
Case Digest
It was amended by Sec. 7 of Act No. 3518. 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.

CORPORATION LAW
Case Digest
CITIBANK, N.A., petitioner, vs. HON. SEGUNDINO AUTHOR: Revy Neri
G. CHUA, SANTIAGO M. KAPUNAN and LUIS L.
VICTOR, ASSOCIATE JUSTICES OF THE HON. Since the SEC will grant a license only when the foreign
COURT OF APPEALS, THIRD DIVISION, MANILA, corporation has complied with all the requirements of law, it
HON. LEONARDO B. CANARES, Judge of Regional, follows that when it decides to issue such license, it is
Trial Court of Cebu, Branch 10, and SPOUSES satisfied that the applicant's by-laws, among the other
CRESENCIO AND ZENAIDA VELEZ, respondents. documents, meet the legal requirements. This, in effect, is
G.R. No. 102300. March 17, 1993 an approval of the foreign corporations by-laws. It may not
TOPIC: Allocation of Power and Control have been made in express terms, still it is clearly an
PONENTE: CAMPOS, JR., J p approval.
FACTS
1. Petitioner bank filed a criminal complaint against private respondents for violation of Batas Pambansa Blg. 22
(Bouncing Checks Law) and estafa (six counts) under Article 315 par. 2(d) of the Revised Penal Code.
2. The investigating fiscal recommended the filing of information against private respondents for violations of the
mentioned laws. The case was set for pre-trial.
3. On March 30, 1990, the date of the pre-trial conference, counsel for petitioner bank appeared, presenting a special
power of attorney executed by Citibank officer Florencia Tarriela in favor of petitioner bank's counsel, the J.P.
Garcia & Associates, to represent and bind petitioner bank at the pre-trial conference of the case at bar.
4. Counsel for private respondents orally moved to declare petitioner bank as in default on the ground that the special
power of attorney was not executed by the Board of Directors of Citibank. Petitioner bank was then required to file
a written opposition to this oral motion to declare it as in default.
5. Petitioner bank attached another special power of attorney made by William W. Ferguson, Vice President and
highest ranking officer of Citibank, Philippines, constituting and appointing the J.P. Garcia & Associates to
represent and bind the BANK at the pre-trial conference.
6. On the scheduled pre-trial conference, private respondents reiterated, by way of asking for reconsideration, their
oral motion to declare petitioner bank as in default for its failure to appear through an authorized agent and that the
documents presented are not in accordance with the requirements of the law. Petitioner bank again filed on May
14, 1990 its opposition thereto.
ISSUE:
1. Whether a resolution of the board of directors of a corporation is always necessary for granting authority to an
agent to represent the corporation in court cases.
2. Whether the by-laws of the petitioner foreign corporation which has previously been granted a license to do
business in the Philippines, are effective in this jurisdiction.
HELD:
1. Not Necessarily. The board of directors of a corporation can validly delegate some of its functions to individual
officers or agents appointed by it.
2. Yes. Provided the SEC will grant the application and it is implied that the foreign corporation validly meet all the
requirements.

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Case Digest
RATIO:
1. In the corporate hierarchy, there are three levels of control: (1) the board of directors, which is responsible for
corporate policies and the general management of the business affairs of the corporation; (2) the officers, who in
theory execute the policies laid down by the board, but in practice often have wide latitude in determining the
course of business operations; and (3) the stockholders who have the residual power over fundamental corporate
changes, like amendments of the articles of incorporation. However, just as a natural person may authorize
another to do certain acts in his behalf, so may the board of directors of a corporation can validly delegate
some of its functions to individual officers or agents appointed by it.
2. It is clear that corporate powers may be directly conferred upon corporate officers or agents by statute, the articles
of incorporation, and the by-laws or by resolution or other act of the board of directors.
3. Since the by-laws are a source of authority for corporate officers and agents of the corporation, a resolution of the
Board of Directors of Citibank appointing an attorney in fact to represent and bind it during the pre-trial
conference of the case at bar is not necessary because its by-laws allow its officers, the Executing Officer and the
Secretary Pro-Tem, to execute a power of attorney to a designated bank officer, William W. Ferguson in this case,
clothing him with authority to direct and manage corporate affairs.
4. Section 125 of the Corporation Code requires that a foreign corporation applying for a license to transact business
in the Philippines must submit, among other documents, to the SEC, a copy of its articles of incorporation and by-
laws, certified in accordance with law.
5. Since the SEC will grant a license only when the foreign corporation has complied with all the requirements of
law, it follows that when it decides to issue such license, it is satisfied that the applicant's by-laws, among the other
documents, meet the legal requirements. This, in effect, is an approval of the foreign corporation’s by-laws. It may
not have been made in express terms; still it is clearly an approval. Therefore, petitioner bank's by-laws, though
originating from a foreign jurisdiction, are valid and effective in the Philippines.
CASE LAW/ DOCTRINE:
1. Where the SEC grants a license to a foreign corporation, it is deemed to have approved its foreign-enacted by
laws. Sec. 46 of the Corporation Code which states that by-laws are not valid without SEC approval applies only
to domestic corporations.
2. A board resolution appointing an attorney-in-fact to represent the corporation during pre-trial is not necessary
where the by-laws authorize an officer of the corporation to make such appointment.

CORPORATION LAW
Case Digest
078 FILIPINAS PORT SERVICES, INC. v. GO AUTHOR: Rosa Cecilia K. Alfafara
March 16, 2007; G.R. 161886 The concentration in the board of the powers of control of
TOPIC: Allocation of Power and Control corporate business and of appointment of corporate officers
PONTENTE: GARCIA, J. and managers is necessary for efficiency in any large
organization.
FACTS
1. Filport, a domestic corporation engaged in stevedoring (loading and unloading ships) services with principal office in
Davao City.
2. On 4 September 1992, petitioner Eliodoro C. Cruz, Filport’s president from 1968 until he lost his bid for reelection as
Filport’s president during the general stockholders’ meeting in 1991, wrote a letter to the corporation’s Board of Directors
questioning the board’s actions: (a) Creation of Exec. Com.; (b) Increase in emoluments, disproportionate to the character
of work; and (c) recreating AVPs for diff. departments & creating Special Asst.s to the Pres.
3. Cruz requested the board to take necessary action/actions to recover from those elected to the aforementioned positions
the salaries they have received.
4. The records do not show what specific action/actions the board had taken on the letter.
5. On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders, among is herein co-petitioner
Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed with the SEC a petition which he describes as a
derivative suit against respondents who were the incumbent members of Filport’s Board of Directors, for alleged acts of
mismanagement.
6. Cruz alleged that despite demands made to the respondent board of directors to desist from creating the positions in
question, the demands were unheeded. Cruz thus prayed that the respondent members of the board of directors be made to
pay Filport, jointly and severally, the sums of money variedly representing the damages.
7. The respondents denied the allegations of mismanagement. That: (a) creation of the Exec. Com and the grant of per
diems for the attendance of each member are allowed under the by-laws of the corporation; (b) increases in the
emoluments of the Chairman, VP, Treasurer and Asst. Gen. Mngr. were within the financial capacity of the corporation
and well-deserved by the officers; and (c) the created AVP positions were already existing during the tenure of Cruz as
pres. of the corp., and were merely recreated by the Board, as well as the additional position of Special Asst.s.
8. Respondents further averred that Cruz and Minterbro, while stockholders of Filport, have no authority nor standing to
bring the so-called "derivative suit" for and in behalf of the corp. That Cruz filed the alleged derivative suit in bad faith and
purely for harassment purposes on account of his non-reelection to the board in the general stockholders’ meeting.
9. With the enactment of R.A. No. 8799, the case was first turned over to the RTC of Manila, sitting as a corporate court.
On respondents’ motion, it was eventually transferred to the RTC of Davao City.
10. TC: In favor of Cruz. (Filport is not a big corporation requiring multiple executive positions and said positions were
just created for accommodation.)
11. CA: Reversed TC’s ruling.
ISSUE: Whether or not Filport’s Board of Directors acted within its powers in creating the Exec. Com. and the positions
of AVPs and those of the Special Assistants.
HELD: Yes, the board’s actions were in accordance with the regular business operations of Filport, as it is authorized to
do so by the corporation’s by-laws, pursuant to the Corporation Code.

CORPORATION LAW
Case Digest
RATIO:
1. The governing body of a corporation is its board of directors. Thus, with the exception only of some powers expressly
granted by law to stockholders (or members, in case of non-stock corporations), the board of directors (or trustees, in case
of non-stock corporations) has the sole authority to determine policies, enter into contracts, and conduct the ordinary
business of the corporation within the scope of its charter, i.e., its articles of incorporation, by-laws and relevant provisions
of law. Verily, the authority of the board of directors is restricted to the management of the regular business affairs of the
corporation, unless more extensive power is expressly conferred.
2. Stockholders are too numerous, scattered and unfamiliar with the business of a corporation to conduct its business
directly. The plan of corporate organization is for the stockholders to choose the directors who shall control and supervise
the conduct of corporate business.
3. The election of officers of a corporation is provided for under Section 25 of the Code which reads:
Sec. 25. Corporate officers, quorum. – Immediately after their election, the directors of a corporation must formally
organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary
who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws.
-In the case, the by-laws of Filport provides: Officers of the corporation, as provided for by the by-laws, shall be elected
by the board of directors at their first meeting after the election of Directors. xxx Likewise, the fixing of the corresponding
remuneration for the positions in question is provided for in the same by-laws of the corporation:
xxx The Board of Directors shall fix the compensation of the officers and agents of the corporation.
4. Unfortunately, the bylaws of the corporation are silent as to the creation of an executive committee. Under Section 35 of
the Code, the creation of an executive committee must be provided for in the bylaws of the corporation. Notwithstanding
the silence of Filport’s bylaws, we cannot rule that the creation of the executive committee by the board of directors is
illegal or unlawful. FIRST, the absence of a showing as to the true nature and functions of said executive committee
considering that the "executive committee," referred to in Section 35 of the Corporation Code which is as powerful as the
board of directors and in effect acting for the board itself, should be distinguished from other committees which are within
the competency of the board to create at anytime and whose actions require ratification and confirmation by the board.
SECOND, ratiocinated by the 2 courts below, the Board of Directors has the power to create positions not provided for in
Filport’s bylaws since the board is the corporation’s governing body, clearly upholding the power of its board to exercise
its prerogatives in managing the business affairs of the corporation.
5. Moreover, Cruz himself, as then Filport president, that the executive committee in question was created, and he was
even the one who moved for the creation of the positions of the AVPs. By his acquiescence and/or ratification of the
creation of the aforesaid offices, Cruz is virtually precluded from suing to declare such acts of the board as invalid or
illegal.
6. With regard to the increased emoluments, the Court agrees with the findings of both the TC and CA as to the
reasonableness and fairness thereof.
7. Even assuming that there was mismanagement resulting to corporate damages and/or business losses, still the
respondents may not be held liable in the absence of a showing of bad faith in doing the acts complained of.
8. In Philippine Stock Exchange, Inc. v. CA: “Questions of policy or of management are left solely to the honest decision
of the board as the business manager of the corporation, and the court is without authority to substitute its judgment for
that of the board, and as long as it acts in good faith and in the exercise of honest judgment in the interest of the
corporation, its orders are not reviewable by the courts.”
CASE LAW/ DOCTRINE:
Section 23 of the Corporation Code explicitly provides that unless otherwise provided therein, the corporate powers of all
corporations formed under the Code shall be exercised, all business conducted and all property of the corporation shall be
controlled and held by a board of directors.

CORPORATION LAW
Case Digest
079 Ramirez v. Orientalist Co. and Fernandez AUTHOR: Arthur Archie Tiu
September 24, 1918 G.R. No. 11897 - The power to make corporate contracts resides
TOPIC: Powers of the Board of directors primarily in the company's board of directors; but
PONTENTE: Street, J. the board may ratify an unauthorized contract made
by an officer of the corporation. Ratification in this
case is held to have occurred when the board, with
knowledge that the contract had been made, adopted
a resolution recognizing the existence of the
contract and directing that steps be taken to enable
the corporation to utilize its benefits.
- Where a corporate contract has been effected with
the approval of the board of directors, a resolution
adopted at a meeting of stockholders refusing to
recognize the contract or repudiating it is without
effect.
FACTS
1. Orientalist Company is a corporation, duly organized under the laws of the Philippine Islands engaged in the
business of maintaining and conducting a theatre in the city of Manila for the exhibition of cinematographic films
2. Under the articles of incorporation the company is authorized to manufacture, buy, or otherwise obtain all
accessories necessary for conducting such a business
3. plaintiff J. F. Ramirez was, at the same time, a resident of the city of Paris, France, and was 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.
4. 1913, certain of the directors of the Orientalist Company, in Manila, 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;"
5. Negotiations begun by Jose Ramirez as Agent of the plaintiff. Its purpose is to acquire exclusive agency over the
films
6. defendant Ramon J. Fernandez, one of the directors of the Orientalist Company and also its treasure, was chiefly
active in this matter, being moved by the suggestions and representations of Vicente Ocampo, manage of the
Oriental Theater, to the effect that the securing of the said films was necessary to the success of the corporation.
7. Jose Ramirez, as representative of his father, placed in the hands of Ramon J. Fernandez an offer stating detail the
terms upon which the plaintiff would undertake to supply from Paris the aforesaid films.
8. Ramon J. Fernandez had an informal conference with all the members of the company's 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
9. the letters also contained a request that Jose Ramirez should at once telegraph to his father in Paris that his offer
had been accepted by the Orientalist Company and instruct him to make a contract with the film companies
10. the films began to arrive in Manila. The Orientalist company was without funds to meet its obligations
11. The drafts were paid by the company’s president, Hernandez. They were treated as his own personal property and
never came to the company’s possession
12. An action was instituted by the plaintiff on 1914, against the Orientalist Company, and Ramon J. Fernandez. As
the films which accompanied the dishonored were liable to deteriorate, the court, upon application of the plaintiff,
and apparently without opposition on the part of the defendants, appointed a receiver who took charge of the films
and sold them. The action was also accompanied by a recovery for the sum of money
ISSUE: Whether or not the Orientalist Co. is liable for the acts of its treasurer, Fernandez?
HELD: Yes

CORPORATION LAW
Case Digest
RATIO:
- The fact that the power to make corporate contract is thus vested in the board of directors does not signify that a
formal vote of the board must always be taken before contractual liability can be fixed upon a corporation; for the
board can create liability, like an individual, by other means than by a formal expression of its will.
- 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 company’s 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.
- the failure of the defendant corporation to make any issue in its answer with regard to the authority of Ramon J.
Fernandez to bind it, and particularly its failure to deny specifically under oath the genuineness and due execution
of the contracts sued upon, have the effect of elimination the question of his authority from the case, considered as
a matter of mere pleading. The statute (sec. 103) plainly says that if a written instrument, the foundation of the suit,
is not denied upon oath, it shall be deemed to be admitted. It is familiar doctrine that an admission made in a
pleading can not be controverted by the party making such admission; and all proof submitted by him contrary
thereto or inconsistent therewith should simply be ignored by the court, whether objection is interposed by the
opposite party or not. We can see no reason why a constructive admission, created by the express words of the
statute, should be considered to have less effect than any other admission.
CASE LAW/ DOCTRINE:
- The power to make corporate contracts resides primarily in the company's board of directors; but the board may
ratify an unauthorized contract made by an officer of the corporation. Ratification in this case is held to have occurred
when the board, with knowledge that the contract had been made, adopted a resolution recognizing the existence of the
contract and directing that steps be taken to enable the corporation to utilize its benefits.
- Where a corporate contract has been effected with the approval of the board of directors, a resolution adopted at a
meeting of stockholders refusing to recognize the contract or repudiating it is without effect.

CORPORATION LAW
Case Digest
080 SALVADOR P. LOPEZ vs. HON.VICENTE AUTHOR: Chedelle Florido
ERICTA, Judge of the Court of First Instance of Rizal,
Branch XVIII (Quezon City), and DR.CONSUELO S.
BLANCO, respondents.
G.R. No. L-32991 June 29, 1972
TOPIC: Votation of the Board of Regents
PONENTE: Makalintal
FACTS
1. The first ad interim appointment was made on April 27, 1970, “effective May 1, 1970 until April 30, 1971, unless
sooner terminated and subject to the approval of the Board of Regents and to pertinent University regulations.”
2. Dr. Blanco assumed office as ad interim Dean on May 1, 1970.
3. The Board of Regents met on May 26, 1970, and President Lopez submitted to it the ad interim appointment of Dr.
Blanco for reconsideration.
4. The minutes of that meeting disclose that “the Board voted to defer action on the matter in view of the objections cited
by Regent Kalaw (Senator Eva Estrada Kalaw) based on the petition against the appointment, addressed to the Board, from
a majority of the faculty and from a number of alumni...”
5. on the same day, May 26, 1970, President Lopez extended another ad interim appointment to her, effective from May
26, 1970 to April 30, 1971, with the same conditions as the first (unless sooner terminated, and subject to the approval of
the Board of Regents and to pertinent University regulations).
6. The next meeting of the Board of Regents was held on July 9, 1970 (The Personnel Committee recommended that the
Board request the President of the University to review his nomination for the Deanship of the College of Education in the
light of the testimonies received and discussions held during the Committee’s meeting on June 4 and June 11, 1970 on this
matter).
7. Following some discussion on what Regent Tangco explained to be the rationale or intention (i.e., that the President
would discuss with Dr. Consuelo S. Blanco a proposal to withdraw her appointment as Dean) behind the wording of the
Personnel Committee’s recommendation, and in view of some uncertainty over whether the Board would be acting upon
the recommendation as “diplomatically” stated in the agenda or as really intended according to Regent Tangco’s
explanation, the Personnel Committee withdrew its recommendation.
8. The Chairman took a roll-call vote on the appointment of Dr. Blanco as Dean.
Affirmative votes:
Regents Fonacier , Escobar, Barican, Lopez, Agbayani
Negative votes:
Regents Kalaw, Silva, Corpuz
Abstentions:
Regent Tangco, Leocadio (Substituting for Regent Soriano), Pedrosa, Virata
9. The Chairman having ruled that Dr. Blanco had not obtained the necessary number of votes, the Board agreed to
expunge the result of the voting and suspended action on the ad interim appointment of Dr. Blanco.
10. The Chair stated that this decision of the Board would in effect render the case subject to further thinking and give the
Board more time on the question of the deanship of the College of Education, and, since the Board had not taken action on
the appointment of Dr. Blanco either adversely or favorably, her ad interim appointment as Dean effective May 26, 1970
terminated as of July 9, 1970.
11. On July 10, 1970, Dr. Blanco addressed a letter to the Board requesting “a reconsideration of the interpretation made
by the Board as to the legal effect of the vote of five in favor, three against and four abstentions on my ad interim
appointment.”
12. On August 18, 1970 Dr. Blanco wrote the President of the University, protesting the appointment of Oseas A. del
Rosario as Officer-in-Charge of the College of Education. Neither communication having elicited any official reply, Dr.
Blanco went to the Court of First Instance of Quezon City on a petition for certiorari and prohibition with preliminary
injunction.
According to Petitioners:
a) if the abstentions were considered as affirmative votes, a situation might arise wherein a nominee (for the office of
Dean as in this case) is elected by only one affirmative vote with eleven members of the Board abstaining.
CORPORATION LAW
Case Digest
According to Respondent:
a) view “an abstention vote should be recorded in the affirmative on the theory that refusal to vote indicates
acquiescence in the action of those who vote;” ... that “the silence of the members present, but abstaining, is
construed to be acquiescence so far as any construction is necessary.”
CFI – declared Dr. Consuelo Blanco as dean of College of Education, UP.

- Declared null & void the appointment of Oseas A. del Rosario
ISSUE:
1. Whether or not the Board of Regents had the power to cancel past discussion.
2. Whether or not abstentions are considered affirmative votes.
HELD:
1. Yes.
2. No.
RATIO:
1. In the same meeting of July 9, 1970, before it adjourned, the Board of Regents resolved, without a vote of dissent,
to cancel the action which had been taken, including the result of the voting, and “to return the case to its original
status—to render the case subject to further thinking.” In effect, as announced by the Chairman, “the Board has not
acted on the confirmation either adversely or favorably, but that the ad interim appointment has terminated.”
Indeed the formal decision of the Board was that all deliberations on the matter should not appear in the record.
And it cannot be seriously argued that the Board had no authority to do what it did: the meeting had yet been
adjourned, the subject of the deliberations had not yet been closed, and as in the case of any deliberative body the
Board had the right to reconsider its action. No title to the office of Dean of the College of Education had yet
vested in respondent Blanco at the time of such reconsideration.
2. The votes of abstention, viewed in their setting, can in no way be construed as votes for confirmation of the
appointment. There can be no doubt whatsoever as to the decision and recommendation of the three members of
the Personnel Committee: it was for rejection of the appointment. If the committee opted to withdraw the
recommendation it was on the understanding (also referred to in the record as gentlemen’s agreement) that the
President would talk to Dr. Blanco for the purpose of having her appointment withdrawn in order to save them
from embarrassment.
CASE LAW/ DOCTRINE:
Abstentions not considered affirmative if reasons for them are known.— It should be noted that an abstention, according to
the respondents’ citations, is counted as an affirmative vote insofar as it may be construed as an acquiescence in the action
of those who voted affirmatively. This manner of counting is obviously based on what is deemed to be a presumption as to
the intent of the one abstaining, namely to acquiesce in the action of those who vote affirmatively, but which presumption,
being merely prima facie, would not hold in the face of clear evidence to the contrary.
BARREDO, J.: Concurring –
I would like to reserve my opinion as to whether or not the announcement of Secretary Corpus, as chairman of the Board
of Regents, that “the vote is not a majority” is correct from the legal standpoint. To start with, the Secretary who was then
presiding counted his own negative vote. In the absence of a rule clearly authorizing him to vote, I am inclined to believe
he should have done so only in case of a tie. And, of course, it would have been better, if the President of the University
who proposed the appointment of Dean Blanco did not also vote.
Now, with respect to the question as to how the recorded abstentions should be counted, while I see the point in the
explanation in the main opinion that abstentions may be considered as presumptively affirmative votes only if there are no
circumstances indicating the view of those abstaining to be otherwise, I am not prepared to draw the conclusion that the
remarks of Regents Pedrosa and Virata appearing in the minutes may not be interpreted as evidence of nothing more than
their feeling that the matter be left entirely to the decision of those who would vote, such that if the majority were to vote
in favor, they would not have any further objection to the result of such voting.
I agree, however, with the main opinion insofar as it holds that the approval without dissent of the motion for
reconsideration of Regent Agbayani had the result of terminating the second proposed appointment of Dean Blanco. I
CORPORATION LAW
Case Digest
would say that this move was what saved the situation from being more complicated. In other words, on the basis of the
action taken by the board on July 9, 1970, I vote that Dean Blanco ceased to be Dean of the College of Education on that
day.

CORPORATION LAW
Case Digest
081 - Zachary v. Milin AUTHOR: De Silva, Denison
September 9, 1940, 294 Mic 662 Note/Overview: The president claimed that he was not
TOPIC: Who Exercises Corporate Powers: (a) Board of given any notice of the meeting at which he was removed
Directors or Trustees and that the meeting was an informal one, making the
PONENTE: Potter, J. removal void. The directors claimed that notice was waived
by the president's appearance at the meeting. The
corporation's bylaws allowed for no notice if all the
directors were personally present. All three directors of the
corporation were present at the meeting in question. When
the vote was initially taken, the president announced a
result. Thereafter, one of the directors changed his vote to
vote cumulatively. Another director then announced the new
result. The trial court found that the announcing director
was the chairman of the meeting and that the president had
attempted to obtain an advantage over the director who
changed his vote by untimely proclaiming cumulative
voting to be in effect. Affirming, the court held that the
announcement of the presiding director of the result,
recognizing the new ballot, was a valid announcement.
FACTS:
1. Theodore Zachary and William N. Philips filed an Information in the nature of a quo warranto to test the right of Ernest
C. Wunsch and Charles Milin to hold, use, exercise and enjoy the office of directors of the Great Lakes Champagne
Wineries, Inc., a Michigan corporation.
2. The result depends upon the validity of the directors' meeting at the company's laboratory December 8, 1937. If Zachary
was legally removed as president of the company, then the trial court should be affirmed. But, if that meeting be
considered as an informal one, not in the nature of a directors' meeting, then the case should be reversed.
3. Zachary claims he was not given notice of the meeting of December 8, 1937, and, therefore, its action was void. On the
other hand, the defendants claim that notice was waived by Zachary's appearance at the meeting.
4. Section 39 of the general corporation law provides that shareholders' and directors' meetings shall be called in
the manner provided in the bylaws. Section 4 of the corporation’s bylaws provides:
"Special meetings of the board of directors may be held by giving one day's notice thereof to each
director, but no notice shall be necessary as a prerequisite to any meeting of the board at which all directors are present."
5. All three of the directors were present at the meeting of December 8, 1937. The validity of the meeting may not be
affected by failure to give notice as required by the bylaws, providing the parties were personally present.
6. If all of the directors were present in the meeting of December 8, 1937, and understood that the meeting was to be a
directors' meeting, then the action taken is final and may not be avoided by an informality in connection with its being
called.
7. Zachary’s contention: he was not given notice of the meeting of December 8, 1937 but he was present.
8. Defendant’s contention: Defendants claim they cast one ballot. There is no question, from the record, but that the
defendant Milin voted twice. The minutes of the stenographer employed by defendants show that after casting his first
vote, but before Wunsch had announced the result of the election, Milin changed his vote to vote cumulatively.
9. A stockholder or member may change his vote at any time before the vote is finally announced; and before that time it is
proper to permit him to correct his ballot so that it will express his true intention. The minutes of the meeting show that the
result was announced by Zachary before the second ballot was cast, but that the result was not announced by Wunsch until
after the second ballot was cast.
10. NOTE: (The case did not discuss the voting, it just indicated the number of votes. Indicated below just in case)
FIRST VOTING – Zachary – 3750, Philipps – 3750, Milin – 2,500, Wunsch – 2,500 votes
SECOND VOTING – Milin and Wunsch – 3750 votes

CORPORATION LAW
Case Digest
ISSUE:
1. The issue in this case is regarding the validity of the director's meeting at the company's laboratory on December 8,
1937 wherein Zachary was removed as president of the company. (Whether Zachary was illegally removed)
2. Sub-issue: Whether Wunsch or Zachary was the chairman of the meeting. (If Zachary was chairman, then it was
too late for Milin to withdraw the ballot which he had cast and to vote cumulatively.)
HELD:
1. No, trial court’s decision affirmed. Section 4 of the corporation’s bylaws provides: Special meetings of the board
of directors may be held by giving one day's notice thereof to each director, but no notice shall be necessary as a
prerequisite to any meeting of the board at which all directors are present.
2. Wunsch is the chairman of the meeting
RATIO:
1. The Court held that: It is the opinion of this court, first, that Wunsch was the presiding officer of the meeting.
2. Second, that Wunsch never announced the vote until after Milin had cast his second ballot.
3. Third, that it was the right of all the stockholders to have announced at the beginning of the meeting, whether or
not cumulative voting was in effect.
4. Fourth, that the attempt of Zachary to obtain an advantage over Milin to which he had no legal right is a course of
conduct to which this court will not lend its approval.
5. Fifth, that no election could be declared closed until the presiding officer had so announced.
6. Sixth, that the presiding officer's announcement of a tie vote, recognizing the ballot which Milin cast, in
accordance with his right to cumulate, was a valid announcement, and one which should be legally sustained.
7. It follows that the petition for a writ of quo warranto should be denied, and judgment herein entered in favor of the
defendants.
8. The SC held that the validity of the meeting was not affected by the failure to give notice as required by the
by-laws, provided that the parties were personally present. Since all the parties were present at the meeting of
December 8, and understood that the meeting was to be a directors' meeting, then the action taken is final and may
not be voided by any informality in connection with its being called.
CASE LAW/ DOCTRINE:
1. In the absence of statutory authority no decision or act done by any number of the board of directors while not duly
assembled as a board is a valid corporate act. To hold that certain directors could form a quorum by coming upon
another in a room, or in the street, and, despite the protests of that other, could, by merely declaring the body of
persons so gathered together to be a meeting, actually give it that complexion, would be illegal.
2. A director of a corporation is not to be trapped into attendance of a meeting against his will. The directors of a
corporation have no authority to act as a board of directors except at a regularly constituted meeting, in the absence
of a consent in writing. But if all of the members of the board of directors are present and participate in the
meeting or proceedings, then the meeting may be said to be duly and legally held.

CORPORATION LAW
Case Digest
082 PNB V CA AUTHOR: Gelene Guevara
May 18, 1978, G.R. No. L-27155
TOPIC: BOARD OF DIRECTORS OR TRUSTEES
PONTENTE: ANTONIO, J..
FACTS
1. Philippine American General Insurance Co., Inc. (Philamgem), as a surety, issued a bond in favor of defendant
Tapnio to guarantee the payment of her debt to PNB. In turn, Gueco and Tapnio executed an Indemnity Agreement
stating that “whatever amount the plaintiff would pay would earn interest at the rate of 12% per annum, plus
attorney's fees in the amount of 15 % of the whole amount due in case of court litigation”. The Philamgem paid
PNB the amount of P2, 379.91. It made several demands to defendants, but defendant Tapnio refused to pay.
2. Tapnio alleged that she is not liable to the bank at all because due to its negligence the contract of lease of sugar
allotment (which amounts to P2, 800) with Tuason was rescinded.
3. Tapnio’s indebtedness to PNB was known as a crop loan and secured by a mortgage on her standing crop
including her sugar quota allocation. Since the quota is mortgaged to the bank, the contract of lease with Tuason
needs to be approved by the bank. Tapnio agreed to lease his sugar quota to Tuason for P2.80/picul (the price was
approved by the bank manager and the Vice President of PNB). However, the Board of Directors required that the
amount be raised to P3.00/picul, its prevailing market value. Tuason asked for reconsideration for the approval of
the lease at P2.80/picul which the board refused to grant. Tuason expressed that he is no longer interested to
continue the contract with Tapnio so latter lost the sum of P2,800.00 which she should have received from Tuason
and which she could have paid the Bank to cancel off her indebtedness.
4. Both the trial court and CA ruled that PNB should pay Tapnio the sum of P2,379.71, plus 12% interest per annum
from September 19, 1957 until the same is fully paid, P200.00 attorney's fees and cost.
ISSUE: Whether PNB is liable for the damage caused to Tapnio?
HELD: YES. There is no question that Tapnio's failure to utilize her sugar quota was due to the disapproval of the lease by
the Board of Directors of petitioner.
RATIO:
1. As observed by the trial court, time is of the essence in the approval of the lease of sugar quota allotments, since the
same must be utilized during the milling season, because any allotment which is not filled during such milling
season may be reallocated by the Sugar Quota Administration to other holders of allotments. There was no proof that
there was any other person at that time willing to lease the sugar quota allotment of private respondents for a price
higher than P2.80 per picul. "The fact that there were isolated transactions wherein the consideration for the lease
was P3.00 a picul", according to the trial court, "does not necessarily mean that there are always ready takers of said
price. " The unreasonableness of the position adopted by the petitioner's Board of Directors is shown by the fact that
the difference between the amount of P2.80 per picul offered by Tuazon and the P3.00 per picul demanded by the
Board amounted only to a total sum of P200.00. Considering that all the accounts of Rita Gueco Tapnio with the
Bank were secured by chattel mortgage on standing crops, assignment of leasehold rights and interests on her
properties, and surety bonds and that she had apparently "the means to pay her obligation to the Bank, as shown by
the fact that she has been granted several sugar crop loans of the total value of almost P80,000.00 for the agricultural
years from 1952 to 1956", there was no reasonable basis for the Board of Directors of petitioner to have rejected the
lease agreement because of a measly sum of P200.00.
2. While petitioner bank had the ultimate authority of approving or disapproving the proposed lease since the quota was
mortgaged to the Bank, the latter certainly cannot escape its responsibility of observing, for the protection of the
interest of private respondents, that degree of care, precaution and vigilance which the circumstances justly demand
in approving or disapproving the lease of said sugar quota. The law makes it imperative that every person "must in
the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith. This petitioner failed to do. Certainly, it knew that the agricultural year was about to expire,
that by its disapproval of the lease private respondents would be unable to utilize the sugar quota in question. In
failing to observe the reasonable degree of care and vigilance which the surrounding circumstances reasonably
impose; petitioner is consequently liable for the damages caused on private respondents. Under Article 21 of the
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Case Digest
New Civil Code, "any person who willfully causes loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the damage." The afore-cited provisions on human
relations were intended to expand the concept of torts in this jurisdiction by granting adequate legal remedy for the
untold number of moral wrongs which is impossible for human foresight to specifically provide in the statutes.
3. A corporation is civilly liable in the same manner as natural persons for torts, because "generally speaking, the rules
governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the
principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial
person. All of the authorities agree that a principal or master is liable for every tort which he expressly directs or
authorizes, and this is just as true of a corporation as of a natural person, A corporation is liable, therefore, whenever
a tortuous act is committed by an officer or agent under express direction or authority from the stockholders or
members acting as a body, or, generally, from the directors as the governing body."

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Case Digest
083 Yu Chuck, Mack Yueng, and Ding Moon v. Kong AUTHOR: Myk
Li Po Reasonable Contracts
3 December 1924 G.R. No. L-22450
TOPIC: Control and Management of Corporation: Who
Exercises Corporate Powers: Corporate Officers and
Agents
PONENTE:
FACTS:
• Kong Li Po
• A domestic corporation organized in accordance with the laws of the Philippine Islands and engaged in
the publication of a Chinese newspaper.
• In its articles of incorporation and by-laws are:
• In the usual form and provide for a board of directors and other officers among them a president
whose duty it is to "sign all contracts and other instruments of writing."
• No special provision is made for a business or general manager.
• In the year 1919 - C. C. Chen/ T. C. Chen was appointed general business manager of the newspaper.
• December 1919 - he entered into an agreement with Yu Chuck, Mack Yueng, and Ding Moon (the plaintiffs).
• They agreed that to do they would do the printing for the newspaper for the sum of P580 per month for a
term of three years from the 1st day of January 1920 as alleged in the complaint.
• They worked for Kong Li Po from January 1, 1920 to January 31, 1921 when they were discharged by the new
manager, Tan Tian Hong, who had been appointed in the meantime, C. C. Chen having left for China.
• They were discharged through a letter of dismissal which stated no special reasons for the discharge of the
plaintiffs.
• The plaintiffs then filed a complaint alleging that they had been so discharged without just cause and therefore
asked judgment for damages in the sum of P20,880 and payment of the remaining portion of the term since they were
discharged by Kong Li Po without just cause before the expiration of the term of the contract.
• Kong Li Po denied all allegations and set up five special defences and counter-claims.
• C. C. Chen, whose name appears to have been signed to the employment contract was not
authorized by the defendant to execute such a contract in its behalf.
• January, 1921, the plaintiffs purposely delayed the issuance of defendant's newspaper on three separate
and distinct occasions causing damage and injury to the defendant in the amount of P300.
• The plaintiffs failed, neglected, and refused to prepare extra pages for the January 1, 1921, issue of the
defendant's newspaper and thus compelled the defendant to secure the preparation of said extra pages by
other persons at a cost of P110.
• The plaintiffs neglected and failed to correct errors in advertisements appearing in defendant's
newspaper, although their attention was specifically called to such errors and they were requested to
make the corrections, as a result of which certain advertisers withdrew their patronage from the paper
and refused to pay for the advertisements, thus causing a loss to the defendant of P160.50.
• The defendant alleged that the plaintiffs neglected and refused to do certain job printing such neglect and
refusal causing injury and damage to the defendant in the sum of P150.
• TRIAL COURT’S FINDINGS:
• The signature was authentic.
• The contract had been impliedly ratified by Kong Li Po.

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• TRIAL COURT’S RULING:
• Rendered judgment in favour of the plaintiff’s for the sum of P13,340.
ISSUE:
Whether or not C. C. Chen had no power or authority to bind the defendant corporation by such contract.
HELD: No he had no authority to bind the defendant corporation by such contract.
RATIO:
• It is conceded that he had no express authority to do so, but the evidence is conclusive that he, at the time the
contract was entered into, was in effect the general business manager of the newspaper Kong Li Po and that he, as such,
had charge of the printing of the paper, and the plaintiff maintain that he, as such general business manager, had implied
authority to employ them on the terms stated and that the defendant corporation is bound by his action.
• Chen is the general manager of the Kong Li Po and had implied authority to bind the corporation by a reasonable
and usual contract of employment with the plaintiffs. However, from what can be gleaned from the contract in question it
was onerous. The fact that the possibility of company being thrown into insolvency was sufficient to put the plaintiffs
upon inquiry as to the extent of the business manager’s authority.
• The SC ruled that the corporation did not impliedly ratified the contract.
• This contention is based on the contention that Te Kim Hua, president of the corporation, was a witness
to their work as printers in the office. He denied, however, any knowledge of the existence of the
contract and asserted that it was never presented neither to him nor to the board of directors.
• Even if he were the president of the corporation ratification by him would have been of no avail in order
to validate a contract. The fact that the president was required by the by-laws to sign the documents
evidencing contracts of the corporation, does not mean that he had power to make the contracts.
• Before a contract can be ratified knowledge of its existence must be brought home to the parties who have
authority to ratify it or circumstances must be shown from which such knowledge may be presumed. No such knowledge
or circumstances have been shown here. Ratification by the board of directors was necessary.
• C. C. Chen made a notice that all contract, agreements, and receipts are considered to be null and void unless it is
signed by him. This led to think that C. C. Chen had in fact the authority to make the contract. Aside from being
published almost a most after the contract between the plaintiffs and C. C. Chen was made, it is only an assertion by
Chen that he would recognize no contract, agreements, and receipts not duly signed by him. Thus, it can’t be given
weight.
CASE LAW/ DOCTRINE:
The general rule is that the power to bind a corporation by contract lies with its board of directors or trustees, but this
power may either expressly or impliedly be delegated to other officers or agents of the corporation, and it is well settled
that except where the authority of employing servants and agent is expressly vested in the board of directors or trustees,
an officer or agent who has general control and management of the corporation's business, or a specific part thereof, may
bind the corporation by the employment of such agent and employees as are usual and necessary in the conduct of such
business. But the contracts of employment must be reasonable.

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Case Digest
084 BOARD OF LIQUIDATORS V HEIRS OF AUTHOR: Jelena
MAXIMO KALAW NACOCO tries to recover the settlements authorized by
August 14, 1967, G.R. No. L-18805 Kalaw in his capacity as General Manager because its by-
TOPIC: Who Exercises Corporate Powers – (b) Corporate laws prohibit such acts without prior approval of the Board.
Officers as Agents
PONENTE: SANCHEZ, J. Kalaw does not need prior approval, his actions were done
for personal gain, no bad faith on his part, he was just doing
his job, based on what he was previously allowed to do.
FACTS
1. The National Coconut Corporation (NACOCO) was chartered as a non-profit governmental organization avowedly for
the protection, preservation and development of the coconut industry in the Philippines.
2. An unhappy chain of events conspired to deter NACOCO from fulfilling some contracts entered. Nature supervened.
Four devastating typhoons visited the Philippines: the first in October, the second and third in November, and the fourth in
December, 1947. Coconut trees throughout the country suffered extensive damage. Copra production decreased. Prices
spiraled. Warehouses were destroyed. Cash requirements doubled. Deprivation of export facilities increased the time
necessary to accumulate shiploads of copra. Quick turnovers became impossible, financing a problem.
3. The buyers threatened damage suits. All the settlements sum up to P1,343,274.52.
4. NACOCO, represented by the Board of Liquidators, seeks to recover the above sum of P1,343,274.52 from general
manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It charges
Kalaw with negligence under Article 1902 of the old Civil Code (now Article 2176, new Civil Code);and defendant board
members, including Kalaw, with bad faith and/or breach of trust for having approved the contracts without prior approval
of the Board.
5. The lower court came out with a judgment dismissing the complaint.
6. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into the controverted
contracts without the prior approval of the corporation's directorate.
7. Plaintiff leans heavily on NACOCO's corporate by-laws. Article IV (b), Chapter III recites, as amongst the duties of
the general manager, the obligation: "(b) To perform or execute on behalf of the Corporation upon prior approval of the
Board, all contracts necessary and essential to the proper accomplishment for which the Corporation was organized.´
ISSUE: Is the case at bar is to be taken out of the general concept of the powers of a general manager, given the cited
provision of the NACOCO by-laws requiring prior directorate approval of NACOCO contracts.
HELD: NO, under the given circumstances, the Kalaw contracts are valid corporate acts.
RATIO:
1. Not of de minimis importance in a proper approach to the problem at hand, is the nature of a general manager's position
in the corporate structure. A rule that has gained acceptance through the years is that a corporate officer "intrusted with the
general management and control of its business, has implied authority to make any contract or do any other act which is
necessary or appropriate to the conduct of the ordinary business of the corporation. As such officer, "he may, without any
special authority from the Board of Directors perform all acts of an ordinary nature, which by usage or necessity are
incident to his office, and may bind the corporation by contracts in matters arising in the usual course of business.
2. Long before the disputed contracts came into being, Kalaw contracted — by himself alone as general manager — for
forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw signed some 60 such contracts for the sale of copra
to divers parties. During that period, NACOCO reaped a gross profit of P3,631,181.48 from copra sales and Kalaw was
even rewarded.
3. These previous contract it should be stressed, were signed by Kalaw without prior authority from the board. Said
contracts were known all along to the board members. Nothing was said by them. The aforesaid contracts stand to prove
one thing: Obviously, NACOCO board met the difficulties attendant to forward sales by leaving the adoption of means to
end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw.
4. Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general practice,
custom, and policy, the general manager may bind the company without formal authorization of the board of directors. In
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Case Digest
varying language, existence of such authority is established, by proof of the course of business, the usage and practices of
the company and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation. So also,
x x x authority to act for and bind a corporation may be presumed from acts of recognition in other instances where the
power was in fact exercised.
5. As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of damage and wrong is here
absent. There cannot be an actionable wrong if either one or the other is wanting.
6. In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute
contracts in its copra trading activities for and in NACOCO's behalf without prior board approval. If the by-laws were to be
literally followed, the board should give its stamp of prior approval on all corporate contracts. But that board itself, by its
acts and through acquiescence, practically laid aside the by-law requirement of prior approval.
CASE LAW/ DOCTRINE:
When, in the usual course of business of a corporation, an officer has been allowed in his official capacity to manage its
affairs, his authority to represent the corporation may be implied from the manner in which he has been permitted by the
directors to manage its business.

CORPORATION LAW
Case Digest
085. Zamboanga Transportation Company, Inc. v Bachrach Motor Company Inc, AUTHOR: Dolina, Chad
G.R. No. L-27694 October 24, 1928
TOPIC: Control and Management of Corporation: Corporate Officers and Agents
PONENTE: Villa-Real, J.
FACTS: 1. Zamboanga Transportation Co., Inc., bought trucks, automobiles, repair and accessory parts for use in the
business of transportation from Bachrach Motor Co. Payments were made in installments and several chattel mortgages
were executed in favor of Bachrach.
2. Zamboanga Transportation Co., Inc., found itself in financial straits and on several occasions appealed to Mons. Jose
Clos, Bishop of Zamboanga for loans of money. As the latter, who was the principal stock holder of the Zamboanga
Transportation Co. Inc., was leaving for Rome in February 1925 and could not continue to loan money to said corporation
to pay the installments stipulated in the chattel mortgages, additional agreements were entered between Mons. Clos and the
Bachrach Motor Co., Inc. Zamboanga Trasportation Co., Inc., intervened and took part in these agreements.
3. In pursuance of said agreements, a new chattel mortgage was executed by the Zamboanga Transportation Co., Inc.,
represented by its president, general manager, and attorney Jose Erquiaga.
4. Jose Erquiaga submitted said mortgage deed to the board of directors through its secretary and discussed said mortgage
with directors Carlos Camins and Ciriaco Bernal, who expressed their satisfaction with the advantages obtained by their
president and general manager.
5. Jose Erquiaga received a letter from Bachrach stating that the latter would enclose the cancellation of the chattel
mortgage in order to be recorded in the registries of deeds. Jose Erquiaga replied stating that said cancellation could not be
registered, because the new chattel mortgage had not been approved by the mortgagor's board of directors, according to the
express stipulation of the parties, and that as soon as it was approved it would be submitted to the Public Utility
Commission for approval in conformity with the law.
6. Board of Directors of Zamboanga Transportation Inc. rejected the new chattel mortgage.
7. Bachrach Motor Co., Inc., acting through its president, filed a complaint against the Zamboanga Transportation Co.,
Inc., in the Court of First Instance of Manila
8. The Zamboanga Transportation Co., Inc., tried to prove that at the time the chattel mortgage was executed there existed
an oral agreement between the parties, which contained the following stipulations: (1) That the mortgage would not be
valid until it was approved by resolution of the board of directors of the mortgagor; (2) that it would not be recorded in the
proper registry of deeds until such approval was obtained; (3) that after the mortgagor's board of directors had approved it,
the approval of the Public Utility Commission as required by Act No. 3108 would also be requested
ISSUE: Whether the chattel mortgage executed by Jose Erquiaga, president, general manager, attorney, and auditor of the
Zamboanga Transaportation Co., Inc., in behalf of the corporation is valid and binding upon said corporation despite the
fact that it was disapproved by the mortgagor's board of directors.
HELD: Yes. The broad powers vested in Jose Erquiaga as president, general manager, auditor, attorney or legal adviser,
and one of the largest shareholders of Zamboanga Transportation Co. Inc. reflects that he may be the corporation itself.
RATIO:
1. While it is true that said last chattel mortgage contract was not approved by the board of directors of the Zamboanga
Transportation Co., Inc., whose approval was necessary in order to validate it according to the by-laws of said corporation,
the numerous capacities that Jose Erquiaga performs in the corporation along with the two other directors who expressed
satisfaction in the new chattel mortgage, Carlos Camins and Ciriaco Bernal, respectively, together with the president
constitute a majority: The payments made under said contract with the knowledge of said three directors are equivalent to a
tacit approval by the board of directors of said chattel mortgage contract and binds the Zamboanga Transportation Co., Inc.
2. The chattel mortgage deed being declared valid and effective, the lack of previous authorization and approval of the
Public Utility Commission, while it, indeed, rendered said contract ineffective, was cured by the nunc pro tunc
authorization and approval granted by said Commission, and the contract was made effective from its execution.
3. Supreme Court affirmed decision of CFI Manila orderering said defendant Zamboanga Transportation Co., Inc., the sum
of P18,298.58, with 10 per cent interest on the sum of P6,254.81, from May 19, 1925, and legal interest on the balance of
said sum from May 23, 1925, when the complaint was filed, plus the costs, and dismissing all the counterclaims and cross
complaints set up by the defendant corporation.
CASE LAW/ DOCTRINE: When the president of a corporation, who is one of the principal stockholders and at the same
time its general manager, auditor, attorney or legal adviser, is empowered by its by-laws to enter into chattel mortgage
contracts, subject to the approval of the board of directors, and enters into such contracts with the tacit approval of two
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Case Digest
other members of the board of directors, one of whom is also a principal shareholder, both of whom, together with the
president, form a majority, and said corporation takes advantage of the benefits afforded by said contract, such acts are
equivalent to an implied ratification of said contract by the board of directors and binds the corporation even if not
formally approved by said board of directors as required by the by-laws of the aforesaid corporation.

CORPORATION LAW
Case Digest
086 ACUNA v. BATAC PRODUCERS AUTHOR: Rhona Burce
COOPERATIVE MARKETING ASSOC., This case was remanded to the lower court. It mainly
June 30, 1967 G.R. No. L-20333 focused on why the complaint should not have been
TOPIC: Corporate officers and agents dismissed. The topic corporate officers and agents can be
PONENTE: Makalintal, J. found under the facts/ratio part.
FACTS
1. Plaintiff Emiliano Acuña filed a complaint against the defendant Batac Producers Cooperative Marketing Association,
Inc., The complaint alleged that:
• 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 Batac
Procoma, Inc., as additional funds for its Virginia tobacco buying operations;
• That plaintiff would be constituted as the corporation's representative in Manila to assist in handling and facilitating its
continuous shipments of tobacco; that for his services plaintiff would be paid a remuneration
• The said tentative agreement was favorably received by the Board of Directors of the defendant Batac Procoma Inc.,
• All the defendants 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;
• 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;
• 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;
• 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;"
• 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.
2. Plaintiff prayed that an order of attachment be issued against the properties of defendant corporation and that 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.
3. 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.
Contention of defendants: 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.
4. The trial court dismissed plaintiff’s complaint and ruled in favor of the defendants.
ISSUE: Whether or not the trial court was correct in issuing the order of dismissal, on the ground that plaintiff’s complaint
stated no cause of action since the Board of Directors of defendant corporation did not approve the agreement in question.
HELD: No. The sufficiency of the motion [to dismiss] 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
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Case Digest
defendants.
RATIO:
1. 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.
2. 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.
3. 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.
CASE LAW/ DOCTRINE:
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 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.
Note: The order appealed from is set aside and the case is remanded to the court a quo for further proceedings.

CORPORATION LAW
Case Digest
087 Hayes v. Canada, Atlantic & Plant S.S. Co., Ltd. AUTHOR: Bea Mationg
181 F 289/ (1910)
TOPIC: Board Committees Executive committee, Full-powers
PONENTE: PUTNAM, Circuit Judge
FACTS
1. Canada, Atlantic & Plant Steamship Company Ltd as plaintiff brought suit against defendant Hayes, a director and
president of plaintiff company.
2. As president thereof, defendant claimed salary and certain amounts for rent in a room in Boston. The case at bar was
brought to recover said amounts.
3. On June 6and June 24, 1905, defendant member of plaintiff’s executive committee conducted meeting for the purpose of
amending the by-laws to wit: 1) reducing the number of member of the executive committee into two from three (note that
the third member opposed their proceedings) 2) directing the payment of defendant’s salary and the amount for the rental
in Boston and 3) allowing for the meetings of the board to be called only by the president. (Basically they are consolidating
the powers of the board to themselves).
4. Defendant contends the their actions were pursuant to section 8 of their by-laws which allows for the executive
committee “full powers” of the board when said board is not in session. (note that the president is ex-officio member of
such)
5. Plaintiff contends that such meeting where ineffectual for absence of notice. (side issue)
ISSUE:
Were mentioned meeting given proper notice, hence legal?
Are the amounts recoverable to plaintiff?
HELD:
No, evidence suggests so, further there were no emergency situations which justifies for an immediate meeting.
Yes, Section 8’s interpretation should be construed as limited.
RATIO:
It is certainly intolerable to maintain that the words “full powers,” in the provision for the appointment of
executive committee practically divested the directors of all their functions, and built up a new foundation for it in lieu of
that was formally established. Such an assumed absorption of the power of the creator by the created is too absurd to be
received the approbation of the court of any law. We cannot give force to the words “full powers” in the by-laws referred
to except with limitations restricting them to the ordinary business transactions of the corporation.
Having in mind that neither the president nor any director of the corp is entitled to compensation for his services without
some special provision of statute or some action by the stockholders or directors, we must hold that the matter of such
compensation was specifically retained for the personal action of the board of directors.
CASE LAW/ DOCTRINE:

Sec. 35 allows the corporation to vest broad powers to Executive Committees such as to review and amend board
resolutions not expressly unaemdable if it deems wise to do so. However, the delegation cannot legally go so far as to
render the board of directors powerless and free from all the responsibilities imposed on it by law. The rule is, except only
in cases where the law so provides, all corporate powers hall be exercised by the board is fundamental.

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Case Digest
088 THE BOARD OF DIRECTORS AND ELECTION AUTHOR: Mercado, Christopher Dann C.
COMMITTEE OF THE SMB WORKERS SAVINGS
AND LOAN ASSOCIATION, INC., ET AL., petitioners,
vs.
HON. BIENVENIDO A. TAN, ETC., ET AL., respondents.
TOPIC: Stockholders or Members
Ponente: Justice Padilla

FACTS
1. John Castillo et al., commenced a suit in the court of First Instance of Manila to declare null and void election of
the members of the board of directors of the SMB Workers Savings and Loan Association, Inc. and of the
members of the board of directors of the association to call for and hold another election in accordance with its
constitution and by-laws and the Corporation Law.
2. The Court rendered judgment declaring the election held null and void, ordering the defendants to call for and hold
another election in accordance with the constitution and by-laws of the association and the Corporation Law.
3. Before the expiration of the time to appeal, the plaintiffs move for immediate execution of the judgment, which the
Court granted.
4. In compliance with the judgment, on MARCH 26, the election committee composed of Quintin Tesalona, Manuel
Dumaup and Jose' Capinio Santos set the meeting of the members of the association for 28 March at 5:30 o'clock
in the afternoon to elect the new members of the board of directors.
5. However, the plaintiff filed an ex-parte motion alleging
a. that the election committee that had called the meeting of members of the association is composed of the
same members that had conducted and supervised the election of the members of the board of directors
that was declared null and void by the Court;
b. that the election to be conducted and supervised by the said committee would not be held in accordance
with the constitution and by laws of the association providing for five days notice to the members before
the election, since the notice was posted and sent out only on 26 March, and the election would be held on
28 March, or two days after notice
c. They prayed that the Court appoint its representative or representatives, whose compensation shall be paid
out of the funds of the association, to supervise and conduct the election ordered by it.
6. The Court granted the said motion.
7. Thus, the petitioners herein brought this petition before the court asking for a preliminary injunction for the grave
abuse of discretion of the respondent-judge.
8.
ISSUE: (1) Whether or not there was a violation of the by-laws of the Corporation
(2) Whether or not the Court may appoint persons to hold the election of the officers of a corporation
HELD: (1) Yes. Notice of a special meeting of the members should be given at leasts five days before the date of the
meeting. Therefore, the five days previous notice required would not be complied with.
(2) Yes. The Court in the exercise of its equity jurisdiction may appointment such committee, it having been shown that
the Election Committee provided for in section 7 of the by-laws of the association that conducted the election annulled by
the respondent court if allowed to act as such may jeopardise the rights of the respondents.

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Case Digest
RATIO:
(1) Section 3, article III, of the constitution and by-laws the association provides:
Notice of the time and place of holding of any annual meeting, or any special meeting, the members, shall be given either
by posting the same in a postage prepaid envelope, addressed to each member on the record at the address left by such
member with the Secretary of the Association, or at his known post-office address or by delivering the same person at least
(5) days before the date set for such meeting. . . . In lieu of addressing or serving personal notices to the members, notice
of the members, notice of a regular annual meeting or of a special meeting of the members may be given by posting copies
of said notice at the different departments and plants of the San Miguel Brewery Inc., not less than five (5) days prior to
the date of the meeting. (Annex K.)
Notice of a special meeting of the members should be given at leasts five days before the date of the meeting. Therefore,
the five days previous notice required would not be complied with.
(2) As regards the creation of a committee of three vested with the authority to call, conduct and supervise the election, and
the appointment thereto of Candido C. Viernes as chairman and the representative of the court and one representative each
from the parties, the Court in the exercise of its equity jurisdiction may appointment such committee, it having been shown
that the Election Committee provided for in section 7 of the by-laws of the association that conducted the election annulled
by the respondent court if allowed to act as such may jeopardise the rights of the respondents.
In a proper proceeding a court for equity may direct the holding of a stockholders' meeting under the control of a special
master, and the action taken at such a meeting will not be set aside because of a wrongful use of the court' interlocutory
decree, where not brought to the attention of the court prior to the meeting. (18 C.J.S. 1270.)
A court of equity may, on showing of good reason, appoint a master to conduct and supervise an election of directors when
it appears that a fair election cannot make directions contrary to statute and public policy with respect to the conduct of
such election. (19 C.J.S. 41)
CASE LAW/ DOCTRINE:
In a proper proceeding a court for equity may direct the holding of a stockholders' meeting under the control of a special
master, and the action taken at such a meeting will not be set aside because of a wrongful use of the court' interlocutory
decree, where not brought to the attention of the court prior to the meeting

CORPORATION LAW
Case Digest
089. Johnston v. Johnston AUTHOR: “ang dakilang magsasaka”
(1965, 61 OG No. 39, 6160) -You can find the full text of the case in the book of Campos
TOPIC: Control and Management of Corporation: p. 425
Who Exercises Corporate Powers -The withdrawal of F. Logan from the meeting was
(d) Stockholders or Members reasonable as he was continually denied to represent Silos
PONTENTE: family by the Chair yet he has acquired the share properly
FACTS
1. In CFI Zamboanga, petitioners-appellees F. Logan Johnston, Irene R. Johnston and Felisa P. Johnston filed a
petition for quo warranto alleging that they were elected as directors in the stockholders meeting of the Johnston
Lumber Co., Inc. on July 20, 1963 and were in turn elected respectively as president and general manager, vice-
president and assistant general manager, and secretary-treasurer in the meeting of the board of directors held on the
same date, and praying in the main for the ouster of the respondent-appellants Louis A. Johnston, Elizabeth J.
Araneta, and Rosario S. Johnston from the position of president and general manager, vice-president and assistant
general manager, and secretary-treasurer of Johnston Lumber Co., Inc.
2. The appellants answered that they was no election on July 20, 1963 and claiming that they are occupying the
position in question because they were re-elected in the regular stockholders’ meeting on April 2, 1963
3. All of them are stockholders of the said family stock corporation.
4. In the by-laws, the annual meeting of stockholders shall be held in the principal office at Zamboanga in the month
of April. Thus the meeting is indeed April 2, 1963 for the purpose of electing new directors who would in turn
choose new officers of the corporation.
5. F. Logan et al shares:
a. F. Logan = 305
b. Proxy by his mother = 320
c. Proxy by his wife = 5
d. Duly endorsed stock cert. for J.B. Solis = 305
6. The Chair informed F. Logan that he will not be able to vote the 307 shares of the late Albert S. Johnston as the
administrator of the intestate estate of the latter for it has already ended.
7. Logan insist to continue voting for he alleged that he is also the guardian of all the minor children of the diseased
but the Chair denied this for the latter said that shares must be first be registered in the names of the wards.
8. F. Logan et al representing 1, 242 of the 2, 462 shares walked out of the meeting saying that the April meeting was
a minority meeting while respondent stayed and elected themselves as officers.
9. After a notice to the president of the corporation, on July 20, 1963, F. Logan sensing he owned/ represent the
majority of share proposed a division of the house which was seconded by Johnston.
10. Respondent Louis and Elizabeth refuse to recognize the new bloc. As the petitioners where demanding for the
turnover of the records and function of the above mentioned position, respondents refuse to recognize it.
ISSUE: 1) WON appellants were validly elected as directors and officers in the April meeting
2) WON appellees were duly elected as directors and officers in the July meeting
HELD: 1) No. As there is no quorum in the meeting.
2) Yes. There was a quorum as everyone was present and Louis as presiding officer, declared a quorum.

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Case Digest
RATIO:
1. Both appellants and appellees agreed that the April meeting was valid but because F. Logan owning/representing
1, 242 of the 2,462 shares walked out of the meeting, those who were left was considered as minority and does not
constitute a quorum. Sec. 31 of Corporation Law (Act. No. 1459) explicitly requires the presence of a quorum
at all elections of directors.
By-laws of Johnston Lumber Co., Inc.:
Sec. 4 A quorum at any meeting shall consist of a majority of the voting stock of the company
represented in person or by proxy….
• Thus, after F. Logan walked out, the subsequent meetings of the stockholders were null and void so as the election.
2. Petitioners held the majority of the stock. Respondents were present at the meeting but refused to vote.
• “By the weight of authority, a majority of the votes actually cast will decide, although some stockholders or
members who are present may refuse to vote, and, therefore, the majority of the vote cast may be less that a
majority of the persons present or stock, must be held to acquiesce in the votes actually cast.”
CASE LAW/ DOCTRINE:
Sec. 31 of Corporation Law (Act. No. 1459) explicitly requires the presence of a quorum at all elections of directors.

CORPORATION LAW
Case Digest
090 PONCE ET AL. v. ENCARNACION ET AL. AUTHOR: JANNA
November 28, 1953, G.R. No. L-5883
TOPIC: Control and management of corporation: “On showing of good cause thereof, the court is authorized
Stockholders or members to issue orders authorizing a stockholder to call for a
PONENTE: PADILLA, J. stockholder’s meeting”
FACTS
1. June 24, 1948 – Daguhoy Enterprises, Inc. was registered.
2. April 16, 1959 – at a duly called meeting, the following were agreed upon: (1) the voluntary dissolution of the
corporation and; (2) the appointment of Potenciano Gapol (the largest stockholder) as receiver.
3. Pursuant to the above, a petition for voluntary dissolution was drafted, sent to, and signed by Domingo Ponce.
4. Potenciano Gapol changed his mind and did not file the petition for voluntary dissolution of the corporation
5. Instead, Gapol filed a complaint in the CFI of Manila to compel petitioner spouses Domingo & Buhay L. Ponce,
to: (1) render an accounting of the funds and assets of the corporation; and (2) reimburse, jointly, the amount the
following: (a) P4,500 for a parcel of land acquired by the corporation; (b) P6,190 loaned to Buhay; (c) P8,000
spent by the Domingo on his recent U.S. trip.
6. Total sum sought to be reimbursed from the Ponce spouses = P18,690 plus interest, or such sum as may be found
to have been misappropriated by Domingo Ponce for his own benefit.
7. May 18, 1951 –Gapol also filed a motion praying that Ponce spouses be removed as members of the board of
directors, but was denied.
8. January 3, 1952 – Gapol filed a petition praying for an order directing him to call a meeting of the stockholders of
the corporation and to preside at such meeting in accordance with Sec. 26 of the Corporation Law.
9. Respondent court issued the order as prayed for (calling for the stockholder’s meeting), without notice to
petitioners and other members of the board of directors, in violation of the Rules of Court which require that
adverse parties be notified of the hearing of the motion three days in advance.
10. Feb. 27, 1952 – Petitioners only learned of the order of the court when Bank of America refused to recognize the
new board of directors elected at the meeting and returned checks drawn upon it by said board of directors.
ISSUE: Whether the court, pursuant to Sec. 26 of the Corporation Law (Act No. 1459), may validly issue orders
authorizing a stockholder to call a meeting of stockholders.
Minor issue: Whether petitioners were deprived of due process.
HELD: YES, because the court is allowed to issue such orders authorizing stockholders meetings to be held, upon being
satisfied that there is good cause to call for such.
NO, there was no deprivation of due process, as petitioners had no right to continue as directors of the corporation unless
reflected by the stockholders in a meeting called for that purpose every even year. Petitioners failed, neglected, or refused
to call for such meeting.

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Case Digest
RATIO:
1. Sec. 26 of Act No. 1459 provides:
“Whenever, from any cause, there is no person authorized to call a meeting, or when the officer authorized to do so
refuses, fails or neglects to call a meeting, any judge of a Court of First Instance on the showing of good cause
therefor, may issue an order to any stockholder or member of a corporation, directing him to call a meeting of the
corporation by giving the proper notice required by this Act or by-laws; and if there be no person legally
authorized to preside at such meeting, the judge of the Court of First Instance may direct the person calling the
meeting to preside at the same until a majority of the members or stockholders representing a majority of the stock
members or stockholders presenting a majority of the stock present and permitted by law to be voted have chosen
one of their number to act as presiding officer for the purposes of the meeting.”
2. Article 9 of the by-laws of the Daguhoy Enterprises Inc. provides:
The Board of Directors shall compose of five (5) members who shall be elected by the stockholders in a general
meeting called for that purpose which shall be held every even year during the month of January.
Article 20 of the by-laws in part provides:
. . . Regular general meetings are those which shall be called for every even year, . . . .
3. Relief granted by the CFI lies within its jurisdiction, hence there was no abuse of discretion in granting it.
4. The respondent court was satisfied that there was a showing of good cause for authorizing the respondent
Potenciano Gapol to call a meeting of the stockholders for the purpose of electing the board of directors as
required and provided for in the by-laws, because the chairman of the board of directors called upon to do so had
failed, neglected or refused to perform his duty.
5. Petitioners have not been deprived of due process, as they had no right to continue as directors of the corporation
unless reflected by the stockholders in a meeting called for that purpose every even year.
6. Petitioners had no right to a hold-over brought about by the failure to perform the duty incumbent upon one of
them. If they felt that they were sure to be reelected, why did they fail, neglect, or refuse to call the meeting to
elect the members of the board? Or, why did they not seek their reelection at the meeting called to elect the
directors pursuant to the order of the respondent court.
7. Alleged illegality of the election of one member of the board of directors at the meeting called by the
respondent Potenciano Gapol as authorized by the court being subsequent to the order complained of cannot
affect the validity and legality of the order.
8. If it be true that one of the directors elected at the meeting called by the respondent Potenciano Gapol, as
authorized by the order of the court complained of, was not qualified in accordance with the provisions of the by-
laws, the remedy of an aggrieved party would be quo a warranto.
9. Alleged previous agreement to dissolve the corporation does not affect or render illegal the order issued by
the respondent court.
CASE LAW/ DOCTRINE:
1. “On the showing of good cause therefor, the court may authorize a stockholder to call a meeting and to preside
tehreat until the majority stockholders representing a majority of the stock present and permitted to be voted shall
have chosen one among them to preside over it.Showing of good cause therefor exists when the court is apprised
CORPORATION LAW
Case Digest
of the fact that the by-laws of the corporation require the calling of a general meeting of the stockholders to elect
the board of directors, but the call for such meeting has not been done””

CORPORATION LAW
Case Digest
091. Detective & Protective Bureau v. Cloribel AUTHOR: twinkle
November 11, 1968, G.R. L-23428 Every director must own in his own right at least one share
TOPIC: Stockholders or members of the capital stock.
PONTENTE: Zaldivar, J
FACTS
1. Fausto S. Alberto was managing director of Detective & Protection Bureau, Inc. (DPB) from 1952 until January 14,
1964.
2. June 1963, Alberto illegally seized and took control of all the assets as well as the books, records, vouchers and receipts
of the corporation from the accountant-cashier, concealed them illegally and refused to allow any member of the
corporation to see and examine the same
3. January 14, 1964, the stockholders, in a meeting, removed Adolfo as managing director and elected Jose de la Rosa
despite the fact that de la Rosa did not own any stock in the corporation.
4. Adolfo, contending that de la Rosa cannot be elected as managing director because he did not own any stock, refused to
vacate his office and to deliver the assets and books to Jose de la Rosa. He continued to perform acts in behalf of DBP.
Adolfo was required to submit a financial statement and to render an accounting of his administration from 1952 but he
failed to do so. With this, DBP contends that the corporation had been illegally disposing of corporate funds since 1964.
4. DBP prayed that a preliminary injunction ex-parte be issued restraining defendant from exercising the functions of
managing director and from disbursing and disposing of its funds and that Jose M. Barredo be appointed receiver.
CORP ISSUE: WON Jose de la Rosa can be elected as managing director even though he has no stocks in the company?
HELD: NO. According to Sec. 30 of the Corporation Law: “Sec. 30. Every director must own in his own right at least
one share of the capital stock of the stock corporation of which he is a director, which stock shall stand in his name
on the books of the corporation…"
RATIO: Petitioner contended that respondent Alberto had arrogated to himself the powers of the Board of Directors of
the corporation because he refused to vacate the office and surrender the same to Jose de la Rosa who had been elected
managing director by the Board to succeed him. This assertion, however, was disputed by respondent Alberto who stated
that Jose de la Rosa could not be elected managing director because he did not own any stock in the corporation.
There is in the record no showing that Jose de la Rosa owned a share of stock in the corporation. If he did not own any
share of stock, certainly he could not be a director pursuant to the mandatory provision of Section 30 of the Corporation
Law, which in part provides:
"Sec. 30. Every director must own in his own right at least one share of the capital stock of the stock corporation of which
he is a director, which stock shall stand in his name on the books of the corporation..."
If he could not be a director, he could also not be a managing director of the corporation, pursuant to Article V, Section 3
of the By-Laws of the Corporation which provides that:.
"The manager shall be elected by the Board of Directors from among its members . . ." If the managing director-elect was
not qualified to become managing director, respondent Fausto Alberto could not be compelled to vacate his office and cede
the same to the managing director-elect because the by-laws of the corporation provides in Article IV, Section 1 that
"Directors shall serve until the election and qualification of their duly qualified successor."
CASE LAW/ DOCTRINE: "Sec. 30. Every director must own in his own right at least one share of the capital stock of
the stock corporation of which he is a director, which stock shall stand in his name on the books of the corporation…”
Procedural Issue: (baka tanungin ni sir)
1) DBP filed a bond. But while it was pending, Adolfo filed a motion for counter-bond. Judge Cloribel admitted the
counter bond and set aside the writ of preliminary injunction. DBP contends that this is contrary to law because the
motion for dissolution of the writ for preliminary injunction was not verified.
BUT SC held that the motion did not appear in the records so they can’t decide on it.
Note: M to lift preliminary injunction- need not verified
M for dissolution of PI – need to be verified (by affidavits)
SC further held: the issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure
the rights of a party in a pending case is entirely within the discretion of the court taking cognizance of the case.
CORPORATION LAW
Case Digest
MORE IMPORTANTLY why the petition was dismissed: DBP should have first filed a Motion for
Reconsideration for the Judge to correct his mistake, if any, and should have not gone directly to the SC.

CORPORATION LAW
Case Digest
092 Gokongwei v SEC AUTHOR: N. Manalo
(April 11, 1979; G.R. No. L-45911) “Ang kay Pedro ay kay Pedro, at ang kay Juan ay kay Juan”
TOPIC: Control and Management of Corporation: (d)
Stockholders or Members Doctrine of "corporate opportunity": is precisely a
PONTENTE: ANTONIO, J. 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.
FACTS
1. Petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction, arose out of
two cases filed by petitioner with the Securities and Exchange Commission
2. SEC CASE NO 1375: On October 22, 1976, petitioner, as stockholder of respondent 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, petitioner alleged that on September 18, 1976, individual respondents amended by bylaws of the
corporation, basing their authority to do so on a resolution of the stockholders adopted on March 13, 1961. 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, petitioner 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, petitioner averred that the membership of the Board of Directors had changed since the authority
was given in 1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all the qualifications to
be a director of respondent corporation, being a Substantial stockholder thereof; that as a stockholder, petitioner 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, respondents purposely provided for petitioner'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
respondent corporation, which was allowed 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 bylaws 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.
*The respondent opposed that the petition is premature; that petitioner is estopped from questioning the amendments on
the ground of lack of authority of the Board. since he failed, to object to other amendments made on the basis of the same
1961 authorization: that petitioner has not availed of his intra-corporate remedy for the nullification of the amendment,
which is to secure its repeal by vote of the stockholders representing a majority of the subscribed capital stock at any
regular or special meeting.
CORPORATION LAW
Case Digest
petitioner was rejected by the stockholders in his bid to secure a seat in the Board of Directors on the basic issue that
petitioner was engaged in a competitive business and his securing a seat would have subjected respondent corporation to
grave disadvantages; that "petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual
meeting; that thereafter the Board of Directors amended the by-laws as afore-stated.
3. SEC. CASE NO. 1423: Petitioner likewise alleges that, having discovered that respondent 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 respondent Commission, on January 20, 1977, a petition
seeking to have private respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation
declared guilty of such violation, and ordered to account for such investments and to answer for damages.
* Petitioner's contention is that SEC gravely abused its discretion when it failed to act with deliberate dispatch on the
motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon his rights as stockholder of
respondent corporation, and that respondent are acting oppressively against petitioner, in gross derogation of petitioner's
rights to property and due process.
4. Hence, this petition

ISSUE: WON the Stockholder has the vested right to be elected Director
HELD: No
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 cannot 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 ... ."
RATIO:
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 disenting 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 petitioner 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.
It being settled that the corporation has the power to provide for the qualifications of its directors. A DIRECTOR STANDS
IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS SHAREHOLDERS; 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. Equity recognizes that stockholders are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof
It is a settled state law in the United States, according to Fletcher, that corporations have the power to make by-laws
declaring a person employed in the service of a rival company to be ineligible for the corporation's Board of Directors. ...
(A)n amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a
corporation whose business is in competition with or is antagonistic to the other corporation is valid."
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
CORPORATION LAW
Case Digest
profit when the interest of the corporation justly calls for protection.
The Constitution and the law prohibit combinations in restraint of trade or unfair competition. Thus, section 2 of Article
XIV of the Constitution provides: "The State shall regulate or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be snowed." If a competitor has access to the
pricing policy and cost conditions of the products of San Miguel Corporation, the essence of competition in a free market
for the purpose of serving the lowest priced goods to the consuming public would be frustrated, The competitor could so
manipulate the prices of his products or vary its marketing strategies by region or by brand in order to get the most out of
the consumers.
Considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the election of petitioner to the
Board of SMC may constitute a violation of the prohibition contained in section 13(5) of the Corporation Law. Said
section provides in part that "any stockholder of more than one corporation organized for the purpose of engaging in
agriculture may hold his stock in such corporations solely for investment and not for the purpose of bringing about or
attempting to bring about a combination to exercise control of incorporations ... ."
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 ownership. This right is predicated upon the
necessity of self-protection.
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. In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent 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 subsidiary which are in respondent corporation's possession
and control.
CASE LAW/ DOCTRINE:
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.
Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a separate opinion, wherein they voted against the
validity of the questioned amended bylaws and that this question should properly be resolved first by the SEC as the
agency of primary jurisdiction. They concur in the result that petitioner may be allowed to run for and sit as director of
respondent SMC in the scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing by
the respondent's Board of Directors and petitioner's disqualification shall have been sustained by respondent SEC en
banc and ultimately by final judgment of this Court.

CORPORATION LAW
Case Digest
093 Roxas v. Dela Rosa Author: Sarah
16 November 1926, G.R. No. L-26555 Note: A director cannot be removed by a
Topic: Control and Management of Corporation; Stockholders or Members mere majority by disguising it as filing a
Ponente: Street, J. vacancy.
Facts:
1. Binalbagan Estate, Inc. is a corporation engaged in the manufacture of raw sugar from canes grown upon farms
accessible to its central in Occidental Negros.
2. In July 1924, the possessors of a majority of the shares of the Binalbagan Estate, Inc., formed a voting trust composed
of three members:Salvador Laguna, Segunda Monteblanco, and Arthur F. Fisher, as trustee.
3. Trustees were authorized to represent and vote the shares pertaining to their constituents. The shareholders undertook to
assign their shares to the trustees on the books of the company
4. The outstanding share is over 5,500. The number of shares controlled by the voting trust is less than 3,000.
5. On 1 February 1926, Mr. J. Heilbronn represented the voting trust on the general annual meeting of shareholders of the
estate.
6. Heilbronn nominated and elected a board of directors without any opposition from the minority.
7. The board of directors chose a set of officers constituting of Jose M. Yusay as President, Timoteo Unson as Vice-
president, Jose G. Montalvo as secretary-treasurer and, H.W. Corp and Agustin Coruna as members.
8. A number of substitutions have been made in the personnel of the voting trust due to resignation and absence of
members from the Philippines.
9. Petitioners Roxas, Echaus, and Lacson constitute its membership.
10. On 2 August 1926, Petitioners caused the secretary of the estate to issue the shareholders a notice of calling for a
special general meeting of shareholders for (a) the election of the board of directors, (b) for the amendment of the By-
laws, and (c) for any other business that can be dealt with in said meeting.
11. Agustin Coruna and Mauro, simple shareholder of the corporation (respondents in this case). instituted a civil action
(no. 3840) in the CFI of Occidental Negros against trustees and the estate.
12. Respondent judge issued the restraining order. A part of the order restrained the estate, lawyers, representatives and
others who may be corroborating with them from holding the general shareholders’ meeting.
13. Petitioners filed before the SC alleging that the order was beyond the legitimate powers of the respondent judge.
Issue: Whether or not respondent judge acted within his legitimate powers in making order against which the relief is
sought.
Held: Yes.
Ratio: Act No. 1459, Sec. 34: Under the law the directors of a corporation can only be removed from office by a vote of
stockholders representing at least 2/3 of the subscribed capital stock entitled to vote
Act No. 1459, Sec. 25: Vacancies in the board exist, can be filled by majority vote
Act No. 1459, Sec. 34: The law further requires that when action is to be taken at a special meeting to remove the directors,
such purpose shall be indicated in the call
While the voting stock controls majority of the stock, it does not have 2/3 majority. It was impolitic for
petitioners, in forcing the call for the meeting, to come out frankly and say in the notice that one of the purpose of the
meeting was to removed the directors of the corporation from office. The call was limited to the election of the board of
directors, it being the evident intention of the voting trust to elect a new board as if the directorate had been vacant.
But the complaint in the civil action directly asserts that the members of the present directorate were
regularly elected at the general annual meeting held in February. If that is true, the proposal to elect
another directorate, if august 2 is carried into effect, it would probably result in the election of a rival ser
of carried directors, who would probably need the assistance of judgment of court in an independent
action of quo warranto to get them installed into office. that the trial judge had jurisdiction to forestall
that step and enjoin contemplated election is a matter about which there cannot be the slightest doubt
Case Law/ Doctrine: In the following basic changes in the corporation, although action is usually initiated by the board of
directors or trustees, their decision is not final, and approval of the stockholders or members would be necessary:
(1) Amendment of articles of incorporation;
(2) Increase and decrease of capital stock;
(3) Incurring, creating or increasing bonded indebtedness;
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(4) Sale, lease, mortgage or other disposition of substantially all corporate assets;
(5) Investment of funds in another business or corporation or for a purpose other than the primary purpose for which the
corporation was organized;
(6) Adoption, amendment and repeal of by-laws;
(7) Merger and consolidation;
(8) Dissolution of corporation

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Case Digest
094 Angeles v. Santos AUTHOR: De Guzman, Bien
August 31, 1937 64 Phil 697 Gen Rule: Shareholers cannot ordinarily sue in equity to
TOPIC: Stockholders or Members redress wrong done to the corporation, but that the action
PONENTE: Laurel, J; must be brought by the board of directors
Exception: Corporation is under the complete control of the
principal defendants in the case
FACTS
1. The plaintiff and the defenant are all stockholders and member of the board of directors of the "Parañaque Rice
Mill, Inc., a corporation organized for the purpose of operating a rice mill in the municipality of Parañaque,
Province of Rizal.
2. That the plaintiffs are stockholders and constitute the minority and the defendants are also stockholers and
constitute the majority of the board of directors of the Parañaque Rice Mill, Inc.;
3. That at an meeting held on February 21, 1932, the stockholders appointed an investigation committee of which the
plaintiff Jose de Lara was chairman and the stockholers Dionisio Tomas and Aguedo Bernabe were members, to
investigate and determine the properties, operations, and losses of the corporation as shown in the auditor's report
corresponding to the year 1931, but the defendants, particularly Teodorico B. Santos, who was the president of the
corporation, denied access to the properties, books and record of the corporation which were in their possession
4. That the defendant Teodorico B. Santos, in violation of the by-laws of the corporation, had taken possession of the
books, vouchers, and corporate records as well as of the funds and income of the Parañaque Rice Mill, Inc., all of
which, according to the by-laws, should be under the exclusive control and possession of the secretary-treasurer,
the plaintiff Aguedo Bernabe;
5. That the said Teodorico B. Santos, had appropriated to his own benefit properties, funds, and income of the
corporation in the sum of P10,000;
6. Teodoro B. Santos, for the purpose of illegally controlling the affairs of the corporation, refuse to sign and issue
the corresponding certificate of stock for the 600 fully paid-up share of the plaintiff, Higinio Angeles, of the total
value of P15,000;
7. that notwithstanding written requests made in conformity with the by-laws of the corporation of three members of
the board of directors who are holders of more than one-third of the subscribed capital stock of the corporation, the
defendant Teodorico B. Santos as president of the corporation refuse to call a meeting of the board of directors and
of the stockholers;
8. That in violation of the by-laws of the corporation, the defendant who constitute the majority of the board of
directors refused to hold ordinary monthly meetings of the board since March, 1932;
9. Teodorico B. Santos as president of the corporation, in connivance with his co-defendants, was disposing of the
properties and records of the corporation without authority from the board of directors or the stockholders of the
corporation and without making any report of his acts to the said board of directors or to any other officer of the
corporation, and that, to prevent any interferrence with or examination of his arbitrary acts, he arbitrarily
suspended plaintiff Jose de Lara from the office of general manager to which office the latter had been lawfully
elected by the stockholders; and
10. that the corporation had gained about P4,000 during the first half of the year 1932, but that because of the illegal
and arbitrary acts of the defendants not only the funds but also the books and records of the corporation are in
danger of disappearing.
11. The trial court by order of October 31, 1934, appointed Emilio Figueroa, as receiver of the corporation, after
giving a bond in the amount of P2,000.
12. On November 21, 1934, the defendants-appellants, moved for reconsideration of the decision and at the same time
prayed for the dismissal of the case, because of defect of parties defendant.
13.
ISSUE:
1. Whether or not stockholders can bring suit in the following case?
2. Whether or not the lower court erred in ordering the destitution of the defendants from their office as members of
the board of directors of the corporation, until the new election of the stockholders which shall be held once the
decision has become final.
3. Whether or not The lower court erred in declaring that Higino Angeles is entitled to have in his name 600 shares of
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stock of the par value of P15,000.
HELD: (Short Answer)
1. Yes, the stockholers constituting the minority brought a suit in behalf of the bank against the directors to recover
damages, and this over the objection of the majority of the stockholers and the directors.
2. No, There are abundant authorities, however, which hold that if the court has acquire jurisdiction to appoint a
receiver because of the mismanagement of directors these may thereafter be remove and others appointed in their
place by the court in the exercise of its equity jurisdiction.
3. No, A review of the evidence, oral and documentary, relative to the number of shares of stock to which Higinio
Angeles is entitled, shows that Higinio Angeles brought in P15,000 party in money and party in property, for 600
shares of stock.
RATIO:
1. The contention of the defendants in the case at bar that the Parañaque Rice Mill, Inc., should have been brought in
as necessary party and the action maintained in its name and in its behalf directly states the general rule, but not
the exception recognize by this court in the case.
Invoking the well-known rule that shareholers cannot ordinarily sue in equity to redress wrong done to the
corporation, but that the action must be brought by the board of directors. But, like most rules, the rule in question
has its exceptions. It is alleged in the complaint and, consequently, admitted through the demurrer that the
corporation is under the complete control of the principal defendants in the case, and, in these circumstances it is
obvious that a demand upon the board of directors to institute action and prosecute the same effectively would
have been useless, and the law does not require litigants to perform useless acts.
2. The Corporation Law, as amended, in section 29 to 34, provide for the election and removal of the directors of a
corporation. Our Corporation Law (Act No. 1459, as amended), does not confer expressly upon the court the
power to remove a director of a corporation. In some jurisdictions, statutes expressly provide a more or less
summary method for the confirmation of the election and for the a motion of the directors of a corporation. This is
true in New York, New Jersey, Virginia and other states of the American Union.
In the present case, however, the properties and assets of the corporation being amply protected by the
appointment of a receiver and view of the statutory provisions above referred to, we are of the opinion that the
removal of the directors is, under the circumstances, unnecessary and unwarranted.
3. The certificate of stock, however, was not issued as disagreement arose between him and the defendant Santos.
We, therefore, find no error in the decision of the lower court ordering the issuance of a certificate for 600 shares
of stock of the total par value of P15,000 to Higinio Angeles.
The very articles of incorporation signed by all the incorporators, among whom are the defendants, show that
Higinio Angeles paid P5,600 on account of his subscription amounting to P10,000. The amount of P5,600 is the
value of Angeles' cinematograph building in Bacoor, Cavite, which he transferred to the municipality of Parañaque
where the same was reconstructed for the use of the corporation.
The receipts signed by the Philippine Engineering Company and the testimony of Higinio Angeles and Aguedo
Bernabe (secretary-treasurer of the corporation) show that Higinio Angeles paid with his own funds the sum of
P2,750 to the Philippine Engineering Co., as part of the purchase price of the ricemill bought for the corporation.
Angeles paid a further sum of P2,397.99 to the Philippine Engineering Company.
It also appears that for the installation of the Rice Mill, the construction of camarin, and the cement paving
(cementacion) of the whole area of two camarines, and for the excavation of a well for the use of the rice mill the
plaintiff Higinio Angeles paid with his own funds the amount of P7,431.47. Adding all these sums together we
have a total of P18, 179.46. At a meeting of the board of directors on December 27, 1931, which meeting was
convoked by Angeles, it seemed to have been agreed that Angeles was to be given shares of stock of the total par
value of P15,000. Angeles wanted to have P16,000 worth of stock to his credit for having made the disbursements
mentioned above, but he finally agreed to accept 600 share worth only P15,000.
CASE LAW/ DOCTRINE: Invoking the well-known rule that shareholers cannot ordinarily sue in equity to redress
wrong done to the corporation, but that the action must be brought by the board of directors. But, like most rules, the rule
in question has its exceptions. It is alleged in the complaint and, consequently, admitted through the demurrer that the
corporation is under the complete control of the principal defendants in the case, and, in these circumstances it is obvious
that a demand upon the board of directors to institute action and prosecute the same effectively would have been useless,
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and the law does not require litigants to perform useless acts.

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Case Digest
095 CAMPBELL v. LOEW’S INC. AUTHOR: Danna Zerrudo
19 September 1957, 134 A. 2d 852
TOPIC: Who Exercises Corporate Powers - Stockholders Shareholders have an "inherent right" to remove directors
or Members for cause even though the certificate provides for
PONENTE: Seitz, Chancellor cumulative voting; and the "harassment" charge, if
provided, would establish cause for removal.
HOWEVER, since the directors had not been afforded an
adequate opportunity to meet the accusations, the Court
enjoined the corporation from counting the proxies obtained
by means of Vogel's letter.
FACTS
1. Two factions were fighting for control of Loew's, Inc.: one headed by Joseph Tomlinson, and one headed by President
Joseph Vogel.
2. Vogel, in his capacity as president, sent out a notice calling a stockholders’ meeting for the purpose of removing two
Tomlinson directors (Tomlinson and Meyer), and filling the resulting vacancies.
3. Vogel sent out a proxy statement soliciting stockholder votes for removal, together with a letter charging the two
directors with, among other things, embarking upon a “planned scheme of harassment” against the corporation.
4. Plaintiff stockholder brought this action to prevent the consideration of the proposed removal at the meeting or, in the
alternative, to prevent the voting of the proxies solicited by Vogel.
5. The corporate bylaws provided that stockholders could fill director vacancies.
6. The Vogel faction (which has physical control of the corporate offices and facilities) would not supply shareholder
records so that the two directors could contact them to refute the charges.
ISSUES AND HELD:
1. Whether or not, at a time other than an annual meeting, the filling of new director positions by the stockholders
constitutes a valid meeting purpose (since it is Plaintiff’s contention that Loew's by-laws provide that the
stockholders may fill 'vacancies', but jurisprudence has construed 'vacancy' not to embrace 'newly created
directorships’)
Yes, because a strong by-law language is necessary to warrant the conclusion that those adopting the by-laws intended
to prohibit the stockholders from filling new directorships between annual meetings
2. Whether or not shareholders of a Delaware corporation have the power to remove directors from office even
for cause
Yes. Delaware statutes are silent about shareholder removal of directors, and the Loew's by-laws mention shareholder
removal of officers and employees but not director. However, directors can do much harm to the corporation, so it
must be implied that Delaware allows shareholders to remove directors for cause.
3. Whether or not there can be no removal of a director by the stockholders for cause in any case where
cumulative voting exists
Yes, there can be removal, because the cumulative voting election is offset by the possibility that a director could be
clearly damaging to the corporation. He should not be "be free to continue such damage merely because he was elected
under a cumulative voting provision."
4. Whether or not the directors (to be removed for cause) given adequate notice of charges
Yes, because the letter accompanying the meeting notice gave an adequate description of the charges to the directors.
"Matters for stockholder consideration need not be conducted with the same formality as judicial proceedings."
5. Whether or not the charge of "a planned scheme of harassment" constitutes a "cause" allowing removal as a
matter of law
Yes, because there is a line at which a calculated plan of harassment can exceed the call of duty to ask questions and
instead become a detriment to the corporation.
6. Whether or not the directors, to be removed, must have been given a reasonable opportunity to be heard by the
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stockholders regarding the charges
Yes. The accused directors must be "afforded an opportunity to present their case to the stockholders," but here "the
corporation admittedly refused to supply them with a stockholders' list." Not allowing the accused directors access to
stockholders "would make a mockery of the requirement that a director sought to be removed for cause is entitled to an
opportunity to be heard before the stockholders vote."
RATIO:
For Issue #1:
1. Conceding that 'vacancy' as used in the by-laws does not embrace 'newly created directorships', does not resolve
this issue. Absence of a reference in the by-laws to new directorships is insignificant.
2. The by-law relied upon by plaintiff was adopted long before the statutory amendment and it does not purport to be
exclusive in its operation.
3. It would take a strong by-law language to warrant the conclusion that those adopting the by-laws intended to
prohibit the stockholders from filling new directorships between annual meetings. No such strong language
appears here and I no implication could be warranted in view of the subject matter.
For Issue #2:

1. Stockholders have the power to remove a director for cause.
2. This power must be implied when we consider that otherwise, a director who is guilty of the worst sort of violation
of his duty could nevertheless remain on the board. It is hardly to be believed that a director who is disclosing the
corporation's trade secrets to a competitor would be immune from removal by the stockholders.
3. Considering the damage a director might be able to inflict upon his corporation, the doubt must be resolved by
construing the statutes and by-laws as leaving untouched the question of director removal for cause. This being so,
the Court is free to conclude on reason that the stockholders have such inherent power.
For Issue #3:

1. Although the cumulative voting election issue presents a valid concern, it is offset by the possibility that a director
could be clearly damaging to the corporation—he should not be "be free to continue such damage merely because
he was elected under a cumulative voting provision."
For Issue #4:

1. Matters for stockholder consideration need not be conducted with the same formality as judicial proceedings.
2. The proxy statement specifically recites that the two directors are sought to be removed for the reasons stated in
the president's accompanying letter.
3. Both directors involved received copies of the letter.
4. The two directors were served with notice of the charges against them.
5. The notice and the proxy statement failed to contain a specific statement of charges. But as indicated, the
accompanying letter was sufficient compliance with the notice requirement.
For Issue #5:

1. Certainly a director may examine books, ask questions, etc., in the discharge of his duty, but a point can be reached
when his actions exceed the call of duty and become deliberately obstructive.
2. In such a situation, if his actions constitute a real burden on the corporation then the stockholders are entitled to
relief.
3. The charges in this area made by the Vogel letter are legally sufficient to justify the stockholders in voting to
remove such directors.
For Issue #6:

1. The corporate defendant freely admits that it has flatly refused to give the five Tomlinson directors or the plaintiff
a stockholders' list.
2. The Vogel faction has physical control of the corporate offices and facilities. By this action, the corporation,
through the Vogel group, has deliberately refused to afford the directors in question an adequate opportunity to be
heard by the stockholders on the charges made. This is contrary to the legal requirements which must be met
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before a director can be removed for cause.
CASE LAW/ DOCTRINE:

Shareholders have an "inherent right" to remove directors for cause even though the certificate provides for cumulative
voting; and the "harassment" charge, if provided, would establish cause for removal.

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Case Digest
096 Dela Rama v. Ma-ao Sugar Central AUTHOR: Palomique, Ernesto III C.
G.R. No. L-17504 & L-17506 February 28, 1969 A corporation may use its funds to invest in another
TOPIC: Who Exercises Corporate Powers (Stockholders or corporation without the approval of the stockholders if done
Members) in pursuance of a corporate purpose. However, if it is
PONENTE: CAPISTRANO, J. purely for investment, the vote of the stockholders is
necessary.
FACTS
1. This case was filed by four minority stockholders against the Ma-ao Sugar Central and four of its directors.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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:
1. Whether the investment of the corporate funds by Ma-ao in Philippine Fiber constitutes a violation of the Corporation
Law.
2. Whether Ma-ao may make investments in any other company whose purpose is not connected with the sugar central
business.
HELD & RATIO:
1. 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 ½ 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.
2. 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.
CASE LAW/ 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.

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Case Digest
097 Gokongwei, Jr. v. SEC/ Andres & AUTHOR: Keith Meridores
Jose Soriano/ Enrique Zobel/ Miguel IMHO, this is a very important case. There are several issues all CORPLAW
Ortigas/ Antonio Prieto/ SanMig Corp, related.
et. al Jist: Gokongwei (Universal Robina Corp) as a stockholder of SanMig is
April 11, 1979, GR No. L-45911 throwing a fit because of the acts of the BoD in amending the by-laws
TOPIC: Control and Management; Who resulting in his ineligibility to be elected as a BoD. (The amendment: director
Exercises Corporate Powers; Stockholders from a rival corp. cannot sit as a director in SMC.)
or Members Law in effect was Act 1459 (the old corporation law)
PONTENTE: Antonio, J., Counsels for the big-time respondent are all big-time law firms. (ACCRA,
Siguion Reyna, Balgos Law, etc.)- d ka pa manalo ewan ko nalang.
FACTS :
Prelude to the facts surrounding the case:
1. 2 SEC cases were filed (SEC Case 1375 and SEC Case 1423)
2. Case 1375 is what will be discussed in this digest
3. Case 1423 concerns SMC investing in a foreign corporation and Gokongwei contends that it’s not in accordance with
SMC’s “primary purpose clause” (note: Case 1423 will not be discussed in this digest)
SEC Case 1375:

1. Gokongwei is a shareholder of San Miguel Corp.
2. On Oct. of 1976, he filed with the SEC a declaration of nullity of its amended by laws, plus damages, and a prayer for
preliminary injunction against the majority of the board of directors.
3. Gokongwei assigned several causes of action all of which stemmed from the act of the board in amending the by-law.
- 1st cause of action: Gokongwei alleged that board had no authority; he was assailing the authority granted to the BoD
through a resolution by the stockholders in 1961.He contends that the 1961 resolution is no longer applicable because the
outstanding capital stock back then was only P70,139,740, and at the time of the amendment in 1976, the outstanding and
paid up shares totaled P301,270,430 (presumably, there were more stockholder during the time of the amendment. i.e. new
stockholders weren’t able to give their consent or say in the resolution granting the BoD authority)
- 2nd cause of action: authority granted in 1961 was already exercised in 1962-63; authority now ceased to exist
- 3rd cause of action: membership of BoD now is different from the time when the authority was given in 1961. (it’s like
saying authority was given to the old BoD)
- 4th cause of action: Gokongwei had all the qualifications of being elected to the BoD; and that he had acquired “vested
rights” because he was already a stockholder before the amending of the by-laws
- Additional causes: corporations have no inherent power to disqualify a stockholder from being elected as a director;
thus, the BoD’s acts were ultra vires.
4. A series of motions were filed by both parties
5. Gokongwei filed before the SC this petition for Certiorari, Mandamus, and Injunction assailing the SEC’s decision.
ISSUE:
1. Whether or not the corporation has the power to provide for the qualifications of its directors?
2. Whether or not the disqualification of a competitor from being elected to the Board of Directors is a reasonable exercise
of corporate authority?
HELD: 1 and 2: YES.

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RATIO:
Issue 1:
1. Section 21 of the Corporation Law (old corpo law), a corporation may prescribe in its by-laws "the qualifications, duties
and compensation of directors, officers and employees."
2. "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.'"
3. 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."
4. Pursuant to section 18 of the Corporation Law (old corpo 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.
5. 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.
6. It cannot be said, therefore, that Gokongwei has a vested right to be elected director
Issue 2:
1. 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."
2. Directors have the control and guidance of corporate affairs and property and hence of the property interests of the
stockholders. 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.
3. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common
decency.
4. 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.
5. 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. That power is at
all times subject to the equitable limitation.
6. 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. (i.e. Gokongwei cannot act as member of
the BoD of 2 competing corporations. Yung kanya URC, tapos direct competitor is SMC, both of which he’s a board
member.
7. Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information such as
marketing, budgets, expansion and diversification plant, R&D, funding, personnel, etc.
8. 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 a director.
9. Gokongwei obviously cannot discharge his functions as a BoD of SMC properly while attending to his own interests.
The issue of loyalty comes in and it would be detrimental to SMC.
10. Gokongwei’s offer that to avoid any possibility of his taking unfair advantage of his position as director, he would
absent himself from meetings at which confidential matters would be discussed. This would be impractical since desiring to
be a board member precisely calls for the duty of a board member to attend to these meetings and advance the interests of
the corporation.
11. The amendment also has a constitutional and statutory basis:
- Constitution: The State shall regulate or prohibit private monopolies when the public interest so requires. No
combinations in restraint of trade or unfair competition shall be snowed.(Art. 14, sec. 2)
- RPC: Monopolies and combinations in restraint of trade. (Art. 186) (i.e. Gokongwei might use his inside information to
create a monopoly)

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Case Digest
CASE LAW/ DOCTRINE:
1. 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.
2. 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."
TEEHANKEE, CONCEPCION JR., FERNANDEZ and GUERRERO, JJ.,
1. The prohibition and disqualification therein provided shall not apply to petitioner Gokongwei until and after he shall
have been given a new and proper hearing" by the corporation's board of directors and the board's decision of
disqualification
2. The board by 3/4 vote the arbitrary power to bar any stockholder from his right to be elected as director by the simple
expedient of declaring him to be engaged in a "competitive or antagonistic business" or declaring him as a "nominee" of
the competitive or antagonistic" stockholder are illegal, oppressive, arbitrary and unreasonable.
3. The questioned amended by-laws specifically tailored to discriminate against petitioner and depriving him in violation of
substantive due process of his vested substantial rights as stockholder of respondent corporation.
4. The amended by-laws as violate specific provisions of the Corporation Law which grant and recognize the right of a
minority stockholder like petitioner to be elected director by the process of cumulative voting ordained by the Law.

CORPORATION LAW
Case Digest
098 Cua Jr. v. Tan AUTHOR: Marvin
G.R. No. 181455-56;December 4, 2009
TOPIC: (a) Business Judgment Rule
PONENTE: CHICO-NAZARIO, J.
FACTS
1 PHILIPPINE RACING CLUB, INC. (PRCI) is a domestic corporation that holds a franchise granted under Republic Act
No. 6632, as amended by Republic Act No. 7953, to operate a horse racetrack and manage betting stations. Under its
franchise, PRCI may operate only one racetrack.
2. The Articles of Incorporation of PRCI was amended to include a secondary purpose, viz: To acquire real properties
and/or develop real properties into mix-use realty projects including but not limited to leisure, recreational and memorial
parks and to own, operate, manage and/or sell these real estate projects.
3. PRCI business operations includes, among others: 1) APPROVAL OF THE ACQUISITION OF THE SHARES OF
STOCK OF JTH DAVIES HOLDINGS, INC; 2) Exchange of the Corporation’s Makati Property with Shares of JTH
Davies Holdings, Inc.; 3) RATIFICATION OF THE ACTS OF THE BOARD OF DIRECTORS, THE EXECUTIVE
COMMITTEE AND THE MANAGEMENT OF THE CORPORATION FOR FISCAL YEARS 2006 AND 2007; 4)
APPROVAL OF THE EXCHANGE OF PRCI’S MAKATI PROPERTY FOR SHARES OF STOCK OF JTH DAVIES
HOLDINGS, INC.;
4. Respondents Miguel, et al., as minority stockholders of PRCI filed before the RTC a Complaint, denominated as a
Derivative Suit with prayer for Issuance of TRO/Preliminary Injunction, against the rest of the directors of PRCI and/or
JTH. The Complaint was based on three causes of action: (1) the approval by the majority directors of PRCI of the Board
Resolutions dated 26 September 2006 and 11 May 2007 -- with undue haste and deliberate speed, despite the absence of
any disclosure and information -- was not only anomalous and fraudulent, but also extremely prejudicial and inimical to
interest of PRCI, committed in violation of their fiduciary duty as directors of the said corporation; (2) respondent
Solomon, as PRCI President, with the acquiescence of the majority directors of PRCI, maliciously refused and resisted the
request of respondents Miguel, et al., for complete and adequate information relative to the disputed Board Resolutions,
brazenly and unlawfully violating the rights of the minority stockholders to information and to inspect corporate books and
records; and (3) without being officially and formally nominated, the majority directors of PRCI illegally and unlawfully
constituted themselves as members of the Board of Directors and/or Executive Officers of JTH, rendering all the actions
they have taken as such null and void ab initio.
5. Petitioners insisted that the Civil Case did not constitute a valid derivative suit. Respondents Miguel, et al., failed to
allege in their Complaint that they had no appraisal rights for the acts they were complaining of. In fact, the very
allegations made by respondents Miguel, et al. in their Complaint supported the availability of appraisal rights to them.
The Complaint was nothing more than a nuisance or harassment suit against petitioners and the other PRCI directors.
6. On substantial grounds, respondents Miguel, et al., explained that their Complaint was comprised of several causes of
action. It was not merely a derivative suit, but was also an intra-corporate action arising from devices or schemes
employed by the PRCI Board of Directors amounting to fraud or misrepresentation and were detrimental to the interest of
the PRCI stockholders.
ISSUE: WON the civil case is not only a derivative suit, but was also an intra-corporate action arising from devices or
schemes employed by the PRCI Board of Directors amounting to fraud or misrepresentation and were detrimental to the
interest of the PRCI stockholders.
HELD: The Court determines that there is only a derivative suit, based on the devices and schemes employed by the PRCI
Board of Directors that amounts to mismanagement, misrepresentation, fraud, and bad faith.

CORPORATION LAW
Case Digest
RATIO:
1. Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or other persons
may be classified into individual suits, class suits, and derivative suits. Where a stockholder or member is denied the right
of inspection, his suit would be individual because the wrong is done to him personally and not to the other stockholders or
the corporation. Where the wrong is done to a group of stockholders, as where preferred stockholders’ rights are violated, a
class or representative suit will be proper for the protection of all stockholders belonging to the same group. But where the
acts complained of constitute a wrong to the corporation itself, the cause of action belongs to the corporation and not to
the individual stockholder or member. Although in most every case of wrong to the corporation, each stockholder is
necessarily affected because the value of his interest therein would be impaired, this fact of itself is not sufficient to give
him an individual cause of action since the corporation is a person distinct and separate from him, and can and should itself
sue the wrongdoer. Otherwise, not only would the theory of separate entity be violated, but there would be multiplicity of
suits as well as a violation of the priority rights of creditors. Furthermore, there is the difficulty of determining the amount
of damages that should be paid to each individual stockholder.
2. However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees themselves, a
stockholder or member may find that he has no redress because the former are vested by law with the right to decide
whether or not the corporation should sue, and they will never be willing to sue themselves. The corporation would thus be
helpless to seek remedy. Because of the frequent occurrence of such a situation, the common law gradually recognized the
right of a stockholder to sue on behalf of a corporation in what eventually became known as a "derivative suit." It has been
proven to be an effective remedy of the minority against the abuses of management. Thus, 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 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 the nominal party, with the corporation as the party in
interest.
3. The Supreme Court declared that a thorough study of the said Complaint, however, reveals that the distinction is
deceptive. The supposed devices and schemes employed by the PRCI Board of Directors amounting to fraud or
misrepresentation are the very same bases for the derivative suit. They are the very same acts of the PRCI Board of
Directors that have supposedly caused injury to the corporation. From the very beginning of their Complaint, respondents
have alleged that they are filing the same "as shareholders, for and in behalf of the Corporation, in order to redress the
wrongs committed against the Corporation and to protect or vindicate corporate rights, and to prevent wastage and
dissipation of corporate funds and assets and the further commission of illegal acts by the Board of Directors." Although
respondents Miguel, et al., also aver that they are seeking "redress for the injuries of the minority stockholders against the
wrongdoings of the majority," the rest of the Complaint does not bear this out, and is utterly lacking any allegation of
injury personal to them or a certain class of stockholders to which they belong.
4. "A shareholder's derivative suit seeks to recover for the benefit of the corporation and its whole body of shareholders
when injury is caused to the corporation that may not otherwise be redressed because of failure of the corporation to act.
Thus, ‘the action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or
to the whole body of its stock and property without any severance or distribution among individual holders, or it seeks to
recover assets for the corporation or to prevent the dissipation of its assets.’ In contrast, "a direct action [is one] filed by
the shareholder individually (or on behalf of a class of shareholders to which he or she belongs) for injury to his or her
interest as a shareholder. ... The two actions are mutually exclusive: i.e., the right of action and recovery belongs to either
the shareholders (direct action) or the corporation (derivative action)."
CASE LAW/ DOCTRINE:
With the corporation as the real party-in-interest and the indispensable party, any ruling in one of the derivative suits
should already bind the corporation as res judicata in the other. Allowing two different minority stockholders to institute
separate derivative suits arising from the same factual background, alleging the same causes of action, and praying for the
same reliefs, is tantamount to allowing the corporation, the real party-in-interest, to file the same suit twice, resulting in the
violation of the rules against a multiplicity of suits and even forum-shopping. It is also in disregard of the separate-
corporate-entity principle, because it is to look beyond the corporation and to give recognition to the different identities of
the stockholders instituting the derivative suits.

CORPORATION LAW
Case Digest
099 Alfredo and Estelita Lipat v. Pacific Banking Corp. AUTHOR: Pat
April 30,2003, G.R. No. 142345
TOPIC: Theory of Estoppel
PONENTE: Quisimbing., J.
FACTS:
1. Petitioner, Spouses Alfredo Lipat and Estelita Lipat, owned:
- “Bela’s Export Trading” (BET), a single proprietorship engaged in manufacture of garments for domestic and
foreign consumption.
- “Mystical Fashions” (MF) in the U.S., which sells goods imported from the Philippines through BET.
2. Estelita designated her daughter, Teresita Lipat, to manage BET in the Philippines while she managed MF in the U.S.
3. Estelita executed a special power of attorney:
- appointing Teresita as her attorney-in-fact to obtain loans from respondent Pacific Banking Corporation (Pacific
Bank)
- authorizing Teresita to execute mortgage contracts on properties owned/co-owned by her as security for the
obligations to be extended by Pacific Bank
4. April 1979: Teresita secured for her Estelita a P585,854 loan from Pacific Bank to buy fabrics to be manufactured by
BET and exported to MF in the U.S. Lipat spouses, as represented by Teresita, executed a Real Estate Mortgage over
their property in Aurora Blvd., Cubao
- Said property was likewise made to secure “other additional or new loans, discounting lines, overdrafts and credit
accommodations, of whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from the
Mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor…..”
5. September 1979: BET was incorporated into a family corporation named Bela’s Export Corporation (BEC) to facilitate
the management of the business.
- BET was engaged in the business of manufacturing and exportation of all kinds of garments of whatever kind and
description and utilized the same machineries and equipment previously used by BET.
- Its incorporators and directors included Lipat spouses (owned 300 shares out of 420 shares), Teresita (owned 20
shares), and other close relatives and frinds of Lipats
- Estelita was named President of BEC, while Teresita became the vice-president and general manager
6. Eventually, the loan became restructured in the name of BEC as well as other subsequent loans. Pacific Bank opened a
letter of credit in favor of AO Knitting Manufacturing Co., Inc., upon BEC’s request
7. The promissory notes, export bills, and trust receipt eventually became due and demandable. BEC defaulted in
payments. Estelita asked for additional time which the bank allowed.
8. The Real Estate Mortgage was foreclosed and was sold at a public auction. It was sold to Eugenio Trinidad.
9. November 1989: spouses Lipat filed a complaint for annulment of REM, extrajudicial foreclosure, contending:
- The promissory notes, trust receipt, export bills were all ultra vires acts of Teresita because they were executed
without the requisite board resolution of the Board of Directors of BEC
- That Teresita’s authority to secure a loan from Pacific Bank was specifically limited to Mrs. Lipat’s sole use and
benefit and that the REM was executed to secure the Lipats’ and BET’s P583,854 loan only.
10. Respondents Pacific Bank and Trinidad alleged that:
- Petitioners Lipat cannot evade payments of the value of the PN, trust receipt, and export bills with their property
because they and the BEC are one and the same, being a family corporation.
- That Trinidad is a buyer in good faith and for value
- That petitioners are estopped from denying BEC’s existence after holding themselves out as a corporation
11. RTC dismissed the complaint, because:
- There was convincing and conclusive evidence proving that BEC was a family corporation of the Lipats. As such,
it was a mere extension of petitioners’ personality and business and a mere alter ego or business conduit of the
Lipats established for their own benefit.
- To allow petitioners to invoke the theory of separate corporate personality would sanction its use as a shield to
further an end subversive of justice.
- RTC pierced the veil of corporate fiction and held that BEC and petitioners (Lipats) are one and the same.
- Pacific Bank had transacted business with both BET and BEC on the supposition that both are one and the same.
Hence, the Lipats were estopped from disclaiming any obligations on the theory of separate personality of
CORPORATION LAW
Case Digest
corporations, which is contrary to principles of reason and good faith.
12. CA dismissed the appeal, because:
- Mrs. Lipat had full control over the activities of the corporation and used the same to further her busienss interests.
She had benefited from the loans obtained byt he corporation to finance her business.
- It is unnecessary a board resolution authorizing Teresita to secure loans from Pacific Bank on behalf of BEC
because the corporation’s by-laws allowed such conduct even without a board resolution.
ISSUE:
1. WON petitioners' property under the real estate mortgage is liable not only for the amount of P583,854.00 but also for
the value of the promissory notes, trust receipt, and export bills subsequently incurred by BEC
2. WON a board resolution was required before Teresita executed the promissory notes, trust receipt, export bills
3. WON the principle of estoppel can be applied
HELD:
1. Yes.
2. No.
3. Yes.
RATIO:
1.The property of the Lipat spouses under the real estate mortgage is liable not only for the amount of P583,854.00 but also
for the value of the promissory notes, trust receipt, and export bills subsequently incurred by BEC.
• For the mortgage was executed not only for the purpose of securing the BET’s original loan of P583,854.00, but
also for “other additional or new loans, discounting lines, overdrafts and credit accommodations, of whatever
amount, which the Mortgagor and/or Debtor may subsequently obtain from the mortgagee as well as any renewal
or extension by the Mortgagor and/or Debtor of the whole or part of said original, additional or new loans,
discounting lines, overdrafts and other credit accommodations, including interest and expenses or other obligations
of the Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or indirectly principal or secondary, as
appears in the accounts, books and records of the mortgagee.”
• BEC merely succeeded BET as petitioners’ alter ego; hence, petitioners’ mortgaged property must be held liable
for the subsequent loans and credit lines of BEC.
2.It is not possible for BEC to release a board resolution since petitioner admitted that no business or stockholder’s
meetings were conducted nor were there election of officers held since its incorporation. In fact, not a single board
resolution was passed by the corporate board and it was Estelita Lipat and/or Teresita Lipat who decided business matters.
3.The principle of estoppel precludes petitioners Lipat spouses from denying the validity of the transactions entered into by
Teresita Lipat with Pacific Bank, who in good faith, relied on the authority of the former as manager to act on behalf of
petitioner Estelita Lipat and both BET and BEC.
• Teresita had dealt with Pacific Bank on the mortgage contract by virtue of a SPA executed by Estelita Lipat.
Teresita acted as the manager of both BEC and BET and had been deciding business matters in the absence of
Estelita Lipat. Further, the export bills secured by BEC were for the benefit of “Mystical Fashion” owned by
Estelita Lipat. Hence, Pacific Bank cannot be faulted for relying on the same authority granted to Teresita Lipat by
Estelita Lipat by virtue of a special power of attorney.
- While the power and responsibility to decide whether the corporation should enter into a contract that will bind
the corporation is lodged in its board of directors, subject to the articles of incorporation, by-laws, yet, just as a
natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly
delegate some of its functions and powers to officers, committees, or agents.
- The authority of such individuals to bind the corporation is generally derived from law, corporate by-laws, or
authorization from the board, either expressly or impliedly by habit, custom, or acquiescence in the general course
of business.
- Apparent authority, is derived not merely from practice. Its existence may be ascertained through (1) the general
manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular

CORPORATION LAW
Case Digest
nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary
powers.1[32]
CASE LAW/ DOCTRINE:
It is a familiar doctrine that if a corporation knowingly permits one of its officers or any other agent to act within the scope
of an apparent authority, it holds him out to the public as possessing the power to do those acts; thus, the corporation will,
as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority.

CORPORATION LAW
Case Digest
100 ROVELS ENTERPRISES INC. v. OCAMPO AUTHOR: Yayie Lanting
October 17, 2002 G.R. No. 136821
TOPIC: Doctrine of Laches
PONENTE: Sandoval-Gutierrez, J.
FACTS
1. Rovels Enterprises, Inc. (Rovels) is a domestic corporation engaged in construction work. Its President is Eduardo
Santos. Tagaytay Taal Tourist Development Corporation(TTTDC) was among Rovels’ clients.
2. In payment for the services rendered by Rovels, the Board of Directors of TTTDC passed a Resolution, which was
signed by 3 of the TTTDC directors on December 29, 1975 providing as follows:
“RESOLVED, as it is hereby resolved that payment for professional fees and services rendered by x x x
Rovels’ Enterprises x x x be made in cash if funds are available, or its equivalent number of shares of stock of the
corporation at par value, and should said creditors elect the latter mode of payment, it is further resolved that the President
and/or his Secretary be authorized as they are hereby authorized, to issue the corresponding unissued shares of stock of the
corporation.”
3. On March 1, 1976, the TTTDC Board of Directors passed another Resolution repealing the authorizing of payment of its
creditor with unissued shares of the corporation under Resolution of December 29, 1975.
4. TTDC Directors Jose Silva, Jr. and Emmanuel Ocampo filed a complaint with the SEC against Roberto Roxas, TTTDC
President, and Eduardo Santos, Rovels’ President and prayed that the transfer of TTTDC’s shares of stock to Rovels
pursuant to Resolution dated December 29, 1975 be annulled.
On March 17, 1979, SEC Hearing Officer Eugenio E. Reyes issued a Decision in favor of Silva and Ocampo.
5. On appeal by Roberto Roxas and Eduardo Santos, the SEC en banc affirmed the Decision of the SEC Hearing
Officer. This Court likewise affirmed the Decision of the SEC en banc and became final and executory on September 2,
1983.
6. Subsequently, TTTDC, the SILVA GROUP (now respondents), filed with the SEC a petition against the SANTOS
GROUP, who were nominees of Rovels who, by virtue of the shares of stock issued pursuant to the December 29, 1975
Resolution, proceeded to act as directors and officers of TTTDC. In their petition, the SILVA GROUP prayed that they be
declared the true and lawful stockholders and incumbent directors and officers of TTTDC.
7. July 6, 1993: SEC rendered a Decision in favor of the SILVA GROUP which became final and executory on September
1, 1994 as no appeal was interposed by either the SILVA GROUP or the SANTOS GROUP.
8. Rovels, to whom the TTTDC shares of stock were transferred, claimed that it became aware of the July 6, 1993 SEC
Decision only in June of 1995.
9. September 6, 1995: Rovels filed a petition with the SEC praying that it be declared the majority stockholder
of TTTDC as against respondents.
10. SILVA GROUP filed a motion to dismiss, one of the grounds was the petition is barred by estoppel, prescription and
laches since it was filed long after Rovels was notified of the repeal of the December 29, 1975 TTTDC Resolution.
11. In an Order dated April 22, 1996 SEC Hearing Officer dismissed Rovel’s petition on the grounds of lack of cause of
action, res judicata, estoppel, laches and prescription. This Order was affirmed by the SEC en banc in its Decision dated
January 20, 1997.
Court of Appeals, in its Decision affirmed the SEC en banc Decision. Rovels’ motion for reconsideration was likewise
denied.
CORPORATION LAW
Case Digest
Hence, the instant petition for review on certiorari.
ISSUE: Whether or not the petition of Rovels is already barred by estoppels, prescription and laches?
HELD: Yes. Court sustains the Appellate Court’s finding that the filing of Rovels petition in the instant is barred by
estoppel, prescription and laches. There is no merit to Rovels’ claim that it was only in June of 1995 when it became aware
of the repeal of the December 29, 1975 TTTDC Resolution and of the consequent nullification of the transfer of its shares
of stock.
RATIO:
It is undisputed that Eduardo Santos was present in the March 1, 1976 TTTDC Board meeting wherein the December 29,
1975 Resolution was repealed. We hold that Eduardo Santos, being the President of Rovels, is considered as its (Rovels’)
agent. As such, his knowledge of the repeal of the December 29, 1975 Resolution, under the theory of imputed
knowledge, is ascribed to his principal (Rovels).
It was only on September 6, 1995, or almost twenty (20) years from the time Eduardo Santos learned of the March 1, 1976
Resolution, that Rovels filed its petition in SEC Case No. 09-95-5135. Within that long period of time, Rovels did nothing
to contest the March 1, 1976 TTTDC Resolution to protect its rights, if any. Obviously, such inaction constitutes estoppel,
prescription and laches. As stated by Rovels itself, Article 1149 of the New Civil Code limits the filing of actions, whose
periods are not fixed therein or in any other laws, to only five (5) years.
Petition denied
CASE LAW/ DOCTRINE:

the principle of laches or “stale demands” provides that the failure or neglect, for an unreasonable and unexplained length
of time, to do that which by exercising due diligence could or should have been done earlier, or the negligence or omission
to assert a right within a reasonable time, warrants a presumption that the party entitled to assert it either has abandoned it
or declined to assert it

CORPORATION LAW
Case Digest
101 Westmont Bank v. Inland Construction and Dev. Corp AUTHOR: Jade
March 23, 2009 - G.R. No. 123650 Westmont Bank used to be known as Associated
TOPIC: Exercise of Corporate Powers /Apparent Authority Doctrine Citizens Bank and later became United Overseas
PONENTE: J. Carpio-Morales Bank
FACTS
Inland Construction and Development Corp (Inland) obtained various loans and other credit accommodations from
Westmont Bank in 1977 executed with 3 real estate mortgages over 3 real properties in Pasig City. Inland also issued
promissory notes in favor of the bank. When the 1st and 2nd promissory notes fell due, Inland defaulted in its payments. It
authorized the bank to deduct P350,000.00 from its savings account as partial payment.
14 December 1979 - Inland was served a Notice of Sheriff's Sale foreclosing the real estate mortgages over the real
properties. Inland filed a complaint for injuction against Westmont Bank and Provincial Sheriff of Rizal at the RTC of
Pasig City. The bank claimed that it had no knowledge over the deed of assignment executed by Felix Aranda, President
of Inland, in favor of Horacio Abrantes, EVP & General Manager of Hanil-Gonzales Construction and Development
Corporation, and that it did not give its conformity to the said assignment of the obligation. In the said deed of assignment,
it appeared that Abrantes assumed Inland's obligation particulary the loan of Inland from Westmont Bank amounting to
P880,000.00.
The trial court found that the bank ratified the deed of assignment. Lionel Calo, Westmont Bank's account officer, signed
the deed for conformity and the bank failed to repudiate the assignment within a reasonable time and even approved the
restructuring of the Liberty Const. & Dev. Corp./Hanil-Gonzales Construction & Development Corp.’s obligations, which
included the P880,000.00 loan
The trial court ruled in favor of Inland and perpetually restrained the bank and the sheriff from proceeding with the
foreclosure of the mortgage and conducting an auction sale.
The bank appealed to the Court of Appeals.
CA affirmed the findings of the trial court that the bank ratified the Deed of Assignment but reversed all other
judgment. CA ordered Inland to pay the bank the sum of P186,241.86 with legal interest computed from December 21,
1979 untill fully paid.
The bank appealed that it did not ratify the Deed of Assignment through the act of Lionel Calo. The bank issued an inter-
office memorandum pronouncing that Calo has no authority to sign the Conforme of the bank for he is only an accounts
officer (but this inter-office memorandun was not presented to Inland and not even used as an evidence during the trial).
ISSUE:
Whether or not Lionel Calo acted under the power of an apparent authority.
HELD:
Yes, Calo acted under the power of an apparent authority.
Supreme Court Ruling:

The petitions are DENIED. The decision of the Court of Appeals is AFFIRMED.

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Case Digest
RATIO:
The record showed that Calo was the one assigned to transact of the bank's behalf with respect to the loan transactions and
arrangements of Inland as well as those of Hanil-Gonzales and Abrantes. Since it conducted business through Calo, who is
an Account Officer, it is presumed that he had authority to sign for the bank in the Deed of Assignment.
When the bank approved the restructuring request of the loan of Hanil-Gonzales, it is assumed that the vank exercised the
highest degree of diligence and meticulousness in the conduct of its business. Since there was a proof that they agreed with
the restructuring request, their claim that Calo has no authority to sign on the bank's behalf cannot be held valid.
The bank failed to discharge its primary burden of proving that Calo was not authorized to bind it:
• no presentation of proof that Calo was unauthorized
• no presentation of any Resolution from its Board of Directors or its Charter or By-laws from which the Court
could infer that Calohad no authority to sign in its behalf or bind it in the Deed of Assignment.
• the May 20, 1985 inter-office memorandum stating that Calo had “no signing authority” remains self-serving as it
does not even form part of petitioner’s body of evidence.
CASE LAW/ DOCTRINE:

The doctrine of apparent authority provides that a corporation will be liable to innocent third persons for the acts of its
agent where the representation was made by the agent in the course of business and acting within his/her general scope of
authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud
upon his/her principal or some other person for his/her own ultimate benefit.
In the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. If a
corporation, however, consciously lets one of its officers, or any other agent, to act within the scope of an apparent
authority, it will be estopped from denying such officer's authority.
DISSENTING/CONCURRING OPINION: n/a

CORPORATION LAW
Case Digest
102 NYCO SALES CORP. v BA FINANCE CORP. AUTHOR: Krystelle
August 16, 1991 G.R. No. 71694
TOPIC: Exercise of Corporate Powers: Doctrine of Its corporate By-Laws clearly provide for the powers of its
Apparent Authority President, which include, inter alia, executing contracts and
PONENTE: PARAS, J. agreements, borrowing money, signing, indorsing and
delivering checks, all in behalf of the corporation. Thus,
Nyco is estopped from denying Rufino Yao's authority as
far as the latter's transactions with BA Finance are
concerned.
FACTS
11. It appears on record that petitioner Nyco Sales Corporation (hereinafter referred to as Nyco) whose president and
general manager is Rufino Yao, is engaged in the business of selling construction materials.
12. Sometime in 1978, the brothers Santiago and Renato Fernandez (hereinafter referred to as the Fernandezes), both
acting in behalf of Sanshell Corporation, approached Rufino Yao for credit accommodation. They requested Nyco,
thru Yao, to grant Sanshell discounting privileges which Nyco had with BA Finance Corporation (hereinafter
referred to as BA Finance).
13. Yao apparently acquiesced, hence on or about November 15, 1978, the Fernandezes went to Yao for the purpose of
discounting Sanshell's post-dated check which was a BPI-Davao Branch Check No. 499648 dated February 17,
1979 for the amount of P60,000.00. The said check was payable to Nyco. Following the discounting process
agreed upon, Nyco, thru Yao, endorsed the check in favor of BA Finance.
14. Thereafter, BA Finance issued a check payable to Nyco which endorsed it in favor of Sanshell. Sanshell then made
use of and/or negotiated the check. Accompanying the exchange of checks was a Deed of Assignment executed by
Nyco in favor of BA Finance with the conformity of Sanshell. Nyco was represented by Rufino Yao, while
Sanshell was represented by the Fernandez brothers.
15. Under the said Deed, the subject of the discounting was the aforecited check. At the back thereof and of every
deed of assignment was the Continuing Suretyship Agreement whereby the Fernandezes unconditionally
guaranteed to BA Finance the full, faithful and prompt payment and discharge of any and all indebtedness of
Nyco. The BPI check, however, was dishonored by the drawee bank upon presentment for payment.
16. BA Finance immediately reported the matter to the Fernandezes who thereupon issued a substitute check dated
February 19,1979 for the same amount in favor of BA Finance. It was a Security Bank and Trust Company check
bearing the number 183157, which was again dishonored when it was presented for payment.
17. Despite repeated demands, Nyco and the Fernandezes failed to settle the obligation with BA Finance, thus
prompting the latter to institute an action in court. Nyco and the Fernandezes, despite having been served with
summons and copies of the complaint, failed to file their answer and were consequently declared in default.
18. On May 16, 1980, the lower court ruled in favor of BA Finance ordering them to pay the former jointly and
severally, the sum of P65,536.67 plus 14% interest per annum from July 1, 1979 and attorney's fees in the amount
of P3, 000. 00 as well as the costs of suit. Nyco, however, moved to set aside the order of default, to have its
answer admitted and to be able to implead Sanshell. The prayer was granted through an order dated June 23, 1980,
wherein the decision of the court was set aside only as regards Nyco.
19. On appeal, the appellate court also upheld BA Finance but modified the lower court's decision by ordering that the
interest should run from February 19, 1979 until paid and not from February 1, 1979. Nyco's subsequent motion
for reconsideration was denied. Hence, the present recourse.
ISSUE: WON Nyco Corp is bound by the contract entered into by its president with BA Finance Corp. for credit
accommodation.
HELD: Yes. Its corporate By-Laws clearly provide for the powers of its President, which include, inter alia, executing
contracts and agreements, borrowing money, signing, indorsing and delivering checks, all in behalf of the corporation.

CORPORATION LAW
Case Digest
RATIO:
Nyco disowns its President's acts claiming that it never authorized Rufino Yao (Nyco's President) to even apply to BA
Finance for credit accommodation. It supports its argument with the fact that it did not issue a Board resolution giving Yao
such authority. However, the very evidence on record readily belies Nyco's contention. Its corporate By-Laws clearly
provide for the powers of its President, which include, inter alia, executing contracts and agreements, borrowing money,
signing, indorsing and delivering checks, all in behalf of the corporation. Furthermore, the appellate court correctly
adopted the lower court's observation that there was already a previous transaction of discounting of checks involving the
same personalities wherein any enabling resolution from Nyco was dispensed with and yet BA Finance was able to collect
from Nyco and Sanshell was able to discharge its own undertakings. Such effectively places Nyco under estoppel in pais
which arises when one, by his acts, representations or admissions, or by his silence when he ought to speak out,
intentionally or through culpable negligence, induces another to believe certain facts to exist and such other rightfully
relies and acts on such belief, so that he will be prejudiced if the former is permitted to deny the existence of such facts
(Panay Electric Co., Inc. v. Court of Appeals, G.R. No. 81939, June 29,1989). Nyco remained silent in the course of the
transaction and spoke out only later to escape liability. This cannot be countenanced. Nyco is estopped from denying
Rufino Yao's authority as far as the latter's transactions with BA Finance are concerned.
CASE LAW/ DOCTRINE:
Its corporate By-Laws clearly provide for the powers of its President, which include, inter alia, executing contracts and
agreements, borrowing money, signing, indorsing and delivering checks, all in behalf of the corporation. Thus, Nyco is
estopped from denying Rufino Yao's authority as far as the latter's transactions with BA Finance are concerned.

CORPORATION LAW
Case Digest
103 The State of Washington, on the relation of Everett AUTHOR: Revy Neri
Trust and Saving Bank, Appellant vs. Pacific Waxed
Paper Company et al. The court held that the proxy agreement was irrevocable
April 16, 1945 because it was coupled with an interest, and the power given
TOPIC: Allocation of Power and Control to the proxy holder was given to him as part of a security.
PONENTE: Grady The court held that the purpose of the proxy agreement was
to create a community of interest in the stockholdings of the
decedent and the proxy holder.
FACTS
7. Jordan was the owner of ALL the capital stocks of PAINE-MITCHELL COMPANY. Engle was the owner of
preferred and common stock of respondent, which stockholdings had increased.
8. PAINE-MITCHELL CO, in return, was the owner of common stocks in PACIFIC WAXED PAPER CO. while
Jordan also owned 1 preferred share in PACIFIC WAXED PAPER CO. All of the stock had voting power. The
combined shares of Engle and Paine-Mitchell Co. were more than a majority of all of the issued stock.
9. Engle and Paine-Mitchell Co. entered into a written agreement by which each party gave to the other a promise
that, before he sold or caused to be transferred any part or portion of the stock then owned and held by him, he
would notify the other party in writing of his intention to sell such stock or to cause the same to be transferred.
10. Engle, Jordan and PAINE-MITCHELL CO. entered into a written agreement wherein:
In the event of the death of Jordan, Engle will have the same voting right as to the stock of PACIFIC WAXED
PAPER CO. and Jordan, or either of them and contained a similar irrevocable proxy provision in favor of Engle
binding upon the successors, heirs and legal representatives, respectively of PAINE-MITCHELL CO. and Jordan.
11. Jordan died testate.
12. In his will, Jordan named EVERETT TRUST & SAVINGS BANK as executor. Executor caused the PAINE-
MITCHELL CO. to be voluntarily dissolved.
13. Due to the voluntary dissolution, the stock owned by Jordan in PACIFIC WAXED PAPER CO. was transferred to
Executor.
14. Executor sought to vote on transferred stocks at the stockholder’s meeting of PACIFIC WAXED CO.
15. PACIFIC WAXED PAPER CO. denied the Executor’s right to vote on the transferred stocks because of the proxy
held by Engle.
ISSUE:
1. Whether or not the proxy to vote the stock of respondent owned by Paine-Mitchell Co. and Jordan was revocable.
HELD:
3. No. The voluntary dissolution of the PAINE-MITCHELL CO. did not affect the proxy agreement so far as the
rights of Engle were concerned.

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Case Digest
RATIO:
1. It is clear from the proxy agreement and the facts of the case that the parties intended that the Paine-Mitchell Co.
stock should be used in conjunction with the stock owned by Engle so that the policies of the respondent could
thus be controlled.
2. In the situation we have before us, Engle was more than a mere agent. In voting the stock, he served purposes of
his own in maintaining control of the corporation by the choice of directors and the determination of its policies
and business affairs. This voting of the stock for these purposes was the subject matter of the agency. Engle
acquired an interest in the subject matter of the power given to him, and this interest was coupled with such power.
The power to vote the stock was necessary in order to make Engle's control of the corporation secure.
3. The general rule is that a proxy given by a stockholder to vote his corporate stock at a meeting of stockholders of a
corporation is revocable by him even though the proxy by its terms is expressly made irrevocable.
4. The exceptions are: (1) Where the authority or power is coupled with an interest; (2) where the authority is given
as part of a security or is necessary to effectuate such a security.
CASE LAW/ DOCTRINE:

When a corporation is dissolved by its voluntary act, the corporation remains bound by its outstanding executor contracts.

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Case Digest
104 DUFFY v. LOFT, INC. AUTHOR:Rosa Cecilia K. Alfafara
April 29, 1930; 17 Del. Ch. 140 -The paper writing called a proxy is nothing more than
TOPIC:Proxy Device evidence of a relationship. (It is not the relationship.)
PONTENTE: THE CHANCELLOR -In deciding questions regarding a shareholder’s meeting &
the election of directors, the court should indulge in every
reasonable intendment in favor of the conclusiveness of the
meeting.
FACTS
1.Petitioner filed an action for a summary order for election of directors of respondent corporation.
Miller Faction Guth Faction

The meeting resulted in no action recognizable as legal. The proceedings of the meeting lawfully resulted in the
election of a new board of directors.
2.On 19 March, a stenographic report of the meeting was made.The president, Miller, designated in the call for the
convening of the meeting, appeared and commenced to address the gathering of 250 to 300 people; he was asked to
proceed in accordance with the by-laws.
3.He replied that he had not yet called the meeting. There then followed a great amount of discussion and argument on
whether the president formally opened the meeting or not.
4.The first controversy that engaged the attention of the meeting presented the question of who should preside. The
president insisted that under the by-laws he was the only one entitled to preside. Stockholders on the floor moved that a
chairman be selected by the meeting.
5. The president ruled the motion out of order and insisted that the first thing to be done was to call the roll to see if enough
stock was present either in person or by proxy to constitute a quorum.
6. Nominations were made for chairman. There were several nominations, but the president would not put them to a vote.
7. Finally, a Mr. Donald rose from the floor and asked all that were in favor of the nominee, Dr. Sullivan, to stand.
8. All present stood up. Thereafter, Dr. Sullivan took the chair.
9. Miller, with some of his following, left and went to their offices at the other end of the room. (Walked out)
10. Miller refused to recognize the right of the meeting to choose a chairman and repeatedly declared all attempts to elect
one to be out of order on the ground that under the by-laws, as president he was entitled to preside.
11. According to their by-laws: “the president shall preside at all meetings of the stockholders, unless the stockholders
shall appoint a chairman, who may be the president.” Another by-law provides for the order of business at a stockholders'
meeting as follows:“xxx.(2) Election of a chairman, if necessary;xxx.”
12. Miller evidently noticing the phrase in the second order of business "if necessary," took the position that the election of
a chairman was not necessary and therefore all motions looking to such election were out of order.
13. In addition, it was also argued that the choice they made was by a viva voce vote (orally) and under the by-laws it
should have been by a vote of shares and by ballot.
ISSUE:(1) Whether or not a meeting was convened and there was a proper quorum present for the transaction of business.
(2) Whether or not a demand for a stock vote was made so as to render a viva voce vote on the chairmanship
improperunder the by-laws.
HELD: (1) Yes, the 232,840 shares for which the Miller committee held proxies can be properly counted as present.The fact
that the proxy holders walked out did not operate to defeat the quorum. Therefore, the board of directors was
properly elected.
(2) No, the president never demanded that the vote upon the chairmanship should be by stock.

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RATIO:
1. The presence of the president ready and willing to preside cannot be said to oust the stockholders of their right to choose
a chairman; the by-law proceeds expressly to say that the stockholders may choose the president himself as chairman and
therefore negatives the idea that his absence is a prerequisite to the right of the stockholders to elect. The by-law that deals
with the order of business --"election of a chairman, if necessary"--must be construed in harmony with the other by-law
giving the stockholders the right to choose a chairman. The president was in error, therefore, when he repeatedly refused
the demand of the stockholders that the meeting elect a chairman.
2. With regard to the voting: the by-laws contain a provision which answers this argument, it provided: "The vote in
election of directors, and, upon demand of a stockholder present in person or by proxy, the vote on any question, shall be
by a stock vote and by ballot."A careful reading of the minutes of the meeting fails to show such a demand.He never
demanded a stock vote on the question of chairman.Neither did any one else. Dr. Sullivan's choice as chairman was
therefore not in violation of the by-laws.
3. Proxies for those shares ran in favor of:
"Alfred R. Miller, Charles R. Stevenson and/or Edward Gray, Jr.," and appointed these gentlemen the "true
and lawful attorney or attorneys, agent or agents, and proxy or proxies of the undersigned, with power of
substitution, for, and in the name, place and stead of the undersigned to attend the annual meeting of the
stockholders * * * and then and there to vote all stock held or owned by the undersigned * * * to represent
and to vote all shares of stock of the undersigned, according to the number of votes which the undersigned
would be entitled to cast if personally present. * * * "
4. The designated agents were in fact present at the meeting.
5. It was the manifest intent and desire of the stockholders who gave the proxies to have their designated agents or
attorneys-in-fact attend the meeting and vote in their behalf. In so far as the stockholders could, without personal
attendance, accomplish their presence at the meeting, they are to be thought of as having intended to do so when
they gave their proxies.
6. The paper writing, which we call a proxy, is nothing more than evidence of a relationship. It is not the
relationship. It simply testifies that A. has constituted B. his agent to act for him in a vicarious capacity. The
producing of the proxy is not the creation of the agency. It is only proof of it to the satisfaction of others.
7. In the case, the failure of the Miller faction (group) to produce and file their proxies did not of itself destroy their
attorneyship. Their omission in this regard simply amounted that they did not show to the meeting the documentary
evidence of their authority.
8. The proxies were solicited on the theory that the shares represented by them would be represented at the meeting
and the agents designated to represent them were in fact present. The absence or failure to show the written
evidence of their authoritycannot destroythe fact of its existence.
9. The fact that they were not the owners but only the representatives of the owners does not, under the
circumstances shown, make any difference in the result.Therefore, the agents’ actswhen they disagreed and after
making their contentions, walked out bound their principals.Their withdrawal would not have the effect of breaking
the quorum.
10. Miller and Gray, two members of the Miller proxy committee, should be counted in their individual stockholder
capacities and in their representative capacities. The Miller committee can be counted as present for quorum
purpose.
CASE LAW/ DOCTRINE:
-The president of a corp. could not prevent stockholder’s meeting by refusing or neglecting to formally announce its
opening.
-Paper commonly called "proxy" is nothing more than evidence of relationship of principal and agent.
-Failure of agents authorized to represent stockholders to produce and file their proxies at stockholders' meeting did not of
itself destroy authority.
-“That stockholders holding proxies became dissatisfied and walked out of stockholders' meeting after commencement
thereof did not have effect of breaking quorum.”
Note: There is a later decision dated Dec. 1930, 17 Del. Ch. 376, however, the one in the syllabus is 17 Del. Ch. 140.
Nonetheless, the important ratio for it is: “Where a stockholder’s meeting was validly convened, the proxies must be

CORPORATION LAW
Case Digest
deemed present even if the proxies were not presented, provided: (a) their existence is established; (b) the agents were so
designated to attend and act in stockholder’s behalf; and (c) the agents were present in the meeting.
** “Faction” = “Group” ; “Viva voce” = by word of mouth

CORPORATION LAW
Case Digest
105 GSIS vs. CA AUTHOR: Arthur Archie Tiu
April 16, 2009 G.R. No. 183905 - Corporation Law; Securities and Exchange
TOPIC:Exercise of corporate powers; Devices affecting Commission; Proxies; Words and Phrases; Proxy
control solicitation involves the securing and submission of
PONTENTE:Tinga, J. proxies, while proxy validation concerns the
validation of such secured and submitted proxies.-
FACTS
1. The annual stockholders’ meeting (annual meeting) of the Manila Electric Company (Meralco) was scheduled on
27 May 2008. In connection with the annual meeting, proxies were required to be submitted on or before 17 May
2008, and the proxy validation was slated for five days later, or 22 May.
2. CamiloQuiason, Corporate secretary, was to resign so his position became vacant
3. BOD designated Jose Vitug as corporate secretary for the annual meeting.
4. On May 22, the proceedings were presided by respondent Rosete (assistant corporate secretary)
5. Petitioner Government Service Insurance System (GSIS), a major shareholder in Meralco, was distressed over the
proxy validation proceedings, and the resulting certification of proxies in favor of the Meralco management
6. GSIS filed a complaint with the Regional Trial Court (RTC) of Pasay Cityseeking the declaration of certain
proxies as invalid
7. GSIS filed a Notice with the RTC manifesting the dismissal of the complaint. On the same day, GSIS filed an
Urgent Petition[13] with the Securities and Exchange Commission (SEC) seeking to restrain Rosete from
“recognizing, counting and tabulating, directly or indirectly, notionally or actually or in whatever way, form,
manner or means, or otherwise honoring the shares covered by” the proxies in favor of respondents Manuel Lopez
8. Complaint was dismissed by SEC due to lack of jurisdiction
9. GSIS raises the sensible point that there was no election yet at the time it filed its petition with the SEC, hence no
proper election contest or controversy yet over which the regular courts may have jurisdiction.
10. Meralco raises the substantial point that nothing in the SRC empowers the SEC to annul or invalidate improper
proxies issued in contravention of Section 20
ISSUE:WON the proxies were valid.
HELD: yes
RATIO:
- we do not see it feasible for GSIS to posit that its challenge to the solicitation or validation of proxies bore no
relation at all to the scheduled election of the board of directors of Meralco during the annual meeting. GSIS very
well knew that the controversy falls within the contemplation of an election controversy properly within the
jurisdiction of the regular courts. Otherwise, it would have never filed its original petition with the RTC of Pasay.
GSIS may have withdrawn its petition with the RTC on a new assessment made in good faith that the controversy
falls within the jurisdiction of the SEC, yet the reality is that the reassessment is precisely wrong as a matter of law
- Under Section 20.1, the solicitation of proxies must be in accordance with rules and regulations issued by the SEC,
such as AIRR-SRC Rule 4. And by virtue of Section 53.1, the SEC has the discretion “to make such investigations
as it deems necessary to determine whether any person has violated” any rule issued by it, such as AIRR-SRC
Rule 4.
- Proxy solicitation involves the securing and submission of proxies, while proxy validation concerns the validation
of such secured and submitted proxies.-—It is plain that proxy solicitation is a procedure that antecedes proxy
validation. The former involves the securing and submission of proxies, while the latter concerns the validation of
such secured and submitted proxies. GSIS raises the sensible point that there was no election yet at the time it filed
its petition with the SEC, hence no proper election contest or controversy yet over which the regular courts may
have jurisdiction. And the point ties its cause of action to alleged irregularities in the proxy solicitation procedure,
a process that precedes either the validation of proxies or the annual meeting itself.

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Case Digest
CASE LAW/ DOCTRINE:

CORPORATION LAW
Case Digest
106 RALPH B. CAMPBELL, Plaintiff, v. LOEW'S AUTHOR: Chedelle Florido
INCORPORATED, a Delaware corporation, JOSEPH • Corporate funds may be used by the Vogel faction.
R. VOGEL, WILLIAM A. PARKER, GEORGE L.
KILLION and JOHN L. SULLIVAN, Defendants
September 19, 1957 134 A.2d 852
TOPIC: Proxy device
PONENTE: Seitz
FACTS
1. There are 2 factions fighting for the control of Loew’s Inc. The Tomlinson faction headed by Joseph Tomlinson and the
Vogel Faction headed by Loew’s President Joseph Vogel.
2. (February) At the annual meeting of stockholders, a compromise was reached by which each nominated six directors
and they in turn nominated a thirteenth or neutral director.
3. (July 17-18) 2 of the 6 Vogel directors and the thirteenth or neutral director resigned (quorum is seven).
4. July 19, the Tomlinson faction asked that a directors' meeting be called for July 30 to consider the problem of filling
director vacancies (On the eve of this meeting one of the Tomlinson directors resigned, leaving five Tomlinson directors
and four Vogel directors in office). Only the five Tomlinson directors attended the July 30 meeting.
5. July 29, Vogel, as president, sent out a notice calling a stockholders' meeting for September 12 (for filling director
vacancies, to amend by-laws to increase the number of board members also increasing the number of quorum, to add 6
more directors, and to remove Meyer and Tomlinson as director and to fill the spot they’ll be leaving).
6. Sept. 12, Pres. Vogel sent out a notice and a proxy statement (containing only his accusations and views) for another
stockholder’s meeting with a letter, also from Vogel, soliciting support from the stockholders for “his” nominees (for the
vacant positions).
7. Campbell filed an action in court (asking to restrain the proceedings or to prevent the voting of proxies).
Campbell’s contentions:
a) President Vogel had no authority to call for a special meeting of stockholders to act upon policy matters (fill vacancies
and increase the number of the board and the directors);
b) The by-law provisions which give the president the power to call the stockholders for a special meeting are contrary to
8 Del.C. § 141(a);
c) Vogel had no authority to propose an amendment of by-laws without the board’s approval;
d) The removal of Tomlinson and Meyer as directors would violate the right of minority shareholders to representation on
the board and would be contrary to the policy of the Delaware law regarding cumulative voting;
e) When the shareholders attempt to remove a director for cause, "* * * there must be the service of specific charges,
adequate notice and full opportunity of meeting the accusation * * *”.
*It is helpful to have in mind the pertinent by-law provisions:
Section 7 of Article I provides:

"Special meetings of the stockholders for any purpose or purposes, other than those regulated by statute, may be called by
the President * * *"
Section 2 of Article IV reads:
"The President * * * shall have power to call special meetings of the stockholders * * * for any purpose or purposes * * *"
!!!Court’s analysis of the facts:

The by-laws provide for thirteen directors. Seven is a quorum. Due to four resignations there are now nine directors in
office. Five of the nine are of the Tomlinson faction while the remaning four are of the Vogel faction. Since the Vogel
faction will not attend directors' meetings, or at least will not attend directors meetings at which matters may possibly be
considered which they do not desire to have considered, it follows that the Tomlinson faction is unable to muster a quorum
of the board and thus is unable to take action on behalf of the board. And it must be kept in mind that this election can
determine which faction will control the corporation.
ISSUE: 1. WON Vogel (and his faction) had a right to ask/request for voting a proxy.
2. WON the Vogel faction may use corporate money and facilities for proxy solicitation at a stockholder’s
CORPORATION LAW
Case Digest
Meeting.
HELD: 1. YES (but only upon giving the Stockholder’s list to the Tomlinson faction)
2. YES
RATIO:
(explanation for 1 & 2)
I conclude that the Vogel group should be enjoined from voting any proxies unless and until the Tomlinson board
members are given a reasonable period to solicit proxies after a stockholders' list is made available to them without
expense by the corporation.
I next consider how these two groups should be classified for purposes of determining the rights of the Vogel group in
connection with the use of corporate money and facilities for proxy solicitation at a stockholders' meeting duly called by
the president. Basically, the stockholders are being asked whether they approve of a record made by one group and perhaps
opposed by another. While the Tomlinson faction has five of the nine directors, it would be most misleading to have them
represent to the stockholders that they are "management" in the sense that they have been responsible for the corporate
policy and administration up to this stage. Resignations of directors have created the unusual situation now presented.
Viewing the situation in the light of what has just been said, it is apparent that the Vogel group is entitled to solicit
proxies, not as representing a majority of the board, but as representing those who have been and are now responsible for
corporate policy and administration. Whereas, the Tomlinson group, while not management in the sense that it is able on
its own to take effective director action, is representative of the majority of the incumbent directors and is entitled to so
represent to the stockholders if it decides to solicit proxies.
Since the stockholders will, in the event of a proxy fight, be asked to determine which group should run the corporation in
the future, the Vogel faction, because it symbolizes existing policy, has sufficient status to justify the reasonable use of
corporate funds to present its position to the stockholders. I am not called upon to decide whether the Tomlinson board
members would also be entitled to have the corporation pay its reasonable charges for proxy solicitation.
Since I have concluded that the Vogel faction is entitled to expend reasonable sums of corporate funds in the solicitation of
proxies, it follows that the request for a preliminary injunction against such use will be denied. The restraining order
heretofore entered will be vacated to the extent that it prevents such expenditures.
CASE LAW/ DOCTRINE:
*When a corporate director is the subject of a movement to remove him for cause, the vote is not an ordinary proxy contest
case; consequently, a much more stringent standard must be invoked, at least at the initial stage, with regard to proxy
solicitations and voting.
*Under Delaware corporation law, an opportunity must be provided to directors subjected to a movement to remove them
for cause to present their defense to the stockholders by a statement which must accompany or precede the initial
solicitation of proxies seeking authority to vote for the removal of such director for cause. If not provided then such
proxies may not be voted for removal. And the corporation has a duty to see that this opportunity is given the directors at
its expense.

CORPORATION LAW
Case Digest
107 - Rosenfeld v. Fairchild Engine and Airplane AUTHOR: De Silva, Denison
Corporation Note: Corporate directors can make expenditures so long as
(1955, 309 N.Y. 168) it is done in good faith, and for reasonable and proper
TOPIC: Devices Affecting Contro: (a) Proxy Device, (i) expenses for solicitation of proxies.
Who Pays?
PONENTE: Froessel, J.
FACTS:
1. Plaintiff William Rosenfeld, an attorney, owns 25 out of the company's (Fairchild Engine) over 2,300,000 shares, seeks
to compel the return of $261,522, paid out of the corporate treasury to reimburse both sides in a proxy contest for their
expenses.
2. Of the amount in controversy, $106,000 were spent out of corporate funds by the old board of directors while still in
office in defense of their position in said contest; $28,000 were paid to the old board by the new board after the change of
management following the proxy contest, to compensate the former directors for such of the remaining expenses of their
unsuccessful defense as the new board found was fair and reasonable; payment of $127,000, representing reimbursement
of expenses to members of the prevailing group, was expressly ratified by a 16 to 1 majority vote of the stockholders.
ISSUE: Whether or not the corporate directors can make expenditures in a proxy contest.
HELD: Yes, when the directors act in good faith in a contest over policy, they have the right to incur reasonable and
proper expenses for solicitation of proxies and in defense of their corporate policies, and are not obliged to sit idly by.
RATIO:
1. The Court held that in a contest over policy, as compared to a purely personal power contest, corporate directors
have the right to make reasonable and proper expenditures, subject to the scrutiny of the courts when duly
challenged, from the corporate treasury for the purpose of persuading the stockholders of the correctness of their
position and soliciting their support for policies which the directors believe, in all good faith, are in the best
interests of the corporation.
2. It should be noted that plaintiff does not argue that the aforementioned sums were fraudulently extracted from the
corporation; indeed, his counsel conceded that "the charges were fair and reasonable", but denied "they were legal
charges which may be reimbursed for".
3. The stockholders, moreover, have the right to reimburse successful contestants for the reasonable and bona fide
expenses incurred by them in any such policy contest, subject to like court scrutiny.
4. However, the corporate directors cannot, under any circumstances, disport themselves in a proxy contest with the
corporation's moneys to an unlimited extent.
5. In the event of a proxy contest, if the directors may not freely answer the challenges of outside groups and in good
faith defend their actions with respect to corporate policy for the information of the stockholders, they and the
corporation may be at the mercy of persons seeking to wrest control for their own purposes, so long as such
persons have ample funds to conduct a proxy contest.
6. Where it is established that such moneys have been spent for personal power, individual gain or private advantage,
and not in the belief that such expenditures are in the best interests of the stockholders and the corporation, or
where the fairness and reasonableness of the amounts allegedly expended are duly and successfully challenged, the
courts will not hesitate to disallow them.
CASE LAW/ DOCTRINE: In a contest over policy, corporate directors have the right to make reasonable and proper
expenditures, subject to the scrutiny of the courts when duly challenged, from the corporate treasury for the purpose of
persuading the stockholders of the correctness of their position and soliciting their support for policies which the directors
believe, in all good faith, are in the best interests of the corporation.

CORPORATION LAW
Case Digest
108 ABERCROMBIE V DAVIES AUTHOR: Gelene Guevara
36 Del.Ch. 371, March 19, 1957 Notes:
TOPIC: VOTING TRUST • A voting trust is a device established by the formal
PONTENTE: SOUTHERLAND, C.J. transfer of voting shares, usually for a designated
period, from their owners to trustees. The trustee
has legal title to the shares, as well as the right to
vote in the manner agreed on. The shareholders are
usually issued voting trust certificates for their
shares, which carry the right to dividends and other
asset distributions and in turn are exchanged for the
shares on termination of the trust.
• an essential characteristic of a voting trust is the
separation of voting rights of stock from the
other attributes of ownership
• principal object of the grant of voting rights is
voting control of the corporation.
• voting trusts derive their validity solely from the
statute, compliance with its provision is mandatory
FACTS
1. American Independent Oil Company (American), a Delaware corporation, was formed to develop an oil
concession in Middle East. It was organized by Abercrombie, Sunray Oil Corporation, Phillips Petroleum
Company, Davies, Signal Oil and Gas Company, The Hancock Oil Company, The Globe Oil and Refining
Company, Lario Oil and Gas Company, Ashland Oil & Refining Company, Deep Rock Oil Corporation, and
Allied Oil Company.
2. The organization agreement provided that “the Board of Directors of American should consist of one director for
each 5,000 shares (out of the 150,000 shares) and the directors should be elected by cumulative voting.” Each
stockholder was permitted to choose the director/s to represent his or its interests to the board.
3. Davies represents his own interest and is president of the corporation. At all times the number of directors have
been 15. No one stockholder holds a majority of stock, and no one stockholder is represented by more than four
directors.
4. On March 30, 1950, 6 of the stockholders took steps to form a coalition. An agreement was executed between 8
individuals designated 'Agents', and the 6 stockholders--Davies, Ashland, Globe, Lario, Hancock and Signal.
These stockholders hold 54 1/2% of the shares. The ‘Agents’ were the 8 directors (out of the 15 directors)
representing the 6 stockholders. The obvious purpose of the agreement was to achieve effective control of the
board and thus control of corporate policy. The ‘Agents’ agreement transferred the voting control of the stock of
the 6 stockholders to the 8 Agents.
5. A suit was filed by Abercrombie, Phillips and Sunray against the other shareholders and the Agents. Plaintiffs filed
a motion for summary judgment. Several contentions arose out of the hearings on this motion: (a) Certain
provisions of the Agents' Agreement attempting to control directorate action are invalid on their face; (b) The
agreement is not a voting trust; and, (3) The provisions respecting stockholder action are severable from the illegal
provisions, and constitute a valid stockholders' pooling agreement.
ISSUE: Whether ‘Agents’ agreement is a voting trust?
HELD: YES. It is an illegal voting trust because it failed to comply with the provisions of the voting trust statute.

CORPORATION LAW
Case Digest
RATIO:
1. The elements of a Voting Trust are present in this case: (1) that the voting rights of the pooled stock have been
divorced from the beneficial ownership, which is retained by the stockholders; (2) that the voting rights have been
transferred to fiduciaries denominated Agents; (3) that the transfer of such rights is, through the medium of
irrevocable proxies, effective for a period of ten years; (4) that all voting rights in respect of all the stock are
pooled in the Agents as a group, through the device of proxies running to the agents jointly and severally, and no
stockholder retains the right to vote his or its shares; and (5) that on its face the agreement has for its principal
object voting control of American.
2. The General Corporation Law, 8 Del.C. § 218, provides in part:
(a) One or more stockholders may by agreement in writing deposit capital stock of an original issue with or
transfer capital stock to any person or persons, or corporation or corporations authorized to act as trustee,
for the purpose of vesting in such person or persons, corporation or corporations, who may be designated
voting trustee or voting trustees, the right to vote thereon for any period of time determined by such
agreement, not exceeding ten years, upon the terms and conditions stated in such agreement. Such
agreement may contain any other lawful provisions not inconsistent with said purpose. After the filing of a
copy of such agreement in the principal office of the corporation in the State of Delaware, which copy
shall be open to the inspection of any stockholder of the corporation or any beneficiary of the trust under
said agreement daily during business hours, certificates of stock shall be issued to the voting trustees to
represent any stock of an original issue so deposited with them, and any certificates of stock so transferred
to the voting trustees shall be surrendered and cancelled and new certificates therefor shall be issued to the
voting trustees, and in the certificates so issued it shall appear that they are issued pursuant to such
agreement, and in the entry of such voting trustees as owners of such stock in the proper books of the
issuing corporation that fact shall also be noted. The voting trustees may vote upon the stock so issued or
transferred during the period in such agreement specified.
*The provision of the statute that was not complied with is the requirement that the shares be transferred on the books
and the requirement that a copy of the agreement shall be filed in the corporation's principal office in Delaware.
The effect was to create a secret voting trust. The provision respecting the filing of a copy in the principal office in
Delaware 'open to the inspection of any stockholder or any beneficiary of the trust' is a provision obviously for the benefit
of all stockholders and of all beneficiaries of the trust, who are entitled to know where voting control of a corporation
resides. And the provision for transfer of the stock on the corporate books necessarily serves, though perhaps only
incidentally, a similar purpose with respect to the officers and directors. If the validity of a stockholders' pooling agreement
of the kind here presented were to be sustained, the way is clear for the creation of secret voting trusts. The statute clearly
forbids them.

CORPORATION LAW
Case Digest
109 HARRIE S. EVERETT, CRAL G. CLIFFORD, AUTHOR: Myk
ELLIS H. TEAL and GEORGE W. ROBINSON v. The circumstances surrounding the suit enumerated here are
THE ASIA BANKING CORPORATION, NICHOLAS not the actual facts as found by the SC, it’s actually what the
E. MULLEN, ERIC BARCLAY, ALFRED F. KELLY, plaintiffs wrote in their complaint.
JOHN W. MEARS and CHARLES D. MACINTOSH Voting trust
November 3, 1926 G.R. No. L-25241
TOPIC: Control & Management of Corp.: Devices
Affecting Control: Voting Trust
PONENTE: Ostrand, J.
FACTS
1. The action was brought about by the court’s sustenance of a demurrer to the complaint. Everett, et. al. (plaintiffs)
declined to amend the complaint which led to the court dismissing the complaint.
2. The complaint, as submitted by the plaintiffs, narrated the circumstances surrounding the suit:
a. Everett, Teal, Robinson, and Clifford were stockholders of “Teal and Co.” Owning a total of 4,478 shares
and Barclay (one of the defendants owns 1 share). The company was engaged in the merchandising of
automobiles, trucks, tractors, spare parts and accessories.
b. Asia Banking Corporation (the Bank) is a foreign bank; while Barclay, Mullen, Kelly, Mears, and
Macintosh were officers, agents, and employees of the bank.
c. Teal and Co. had done its banking business and financing exclusively with the bank and acquired trust and
confidence.
d. In 1921, Teal and Co. Became indebted to the firm of H.W. Peabody and Co. for P300,000 for ordering
tractors, plows, and parts but these were returned.
e. Teal and Co. made payments to H.W. Peabody thru the Bank amounting to P150,000.
f. Teal and Co. ordered another set of tractors from Smith, Kirkpatrick and Co. Delivery of the tractors had
been delayed. They had been advised by that the order was cancelled and not to ship the tractors. But they
still delivered the order under D/A drafts. Teal and Co. accepted the drafts and stored the tractors in a
warehouse in Manila.
g. March 1921, Teal and Co., H.W. Peabody and Co., and Smith, Kirkpatrick, and Co. (creditors) entered
into a “creditors’ agreement” upon advice of the Bank wherein none of them would collect debts from
Teal and Co. Until after 2 years.
h. 29 December 1922, Teal and Co. was indebted to the Bank in the sum of P750,000 which was secured by
mortgage upon the real estate occupied by it covered by a 99-year lease.
i. Mullen, the manager of the Bank, required them to place the stockholders’ shares in a Voting Trust to be
held by the Bank without the knowledge of the creditors.
i. The agreement was for the trust to terminate upon success of the Bank in the management of the
Teal and Co. control would be returned to the original stockholders. Should the bank decide to
discontinue operation under the trust the stocks would be returned.

CORPORATION LAW
Case Digest
j. Mullen caused the displacement and removal of the original BOD and replaced them with the defendants.
Mullen also prevented any trustee to act as a Director of Teal and Co. And that none of the current
stockholders of Teal and Co. purchased any share of the capital stock.
k. The new set of directors conducted business without the knowledge of the original stockholders. They
even entered into new mortgages upon the properties of Teal and Co. to the Bank. The defendants and the
Bank agreed to foreclose all the mortgages.
l. 18 August 1923, Mullen, Barclay, Mears and Mcintosh, made, executed and filed in the Bureau of
Commerce and Industry of the Philippine Islands, registered "Philippine Motors Corporation.”
m. The Bank turned over all the assets of Teal and Co. to Philippine Motors Corporation all business and
assets of Teal and Co.
n. Everett alleged the following:
i. Philippine Motors Corporation is a fictitious entity brought into semblance of being by the Bank
through the control of its employees as pretended incorporators, stockholders and directors when
they have to personal stake in the company
ii. Philippine Motors Corporations never obtained and has now no legal existence
iii. It was the Bank itself operating under a disguise
iv. The creation of the and operations were a fraud because all acts of the Philippine Motors
Corporation were caused by Mullen being a voting trustee of Teal and Co. and at the same time
being the Manager of Asian Banking Co.
v. The Everett and et.al. were ignorant of the relations between the Bank, Philippine Motors Corp,
and the defendants. They were prevented from obtaining information from the any other parties.
They demanded for the stocks to be reverted to them and to dissolve the voting trust.
ISSUE:
Whether or not the plaintiffs have legal capacity to bring the action.
HELD:
Yes, since Teal and Co. is under complete control of the defendants.
RATIO:
1.) The general rule is that shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation,
but that the action must be brought by the Board of Directors. However, in this case, Teal and Co. is under the
complete control of the principal defendants in the case, it is obvious that a demand upon the Board of
Directors to institute an action and prosecute the same effectively would have been useless, and the law does
not require litigants to perform useless acts.
2.) The conclusion of the court below that the plaintiffs, not being stockholders in the Philippine Motors
Corporation, had no legal right to proceed against that corporation in the manner suggested in the complaint
evidently rest upon a misconception of the character of the action. In this proceeding it was necessary for the
plaintiffs to set forth in full the history of the various transactions which eventually led to the alleged loss of
their property and, in making a full disclosure, references to the Philippine Motors Corporation appear to have
been inevitable. It is to be noted that the plaintiffs seek no judgment against the corporation itself at this stage

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Case Digest
of the proceedings.

CORPORATION LAW
Case Digest
110 MACKIN v. NICOLLET HOTEL AUTHOR: Jelena
April 16, 1928,25 F.2d 783; 1928 U.S. App. LEXIS 3071 Voting trust agreements are VALID if there is no want of
TOPIC:Devices Affecting Control (b) Voting Trust consideration or fraud that attended it.
PONENTE:KENNEDY
FACTS
1.1)Defendant Dixon was the owner of a leasehold interest in a tract of land in Minneapolis City upon w/c stood what was
known as the old Nicollet Hotel.
2)NICOLLET HOTEL, INC. (a Delaware C) was organized at the instance of a group of men interested in the commercial
welfare of Minneapolis, for the purpose of adding to the hotel accommodation of that city.
3)Arrangements were made to have Dixon take 2,500 shares of common stock for his lease and to erect a new Nicollet
Hotel upon this property.
4) The cost of the hotel was to be about $3M to be raised by the sale of $1.8M of 1st mortgage bonds and $1.25M of
preferred stock.
5)MINNESOTA LOAN & TRUST COMPANY, WELLS-DICKEY TRUSTCOMPANY accepted the application of the
NICOLLET HOTEL, INC. for a loan of $1.8M, to be secured 1st by mortgage bonds and a trust deed covering the hotel
property.
6)In the application for loan, the ff statement was made: “The borrower agrees that a voting trust agreement covering all
of the common stock of the borrower will be executed in the form and on the terms and conditions satisfactory to you, and
your acceptance of this application is conditional upon the execution of such agreement.”
7)3 March ’23 a voting trust agreement was made with 3persons (Zonne, Dixon and Chapman) as voting trustees. The trust
agreement partly states that: “In consideration of the premises, and the benefits to be derived by the undersigned
stockholders in said corporation from the purchase by third persons of the preferred stock of said corporation and of said
bonds of said corporation.” “Under the trust agreement, the trust shall continue for 10years or until all outstanding
preferred stock shall be retired, and, if it shall not be retired before the expiration of 10 years, then the trust shall be
continued in 2-year periods for an additional term of 10 years.”
8)Plaintiff (Mackin) and the intervener (Cooper) are the owners of the trust certificates representing 80 shares and 1,520
shares, respectively, of the common stock held by the defendant trustees.
9)They claim the voting trust is VOID, that the trustees and those appointed by them have mismanaged the C and have
caused large losses; that in the event of a SH’s meeting, the trustees will vote the common stock; and that the Plaintiff has
been denied the right to inspect the books. They are denied their rights as common stockholders because of this trust
agreement, that they do not approve of the management, and they ask the court to declare the agreement void and to
appoint a receiver until they and the rest of the beneficial owners of the common stock can organize and elect a BOD of
their own to take over and manage the hotel property.
ISSUE: The voting trust executed on 3 March ’23** valid?
**Where the SHS of the no par value common stocks of the NICOLLET HOTEL, INC, agreed that said stock shall be
voted by 3 designated trustees for at least a period of 10 year
HELD: VALID.There is no invalidating circumstance. There is no want of consideration or fraud alleged or shown. The
voting power in the3 trustees is coupled with an interest because 1 of the trustees is a substantial owner of common stock
of the C (Dixon), and all are charged with the duty of protecting and conserving the property for the benefit of those who
became purchasers of preferred stock and bonds upon the strength of the trust agreement itself.

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Case Digest
RATIO:
The purpose of the agreement was and is legitimate and wholesome. The plan was originally conceived as a matter of civic
pride by enterprising citizens of Minneapolis to have an 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.
Appellants also raise the point that the trust agreement here challenged is violative of the Minnesota statute with relation to
a stockholder voting his stock by proxy, because of the time limit placed upon such right.
Section 7461 of the Minnesota General Statutes 1923 provides:

"Unless otherwise provided in the certificate or by-laws, at every meeting each stockholder or member, resident or non-
resident, shall be entitled to one vote in person, or by proxy made within one year or other times specially limited by law,
for each share or other lawful unit of representation held by him in his individual, corporate, or representative capacity."
This objection is clearly met by the bylaws of the defendant corporation [**12] in "otherwise providing" as follows:
"At each meeting of the stockholders every stockholder having the right to vote shall be entitled to vote in person, or by
proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years
prior to said meeting, unless said instrument provides for a longer period."
(The case mentioned several other cases with similar issues:) While these cases and others are based upon different facts
and involve varying situations, they seem altogether to sustain the conclusion that voting trust agreements are not
illegal per se. Undoubtedly many of such agreements have at times been held invalid by the courts, but these holdings
have generally been based upon a variety of invalidating circumstances, such as want of consideration, the voting power
not being coupled with an interest, fraud, or having an illegal or improper purpose.
The facts in the case at bar fail to disclose any of these elements. There is no want of consideration or fraud alleged or
shown. The voting power in the three trustees is coupled with an interest because one of the trustees is a substantial owner
of common stock of the corporation, and all are charged with the duty of protecting and conserving the property for the
benefit of those who became purchasers of preferred stock and bonds upon the strength of the trust agreement itself. And
the purpose of the agreement was and is legitimate and wholesome. The plan was originally conceived as a matter of civic
pride by enterprising citizens of Minneapolis to have an outstanding hostelry commensurate with the generally progressive
character of the city. To make this possible, it involved the matter of inviting combinations of capital in substantial
amounts. This co-operation could only be secured by having those who invested their money assured of the fact that there
would be a continuity of management during a period of years until the new enterprise would have an opportunity to
justify a successful financial future. This feature of adequate financing was covered by the trust agreement controlling the
voting power of the common stock over a period of years under certain circumstances and conditions, and the securities
and stock were sold to the public upon the basis of this representation.
All other things aside, it would be a manifest injustice to the large number of holders of bonds and preferred stocks, not
parties to this suit, to adjudge and hold illegal a trust agreement upon the strength of which they had invested their money
in the enterprise. A consideration of this phase of the question alone should sustain the trust agreement here.
CASE LAW/ DOCTRINE:

"It may be said, finally, that voting trust agreements are valid and binding, if based upon a sufficient consideration, if they
do not contravene public policy or a positive prohibitory statute, and if they do not sound in fraud or wrong against the
stockholders. Wherefore, the object and not the form of the agreement furnishes the test, and where the trust is voluntarily
created as a condition precedent to a loan to protect those who have furnished the money that has put the life into a
corporation, the courts should not seek further for a consideration."
CONCURRING OPINION:
KENYON, Circuit Judge.
CORPORATION LAW
Case Digest
I concur in the affirmance of this case solely on the ground that plaintiff and intervener are not in position to question the
legality of the voting trust, as they purchased the trust certificates with full knowledge of the trust agreement and therefore
of the limitation of their rights.

CORPORATION LAW
Case Digest
111 NIDC v. AQUINO AUTHOR: Franch Galanza
G.R. No. L-34192 June 30, 1988
TOPIC: Voting Trust
PONENTE: Padilla, J.
FACTS
1. In 1965, the total indebtedness of Batjak amounted to P 11.9M. As security, Batjak had mortaged its 3 coco-oil
processing mills is Davao City, Misamis and Leyte to Manilabank, Republic Bank and PCI Bank. Moreover, as it was
necessary to place additional capital to optimize the operation of the mills, Batjak obtained “financial assistance” from
PNB.
2. Per Batjak’s agreement with PNB, the following happened:
a. NIDC (a PNB subsidiary) invested P 6.7M in Batjak in the form of preferred shares, convertible within 5yrs at par into
common stock.
b. The 3 mortgagee banks released in favor of PNB the mortgages they held; Batjak also executed first mortgages in favor
of PNB
c. PNB granted Batjak an export-advance line of P 3M, later increased to P 5M.
d. A voting trust agreement (VTA) was executed in favor of PNB by the stockholders representing 60% of the outstanding
paid-up and subscribed shares of Batjak. (The VTA was for a period of 5yrs, subject to renegotiation)
3. In 1965, as Batjak was insolvent, PNB / NIDC foreclosed on the 3 mills. Subsequently, ownership was consolidated in
NIDC.
4. In 1970, Batjak wrote to NIDC inquiring if it was interested in a renegotiation. Having received no reply, it wrote
another letter informing NIDC that it (Batjak) would safely assume that NIDC was no longer interested. It then sent a third
letter asking for a complete accounting of the assets, properties, management and operation of Batjak, preparatory to the
turn-over and transfer of the shares covered by the VTA. NIDC replied and refused to comply.
5. NIDC replied and refused to comply.
6. Batjak sued for mandamus. Batjak also filed a petition for receivership of property / assets. 8. NIDC files a motion to
dismiss; denied. Subsequentky, the CFI judge granted the petition for receivership, appointing 3 receivers.
ISSUE:
Whether or not NIDC was constituted as trustee of the assets management and operations of Batjak due to the expiration of
the Voting Trust Agreement.
HELD:
NO. A Voting Trust Agreement only transfers voting or other rights pertaining to the shares subject of the agreement, or
control over the stock.
RATIO:
1. Stockholders of a corporation that lost all its assets through foreclosures cannot go after those properties.
2. The acquisition by PNB-NIDC of the properties in question was not made or effected under the capacity of a trustee but
as a foreclosing creditor for the purpose of recovering on a just and valid obligation of Batjak.
CASE LAW/ DOCTRINE:

A Voting Trust Agreement only transfers voting or other rights pertaining to the shares subject of the agreement, or control
over the stock.

CORPORATION LAW
Case Digest
112 RINGLING v. RINGLING BROS. AUTHOR: Rhona Burce
November 4, 1946 29 Del. Ch. 318
TOPIC:Pooling and voting agreements Petitioner shareholder contested the validity of the election of
PONENTE:Seitz, Vice-Chancellor. directors and officers of defendant corporation. The election
of directors and officer took place at the corporation's annual
meeting of the stockholders and directors. The issue was the
validity of a stock-pooling agreement between the shareholder
and one of several defendant stockholders.The court found
that the stock-pooling agreement was valid and enforceable.
FACTS
1.PetitionerEdith Conway Ringling contests the validity of the election of directors and officers of the defendant
corporationRingling Bros.-Barnum & Bailey Combined Shows, Inc., which was held in 1946during the corporation’s
annual meeting of stockholders and directors.
2. The 1000 shares of authorized and issued common stock of defendant corporationwere owned or controlled as
follows:Petitioner Edith Conway Ringling - 315 shares, defendant Aubrey B. Haley- 315 shares, and defendant John
Ringling North - 370 shares.These shares of stock possessed cumulative voting rights.
3. The company’s board was comprised of seven members, and if each shareholder voted independently, the most likely
outcome would be for each shareholder electing two board members with North selecting the extra member.
4. In 1941, petitioner Ringling and defendant Haley entered into an agreement providing for joint action in matters
affecting their ownership of stock and interest in the defendant corporation, and that the parties desired to continue to act
jointly in all matters relating to their stock ownership.
5. As a result, petitioner Ringling and defendant Haley contracted to pool their votes, wherein each selected two members
and then used their remaining votes to select a fifth member of their choosing.
6. The agreement also provided for anarbitrator provisionto help the parties decide how to vote. “In the event the parties
fail to agree with respect to any matter covered by the voting rights, the question in disagreement shall be submitted for
arbitration to Karl D. Loos.”
7. At the 1943, 1944, and 1945 stockholders' meetings, the parties to the agreement voted together and by virtue of their
ownership of a majority of the stock and the cumulative voting provisions thereof. They elected five out of the seven
directors on each occasion.
8. However,during the 1946 annual stockholders' meeting, Haley could not attend the meeting and so she sent her husband
as proxy. Butinstead of following Loos’ advice, the husband chose to move for adjournment of the meeting.
9. Arbitrator Loos then directed that the stock of the two parties should be voted for five named nominees for directors
(Edith Conway Ringling, Robert Ringling, William P. Dunn, Jr., Aubrey B. Haley and James A. Haley).
10. However, Mr. Haley as proxy for his wife, contrary to the instructions of Loos, voted all his wife's shares for the
election of Aubrey B. Haley and James A. Haley.
11. Defendant Haley argued that the agreement between her and petitioner was invalid as it took the voting power away
from the shareholders and gave it to a third party (Loos). Defendants further contend that the arbitration provision has the
effect of providing for an irrevocable separation of voting power from stock ownership and that such a provision is
contrary to the public policy of this state.
ISSUE:Whether or not the agreement between defendant Haley and petitioner Ringling to pool their votes was valid.
HELD: Yes. The court concluded that the agreement was sufficiently definite in terms of the duties and obligations
imposed on the parties to be legally enforceable. The agreement was not a voting trust within the meaning of that term in
the Delaware General Corporation Law ß 18 and as such was not invalid for failure to comply with the provisions thereof.

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Case Digest
RATIO:
1. The parties agreed to agree as to how they would vote their stock, but they also provided that they would be bound by
the decision of a named person in the event they were unable to agree. The Agreement to agree has, therefore, provisions
that are capable of being enforced with respect to particular facts. Moreover, the very nature and object of the Agreement
render it impossible for the parties to do more than agree to agree, and to provide an enforceable alternative in the event no
agreement is reached.
2. The Agreement does not fall within the limitations of a voting trust (see Notes below for the definition). The
stockholders under the present Agreement vote their own stock at all times which is the antithesis of a voting trust
because the latter has for its chief characteristic the severance of the voting rights from the other attributes of
ownership.
3. Voting trustees have continuous voting control for the period of time stipulated in the agreement of trust. While here,
the right of the arbitrator to direct the vote is limited to those particular cases where a stockholder's vote is called for and
the parties cannot agree. True, the arbitration provision gives teeth to the Agreement but the parties desired that they
should have the initial choice to determine policy in so far as it was determined by the vote of their shares and that a third
party identified as an arbitrator should only resolve a conflict. In a voting trust as generally understood, the trustees in the
very first instance determine policy and implement it by their votes.
4. This Agreement is actually a variation of the well-known stock pooling agreement and as such is to be distinguished
from a voting trust. Such agreements are distinct from voting trusts, and are not controlled by the same principles." Hence,
the present Agreement is not a voting trust within the meaning of that term as used in Section 18 of our General
Corporation Law and as a consequence, is not invalid for failure to comply with the provisions thereof.
5. There is no constitutional or statutory objection to the Agreement and defendants do not seriously challenge the legality
of its objects. Indeed, in my opinion the objects and purposes of the Agreement as they are recited in the Agreement are
lawful in principle and no evidence was introduced which tended to show that they were unlawful in operation.
CASE LAW/ DOCTRINE:
Generally, agreements and combinations to vote stock or control corporate action and policy are valid, if they seek
without fraud to accomplish only what the parties might do as stockholders and do not attempt it by illegal proxies, trusts,
or other means in contravention of statutes or law.
Note:
- Stock pooling agreements are distinct from voting trusts, and are not controlled by the same principles.
- A voting trust as commonly understood is a device whereby two or more persons owning stock with voting powers,
divorce the voting rights thereof from the ownership, retaining to all intents and purposes the latter in themselves and
transferring the former to trustees in whom the voting rights of all the depositors in the trust are pooled.
- The court held that no other shareholder’s rights were violated and public policy was also not violated, as the result of a
pooling agreement. Shareholders should be allowed to benefit as they see fit from their voting rights, and this often means
banding together to strengthen their position. However, the court decided not to invalidate the voting and held that the
members that were voted in by Healey and North would remain.

CORPORATION LAW
Case Digest
113 Buck Retail Stores vs. Harkert AUTHOR: Bea Mationg
157 Neb 867, 62 N.W/ 1954
TOPIC: Control and Management of Corporation- Devices The correct rule is that stockholders’ control agreements are
Affecting Control- Pooling and Voting Agreements valid where it is for the benefit of the corporation, where it
PONENTE: Carter. J. works no fraud upon creditors or other stockholders, and
where it violates no statute or recognized public policy.
FACTS:
1. It is a suit for a declaratory judgment brought by Buck Retail Stores, a corporation, and Earl K. Buck against Harkert,
another corporation, and Mercedes Harkert and Walter Harkert to test the validity of a corporation control agreement
entered into by the parties in their capacities as stockholders in Harkert Houses.
2. Harkert and Buck became acquainted, with the result that Buck entered into four purchase and resale agreements with
Harkert prior to the incorporation of the Harkert restaurants.
3. The evidence shows that Harkert at this time was obligated on repurchase agreements and other forms of indebtedness in
the sum of $44, 750 to persons other than Buck.
4. Harkert was indebted to Buck in the gross face amount to $55, 650 and an agreement was made whereby Buck would
cancel this gross amount of $55, 650 and pay $53, 625 in cash into the business for which he was to receive as a
consideration therefor 40% of the stock of Harkert Houses and equal representation on the board of directors of the
corporation.
5. Figuring the gross amount of indebtedness of Harkert to Buck, it appears that Buck invested a total of $90, 725 in
Harkert Houses.
6. The pertinent part of the contract states “That the number of the members of the board of directors of the Harkert
Houses be reduced from 5, as it now is, to the number 4, and that the said 4 members of the New Board shall consist of
Walter Harkert, Mercedes Harkert, Earl Buck, and Rodney Devor, and that the number of members of said Board of
Directors shall be maintained at 4 in number, of which at all times two thereof shall be such persons as representatives or
legatees, and the other two thereof shall be such persons as shall be nominated or designated by the said party of the
second part.” The contract involved was entered into on May 23, 1938. On the date of the agreement, Harkert was the
owner of 2637 shares of stock and Buck Retail Store was the owner of 1198 shares on the day the contract between Buck
and Devor was made.
7. It is contended by the defendants that the agreement violates Article XII, section 5, of the Constitution. In addition, it
contravenes the public policy of the state and is void for that reason.
8. Article XII, section 5, of the Constitution provides: “The Legislature shall provide by law that in all elections for
directors or managers of incorporated companies every stockholder shall have the right to vote in person or proxy for the
number of shares owned by him, for as many persons as there are directors or managers to be elected or to cumulate said
shares and give one candidate as many votes as the number of directors multiplied by the number of his shares shall equal,
or to distribute them upon the same principle among as many candidates as to distribute them upon the same principle
among as many candidates as he shall think fit, and such directors or managers shall not be elected in any other manner”.
ISSUE: WON the contract violates the Article XII, section 5, of the Constitution with regard to Corporate control.
HELD: No. The elections of directors after the agreement were held in accordance with the method prescribed in Article
XII, section 5 of the Constitution. It was held in the manner prescribed.
RATIO:
The Court believes that the stockholders’ control agreements are valid where it is for the benefit of the corporation, where
it works no fraud upon creditors or other stockholders, and where it violates no statute or recognized public policy.
The Court concluded that the stockholders’ control agreements are valid. If they are based on a sufficient consideration
between the contracting stockholders they are valid and binding if they do not contravene any express constitutional or
statutory provision or contemplate any fraud, oppression, or wrong against creditors or other stockholders, or other illegal
object.
The purpose of the Constitutional provision was to provide for cumulative voting in the election of directors or managers
of incorporated companies in order to secure to minority stockholders a greater representation in the management of the
corporation’s business.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
The Court believes that the stockholders’ control agreements are valid where it is for the benefit of the corporation, where
it works no fraud upon creditors or other stockholders, and where it violates no statute or recognized public policy.

CORPORATION LAW
Case Digest
114 McQuade v Stoneham AUTHOR: Mercado, Christopher Dann C.
TOPIC: Pooling and Voting Agreements

FACTS
16. Defendant Stoneham became the owner of 1,306 shares, or a majority of the stock of National Exhibition
Company.
17. McQuade and McGraw each purchased and paid 70 shares of the defendant’s stocks.
18. As a part of the transaction, the following agreements has been entered into by them:
• That they will try their best to occupy the following positions:
o Directors: Charles A. Stoneham, John J. McGraw, Francis X. McQuade – with the right to the
party of the first part [Stoneham] to name all additional directors as he sees fit.
o Officers: Charles A. Stoneham, President, John J. McGraw, Vice-President, Francis X.
McQuade, Treasurer.
• That no salaries are going to be paid to any of them, except to the president, vice-president and
treasurer.
• That the agreement will continue to be enforce until such time that they are no longer the holder of
their respective shares of 70 of McQuade, 70 of McGraw, and 1,166 of Stoneham.
19. In pursuance of this contract Stoneham became president and McGraw vice president of the corporation.
McQuade became treasurer. The board of directors consisted of seven men. The four outside of the parties hereto
were selected by Stoneham and he had complete control over them.
20. At one meeting, contrary to their agreement, McQuade lost his position as treasurer because Stoneham and
McGraw refrain from voting, and the other for voted for someone else.
21. And in another meeting, McQuade was dropped as director.
22. Stoneham and McGraw did not keep their agreement with McQuade to use their best efforts to make each other
hold their positions.
23. Thus, McQuade brought this case for specific performance of their agreement.
24. The trial court has found that plaintiff was removed because he had opposed the dominant Stoneham by
challenging his power over the corporate treasury and for no misconduct on his part. It also found that plaintiff was
removed by Stoneham for protecting the corporation and its minority stockholders.
25. Thus, the petition before the court.
ISSUE: Whether or not the agreement between McQuade, Stoneham and McGraw pertaining to the control of the
positions of the corporation may be enforced and is valid
HELD: No. A contract is illegal and void so far as it precludes the board
of directors, at the risk of incurring legal liability, from changing officers, salaries, or policies or retaining individuals in
office, except by consent of the contracting parties.
RATIO:
The stockholders may not, by agreement among themselves, control the directors in the exercise of the judgment vested in
them by virtue of their office to elect officers and fix salaries. Directors may not by agreements entered into as
stockholders abrogate their independent judgment.
Stockholders may, of course, combine to elect directors. That rule is well settled. As Holmes, C. J., pointedly said: ‘If
stockholders want to make their power felt, they must unite. There is no reason why a majority should not agree to keep
together.’ The power to unite is, however, limited to the election of directors and is not extended to contracts whereby
limitations are placed on the power of directors to manage the business of the corporation by the selection of agents at
defined salaries.
The minority shareholders whose interests McQuade says he has been punished for protecting, are not, aside from himself,
complaining about his discharge. He is not acting for the corporation or for them in this action. It is impossible to see how
the corporation has been injured by the substitution of Bondy as treasurer in place of McQuade.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
A contract is illegal and void so far as it precludes the board
of directors, at the risk of incurring legal liability, from changing officers, salaries, or policies or retaining individuals in
office, except by consent of the contracting parties.

CORPORATION LAW
Case Digest
115. Clark vs. Dodge AUTHOR: Madagascar mamal
January 8, 1936 269 NY 410 Where the directors are the sole stockholders, there seems to
TOPIC: Devices Affecting Control be no objection to enforcing an agreement among them to
c) Pooling and Voting Agreements vote for certain people as officers.
PONENTE: Crouch, J.
FACTS
1. The two corporate defendants are New Jersey corporations manufacturing medicinal preparations by secret
formulae. The main office, factory and assets of both corporations are located in the State of New York.
2. Clark owned twenty-five per cent and Dodge seventy-five per cent of the stock of each corporation.
3. Dodge – took no active part in the business;
President of Bell & Company, Inc., and nominally general manager of Hollings-Smith Company, Inc.
4. Clark - director and held the offices of treasurer and general manager of Bell & Company;
Formulae and methods of manufacture of the medicinal preparations were known to him alone.
5. Under date of February 15, 1921, Dodge and Clark, entered an agreement and Dodge desired that Clark continue to
his work and should share his knowledge of the formulae to Dodge’s son.
6. Clark on his part agreed to disclose the specified formula to the son and to instruct him in the details and methods of
manufacture; and further, at the end of his life to bequeath his stock — if no issue survived him — to the wife and
children of Dodge.
7. The complaint alleges due performance of the contract by Clark and breach thereof by Dodge in that he has failed to
use his stock control to continue Clark as a director and as general manager, and has prevented Clark from receiving
his proportion of the income, while taking his own, by causing the employment of incompetent persons at excessive
salaries, and otherwise.
ISSUE: WON the contract is illegal as against public policy within the decision in McQuade v. Stoneham (263 N. Y. 323)
HELD: No. If the enforcement of a particular contract damages nobody — not even, in any perceptible degree, the public
— one sees no reason for holding it illegal.
RATIO:
The rule that all the stockholders by their universal consent may do as they choose with the corporate concerns and assets,
provided the interests of creditors are not affected, because they are the complete owners of the corporation, cannot be
invoked here." That was because all the stockholders were not parties to the agreement there in question. So, where the
public was not affected, "the parties in interest, might, by their original agreement of incorporation, limit their respective
rights and powers," even where there was a conflicting statutory standard.
There can be no doubt that the agreement here in question was legal and that the complaint states a cause of action. There
was no attempt to sterilize the board of directors, as in the Mansonand McQuade cases. The only restrictions on Dodge
were:
(a) that as a stockholder he should vote for Clark as a director — a perfectly legal contract;
(b) that as director he should continue Clark as general manager, so long as he proved faithful, efficient and competent —
an agreement which could harm nobody;
(c) that Clark should always receive as salary or dividends one-fourth of the "net income." For the purposes of this motion,
it is only just to construe that phrase as meaning whatever was left for distribution after the directors had in good faith set
aside whatever they deemed wise;
(d) that no salaries to other officers should be paid, unreasonable in amount or incommensurate with services rendered — a
beneficial and not a harmful agreement.
Judgment of the Appellate Division reversed.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
"As the parties to the action are the complete owners of the corporation, there is no reason why the exercise of the power
and discretion of the directors cannot be controlled by valid agreement between themselves, provided that the interests of
creditors are not affected."

CORPORATION LAW
Case Digest
116 GOTTSCHALK v. AVALON REALTY AUTHOR: JANNA
June 22, 1946, 249 Wis. 78 Wisconsin Statute provided: each stock = 1 vote, unless
TOPIC: Devices affecting control – Classification of shares there’s a contrary provision in articles of incorporation;
PONENTE: RECTOR, J. **Denial of voting right need not be expressly stated, but
may be implied.**
FACTS
1. 1928 – Avalon Realty Co. (appellant) was organized for the purpose of “buying, selling, developing, exchanging and
dealing in all kinds of real property […] and personal property. It constructed a building with apartments, stores, and a
movie theatre, which was leased to the Avalon Theatre Co. and other tenants.
2. 1936 – Financial difficulties default on first-mortgage bond. Reorganized under sec.77b of the Bankruptcy Act.
3. Under the reorganization : (a) Each first-mortgage bondholder received a new 5 percent first-mortgage bond,
equivalent to ½ of the principal of his old bond. Bondholder received first preferred stock for the balance of the
principal plus interest on the old bond; (b) General creditors received second preferred stock; (c) Ownership of
common stock was not changed but placed in voting stock of 4 members, 3 of whom were to be elected by
bondholders, and one by holders of the common stock; (d) Vacancy in the position of: (1) trustee representing
common stock = filled by common stock holders; (2) trustee representing bondholders = filled by remaining trustees;
(e) Voting trust was to remain in effect as long as any of the new bonds or first preferred stock was outstanding.
4. Stipulation in the articles of incorporation stated the ff:

(a) "First preferred stock shall have the right to vote whenever default shall exist in the payment of dividends for any
year after July 1, 1951.
(b) "Second preferred stock shall be entitled to a preference as to dividends and division of assets over the common
stock of the company. . . . Said stock shall have the right to vote after default in the payment of dividends for any
two years after July 1, 1951."
5. Before this case, there was no objection to the sole exercise of voting trustees’ right to vote at all stockholders meeting.
6. Nov. 1, 1944 – Gottschalk, Muskat, and Ruppa (respondents) filed against Avalon Realty Co. (officers and directors)
and Avalon Theatre Co. to prevent the sale of the corporation’s property and for certain other relief.
7. Silliman, sole holder of common stock, filed a cross complaint against her co-defendant officers, demanding that sale
of the property without her consent be prohibited.
8. Court gave interlocutory judgment to prevent sale without authority of stockholders. Avalon Realty appealed.
9. January 22, 1945 – at the annual stockholders’ meeting, sale of the corporate property was decided. Thereafter, it was
sold subject to a temporary restraining order which had been entered in the interim.
10. Offer to purchase was accepted by voting trustees voting the common stock. Their action was ratified by the directors.
11. Sec. 182.15 (1), Stats., provides:

(a) Each stockholder = entitled to one vote for each share of stock, UNLESS there’s a contrary provision in articles of
incorporation, and this is recited in each certificate of stock issued by the corporation
(b) Corporation may, in its articles, authorize preferred stock.
(c) May provide "for denying or restricting the voting power of such preferred stock."
(d) It is required that the preferred stock certificates = state all privileges and restrictions upon such stock.
12. Gottschalk et al. argue that preferred stock is entitled to vote unless the right is expressly denied, and there was no such
express denial.

CORPORATION LAW
Case Digest
ISSUE: (1) Whether provision authorizing voting rights of first and second preferred stock holders when default should
exist after July 1, 1951 constitute a denial of right to vote prior to that time; (2) Whether first and second preferred
stockholders may vote in the corporate transactions.
HELD:
(1) NO, there was no denial of a prior right to vote, because there is no such right.
(2) NO, first and second preferred stockholders may not vote in corporate transactions, because corporate articles deny
them the right to vote prior to the happening of the specified contingencies* ( see #4 of facts).
RATIO:
1. Sec. 182.13 specifies that a corporation may in its articles authorize preferred stock and it may provide for denying
or restricting the voting power of such preferred stock.
2. The provision [in the articles of incorporation of Avalon] that such stock may vote [only] upon the happening of
such contingencies clearly implies that it may not [do so] until such contingencies occur. Any other interpretation
of the language would render it superfluous and without meaning.
3. Denial [of voting rights] may exist expressly or by necessary implication. Denial may exist under an express
provision even though the denial may not be expressed. Such is the situation in this case. We agree that unless a
denial is clearly manifested, it should not be given effect, but where, as here, it is clear, it should be given effect
even though it is not express.
CASE LAW/ DOCTRINE:
“Unless a denial of a stockholder's right to vote is clearly manifested, it should not be given effect, but where it is clear, it
should be given effect even though it is not express.”

CORPORATION LAW
Case Digest
117. Gokongwei, Jr. v. SEC/ Andres & Jose Soriano/ AUTHOR: Keith Meridores
Enrique Zobel/ Miguel Ortigas/ Antonio Prieto/ SanMig Twinkle’s note: credits to Keith, I deleted the part not
Corp, et. al related to the topic.
April 11, 1979, GR No. L-45911
TOPIC:Prescribing qualifications for directors; founding
Shares
PONTENTE:Antonio, J.,
FACTS :
1. On Oct. of 1976, he filed with the SEC a declaration of nullity of its amended by laws, plus damages, and a prayer for
preliminary injunction against the majority of the board of directors.
2. Gokongwei assigned several causes of action all of which stemmed from the act of the board in amending the by-law.
- 1st cause of action: Gokongwei alleged that board had no authority; he was assailing the authority granted to the BoD
through a resolution by the stockholders in 1961.He contends that the 1961 resolution is no longer applicable because the
outstanding capital stock back then was only P70,139,740, and at the time of the amendment in 1976, the outstanding and
paid up shares totaled P301,270,430 (presumably, there were more stockholder during the time of the amendment. i.e. new
stockholders weren’t able to give their consent or say in the resolution granting the BoD authority)
- 2nd cause of action: authority granted in 1961 was already exercised in 1962-63; authority now ceased to exist
- 3rd cause of action: membership of BoD now is different from the time when the authority was given in 1961. (it’s like
saying authority was given to the old BoD)
- 4th cause of action: Gokongwei had all the qualifications of being elected to the BoD; and that he had acquired “vested
rights” because he was already a stockholder before the amending of the by-laws
3. A series of motions were filed by both parties. Gokongwei filed before the SC this petition for Certiorari, Mandamus,
and Injunction assailing the SEC’s decision.
ISSUE:Whether or not the corporation has the power to provide for the qualifications of its directors?
HELD: YES.
RATIO:
1. Section 21 of the Corporation Law (old corpo law), a corporation may prescribe in its by-laws "the qualifications, duties
and compensation of directors, officers and employees."
2. "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.'"
3. 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."
4. Pursuant to section 18 of the Corporation Law (old corpo 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.
5. 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.
6. It cannot be said, therefore, that Gokongwei has a vested right to be elected director
CASE LAW/ DOCTRINE:
3. 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.
DISSENTING/CONCURRING OPINION: TEEHANKEE, CONCEPCION JR., FERNANDEZ and GUERRERO, JJ.,
1. The prohibition and disqualification therein provided shall not apply to petitioner Gokongwei until and after he shall
have been given a new and proper hearing" by the corporation's board of directors and the board's decision of
disqualification
2. The board by 3/4 vote the arbitrary power to bar any stockholder from his right to be elected as director by the simple
expedient of declaring him to be engaged in a "competitive or antagonistic business" or declaring him as a "nominee" of
the competitive or antagonistic" stockholder are illegal, oppressive, arbitrary and unreasonable.

CORPORATION LAW
Case Digest
3. The questioned amended by-laws specifically tailored to discriminate against petitioner and depriving him in violation
of substantive due process of his vested substantial rights as stockholder of respondent corporation.
4. The amended by-laws as violate specific provisions of the Corporation Law which grant and recognize the right of a
minority stockholder like petitioner to be elected director by the process of cumulative voting ordained by the Law.

CORPORATION LAW
Case Digest
118 SHERMAN & ELLIS, lnc., v. INDIANA MUTUAL AUTHOR: N. Manalo
CASUALTY CO. et al. A corporations may, at least for a limited period, delegate to
(June 30, 1930, 41 F.2d 588) a stranger certain duties usually performed by the officers.
TOPIC: Management Contracts On the other hand, there are duties, the performance of
PONTENTE: Evans which may not be indefinitely delegated to outsiders.
FACTS
1. The Sherman & Ellis, Inc., (“Sherman”) entered into a contract with the Indiana Mutual Casualty Co., (“Indiana”) to
take over its management for a 20-year period.
2. The compensation for the services was agreed upon and stated in the agreement. Then, Indiana terminated its contract
after some difficulties arose between the Sherman and the Indiana state department.
3. The corporation then sought to enforce specific performance of the contract and to recover damages.
ISSUE: WON appellant was merely the soliciting agent of the casualty company
HELD: No.
It was against public policy for the casualty company to contract away the duties performed by its officers for a period of
20 years, leaving nothing of importance for the board of directors but the unimportant ministerial duties.
RATIO:
It contemplated the substitution of appellant for the officers of the casualty company. What was the casualty company's
business? To write casualty insurance and adjust the losses growing out of such insurance. If there existed a conflict of
opinion between the board and appellant, whose voice under this contract would control? Obviously, appellant's. The
length of time during which the agreement was to operate likewise indicated that not only managerial powers were
delegated, but the entire policy of the casualty company business was to be fixed and determined by appellant. No other
conclusion can be drawn from this agreement and the evidence than that the casualty company was to be merely an
instrumentality through which appellant was to conduct a casualty insurance business in the state of Indiana. The
agreement which accomplished this result transcends the spirit and theory upon which corporate franchises are based, and
is void.
CASE LAW/ DOCTRINE:
A corporations may, at least for a limited period, delegate to a stranger certain duties usually performed by the officers. On
the other hand, there are duties, the performance of which may not be indefinitely delegated to outsiders.

CORPORATION LAW
Case Digest
119. Benintendi v Kenton Hotel Author: Sarah
294 N.Y. 112 (1945), 5 April 1945 Note:
TOPIC: Device affecting Control: Unusual voting
and quorum requirements
PONENTE: Desmond
Facts:
1. Plaintiffs (minority) own 1/3, and defendants (majority) own2/3, of the stock of Kenton Hotel, Inc.
2. On 11 March 1941, the stockholders of the corporation amended the by-laws.
3. The adoption are as follows:
(a) That no action should be taken by the stockholders except by unanimous vote of all of them; if, however, thirty days'
notice of the meeting had been given, unanimous vote of the stockholders present in person or by proxy should be
sufficient;
(b) That the directors of the corporation should be the three persons receiving, at the annual stockholders' meeting, the
unanimous vote of all the stockholders;
(c) That no action should be taken by the directors except by unanimous vote of all of them;
and (d) That the by-laws should not be amended except by unanimous vote of all the stockholders.
4. Plaintiff brought suit against defendant to have the following by-laws above adjudged valid and to prohibit
stockholders from doing anything inconsistent therewith.
5. Defendants alleged that the adoption of by-laws is illegal because they were not present at the stockholders’
meeting when the by-laws were adopted nor did they receive any notice of the meeting.
6. Special Term and Appellate Division held that (a) and (b) by-laws are invalid while the (c) and (d) are valid.
7. Both parties appealed.
Issue: WON the adoption of by-laws are valid
Held: The first three by-laws are invalid
Ratio:
The first three by-laws are invalid because unanimous vote of all is needed (rather it is a requirement).
- First by-law – The State has decreed that every stock corporation must have a representative government, with
voting conducted conformably to the statutes, and the power of decision lodged in certain fractions, always more
than half, of the stock. This whole concept is destroyed when the stockholders, by agreement, by-law or
certificates of corporation provides for unanimous action, giving the minority an absolute, permanent and all-
inclusive power of veto.
- Second by-law- An agreement by a stockholder to vote for certain persons as directors is not unlawful since the
directors are still, under such an agreement, elected by a plurality of votes, as the statute mandates. But a
requirement, wherever found, that there shall be no election of directors at all unless every single vote be cast for
the same nominees, is in direct opposition to the statutory rule - that the receipt of a plurality of the votes entitles a
nominee to election.
- A requirement that there shall be no election of directors at all unless every single vote be cast for the same
nominees, is in direct opposition to the statutory rule that the receipt of plurality of the votes entitles a nominee to
election. (See Sec. 24)
- Third by-law- Requiring unanimity before the BOD can take action on any corporate matter makes it impossible
for the directors to act on any matter at all. In all acts done by the corporation, the major number must bind the
lesser, or else differences could never be determined nor settled.
The fourth by-law is valid because there is no statute requiring the unanimity of all stockholders.
- Once proper by-laws have been adopted, the matter of amending them is no concern of the State.
Case Law/Doctrine:

CORPORATION LAW
Case Digest
120 Strategic Alliance Dev. Corp. vs. Radstock AUTHOR: De Guzman, Bien
Securities Ltd., Compromise Agreement
December 4, 2009, G.R. No.178158
TOPIC: Duties of a Director
PONENTE:Carpio, J;
FACTS
1.PNCC was incorporated in 1966 for a term of fifty years under the Corporation Code with the name Construction
Development Corporation of the Philippines (CDCP). PD 1113, issued on 31 March 1977, granted CDCP a 30-year
franchise to construct, operate and maintain toll facilities in the North, South Luzon Tollways and Metro Manila
Expressway.
2. Between 1978 and 1981, Basay Mining Corporation (Basay Mining), an affiliate of CDCP, obtained loans from
Marubeni Corporation of Japan (Marubeni) amounting to 5,460,000,000 yen.A CDCP official issued letters of guarantee
for the loans, committing CDCP to pay solidarily for the full amount but there was no CDCP Board Resolution authorizing
the issuance of the letters of guarantee.
3.Later, Basay Mining changed its name to CDCP Mining Corporation (CDCP Mining). CDCP Mining secured the
Marubeni loans when CDCP and CDCP Mining were still privately owned and managed.
4. In 1983, CDCP changed its corporate name to PNCC to reflect the extent of the Government's equity investment in the
company, which arose when government financial institutions converted their loans to PNCC into equity following
PNCC’s inability to pay the loans. . In fine, the Government owns 90.3% of the equity of PNCC and only 9.70% of
PNCC’s voting equity is under private ownership.
5. Marubeni loans to CDCP Mining remained unpaid. On 20 October 2000, the PNCC Board of Directors (PNCC Board)
passed Board Resolution No. BD-092-2000 admitting PNCC’s liability to Marubeni for P10,743,103,388.
6. In January 2001, Marubeni assigned its entire credit to Radstock for US$2 million or less than P100 million. In short,
Radstock paid Marubeni less than 10% of the P10.743 billion admitted amount. Radstock immediately sent a notice and
demand letter to PNCC.
7. Radstock immediately started actions for the collection of the amount.
8. PNCC and Radstock entered into a Compromise Agreement. Under this agreement, PNCC shall pay Radstock the
reduced amount of P6,185,000,000.00 in full settlement of PNCC’s guarantee of CDCP Mining’s debt allegedly totaling
P17,040,843,968.00 (judgment debt as of 31 July 2006). To satisfy its reduced obligation, PNCC undertakes to (1) "assign
to a third party assignee to be designated by Radstock all its rights and interests" to the listed real properties of PNCC; (2)
issue to Radstock or its assignee common shares of the capital stock of PNCC issued at par value which shall comprise
20% of the outstanding capital stock of PNCC; and (3) assign to Radstock or its assignee 50% of PNCC’s 6% share, for
the next 27 years, in the gross toll revenues of the Manila North Tollways Corporation.
ISSUE:
1. Whether or not thePNCC Board Acted in Bad Faith and with Gross Negligence?
2. Whether or not the Compromise Agreement between PNCC and Radstock is valid in relation to the Constitution,
existing laws, and public policy
HELD:
1. Yes. In the present case, the PNCC Board blatantly violated its duty of diligence as it miserably failed to act in good
faith in handling the affairs of PNCC.
2. No, not valid. PNCC may not compromise the obligation. Under the Revised Administrative Code, compromise of
claims from a “government agency” exceeding P100,000 must be submitted to Congress.

CORPORATION LAW
Case Digest
RATIO:
1. PNCC Board Acted in Bad Faith and with Gross Negligence
1. In this jurisdiction, the members of the board of directors have a three-fold duty: duty of obedience, duty of
diligence, and duty of loyalty. Accordingly, the members of the board of directors (1) shall direct the affairs of the
corporation only in accordance with the purposes for which it was organized; (2) shall not willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or act in bad faith or with gross
negligence in directing the affairs of the corporation; and (3) shall not acquire any personal or pecuniary
interest in conflict with their duty as such directors or trustees.
2. This is a clear admission by Atty. Francisco of bad faith in directing the affairs of PNCC - that he would not have
recognized the Marubeni loans if his own funds were involved or if he were the owner of PNCC.
3. The act of the PNCC Board in issuing Board Resolution No. BD-092-2000 expressly admitting liability for the
Marubeni loans demonstrates the PNCC Board’s gross and willful disregard of the requisite care and diligence in
managing the affairs of PNCC, amounting to bad faith and resulting in grave and irreparable injury to PNCC and
its stockholders. This reckless and treacherous move on the part of the PNCC Board clearly constitutes a serious
breach of its fiduciary duty to PNCC and its stockholders, rendering the members of the PNCC Board liable under
Section 31 of the Corporation Code.
4. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to
the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the corporation.
2. Compromise Agreement between PNCC and Radstockis not valid
1. PNCC’s toll fees are public funds. PNCC cannot use public funds like toll fees that indisputably form part of the
General Fund, to pay a private debt of CDCP Mining to Radstock. Such payment cannot qualify as expenditure for
a public purpose. The toll fees are merely held in trust by PNCC for the National Government, which is the owner
of the toll fees. Considering that there is no appropriation law passed by Congress for the compromise amount, the
Compromise Agreement is void for being contrary to law, specifically Section 29(1), Article VI of the
Constitution. And since the payment pertains to CDCP Mining’s private debt to Radstock, the Compromise
Agreement is also void for being contrary to the fundamental public policy that government funds or property shall
be spent or used solely for public purposes.
2. Radstock is not qualified to own land in the Philippines. Consequently, Radstock is also disqualified to own the
rights to ownership of lands in the Philippines. Radstock cannot own the rights to ownership of any land in the
Philippines because Radstock cannot lawfully own the land itself. Otherwise, there will be a blatant circumvention
of the Constitution, which prohibits a foreign private corporation from owning land in the Philippines. In addition,
Radstock cannot transfer the rights to ownership of land in the Philippines if it cannot own the land itself. It is
basic that an assignor or seller cannot assign or sell something he does not own at the time the ownership, or the
rights to the ownership, are to be transferred to the assignee or buyer. The third party assignee under the
Compromise Agreement who will be designated by Radstock can only acquire rights duplicating those which its
assignor is entitled by law to exercise. Thus, the assignee can acquire ownership of the land only if its assignor
owns the land. Clearly, the assignment by PNCC of the real properties to a nominee to be designated by Radstock
is a circumvention of the Constitutional prohibition against a private foreign corporation owning lands in the
Philippines. The said circumvention renders the Compromise Agreement void.
CASE LAW/ DOCTRINE:
1. In this jurisdiction, the members of the board of directors have a three-fold duty: duty of obedience, duty of
diligence, and duty of loyalty. Accordingly, the members of the board of directors (1) shall direct the affairs of the
corporation only in accordance with the purposes for which it was organized; (2) shall not willfully and knowingly
vote for or assent to patently unlawful acts of the corporation or act in bad faith or with gross negligence in
directing the affairs of the corporation; and (3) shall not acquire any personal or pecuniary interest in conflict with
their duty as such directors or trustees.

CORPORATION LAW
Case Digest
Bersamin Dissent,
Hence, the silence of P.D. 1113 and P.D. 1894 on the grant to PNCC of the power to enter into compromise agreements
was irrelevant.
It becomes appropriate to stress, for purposes of clarity, that the primary franchise of a corporation should not be confused
with its secondary franchise, if any. According to J.R.S. Business Corp. v. Imperial Insurance, Inc.
For practical purposes, franchises, so far as relating to corporations, are divisible into (1) corporate or general franchises;
and (2) special or secondary franchises. The former is the franchise to exist as a corporation, while the latter are certain
rights and privileges conferred upon existing corporations, such as the right to use the streets of a municipality to lay pipes
or tracks, erect poles or string wires.
The distinction between the two franchises of a corporation should always be delineated. The primary franchise (or the
right to exist as such) is vested in the individuals composing the corporation, not in the corporation itself, and cannot be
conveyed in the absence of a legislative authority to do so; but the special or secondary franchise of a corporation is vested
in the corporation itself, and may ordinarily be conveyed or mortgaged under a general power granted to the corporation to
dispose of its property, except such special or secondary franchises as are charged with a public use.
The general law under which a private corporation is formed or organized is the Corporation Code, whose requirements
must be complied with by individuals desiring to incorporate themselves. Only upon such compliance will the corporation
come into being and acquire a juridical personality, as to give rise to its right to exist and to act as a legal entity. This right
is a corporation’s primary franchise. In contrast, a government corporation is normally created by special law, often
referred to as its charter.
And, secondly, PNCC, prior to its acquisition by the Government, was a private corporation organized under the
Corporation Code, and, as such, it was governed by the Corporation Code and its own articles of incorporation.
PNCC does not "lose" its status as a private corporation, even if we were to assume that it is a GOCC. Second,
neither would such loss of status prevent it from being further classified into an acquired asset corporation.
PNCC is a corporation created in accordance with the general corporation statute. Hence, it is essentially a private
corporation, notwithstanding the government's interest therein through the debt-to-equity conversion imposed by PD 1295.
Being a private corporation, PNCC is subject to SEC regulation and jurisdiction.
Not being a government corporation created by special law, PNCC does not owe its creation to some charter or special
law, but to the Corporation Code. Its powers are enumerated in the Corporation Code and its articles of incorporation. As
an autonomous entity, it undoubtedly has the power to compromise and to enter into a settlement through its Board of
Directors, just like any other private corporation organized under the Corporation Code. To maintain otherwise is to ignore
the character of PNCC as a corporate entity organized under the Corporation Code, by which it was vested with a
personality and an identity distinct and separate from those of its stockholders or members
The resolution, being simply a recognition of a prior indebtedness in favor of Marubeni and the Government, was
clearly issued within the corporation’s powers; hence, it was neither illegal nor ultra vires. Indeed, had PNCC
remained a purely private corporation, no issue would be raised against the propriety of its Board of Directors
thereby recognizing an indebtedness.

CORPORATION LAW
Case Digest
121 Cua Jr. v. Tan AUTHOR: Danna
4 December 2009, G.R. No. 181455-56 Note: This is also case #98 which has exactly the same
TOPIC: Duty of Diligence - Business Judgment Rule topic. I used the facts from case #98. However, I used a
PONENTE: CHICO-NAZARIO, J. different issue.
SC didn’t dismiss the suit because it was a derivative suit.

However, the Court dismissed it for other reasons such as its
being moot and academic.
General Rule: The State will generally not interfere with a

corporation’s corporate and management decisions
Exception: Courts may take cognizance of derivative suits
against corporate directors who are guilty of a breach of
trust (not of mere error of judgment or abuse of discretion),
in such a situation where in an intracorporate remedy would
be futile/useless
FACTS
1 PHILIPPINE RACING CLUB, INC. (PRCI) - domestic corporation that holds a franchise granted under Republic Act
No. 6632, as amended by Republic Act No. 7953, to operate a horse racetrack and manage betting stations. Under its
franchise, PRCI may operate only one racetrack.
2. PRCI’s Articles of Incorporation was amended to include a secondary purpose: To acquire real properties and/or
develop real properties into mix-use realty projects, including, but not limited to, leisure, recreational and memorial parks;
and to own, operate, manage and/or sell these real estate projects.
3. PRCI business operations includes, among others:
• APPROVAL OF THE ACQUISITION OF THE SHARES OF STOCK OF JTH DAVIES HOLDINGS, INC;
• Exchange of the Corporation’s Makati Property with Shares of JTH Davies Holdings, Inc.;
• RATIFICATION OF THE ACTS OF THE BOARD OF DIRECTORS, THE EXECUTIVE COMMITTEE AND
THE MANAGEMENT OF THE CORPORATION FOR FISCAL YEARS 2006 AND 2007;
• APPROVAL OF THE EXCHANGE OF PRCI’S MAKATI PROPERTY FOR SHARES OF STOCK OF JTH
DAVIES HOLDINGS, INC.;
4. Respondents Miguel, et al., as PRCI’s minority stockholders, filed before the RTC a Complaint, denominated as a
Derivative Suit with prayer for Issuance of TRO/Preliminary Injunction, against the rest of the directors of PRCI and/or
JTH. It was based on three causes of action:
• The approval by the majority directors of PRCI of the Board Resolutions dated 26 September 2006 and 11 May
2007 -- with undue haste and deliberate speed, despite the absence of any disclosure and information -- was
anomalous, fraudulent, and extremely prejudicial and inimical to the interest of PRCI. This was committed in
violation of their fiduciary duty as directors of the said corporation;
• Respondent Solomon, as PRCI President, with the acquiescence of the majority directors of PRCI, maliciously
refused and resisted the request of Respondents for complete and adequate information relative to the disputed
Board Resolutions. This brazenly and unlawfully violated the rights of the minority stockholders to information
and to inspect corporate books and records; and
• The majority directors of PRCI illegally and unlawfully constituted themselves as members of the Board of
Directors and/or Executive Officers of JTH. This is because they weren’t officially and formally nominated. Thus,
the actions they have taken are null and void ab initio.
5. Petitioners’ contention: The Civil Case did not constitute a valid derivative suit because Respondents failed to allege in
the Complaint that they had no appraisal rights for the acts they were complaining of. The very allegations made by
Respondents supported the availability of appraisal rights to them. The Complaint was nothing more than a nuisance or
harassment suit against petitioners and the other PRCI directors.
6. Respondents’ (Miguel, et al.) contention: their Complaint was comprised of several causes of action. It wasn’t just a
derivative suit, but also an intra-corporate action arising from devices or schemes employed by the PRCI Board of
Directors, amounting to fraud or misrepresentation, which were detrimental to the interest of the PRCI stockholders.
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ISSUE: Whether or not the Court should dismiss the complaint on the ground that it is not a derivative suit
HELD: No. It is a derivative suit which was filed by the Respondents as a remedy against the devices and schemes
employed by the PRCI Board of Directors, which, the SC found, amounts to mismanagement, misrepresentation, fraud,
and bad faith. (However, the SC found that the derivative suit was dismissible for being moot and academic.)
RATIO:
1. As to a corporation’s corporate and management decisions, the State will generally not interfere with the same.
Questions of policy and of management are left to the honest decision of the officers and directors of a corporation,
and the courts are without authority to substitute their judgment for the judgment of the board of directors. The board
is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the
courts.
2. The board of directors of a corporation, or its majority, controls and directs the affairs of the corporation; but in
drawing to itself the power of the corporation, it occupies a position of trusteeship in relation to the minority of the
stock. The board shall exercise good faith, care, and diligence in the administration of the affairs of the corporation,
and protect not only the interest of the majority but also that of the minority of the stock.
3. Where the majority of the board of directors wastes or dissipates the funds of the corporation or fraudulently disposes
of its properties, or performs ultra vires acts, the court, in the exercise of its equity jurisdiction, and upon showing that
intracorporate remedy is unavailing, will entertain a suit filed by the minority members of the board of directors, for
and in behalf of the corporation, to prevent waste and dissipation and the commission of illegal acts and otherwise
redress the injuries of the minority stockholders against the wrongdoing of the majority. The action in such a case is
said to be brought derivatively in behalf of the corporation to protect the rights of the minority stockholders thereof.
4. Where corporate directors are guilty of a breach of trust — not of mere error of judgment or abuse of discretion — and
intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders
and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholders.
5. A thorough study of the said Complaint, reveals that the distinction claimed by Respondents is deceptive. The
supposed devices and schemes employed by the PRCI Board of Directors amounting to fraud or misrepresentation are
the very same bases for the derivative suit. They are the very same acts of the PRCI Board of Directors that have
supposedly caused injury to the corporation. From the very beginning of the Complaint, Respondents have alleged
that they are filing the same “as shareholders, for and in behalf of the Corporation, in order to redress the wrongs
committed against the Corporation and to protect or vindicate corporate rights, and to prevent wastage and dissipation
of corporate funds and assets and the further commission of illegal acts by the Board of Directors.” Although
Respondents also aver that they are seeking “redress for the injuries of the minority stockholders against the
wrongdoings of the majority,” the rest of the Complaint does not bear this out, and is utterly lacking any allegation of
injury personal to them or a certain class of stockholders to which they belong. Thus, the Court determines that there
is only a derivative suit, based on the devices and schemes employed by the PRCI Board of Directors that amounts to
mismanagement, misrepresentation, fraud, and bad faith.

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The SC didn’t dismiss the case because it is a valid derivative suit. HOWEVER, it found that the derivative suit was
dismissible for being moot and academic. Assuming arguendo that it is not dismissible for mootness, it is still vulnerable to
dismissal for failure to implead indispensable parties, namely, the majority of the PRCI stockholders. The SC also found
that it was dismissible for lack of cause of action.
The SC found that Respondents prematurely filed the suit because they failed to exhaust all other remedies available under
the articles of incorporation, by-laws, laws, or rules governing the corporation or partnership, as required by Rule 8,
Section 1(2) of the IRPICC. The obvious intent behind the rule is to make the derivative suit the final recourse of the
stockholder, after all other remedies to obtain the relief sought have failed.
CASE LAW/ DOCTRINE:

As to a corporation’s corporate and management decisions, the State will generally not interfere with the same. Questions
of policy and of management are left to the honest decision of the officers and directors of a corporation, and the courts are
without authority to substitute their judgment for the judgment of the board of directors. The board is the business manager
of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts.
Where the majority of the board of directors wastes or dissipates the funds of the corporation or fraudulently disposes of its
properties, or performs ultra vires acts, the court, in the exercise of its equity jurisdiction, and upon showing that
intracorporate remedy is unavailing, will entertain a suit filed by the minority members of the board of directors, for and in
behalf of the corporation, to prevent waste and dissipation and the commission of illegal acts and otherwise redress the
injuries of the minority stockholders against the wrongdoing of the majority. The action in such a case is said to be brought
derivatively in behalf of the corporation to protect the rights of the minority stockholders thereof.

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122 OTIS &CO.v. PENNSYLVANIA R. CO. et al. AUTHOR:Palomique, Ernesto III C.
61 F.Supp. 905 (1945) Corporation sold bonds without bidding. Shareholder
TOPIC:Duty of Diligence: Business Judgment Rule corporation requests for a competitive bid and claims
PONENTE:Kalodner, J. Corporation to have acted negligently because of the losses
it incurred as a result of its failure to put the bonds into
bidding.
FACTS
1. Pennsylvania R.R. Co.(PRR)had outstanding a total of $ 28,483,000 'Series A' bonds, maturing April 1, 1977,
bearing interest at the rate of 4 1/2%, payable semi-annually, and redeemable on any interest payment date
subsequent to April 1, 1932, at 102.5 upon 60 days' notice. This bond issue was guaranteed, both as to principal
and interest, by P.R.R.
2. The possibility of refinancing this series of bonds had been under consideration by Mr. Clement, president of
P.R.R., and Mr. Pabst, vice president in charge of finance of P.R.R.
3. When the bond market became so favorable to refinancing, Clement directed Pabst to contact Kuhn, Loeb & Co.
4. The bonds were sold to Kuhn, Loeb and Co. at par and accrued interest subject to approval by the Interstate
Commerce Commission. The transaction was made without bidding.
5. Otis & Co. is a stockholder in the Pennsylvania Railroad Co.
6. Halsey, Stuart & Co., and Otis & Co., by telegrams to Clement and other directors of P.R.R.,requested an
opportunity to submit a competitive bid for the bonds.
7. Petitioner’s Contention:
Halsey, Stuart & Co., and Otis & Co filed a complaint stating that PRRfailed and refused to exercise ordinary care
and judgment in the sale of the bonds and that PRR kept secret the bond issue and refused to deal with any
investment house other than Kuhn, Loeb & Co. Furthermore, it is charged that as a result of failing to 'shop
around,' a half million dollars was lost, and another half million dollars was lost in failing to put the issue to
competitive bidding. In addition, it is also asserted that certain of the directors were influenced because of their
position as directors of several institutions which had made agreements with Kuhn, Loeb & Co. to purchase and/or
sell part of the bond issue.
8. PRR’s defense:
The transaction was an honest exercise of judgment, that the procedure followed was similar to that generally
pursued by railroads, and that it was particularly desirable here.
ISSUE:Whether the officers and directors of Pennsylvania R. CO. are guilty of negligent mismanagement.
HELD: NO. They were in the exercise of their business judgment and they were in good faith.
RATIO:
'The directors are entrusted with the management of the affairs of the railroad. If in the course of management they
arrive at a decision for which there is a reasonable basis, and they acted in good faith, as the result of their
independent judgment, and uninfluenced by any consideration other than what they honestly believe to be for the
best interests of the railroad, it is not the function of the court to say that it would have acted differently and to
charge the directors for any loss or expenditures incurred.'
The bond issue complained of by Otis & Co., a stockholder of PRR, as having been made without bidding was found by
the court to be adequately deliberated and planned, properly negotiated and executed. The court also found that there
was no lack of good faith, no motivation of personal gain or profit; and there was no lack of diligence, skill or care in
selling the issue at a price approved by the Commission and which resulted in a saving of approximately $ 9,000,000 to
the corporations. The various directors were aware of the proposed transaction and its course of conduct; copies of
telegrams and letters from Halsey, Stuart & Co., and Otis & Co. were sent to them; in any event they had a right to rely on
the information supplied by, and the good faith judgment of, those in whose hands the conduct of the everyday affairs of
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the corporation was placed.
Courts have properly decided to give directors a wide latitude in the management of the affairs of a corporation provided
always that judgment, and that means an honest, unbiased judgment, is reasonable exercised by them. Courts will not
interfere with the internal management of the corporation and therefore will not substitute its judgment for that of the
officers and directors. It is also clearly established that mistakes or errors in the exercise of honest business judgment do
not subject the officers and directors to liability for negligence in the discharge of their appointed duties.
CASE LAW/ DOCTRINE:
Requirements for Business Judgment Rule to free the directors of any liability for any loss or expenditures incurred
resulting from the decision:
1. Decision made must have a reasonable basis;
2. Directors must have acted in good faith;
a. Decision made must be the result of the directors’ independent judgment;
b. Decision made must be uninfluenced by any consideration other than what the directors honestly believed to be for
the best interests of the company.

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123 Montelibano v Bacolod-Murcia Milling AUTHOR: Keith Meridores
GR No. L-15092 The board of director adopted a resolution granting an
TOPIC:Business Judgment Rule increase in the share of the planters with a condition (see
PONTENTE: Reyes, JBL, J. fact # 5). The event happened; now, the board is contending
that their resolution was invalid.
FACTS
1.Alfredo and Alejandro Montelibano, and the limited co-partnership Gonzaga & Co. are sugar planter in Negros Occ.
2. They have a milling contract with respondent Bacolod-Murcia Milling.
3. For 30 years (until crop year 1920-1921) they had a contract that provided the share 45-55 (in favor of the planters)
4. In 1936, by virtue of an “Amended Milling Contract” it was changed to 40-60 (in favor of the planters) and extended the
contract from 30, to 45 years.
5. Subsequently later that year in Aug. 1936, the board of directors of respondent company adopted a resolution (written in
Spanish) which granted to its sugar planters an increase in their share in the net profits in the event that the sugar centrals
of Negros Occidental should have a total annual production exceeding one-third of the production of all sugar central mills
in the province. (contained in par. 9 of the resolution)
6. Their contract was amended to include the resolution.
7. In 1953, the production of sugar of the sugar centrals (The La Carlota, The Binalbagan-Isabela, and The San Carlos) of
Negros Occ. Did increase, exceeding 1/3 of the production of all sugar mills in the province.
8. Consequently, the planters demanded and contended that all the sugar central granted 62.5% to their planters (compared
to their 60). Hence, the respondent is obliged to give a similar increase.
9. The board of directors refused contending that resolution were made without consideration and that such resolution was,
therefore, null and void ab initio, being in effect a donation that was ultra vires and beyond the powers of the corporate
directors to adopt.
10. The planters brought suit. The court ruled in favor of the respondent and upheld their contention.
11. Hence this appeal by the planters.
ISSUE:
Whether or not the respondent milling company is bound by its resolution?
HELD:
Yes.
RATIO:
1. The contention that the resolution was without consideration cannot stand. The terms embodied in the resolution were
supported by the same cause and consideration underlying the main amended milling contract (i.e. the extension of another
15 years)
2. With regards to their decision being an ultra vires act; it also cannot stand.
3. The resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or not
it will cause losses or decrease the profits of the central, the court has no authority to review them.
4. It is a well-known rule of law that questions of policy or of management are left solely to the honest decision of officers
and directors of a corporation.
5. The court is without authority to substitute its judgment of the board of directors; the board is the business manager of
the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts.
6. with ratios 4 and 5, I hope you get the idea where the doctrine of “business judgment rule” came from. ☺

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124 Litwin v. Allen AUTHOR:Marvin
25 N.Y.S. 2d 667 (1940) Brief Fact Summary: This is a stockholders derivative
TOPIC:Duty of Diligence: Business Judgment Rule suit against the directors of Guaranty Trust Company,
(Trust), its subsidiary Guaranty Company of New York,
PONENTE: (Guaranty), and J.P. Morgan & Co., (J.P.). The complaint
alleges the directors breached their duty of care when they
entered into the Missouri Pacific Bond Transaction
Synopsis of Rule of Law: Directors of a corporation have

a duty to act with honesty diligence and prudence. A
director is not liable for loss or damage other than what
was proximately caused by his own acts or omissions in
breach of his duty.
FACTS
1. Alleghany Corporation held $23,500,000 of unsecured bonds, which is subordinate to other kinds of bonds, in Missouri
Pacific.
2. Alleghany Corp. bought terminals in Kansas City and St. Josephbut had an unpaid balance of $10,000,000 of the
purchase price.
3. Alleghany needed money to make the payment but because of certain borrowing limitations in its charter, could not
borrow the money. To overcome this limitation and to enable it to complete the purchase, it sold $10,000,000 unsecured
bonds in its Missouri Pacific bonds to banking firm J.P. Morgan & Co. for cash at par value, with an option for
Alleghany to buy backthe bonds within six months for the price at which they were sold to J.P. Morgan.
4. Guaranty Trust Company (Trust Company) made a written commitment to J.P. Morgan to participate in the purchase,
and Guaranty Company of New York (Guaranty Company), a subsidiary of Trust Company, agreed to take over the bonds
upon expiration of the six month repurchase option, if Alleghany failed to exercise the option.
5. The bonds had already been steadily declining in value in 1930 (at the time of transaction). On November 5, 1930, when
the board of directors of Trust Company approved the transaction, the bonds were selling at 102 7/8. On November 18,
1930, when the board of directors of Guaranty Company approved their commitment, the bonds were valued at 98 5/8. On
April 16, 1931, when the six month repurchase option expired, the bonds were selling at 86 high and 81 low.
6.$3M worth of the bonds were sold to Guaranty Trust Company which the latter took them over from Trust Company at
par and carried them on its books as an investment.
7. Shareholders owning 36 out of 900,000 shares of stock in Trust Company (plaintiffs) have brought a derivative suit
against the directors of Trust Company and Guaranty Company, and members of J.P. Morgan (defendants), seeking to
impose liability for losses resulting from the transaction.
ISSUE:
1.Whether the directors breached a duty of care with respect to the Missouri Pacific Bond Transaction.
2. Whether the directors should be liable for the total loss suffered when the bonds were ultimately sold at an 81% loss.
3. Whether all of the directors shall be liable for the breach of the duty of care.
HELD:
1. Yes. The directors plainly failed to bestow the care which the situation demanded because the entire arrangement was so
improvident, risky unusual and unnecessary as to be contrary to the fundamental conceptions of prudent banking practice.
2. No. The directors should only be liable for the portion of the loss which accrued within the six month option period
3. No. All the directors who were present and voted at the relevant meetings are liable.
RATIO:
Option given to seller is invalid. It is against public policy for a bank to sell securities and buy them back at the same
price; similarly, it is against public policy for the bank to buy securities and give the seller the option to buy them back at
the same price because the bank incurs the entire risk of loss with no possibility of gain other than the interest derived from
the securities during the period that the bank holds them. Here, if the market price of the securities rise, the holder of the
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repurchase option would exercise it to recover the securities at a lower price at which he sold them. If the market price
falls, the seller holding the option would not exercise it and the bank would sustain the loss.
A director is not liable for loss or damage other than what was proximately caused by his own acts or omissions in breach
of his duty. Once the option had expired, there was nothing to prevent the directors of the Company that had taken over the
bonds in accordance with its agreement from selling them. Any loss that incurred after the option had expired was a result
of the directors’ independent business judgment in holding them. The further loss should not be laid at the door of the
improper but expired repurchase option.
Directors are not in a position of trustees of an express trust who, regardless of good faith, are personally liable. In this
case, the directors are liable for the transaction because the entire arrangement was improvident, risky, unusual and
unnecessary so as to be contrary to fundamental conceptions of prudent banking practice. Yet, the advice of counsel was
not sought. Absent a showing of exercise of good faith, the directors are thus liable. The ratification by the directors is
equivalent to prior acquiescence and should result in liability. The ratification prevented a possible later rescission on the
ground that the directors did not authorize it.
CASE LAW/ DOCTRINE:
Directors of a corporation have a duty to act with honesty diligence and prudence. A director is not liable for loss or
damage other than what was proximately caused by his own acts or omissions in breach of his duty.
WHAT FACTORS SHOULD BE CONSIDERED IN DETERMINING WHETHER REASONABLE DILIGENCE HAS

BEEN EXERCISED?
The nature of the business, as well as the particular circumstances of each case. The court should look at the facts as
they exist at the time of their occurrence, not aided or enlightened by those which subsequently took place.

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125 Walker v. Man AUTHOR: Pat
253 N.Y.S. 458, February 5, 1931
TOPIC: Duty of Diligence: Business Judgment Rule Plaintiff trustee of a bankrupt corporation brought an action
PONENTE: Collins, J. against defendants, former directors of the corporation, for
dereliction of duty and mismanagement in the conduct of
the bankrupt's affairs. A director filed a motion to dismiss
the amended complaint on the ground that they did not state
facts sufficient to constitute a cause of action against him.
FACTS
1. Frederick Southack & Alwyn Ball, Jr., Inc. (FSAB), is a domestic corporation engaged in the business of managing
real properties, as agents for owners, in New York
2. It was adjudicated as bankrupt in the Federal district in January, 1928
3. FSAB had creditors at that time and it was alleged that the wrongful acts charged were made and done by the
"defendants for the purpose of defrauding" the bankrupt's creditors then existing, or subsequent creditors now
represented by the plaintiff
4. The litigation is by the trustee in bankruptcy of FSAB, and seeks to recover $ 1,677,411.19 from the defendants, as
former directors of the bankrupt corporation, for dereliction of duty and mismanagement in the conduct of the
bankrupt's affairs.
First cause of action

1. That defendant Wheeler was employed by the defendant Alwyn Ball, under an agreement whereby Wheeler was to
receive 18% of the gross amount of any money received by him or the corporation on account of the sale of the
corporation's shares of stock.
− BUT, the claim is made that this agreement was not authorized by any resolution of the board of directors and that
the defendant Alwyn Ball acted without any authority of the corporation or the board
2. Paragraph 15 of the complaint alleges that "At the time of the acts hereinbefore set forth some of the defendants were
directors of the corporation and at the time that other defendants became directors they approved, acquiesced in,
confirmed and ratified the said acts of the other defendant directors so performed as aforesaid."
Second cause of action

1. That the bankrupt advanced to one M. H. Avram or M. H. Avram & Co. the sum of $ 20,000, taking as security
therefor the note of M. H. Avram or M. H. Avram & Co. indorsed by J. D. Lacey
− BUT, this was not authorized by any meeting of the board of directors
− That this loan item remained on the bankrupt's books until the bankruptcy as unpaid and appeared as an asset "in
various statements issued by said corporation from time to time."
2. Paragraph 20 of the complaint charges that the directors "knew or ought to have known the existence of said item upon
the books of the defendant company, yet took no proceedings of any kind or sort, either individually or at board
meeting, or in any other manner……”
Third, Fourth and Fifth causes of action

1. It is alleged that at the time of the declaration of the dividend complained of, the defendants Comstock, Fife, Trisman,
Allen, Alwyn Ball, Jr., Wadham, Alwyn Ball, John S. Ball, Russell and Arnold "were present and/or voted; that the
other defendants herein did approve, ratify and acquiesce in the said declaration of said dividend and did approve of,
participate in and/or receive payment of dividend pursuant to said declaration, and that the said defendants thereafter
failed, neglected and refused to take any steps or proceedings or to make any efforts to recover back said sums on
behalf of said corporation, or to protect the rights of the corporation and to preserve the assets thereof in that
connection."
Ninth cause of action

1. That the defendants had mismanagement with Thayer West Point Hotel Corp. (in which the bankrupt FSAB was
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interested), the bankrupt having guaranteed payment of the bills of the builder and other contractors. It is charged that the
construction costs exceeded what they should have, and as a consequence of this mismanagement regarding the hotel, the
bankrupt FSAB sustained damage in the sum of $585,279.09.
Defendant’s contentions on the causes of action, respectively

1st - Defendant again urges that there is no allegation that he was a director at the time of the loan
2nd - Defendant again urges that there is no allegation that he was a director at the time of the loan
3rd, 4th, 5th - Defendant maintains that since it does not affirmatively appear that he was present or voted at the meeting, or
did not cause his dissent to be registered, he is excluded from the operation of the section. Also, that section 58 of the
Stock Corporation Law fastens joint and several liability for the payment of dividends out of surplus instead of earnings on
"the directors in whose administration the same shall have been declared or made, except those who may have caused their
dissent therefrom to be entered upon the minutes of the meetings of directors at the time or who were not present when
such action was taken.
9th - Defendant insists that the directors cannot be held personally liable because a building venture exceeds in cost the
preliminary estimate and that, in effect, a mere error of judgment is alleged.
ISSUE:
Whether or not defendant Man, and others could be held liable
HELD:
Yes.
RATIO:
The court held that the director could be held liable for certain decisions, notwithstanding that he was not a director at the
time the decisions were made, because by his failure to attempt corrective measures he ratified the decisions through
acquiescence.
Directors are not only obligated to do nothing wrongful themselves, but to attempt to prevent wrongdoing by their fellow
directors, and, if wrong be committed, to seek to rectify it. A director may not shut off liability by shutting off his hearing
and sight. It is his duty to know what is transpiring. The company's stockholders and creditors, as well as the public, have a
right to rely upon the performance by him of the duties of a director.
Liability is not to be fastened upon a director for every dereliction of duty of a fellow director. They are bound generally to
use every effort that a prudent business man would use in supervising his own affairs. A wrong done or a duty omitted
must lie at the foundation of his liability. If at their meetings, or otherwise, information should come to directors of
irregularity in the proceedings of the corporation, they are bound to take steps to correct those irregularities. Directors are
liable only for the losses of its funds attributable to their negligence. Negligence, however, may ensue from inaction, as
well as action.
Regarding the 9th cause of action: Of course, the exercise of bad judgment alone cannot be made the foundation for
liability. This ninth cause, however, goes beyond that, and charges that alterations of the plans of the hotel were made by
the defendants "without any competent or proper or adequate investigation upon their part or consultation amongst
themselves or with others as to the financial obligations necessarily to be incurred thereby and the means of financing the
same and without any reasonable or proper regard to the financial obligation of the corporation by virtue of its
guaranteeing of the existing contracts relating to the erection of said hotel and that the defendants with gross and culpable
negligence did not make any adequate or proper arrangements for the financing of said additional expenditures in said sum
of almost Eight Hundred Thousand Dollars." In this connection all of the defendants are charged with "gross and
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culpable negligence and wanton disregard of their obligations as directors." These allegations are adequate.
CASE LAW/ DOCTRINE:
The exercise of bad judgment alone cannot be made the foundation for liability of a director.

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126 STEINBERG v. VELASCO AUTHOR: Yayie Lanting
March 12, 1929 G.R. No. L-30460
TOPIC: Duty of Diligence: Business Judgment Rule
PONENTE: Johns, J
FACTS:
1. Plaintiff, C.H. Steinberg, is the receiver of the Sibuguey Trading Company, a domestic corporation.
2. Defendants are Gregorio Velasco, as president, Felix del Castillo, as vice-president, Andres L. Navallo, as secretary-
treasurer, and Rufino Manuel, as director of the company.
3. The corporation purchased 330 shares of its capital stock from its stockholders S. R. Ganzon, Felix D. Mendaros and
Dionisio Saavedra (who are also defendants) at the price of P3,300. The transaction was authorized by the board of
directors of the corporation.
4. At the time the purchase was made, the corporation has a debt of P13,807.50, and it had accounts receivable in the sum
of P19,126.02.
5. Also, plaintiff alleges that the officers and directors of the corporation approved a resolution for the payment of P3,000
as dividends to its stockholders, which was wrongfully done and in bad faith, and to the injury and fraud of its creditors.
That at the time the petition for the dissolution of the corporation was presented it had accounts payable in the sum of
P9,241.19, "and practically worthless accounts receivable."
6. The president and manager "recommended that P3,000 — out of the surplus account to be set aside for dividends
payable, and that payments be made in installments so as not to effect the financial condition of the corporation."
7. Plaintiff prays judgment for: 1. P3,300 from the defendants Gregorio Velasco, Felix del Castillo, Andres L. Navallo and
Rufino Manuel, personally as members of the Board of Directors; OR
2.for the recovery from the defendants S. R. Ganzon, of the sum of P1,000, from the
defendant Felix D. Mendaros, P2,000, and from the defendant Dionisio Saavedra, P100; and
3. under his second cause of action, he prays judgment for the sum of P3,000
8. The lower court dismissed plaintiff's complaint, and rendered judgment for the defendants, with costs against the
plaintiff.
ISSUE:
Whether or not the board of directors acted in due diligence and in good faith in authorizing the purchase of its capital
stocks and payment of dividends?
HELD:
No. The board of directors did not act in good faith because their act would affect the financial condition of the
corporation.
RATIO:
It is further stipulated that the dividends should "be made in installments so as not to effect financial condition of the
corporation." In other words, that the corporation did not then have an actual bona fide surplus from which the dividends
could be paid, and that the payment of them in full at the time would "affect the financial condition of the corporation."
It is, indeed, peculiar that the action of the board in purchasing the stock from the corporation and in declaring the
dividends on the stock was all done at the same meeting of the board of directors, and it appears in those minutes that the
both Ganzon and Mendaros were formerly directors and resigned before the board approved the purchase and declared the
dividends, and that out of the whole 330 shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares
out of the 330, which were purchased by the corporation, and for which it paid P3,300. In other words, that the directors
were permitted to resign so that they could sell their stock to the corporation. As stated, the authorized capital stock was
P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was subscribed and paid. Deducting
the P3,300 paid for the purchase of the stock, there would be left P7,000 of paid up stock, from which deduct P3,000 paid
in dividends, there would be left P4,000 only. In this situation and upon this state of facts, it is very apparent that the
directors did not act in good faith or that they were grossly ignorant of their duties.

CORPORATION LAW
Case Digest
The judgment of the lower court is reversed
(a), as to the first cause of action, one will be entered for the plaintiff and against the defendant S. R. Ganzon for the sum
of P1,000, with legal interest from the 10th of February, 1926, and against the defendant Felix D. Mendaros for P2,000,
with like interests, and against the defendant Dionisio Saavedra for P100, with like interest, and against each of them for
costs, each on their primary liability as purchasers of stock
(b) against the defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel, personally, as members of the board of
directors of the Sibuguey Trading Company, Incorporated, as secondarily liable for the whole amount of such stock sold
and purchased as above stated
(c) for the plaintiff and jointly and severally against the defendants Gregorio Velasco, Felix del Castillo and Rufino
Manuel, personally, as members of the board of directors of the Sibuguey Trading Company, Incorporated, for P3,000,
with interest thereon from February 10, 1926, at the rate of 6 per cent per annum, and costs
CASE LAW/ DOCTRINE:
Ruling Case Law, vol. 7, p. 473, section 454:

General Duty to Exercise Reasonable Care. — The directors of a corporation are bound to care for its property and
manage its affairs in good faith, and for a violation of these duties resulting in waste of its assets or injury to the property
they are liable to account the same as other trustees. Are there can be no doubt that if they do acts clearly beyond their
power, whereby loss ensues to the corporation, or dispose of its property or pay away its money without authority, they
will be required to make good the loss out of their private estates. This is the rule where the disposition made of money or
property of the corporation is one either not within the lawful power of the corporation, or, if within the authority of the
particular officer or officers.
Section 458:
Want of Knowledge, Skill, or Competency. — It has been said that directors are not liable for losses resulting to the
corporation from want of knowledge on their part; or for mistake of judgment, provided they were honest, and provided
they are fairly within the scope of the powers and discretion confided to the managing body. But the acceptance of the
office of a director of a corporation implies a competent knowledge of the duties assumed, and directors cannot excuse
imprudence on the ground of their ignorance or inexperience; and if they commit an error of judgment through mere
recklessness or want of ordinary prudence or skill, they may be held liable for the consequences. Like a mandatory, to
whom he has been likened, a director is bound not only to exercise proper care and diligence, but ordinary skill and
judgment. As he is bound to exercise ordinary skill and judgment, he cannot set up that he did not possess them.

CORPORATION LAW
Case Digest
127 BARNES V ANDREWS AUTHOR: Jade
298 F. 614 US ; March 7, 1924
TOPIC: Duty of Diligence
PONTENTE: Hand
FACTS
Plaintiff Barnes filed a case against defendant, Andrews regarding defendant’s role as a corporate director. The center of
the suit is the director for the collapse of the enterprise. It was said that his overpayments made to Delano as consulting
engineer and the expenses in printing pamphlets and circulars in selling corporate shares contributed to the company’s
collapse.
ISSUE: Whether or not Andrews is liable for the collapse of the company (misprision in office)
HELD: The suit was dismissed.

There was no evidence that Andrew’s neglect caused any losses to the company. If there were losses caused by his neglect,
those losses could not be ascertained.
RATIO:
To prove misprision in office, a plaintiff must go further to show that the director should have been more active in his
duties. When a business fails from general mismanagement, business incapacity, or bad judgment. It is possible that a
single director could have made the company successful or how much money he could have saved. It must be shown that if
the director had done his full duty, he could have made the company prosper or at least could have stopped its fall.
The director cannot be faulted for not attending the directors’ meetings. There were only two meetings during his term. He
was able to attend one but had enough reason for his absence from the other. The measure of a director’s duties is
uncertain. while they are collectively the managers of the company, they are not expected to interfere individually in the
actual conduct of its affairs of they would disturb the authority of its officers and destroy their individual responsibility.
The officers must be given the initiative and the immediate direction of the business. The directors can only counsel and
give advice to them.
If a cause of action rests upon a tort, as much though it be a tort of omission, the plaintiff must accept the burden of
showing
that the performance of the defendant’s duties would have avoided loss and what loss would have been avoided. The
plaintiff failed to do so.
The defendant is not subject to the burden of proving that the loss would have happened whether he had done his duty or
not.
*The books of the company did not show excess payments made to Delano with which the defendant could be charged,
except on the theory that the company should have allowed Delano to cancel the aeroplane license. However, this was a
matter of judgment.
*The issue on overspending in printing circulars used to sell the stocks – The expenses did not result to losses; Andrews
was not responsible for the false statements in the circular; and the charge was not within the pleadings.
CASE LAW/ DOCTRINE:

It is a specific duty and responsibility of a director to devote time and attention necessary to properly discharge his duties
and responsibilities. A director should devote sufficient time to familiarize himself with the institution's business. He
should be constantly aware of the institution's condition and be knowledgeable enough to contribute meaningfully to the
Board's work. He should attend and actively participate in Board and committee meetings, request and review meeting
CORPORATION LAW
Case Digest
materials, ask questions, and request explanations.
128 POOL v POOL AUTHOR: Krystelle

22 So. 2d 131; May 10, 1945
TOPIC: Duty of Diligence: Business Judgement Rule Defendants, as directors of the corporation, had a right to
PONENTE: OTT, Judge rely on the advice and suggestion of the public accountant
and the attorney whom they had employed to look after the
legal and technical matters of the corporation.
FACTS
1. The S. D Pool Realty Company was a holding corporation consisting of plaintiff ( Robert E. Pool) and his brother,
Stephen D. Pool, together with his three sisters, Mrs. Farrell, Mrs. D'Aquin and Mrs. Jarreau, each owning 20 per
cent of the stock of the Company. The three defendants, Stephen D. Pool, Mrs. Farrell and Mrs. D'Aquin, are
acting as the directors and officers of the corporation.
2. On April 16, 1938, plaintiff, in his capacity as secretary of the S. D. Pool Realty Company, wrote the Times
Picayune requesting that it send all future dividends, reports, notices, etc. to him as secretary of the corporation at
Ventress, Louisiana, to which the Times Picayune replied that the domicile of the corporation was at 2341
Esplanade Avenue, New Orleans, and 'under the law we are obliged to send communications to that address'.
3. On June 22, 1938, Stephen D. Pool, acting in his capacity as vice president and acting president, wrote the Times
Picayune to ignore the request of plaintiff as secretary to have all notices, etc., sent to his address at Ventress, as
his action was not authorized by the board of directors, and requested that all communications to the Company be
sent to the address of its domicile.
4. On June 30, 1938, the attorneys for the Times Picayune, to whom the matter had been referred, wrote to plaintiff
that, in view of the dispute between plaintiff and his brother, the Times Picayune was advised to hold the check
representing the dividend payable July 1st and not to deliver same until the matter had been settled between the
parties or by judgment of court.
5. Matters rocked along in this unsettled state with the controversy continued and the dividend checks still held up by
the Times Picayune when, on December 9, 1938, Stephen D. Pool, acting as vice president, sent a notice to
plaintiff to be present at the annual stockholders meeting to be held at the domicile of the Company on January 3,
1939.
6. And on December 30, 1938, S. D. Pool, as vice president, wrote the Times Picayune the letter which we quoted in
our former opinion, referring to the conflicting instructions given in regard to the address to which the dividends
should be sent, and requesting the Times Picayune to hold all dividend checks until further instructions after the
stockholders meeting which had been called to be held on January 3rd following.
7. Under these circumstances, no dividend checks were sent out to the Pool Company during the year 1938, resulting
in assessment of a tax on undistributed profits under the Revenue Act of 1938, 26 U.S.C.S. § 1001 et seq., which
assessment was made against the stockholders after the liquidation of the corporation, and plaintiff, as a
stockholder, was forced to pay his pro rata part of said tax, which amount so paid by him he now seeks to recover
from the three defendants.
8. Defendants' contentions:
- They admit that each of the stockholders of the Pool Company was required to pay a surtax for the corporation
because of the failure to distribute the earnings of the Company in 1938, but they deny that they were guilty of any
negligence or wrong doing which caused this tax to be assessed against the stockholders of the Company.
-They allege that plaintiff was a director and secretary of the corporation in 1938, and his acts caused the Times
Picayune to withhold the dividends during 1938, and the various letters written by plaintiff and by Stephen D. Pool
to the Times Picayune are referred to in the answer, as well as the letters from the Times Picayune and its attorneys
giving its reason for withholding the dividends.
- They allege that they employed a certified public accountant and an attorney to handle the tax matters and the
CORPORATION LAW
Case Digest
legal affairs of the Company and took their advice and acted in good faith in all matters pertaining to the affairs of
the corporation.
9. Lower court's decision: dismissed the plaintiff's suit
10. Hence, this appeal.
ISSUE: Whether or not the defendants were negligent in failing to perform their duties as directors in that they failed to
distribute these dividends before March 15, 1939, and thereby avoided the surtax levy against the corporation.
HELD: No. The defendants did not know that these dividends had to be distributed before March 15, 1939 (if this could
have been done), in order to avoid the surtax. They had a right to rely on the advice and suggestion of the public
accountant and the attorney whom they had employed to look after these legal and technical matters.
RATIO:
The defendants as directors were only required to exercise reasonable care and diligence and act in good faith and with that
judgment and discretion which ordinarily prudent men exercise under similar circumstances. They employed a certified
public accountant to make the income tax returns of the Company for 1938 and also had the advice of an attorney in
connection with its legal affairs. The defendants did not know that these dividends had to be distributed before March 15,
1939 (if this could have been done), in order to avoid the surtax. They had a right to rely on the advice and suggestion of
the public accountant and the attorney whom they had employed to look after these legal and technical matters. While the
plaintiff claims that he knew that these dividends had to be distributed before March 15, 1939, in order to avoid the surtax,
yet he admits that he never advised any of the defendants of this fact, notwithstanding he was a stockholder and had as
much at stake as any of the defendants. It was to the interest of all the stockholders to avoid paying this surtax, and it is
hardly conceivable that the defendants would have refused to distribute these dividends had they been advised or had
known that a failure to do so would subject them as well as plaintiff to this loss.
Finding no error in the judgment appealed from, the same is hereby affirmed at the cost of plaintiff.
CASE LAW/ DOCTRINE:
The defendants as directors were only required to exercise reasonable care and diligence and act in good faith and with that
judgment and discretion which ordinarily prudent men exercise under similar circumstances.

CORPORATION LAW
Case Digest
129. Susan E. Foster v. Henry G. Bowen & others AUTHOR: Revy Neri
311 Mass. 359 April 2, 1942
TOPIC: Diligence: Business Judgment Rule Both the interlocutory decree and final decree were affirmed
PONENTE: Qua because defendant’s acts were without fraudulent or
dishonest intent and did not damage the corporation.
FACTS
1. Plaintiff was a minority stockholder in a street railway company. She brought a bill to recover for the benefit of the
company losses from alleged breaches by defendant of his fiduciary obligations as its officer and director.
2. Bowen, who was a lawyer, became the president and director in 1935. Cushing was the treasurer and manger; he
also became a director in 1935.
3. The company owns and controls an amusement resort known as Whalom Park.
4. Cushing was in-charge of the leasing of concessions in the park, including that for a roller skating rink.
5. In 1929 the person then holding the lease of the rink left, and thereafter Cushing made and signed in behalf of the
company a lease of the rink from the company to himself, signing also individually as lessee with the knowledge
and approval of one Baker, "a prominent member of the bar," who was then president and a director and largely in
control of the affairs of the company.
6. In all the leases from the company to himself Cushing undertook to pay the company twenty-five per cent of the
gross receipts. Payments appear on the books of the company, but they appear under Cushing's name only for
1935.
7. Bowen knew nothing of Cushing's leases to himself until January 20, 1937, when Cushing explained the situation
to him, told him how it had come about with the original approval of Baker, the former president, and showed him
the leases.
8. Bowen told Cushing "that he thought a lease from an officer of a corporation to himself was illegal" but he did
nothing about it, except to mention the leases to a fellow director at luncheon.
9. At a directors' meeting, in response to a question by Bowen, Cushing brought in the then current leases, and
Bowen commented that the three-year lease to Cushing was illegal.
10. Bowen asked the directors what they wished to do. No one made any suggestion, and they passed on to
consideration of the next business.
11. The director acquired further information about the leases and the amount Cushing was actually making out of the
rink, and becoming dissatisfied with him for other reasons, decided that Cushing's connection with the company
should be terminated. He was not reelected director for that year, and his offices as treasurer and manager were
declared vacant.
ISSUE:
WON Bowen is liable for causing the company to lose the benefit of two fidelity bonds
HELD:
Bowen is not liable.

CORPORATION LAW
Case Digest
RATIO:
1. His failure to claim proceeds from the fidelity bonds was based on the belief that Cushing’s acts were not
fraudulent as it was sanctioned by the other directors and therefore, would not come under the protection of the
bond for fraud.
2. Bowen is also not liable for the sums received by Cushing on the leases from the time he discovered its existence.
He did not profit personally through Cushing’s transactions.
CASE LAW/ DOCTRINE:
There is no absolute prohibition of dealings between a corporation and its officer, provided safeguards are observed to
insure that those acting for the corporation are themselves disinterested and the utmost good faith is exercised.

CORPORATION LAW
Case Digest
130 Lowell Hoit& Co. v. Detig AUTHOR:
July 8, 1943; 50 N.E. 2d 602 Rosa Cecilia K. Alfafara
TOPIC: Duty of Diligence: Business Judgment Rule To render an officer of a corporation liable for the
PONTENTE: HUFFMAN negligence of the corporation, he must be a participant in the
wrongful act.
FACTS
1.In July 1939, appellant entered into a lease agreement with the Steward Co-operative Grain Company through its
manager Herrmann, whereby appellant became the lessee of certain bins in the elevator for storage of grain.
2.It was alleged that appellant had 12,000 bushels of oats stored in the bins (pursuant to the agreement) and that the
company shipped and sold 9,081 bushels of said oats without the knowledge or consent of appellant, and failed to account
for the proceeds thereof. (Value of the oats was $ 2,724.06)
3.The appellees (Directors) had no knowledge of the agreement made by Herrmann with the appellant, or that he had
stored in the elevator any grain belonging to appellant.
4.The grain corporation was in financial constraints and was later on liquidated.
5. The appellant urges that appellees are liable upon their common law liability; that it was their legal duty to exercise such
supervision as might be required in order that they know what the agent of the corporation was doing in connection with
the corporate business, and that because of their neglect of their duties in this respect, they are liable.
6. Appellant also urges that they, as directors of the corporation, by resolution made in September 1939, ordered and
directed Herrmann, to sell all grain on hands. (However, the evidence discloses that the oats in question were sold in the
previous month of August.)
7. Circuit Court of Lee: Appellees (Directors) are not liable.
ISSUE: Whether or not the directors are liable.
HELD: No, the evidence failed to show any knowledge on the part of the appellees (Directors) concerning the transaction
in question. There was a single act secreted by Hermann from the directors and no corporate record reflecting such
transaction.
RATIO:
1. Directors cannot deny the duty of general supervision and control to a subordinate officer. However, because of
necessity, it becomes proper that they entrust to subordinate and executive officers the discretionary powers which are
usually and ordinarily pertaining to theimmediate management of the business.
2. Nothing appears in the case to indicate that appellees did not exercise care and prudence in their selection of Herrmann.
And nothing appears to indicate that they had any knowledge of Hermann’s act.
3. Courts will treat directors with more leniency with respect to a single isolated act of fraud on the part of a subordinate
officer or agent, than where the practice appears to have been so habitually and openly committed as to have been easily
detected upon proper supervision.
4. We do not consider the directors to be personally liable under the evidence in this case. Here we find a single act
secreted by the subordinate officer from the directors, with the contract locked up by him without their knowledge of its
existence, and no corporate record to come before them reflecting such transaction. Under such circumstances, it can
hardly be said that appellees in the exercise of ordinary and reasonable supervision could have detected the wrongdoing of
their subordinate officer.
CASE LAW/ DOCTRINE:

The mere fact that a person is a director in a corporation does not necessarily render him liable for the torts of the
corporation or its agents.
Directors are not to be held liable for the negligence of the corporation merely because of their official relation to it. And
the general rule would seem to be that he must participate in the wrongful act, or have such knowledge thereof as to give
rise to liability.

CORPORATION LAW
Case Digest
131 Bates vs. Dresser AUTHOR: Arthur
March 1, 1920 251 U.S. 524 - The degree of care required of director of a national
TOPIC:.Duties of Directors and Controlling Stockholders bank depends upon the subject to which it is to be
PONTENTE: Justice Holmes applied, and each case is to be determined in view
of all the circumstance.
FACTS
1. This is a bill in equity brought by the receiver of a national bank to charge its former president and directors
with the loss of a great part of its assets through the thefts of an employee of the bank while they were in
power.
2. Case was sent to a master, who found for the defendants, but the district court entered a decree against all of
them.
3. Circuit court of appeals reversed this decree, dismissed the bill as against all except the administrator of Edwin
Dresser, the president.
4. Before and during the time of the losses, Dresser was its president and executive officer, a large stockholder,
with an inactive deposit of from $35,000 to $50,000.
5. From July, 1903, to the end, Frank L. Earl was cashier. Coleman, who made the trouble, entered the service of
the bank as messenger in September, 1903. In January, 1904, he was promoted to be bookkeeper, being then
not quite eighteen but having studied bookkeeping.
6. an auditor employed on the retirement of a cashier had reported that the daily balance book was very much
behind, that it was impossible toprove the deposits, and that a competent bookkeeper should be employed upon
the work immediately
7. In May, 1906, Coleman took $2,000 cash from the vaults of the bank, but restored it the next morning. In
November of the same year, he began the thefts that come into question here. Perhaps in the beginning he took
the money directly. But as he ceased to have charge of the cash in November, 1907, he invented another way
8. By May 1, 1907, Coleman had abstracted $17,000, concealing the fact by false additions in the column of total
checks and false balances in the deposit ledger.
9. a total of $310,143.02 was stolen, when the bank closed on February 21, 1910. As a result of this, the amount
of the monthly deposits seemed to decline noticeably, and the directors considered the matter in September,
but concluded that the falling off was due in part to the springing up of rivals, whose deposits were increasing,
but was parallel to a similar decrease in New York. An examination by a bank examiner in December, 1909,
disclosed nothing wrong to him.
ISSUE:whether they (the directors) neglected their duty by accepting the cashier's statement of liabilities and failing to
inspect the depositors' ledger
HELD: No. but the president is responsible
RATIO:
- That directors, serving gratuitously, who were without knowledge of the cashier's negligence or of the possibility
of such a fraud, and who had assurance from the president, as from the bank examiners' reports, were not negligent
in accepting the cashier's statements of liabilities, like his statements of assets, which always were correct, and
were not bound to inspect the depositors' ledger or call in the pass-books and compare them with it, although there
was a bylaw, nearly obsolete, calling for examinations by a committee semiannually
- That the president, who, beside being a large depositor, was habitually at the bank, in control of its affairs, with
immediate access to the depositors' ledger, and who had received certain warnings that the bookkeeper was living
fast and dealing in stocks, was guilty of negligence in failing to make an examination. One who accepts the
presidency of a national bank accepts responsibility for any losses the bank may suffer through his fault.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
1. The degree of care required of director of a national bank depends upon the subject to which it is to be applied, and
each case is to be determined in view of all the circumstance.

CORPORATION LAW
Case Digest
132 ANTONIO C. CARAG, Petitioner, vs. NATIONAL AUTHOR: Chedelle Florido
LABOR RELATIONS COMMISSION, ISABEL G.
PANGANIBAN-ORTIGUERRA, as Executive Labor *The personal liability of corporate officers validly
Arbiter, NAFLU, and MARIVELES APPAREL attaches only when (a) they assent to a patently unlawful
CORPORATION LABOR UNION, Respondents. act of the corporation; or (b) they are guilty of bad faith
April 2, 2007 G.R. No. 147590 or gross negligence in directing its affairs; or (c) they incur
TOPIC: liability of an officer of a corporation once it’s conflict of interest, resulting in damages to the corporation,
dissolved its stockholders or other persons.
PONENTE: Carpio
*The liability of corporate officers for corporate debts
remains governed by Section 31 of the Corporation Code.
FACTS
1. National Federation of Labor Unions (NAFLU) and Mariveles Apparel Corporation Labor Union (MACLU) on behalf
of all of MAC’s rank and file employees, filed a complaint in the Labor Arbiter against Mariveles Apparel Corp. (MAC)
for illegal dismissa (illegal closure of business)
2. The 12 August 1993 complaint include:
a) July 8, 1993, without notice of any kind, ceased operations with the intention of completely closing its shop or factory
(letter providing the intention to close the corp was given the same day they closed the operations);
b) at the time of closure, employees who have rendered one to two weeks work were not paid their corresponding
salaries/wages;
c) there are other benefits which have been unpaid by [MAC] at the time it decided to cease operations, benefits gained by
the workers both by and under the CBA and by operations [sic] of law.
3. Upon receipt of the records of the case, Arbiter Ortiguerra summoned the parties to explore options for possible
settlement. Ortiguerra declared the case for resolution “based on the extant pleadings” due to respondent’s non-
appearance.
4. 3 January 1994, the complainants moved to implead Atty. Antonio Carag (Chairman of the Board) and Armando David
(company President). LA Ortiguerra granted (legal basis was Article 212(c) of the Philippine Labor Code: “Employer
includes any person acting in the interest of an employer, directly or indirectly. It does not, however, include any
labor organization or any of its officers or agents except when acting as employer”).
LA – Carag and David solidarily liable with MAC to complainants.

NLRC – (on appeal for reduction of bond) denied motion. “to grant a reduction of bond on the ground that the appeal is
meritorious would be tantamount to ruling on the merits of the appeal.” They’re guilty of illegal closure.
5. Respondents filed separate petitions for certiorari before the Supreme Court under Rule 65 of the 1964 Rules of Court.
6. 31 May 1995, their cases were consolidated (G.R. No. 118820 with G.R. No. 118839 (MAC v. NLRC, et al.) and G.R.
No. 118880 (David v. Arbiter Ortiguerra, et al.)). Case was referred to CA.
CA – affirmed NLRC.

CORPORATION LAW
Case Digest
ISSUE: 1. WON corporate may be held jointly and severally liable with the company when it ceased operations.
2.WON Carag may be held personally liable for MAC’s debts.
HELD: 1. YES
2. NO
RATIO:
1. The rule is that a director is not personally liable for the debts of the corporation, which has a separate legal
personality of its own. Section 31 of the Corporation Code lays down the exceptions to the rule, as follows:
Liability of directors, trustees or officers. - Directors or trustees who wilfully and knowingly
vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad
faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with
their duty as such directors or trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members and other persons. x x x x
Section 31 makes a director personally liable for corporate debts if he wilfully and knowingly votes for or assents to
patently unlawful acts of the corporation. Section 31 also makes a director personally liable if he is guilty of gross
negligence or bad faith in directing the affairs of the corporation.
Complainants did not allege in their complaint that Carag wilfully and knowingly voted for or assented to any
patently unlawful act of MAC. Complainants did not present any evidence showing that Carag wilfully and knowingly
voted for or assented to any patently unlawful act of MAC. Neither did Arbiter Ortiguerra make any finding to this effect
in her Decision.
Complainants did not also allege that Carag is guilty of gross negligence or bad faith in directing the affairs of
MAC. Complainants did not present any evidence showing that Carag is guilty of gross negligence or bad faith in
directing the affairs of MAC. Neither did Arbiter Ortiguerra make any finding to this effect in her Decision.
To hold a director personally liable for debts of the corporation, and thus pierce the veil of corporate fiction, the
bad faith or wrongdoing of the director must be established clearly and convincingly.[24] Bad faith is never
presumed.[25] Bad faith does not connote bad judgment or negligence. Bad faith imports a dishonest purpose. Bad faith
means breach of a known duty through some ill motive or interest. Bad faith partakes of the nature of fraud.
2. Complainants seek to hold Carag personally liable for the debts of MAC based solely on Article 212(e) of the
Labor Code. We have already ruled in McLeod v. NLRC[29] and Spouses Santos v. NLRC[30] that Article 212(e) of
the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the
corporation. The governing law on personal liability of directors for debts of the corporation is still Section 31 of
the Corporation Code. Thus, we explained in McLeod:
“Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to a
patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in
directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its
stockholders or other persons; (2) they consent to the issuance of watered down stocks or when, having
knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (3)
they agree to hold themselves personally and solidarily liable with the corporation; or (4) they are made
by specific provision of law personally answerable for their corporate action.”
CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
• It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons
composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality.
• Thus, the rule is still that the doctrine of piercing the corporate veil applies only when the corporate fiction is used
to defeat public convenience, justify wrong, protect fraud, or defend crime. In the absence of malice, bad faith, or
a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally
liable for corporate liabilities. Neither Article 212[e] nor Article 273 (now 272) of the Labor Code expressly
makes any corporate officer personally liable for the debts of the corporation.

CORPORATION LAW
Case Digest
133 - Sanchez v. Republic AUTHOR: De Silva, Denison
G.R. No. 17288, October 9, 2009 Notes: President and Vice-president acted in bad faith and
TOPIC: Duty of Diligence: Business Judgment Rule gross negligence when they did not remit the net earnings of
PONTENTE: Abad, J. the rent to DECS nor made an accounting of such.
FACTS:
1. The Human Settlements Development Corporation (HSDC), a GOCC, built with public funds and on government land
the St. Martin Technical Institute Complex, later became known as the University of Life Complex.
2. First Lady Imelda R. Marcos and others organized the University of Life Foundation, Inc. (ULFI), a private non-stock,
non-profit corporation devoted to non-formal education.
3. The government gave the management and operation of the Complex to ULFI but HSDC was to continue to construct
facilities and acquire equipment for it. Although ULFI was to get all the incomes of the Complex, ULFI had to pay HSDC
an annual fee of 14 percent of HSDC’s investments in it.
4. After the Marcos regime, the new government reorganized HSDC into the Strategic Investment Development
Corporation (SIDCOR) under the supervision of the Office of the President.
5. Realizing that ULFI never paid the 14 percent annual fee due to HSDC, now totaling about P316 million, on July 25,
1989 SIDCOR rescinded the HSDC-ULFI agreement.
6. Government transferred the ownership of ULFI’s properties to the Department of Education, Culture and Sports
(DECS).
7. Republic Act 6847 transferred full control and management of the Complex to DECS with effect two years from the
law’s enactment. The DECS transferred its offices to the Complex in 1990. SIDCOR transferred all its rights in the
Complex to the National Government which in turn transferred the same to the DECS.
8. DECS and ULFI entered into a Management Agreement, granting ULFI the authority to manage and operate the
Complex until the end of that year. During this period, ULFI was expressly mandated under the said Management
Agreement to remit to the Bureau of the Treasury, through the DECS, all incomes from the Complex, net of allowable
expenses.
9. DECS gave ULFI notice to immediately vacate the Complex. But ULFI declined, prompting the DECS to file an action
for unlawful detainer
10. MeTC dismissed the action. The appeals court ordered ULFI to vacate the Complex and pay such reasonable rentals as
the MeTC might fix.
11. The Supreme Court dismissed ULFI’s recourse to it from the judgment of the Court of Appeals.
12. MeTC fixed the rents that ULFI had to pay the DECS; the DECS succeeded in ejecting ULFI, however, ULFI did not
pay the amounts due from it.
13. DECS filed a complaint against Henri Kahn, ULFI’s president, and petitioner Sanchez, ULFI’s Executive Vice-
President based on their personal liability under Section 31 of the Corporation Code. The latter two were Managing
Director and Finance Director, respectively, of the corporation.
14. DECS allegation: Kahn and Sanchez remiss in safekeeping ULFI’s corporate incomes and in accounting for them.
They neither placed the incomes derived from the Complex in ULFI’s deposit account nor submitted the required
financial statements detailing their transactions. The two operated ULFI as if it were their own property.
15. Sanchez’s defense: being a mere officer of ULFI, he cannot be made personally liable for its adjudged corporate
liability. He took exception to the complaint, characterizing it as an attempt to pierce the corporate veil that cloaked ULFI.
16. RTC: decided in favor of DECS.
17. CA: affirmed RTC’s judgment.
ISSUE: Whether or not petitioner Sanchez, a director and chief executive officer of ULFI, can be held liable in damages
under Section 31 of the Corporation Code for gross neglect or bad faith in directing the corporation’s affairs
HELD: Yes, the DECS does not have to invoke the doctrine of piercing the veil of corporate fiction because Section 31
lays down the liability of Sanchez and Kahn arising from their gross negligence or bad faith in directing corporate affairs.
Section 31: Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or
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trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
RATIO:
1. In a piercing case, the test is complete control or domination, not only of finances, but of policy and business
practice in respect of the transaction attacked. This is not the case here. Section 31, under which this case was
brought, makes a corporate director–who may or may not even be a stockholder or member–accountable for his
management of the affairs of the corporation.
2. Bad faith implies breach of faith and willful failure to respond to plain and well understood obligation. It does not
simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious
doing of wrong; it means breach of a known duty through some motive or interest or ill will. It partakes of the
nature of fraud.
3. Gross negligence, on the other hand, is the want of even slight care, acting or omitting to act in a situation where
there is duty to act, not inadvertently but willfully and intentionally, with a conscious indifference to consequences
insofar as other persons may be affected. It evinces a thoughtless disregard of consequences without exerting any
effort to avoid them; the want or absence of or failure to exercise slight care or diligence, or the entire absence of
care.
4. The Court of Appeals found that from January 1992 to January 1996, after ULFI’s authority to manage the
Complex expired and despite the ejectment suit that the DECS filed against it, petitioner Sanchez and Kahn still
continued to lease spaces in those facilities to third persons. And they collected and kept all the rents although they
knew that these primarily belonged to the DECS.
5. Sanchez and Kahn were aware that they had to submit written accounts of those rents and remit the net earnings
from them to the Bureau of Treasury, through the DECS, at the end of the year. Yet, Sanchez and Kahn, acting in
bad faith or with gross neglect did not turn over even one centavo of rent to the DECS nor render an accounting of
their collections. Nor did they account for the money they collected by submitting to the Securities and Exchange
Commission the required financial statements covering such collections.
6. ULFI’s bookkeeper testified that the revenues from the rents were deposited in the bank in the names of Sanchez
and ULFI’s accountant. And so only they could withdraw and spend those revenues.
7. The indubitable conclusion is that petitioner Sanchez and Kahn acted with bad faith, if not with gross negligence,
in failing to perform their duty to remit to DECS or keep in safe hands ULFI’s incomes from the leases.
8. Petition denied, CA’s decision affirmed.
CASE LAW/ DOCTRINE: Section 31 lays down the "doctrine of corporate opportunity" and holds personally liable
corporate directors found guilty of gross negligence or bad faith in directing the affairs of the corporation, which results in
damage or injury to the corporation, its stockholders or members, and other persons.

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Case Digest
134 PALTING V SAN JOSE PETROLEUM INC. AUTHOR: Gelene Guevara
G.R. No. L-14441, December 17, 1966 Notes:
TOPIC: THE SELF-DEALING DIRECTOR • A self-dealing director is one who enters into a
PONTENTE: BARRERA, J. contract with the corporation of which he is a
director.
FACTS
1 . Respondent San Jose Petroleum Inc. filed with SEC a sworn registration statement, for the registration and
licensing for sale in the Philippines Voting Trust Certificates. It was alleged t h a t t h e e n t i r e p r o c e e d s
o f t h e s a l e o f t h e s e c u r i t i e s w i l l b e used exclusively to finance the operations of San Jose Oil
Company, Inc. (a domestic mining corporation) .
2 . While this application for registration was pending in SEC, respondent filed an amended Statement for registration
of the sale in the Philippines of its shares of capital stock, which was increased from 2,000,000 to 5,000,000, at a
reduced offering price of from P1.00 to P0.70 per share. At this time the par value of the shares has also been
reduced from $.35 to $.01 per share.
3. Pedro R. Palting together with other prospective investors of respondent corporation opposed the registration and
licensing of the securities on the grounds that: (a) the tie-up between the issuer, San Jose Petroleum, a Panamanian
corp. and San Jose Oil (SJO), a domestic corporation, violates the Constitution of the Philippines, the Corporation
Law and the Petroleum Act of 1949; (b) issuer has not been licensed to transact business in the Philippines; (c) sale
of the shares of the issuer is fraudulent, and works or tends to work a fraud upon Philippine purchasers; and, (d)
issuer as an enterprise, as well as its business, is based upon unsound business principles
ISSUE: (1) Whether Palting, a "prospective investor" in respondent's securities, has personality to file the petition?
(2) Whether the Articles of Incporation of respondent San Jose Petroleum is unlawful?
HELD: (1) Yes. Under the Securities Act, any person (who may not be "aggrieved" or "interested" within the legal
acceptation of the word) is allowed or permitted to file an opposition to the registration of securities for sale in the
Philippines.
(2) Yes. The articles of incorporation of respondent included a provision that relieves any director of all
responsibility for which he may otherwise be liable by reason of any contract entered into with the corp., whether it be for
his benefit or for the benefit of any other person, firm, association or partnership in which he may be interested, except in
case of fraud. This is in direct contravention of the Corp Law, of the traditional fiduciary relationship between directors
and the shareholders. The implication is that they can do anything short of fraud, even to their benefit, and with immunity.
RATIO
1. Our Securities Act in Section 7(c) thereof, requires the publication and notice of the registration statement. Pursuant
thereto, the Securities and Exchange Commissioner caused the publication of an order in part reading as follows:
. . . Any person who is opposed with this petition must file his written opposition with this Commission within said
period (2 weeks). . . .
In other words, as construed by the administrative office entrusted with the enforcement of the Securities Act, any person
(who may not be "aggrieved" or "interested" within the legal acceptation of the word) is allowed or permitted to
file an opposition to the registration of securities for sale in the Philippines. And this is in consonance with the
generally accepted principle that Blue Sky Laws are enacted to protect investors and prospective purchasers and to prevent
fraud and preclude the sale of securities which are in fact worthless or worth substantially less than the asking price. This
new Rule eliminating the word "aggrieved" appearing in the old Rule, being procedural in nature, and in view of the
express provision of Rule 144 that the new rules made effective on January 1, 1964 shall govern not only cases brought
after they took effect but all further proceedings in cases then pending, except to the extent that in the opinion of the Court
their application would not be feasible or would work injustice, in which event the former procedure shall apply.

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2. Some of the provisions of the Articles of Incorporation of respondent SAN JOSE PETROLEUM are noteworthy; viz:
(1) the directors of the Company need not be shareholders;
(2) that in the meetings of the board of directors, any director may be represented and may vote through a proxy
who also need not be a director or stockholder; and
(3) that no contract or transaction between the corporation and any other association or partnership will be
affected, except in case of fraud, by the fact that any of the directors or officers of the corporation is interested in,
or is a director or officer of, such other association or partnership, and that no such contract or transaction of the
corporation with any other person or persons, firm, association or partnership shall be affected by the fact that any
director or officer of the corporation is a party to or has an interest in, such contract or transaction, or has in
anyway connected with such other person or persons, firm, association or partnership; and finally, that all and any
of the persons who may become director or officer of the corporation shall be relieved from all responsibility for
which they may otherwise be liable by reason of any contract entered into with the corporation, whether it be for
his benefit or for the benefit of any other person, firm, association or partnership in which he may be interested.
These provisions are in direct opposition to our corporation law and corporate practices in this country. These provisions
alone would outlaw any corporation locally organized or doing business in this jurisdiction. Consider the unique and
unusual provision that no contract or transaction between the company and any other association or corporation shall be
affected except in case of fraud, by the fact that any of the directors or officers of the company may be interested in or are
directors or officers of such other association or corporation; and that none of such contracts or transactions of this
company with any person or persons, firms, associations or corporations shall be affected by the fact that any director or
officer of this company is a party to or has an interest in such contract or transaction or has any connection with such
person or persons, firms associations or corporations; and that any and all persons who may become directors or officers of
this company are hereby relieved of all responsibility which they would otherwise incur by reason of any contract entered
into which this company either for their own benefit, or for the benefit of any person, firm, association or corporation in
which they may be interested.
The impact of these provisions upon the traditional judiciary relationship between the directors and the
stockholders of a corporation is too obvious to escape notice by those who are called upon to protect the interest of
investors. The directors and officers of the company can do anything, short of actual fraud, with the affairs of the
corporation even to benefit themselves directly or other persons or entities in which they are interested, and with immunity
because of the advance condonation or relief from responsibility by reason of such acts. This and the other provision which
authorizes the election of non-stockholders as directors, completely disassociate the stockholders from the government and
management of the business in which they have invested.
NOTE: This case was decided in 1966 under the Corporation Law, which had no provisions on self-dealing directors.

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Case Digest
135 MEAD v. McCULLOUGH, et. al. AUTHOR: Myk
December 26, 1911 G.R. No. 6217 As a stockholder, in dealing with an entity in which he is a
TOPIC: Duties of Director & Controlling Stockholders: part of and holds a common interest with the other
The Self-Dealing Director stockholders constitute the whole of that artificial entity, he
PONENTE: Trent, J. is properly held to a larger measure of candour and good
faith than if he were not a stockholder
FACTS
1. The action was originally brought by Mead against McCullough, Hartigan, Green, and Hilbert (defendants).
2. Mead has died since the commencement of the action and is being represented by an administrator.
3. Three causes of action: salary, profits, and value of personal effects left by Mead and sold by the defendants.
4. All the defendants were jointly and severally liable for the sum of $3,450.61 gold. McCullough applied to have
judgment set aside.
5. 2 to 3 years after the death of Mead dismissed the case as to the 1st and 2nd causes of action and ordered that $1,200
gold be paid in plaintiff's favour for the value of personal effects.
6. 15 March 1902, Philippine Engineering and Construction Company was established. Mead, McCullough,
Hartigan, Green, and Hilbert were acting both as the incorporators and directors of the company with general
powers. (all paid $2k in Mexican currency expect Mead who turned over his personal property)
7. Mead elected as general manager. After 9 months resigned and joined the Canton and Shanghai Railway
Company.
8. Under the management of Mead they were able to secure the following contracts:
a. wrecking contract with the Navy Department at Cavite
b. construction of certain warehouses;
c. wharf at Fort McKinley for the Government;
d. construction of the Pacific Oriental Trading Company's warehouse; and,
e. some other odd jobs not specifically set out in the record.
9. 24 December 1903 (Meads was out of the country), McCullough and the other defendants assigned the wrecking
contract with the Navy Dept. To McCullough.
10. 28 December 1903, McCullough executed another agreement whereby he transferred all his rights, title, and
interest in the contract, except 1/6 of it, to what was later known as “Manila Salvage Association” which in turn
paid $15k Mexican currency for the assignment of said contract. McCullough retained 1/6.
11. Contentions:
a. McCullough: he (Mead) was to receive said amount only when the company made a profit. The other
defendants testified that the salary of the plaintiff was to be determined according to the gains and if the
company failed to make profit he would only get what is necessary for his living expenses.

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b. Mead: as a general manager he was to receive not less than $3,500, 20% of the net profits. This was
unconditional and not dependent upon the success of the company. He also alleged that he would not have
accepted the position upon such conditions.
i. As proven by the following circumstances:
1. The plaintiff put no money into the organization, the defendants put but little: just
sufficient to get the work of raising the wrecks under way. This venture was a risky one.
2. The plaintiff was in complete charge and control of this work and was to receive an
additional 8k come the time their current funds were no longer sufficient.
3. In case the company made no profits, sufficient amount to cover his expenses, which
included his room, board, transportation, etc.
12. Mead received $1.500 gold for his services.
13. Before Mead resigned the company had a net profit of $5,628.37 gold.
14. From 1 July 1902 – 1 April 1903, the company had a balance in its favour $10,728.44 Mexican currency.
15. Lower court’s conclusion was indebted in $2,278.30 gold is based on the following facts:
a. Balance = $10,728.44 Mexican currency - $16,439.40 Mexican currency (McCullough's losses in the
Manila Salvage Association) = $2,278.30 United States currency
b. McCullough charged himself with the $15,000 Mexican currency which he received from his associates in
the new company, but did not credit himself with the $16,439.40
16. Contention:
a. McCullough's accounts in Exhibits 1 and 2 the profits derived from the construction of the Government
warehouse amounted to $4,005.02 gold. He backed up his statement by giving a complete statement of the
work. They were able to receive money from the government thru vouchers. The vouchers showed that an
additional amount of about $5,000 gold paid in checks. It also showed that these were endorsed and
collected by Mead. McCullough did not charge himself with the $2,5000 gold, alleged to have been profits
from several other projects. This work was done under the management of the plaintiff and it is not shown
that the profits from these contracts ever reached McCullough. McCullough was not the treasurer of the
company at that time.
b. Mead: profits amounted to $6,962.54 gold in the government warehouse. Mead insists that McCullough
had no right to credit himself several other amounts in Mexican currency.
c. McCullough says that the amounts are cash borrowed to carry on the operations of the old company while
it was trying to raise the sunken vessels. Since, the expenses of the company exceeded $8,000 it was
necessary that they borrow money to continue work.
ISSUE: Whether or not the officer or directors of the corporation may purchase the corporate property?
HELD: Yes, as long as the officer is in good faith.
RATIO:
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SELF DEALING OF A MEMBER
1.) The SC ruled that there is no rule that forbids one director among several from loaning money to the corporation
when the money is needed, and the transaction is open, and otherwise free from blame.
2.) So long as a purely private corporation remains solvent, its directors are agents or trustees for the stockholders.
They owe no duties or obligations to others. But the moment such a corporation becomes insolvent, its directors
are trustees of all the creditors, whether they are members of the corporation or not, and must manage its property
and assets with strict regard to their interest; and if they are themselves creditors while the insolvent corporation is
under their management, they will not be permitted to secure to themselves by purchasing the corporate property
or otherwise any personal advantage over the other creditors.
3.) A director or officer may in good faith and for an adequate consideration purchase from a majority of the directors
or stockholders the property even of an insolvent corporation, and a sale thus made to him is valid and binding
upon the minority.
4.) As a stockholder, in dealing with an entity in which he is a part of and holds a common interest with the other
stockholders constitute the whole of that artificial entity, he is properly held to a larger measure of candour and
good faith than if he were not a stockholder.
a. So, when the lender is a director, charged, with others, with the control and management of the affairs of
the corporation, representing in this regard the aggregated interest of all the stockholders, his obligation, if
he becomes a party to a contract with the company, to candor and fair dealing, is increased in the precise
degree that his representative character has given him power and control derived from the confidence
reposed in him by the stockholders who appointed him their agent.
b. If he should be a sole director, or one of a smaller number vested with certain powers, this obligation
would be still stronger, and his acts subject to more severe scrutiny, and their validity determined by more
rigid principles of morality, and freedom from motives of selfishness.
5.) Transaction which only accomplish justice, which are done in good faith and operate legal injury to no one, lack
the characteristics of fraud and are not to be upset because the relations of the parties give rise to suspicions which
are fully cleared away.
a. In this case, success was impossible. It had broken its contract with the naval authorities and the $10,000
Mexican currency deposited had been confiscated. It had no money. It was considerably in debt. It was a
losing concern and a financial failure. To continue its operation meant more losses. Success was
impossible. The corporation was civilly dead and had passed into the limbo of utter insolvency. The
majority of the stockholders or directors sold the assets of this corporation, thereby relieving themselves

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and the plaintiff of all responsibility. This was only the wise and sensible thing for them to do. They acted
in perfectly good faith and for the best interests of all the stockholders.

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Case Digest
136 PICCARD v. SPERRY CORPORATION AUTHOR: Jelena
January 11, 1943,48 F. Supp. 465; 1943 U.S. Dist. LEXIS Minority stockholders sued the directors claiming that
3043 settlement was invalid as they did not constitute a quorum.
TOPIC:Duty of Diligence: Business Judgment Rule (a) The court held that the charter of Sperry specifically
The Self-Dealing Director provides that even interested directors may be counted for
PONENTE:RIFKIND, Disrtict Judge purposes of quorum. Such provision is valid and does not
offend any public policy with regards to the internal
governance of the corporation.
FACTS
1. Cowdin, a director of Sperry Corporation, negotiated on behalf of the corporation with Field Glore and Company.
2, The proceeds of the negotiation went to Standard Capital Company, another corporation where Cowdin was also a
director.
3. The other directors of Sperry Corporation demanded from Cowdin and SCC $193,000.
4. The dispute led to fruitful negotiations and ended in Sperry accepting $101,407.50 from Cowdin and SCC and releasing
Cowdin from any liability.
5. Minority stockholders filed a derivative suit against the directors claiming that the settlement was attended by bad faith
and that the release was not the act or deed of the corporation the execution of which was never authorized by the board of
directors.
6. The minority stockholders claim was based on the fact that two of the directors who approved the settlement were not
independent in that they were also stockholders of SCC at the time the settlement was approved.

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ISSUE:
Is the provision in the corporation’s by-laws stating that an interest of a director would be sufficient to make up a quorum
valid?
("Directors so interested may be counted when present at meetings of the Board of Directors or of such Committee for the
purpose of determining the existence of a quorum")
HELD: YES.
The court held that the charter of Sperry specifically provides that even interested directors may be counted for purposes of
quorum.
The minority stockholders could not strike down the settlement because the directors attended the settlement negotiations
in good faith, and the directors had exhibited rational business judgment for the corporation's benefit. A provision in the
corporation's charter stated that interested directors did not have to disclose their interest or refrain from participation in
settlement negotiations and agreements. Delaware, the state of the corporation's incorporation, did not prohibit this type of
provision and New York, where the agreement was entered into, sanctioned it. Therefore, the provision was valid and
the meeting where the settlement agreement was approved constituted a valid act of the corporation.
The central issue of the case: Had Cowdin made a sufficient disclosure of his arrangement with Field Glore and
Company at the meeting of the Sperry board of directors which authorized the agreement with Field Glore?
The Court ruled against Cowdin: Fortunately it is no longer necessary to cite authority for the proposition that Cowdin's
conduct constituted a breach of fiduciary duty, was wrongful and actionable. It is not to the discredit of the defendant
directors that they did not wait for the prod of minority stockholders but vigorously asserted the corporation's claim against
their fellow director and obtained a settlement which, in view of the diffcult issue of fact and the uncertainty attending all
litigation, is fair.
RATIO:
The Delaware Corporation Law provides that "The Certificate of Incorporation may also contain any provision which the
incorporators may choose to insert for the management of the business and for the conduct of the affairs of the
corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors and
the stockholders * * * provided, such provisions are not contrary to the laws of this State". Section 5, subdivision 8,
Delaware Revised Code, Section 2037.
The statute law of Delaware contains no express prohibition of the provision in question. However, it would unduly narrow
The scope of the proviso if the word "laws" were confined to statute law.
The Delaware courts have so far failed to condemn such a provision; that the New York courts have apparently sanctioned
such a provision, then it seems to me a federal court should not assume that Delaware forbids stockholders to contract to
make the rule sanctioned by the minority view prevail in the internal government of their corporation. Plaintiffs have,
therefore, failed to establish the invalidity of the clause in question and the proceedings taken at the meeting of June 30th
must be deemed to be the valid act of the corporation.
At the meeting of July 28, 1936, the following directors were present and voted to approve and ratify the settlement: Doe,
Hopkins, Morgan, Pierce, Royce and Sanderson.The following were present but refrained from voting: Cowdin, Armsby.
If the conclusion with respect to the meeting of June 30th is correct, then there was clearly a proper quorum at this
meeting. But even if a different result were reached concerning the earlier meeting, the meeting of July 28th would
nevertheless stand unless Sanderson were deemed disqualified by reason of his wife's stock ownership in Standard Capital.
The evidence does not suggest that Sanderson was the beneficial owner of his wife's stock. No one testified that Sanderson
CORPORATION LAW
Case Digest
held the stock in his wife's name or that it was bought with Sanderson's funds. It appears that Sanderson's only connection
with his wife's investment in the stock was that, at Cowdin's invitation, he suggested the stock to his wife. Sanderson's
conduct, when he learned of the payment by Field Glore to Standard Capital, was prompt, vigorous and unequivocal in
favor of Sperry. The evidence does not support the contention that the was an interested director.
It has been suggested that Royce was an interested director because he expected compensation for his services as attorney
in negotiating and arranging the settlement and that Doe was likewise interested because he was an employee of the
corporation and participant in a bonus plan under which his compensation was subject to the determination of his fellow
directors. If such circumstances disqualify a director the personnel of a great many, if not most, American corporations
would have to be reconstituted. That would not necessarily be calamitous. However, the widespread practice of having
corporate attorneys and employees on boards ofdirectors does indicate a fairly universal acceptance by the bar of the
proposition that such relationships do not disqualify.
It follows that the release given by the corporation to Cowdin and Standard Capital is valid and that the claim has been
properly and completely discharged.
****
The second avenue of attack open to plaintiffs raises questions not so readily answered. Plaintiffs challenge the release,
asserting in substance that it is not the act or deed of the corporation, its execution and delivery never having been validly
authorized by the board of directors. The issue thus tendered requires analysis of the proceedings taken at two meetings of
Sperry's board of directors: the meeting of June 30, 1936, at which the settlement was authorized and the meeting of July
28, 1936, at which it was approved or ratified.
The board consisted of eight members and the by-laws specified that a majority constituted a quorum. At the June 30th
meeting the following directors were present: Morgan, Sanderson, Pierce, Royce, Doe and Cowdin. Cowdin retired from
the meeting before the consideration of the settlement. Only five directors remained and if anyone of them was ineligible
to be counted towards a quorum, no quorum was present.
At the time of the meeting, Morgan was the owner of 50 shares of common and 50 shares of preferred of the stock of
Standard Capital for which he had paid $5,050. Standard Capital had outstanding at the time 10,555 shares of common
stock and 4750 shares of preferred stock. The charter of Sperry contained not only the usual provisions authorizing
transactions in which a director is personally interested but a provision specifically addressed to the present problem: "Any
director whose interest in any such contract or transaction arises solely by reason of the fact that he is a stockholder, officer
or creditor of such other company * * * shall not be deemed interested in such contract or other transaction under any of
the provisions of this paragraph, nor shall any such contract or transaction be void or voidable, nor shall any director be
liable to account because of such interest nor need such interest be disclosed". Moreover this quoted language is preceded
by the sentence, "Directors so interested may be counted when present at meetings of the Board of Directors or of
such Committee for the purpose of determining the existence of a quorum". The charter, therefore, not only declares
that Morgan might be counted towards a quorum if interested but also that mere stock ownership does not make him an
interested director. If this charter provision is valid, then Morgan, and a fortiori Sanderson, could properly be counted
towards a quorum.
CASE LAW/ DOCTRINE:
The Delaware Corporation Law provides as follows: The certificate of incorporation may also contain any provision which
the incorporators may choose to insert for the management of the business and for the conduct of the affairs of the
corporation, and any provision creating, defining, limiting, and regulating the powers of the corporation, the directors, and
the stockholders, provided such provisions are not contrary to the laws of this state. Section 5, subdivision 8, Delaware
Revised Code, Section 2037. The statute law of Delaware contains no express prohibition of the provision in question.
However, it would unduly narrow the scope of the proviso if the word "laws" were confined to statute law.
A federal court should not assume that Delaware forbids stockholders to contract to make the rule sanctioned by the
minority view prevail in the internal government of their corporation.
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Case Digest
137 Govt. v. El Hogar AUTHOR: Franch Galanza
(G.R. No. L-26649, July 13, 1927 )
TOPIC: Fixing Compensation of Directors and Officers
PONENTE: STREET, J.
FACTS
1. The Philippine Commission enacted Act No. 1459, also known as the Corporation Law, on March 1, 1906.
2. El Hogar Filipino, organized in 1911under the laws of the Philippine Islands, was the first corporation organized under
Sec. 171-190 Act No. 1459, devoted to the subject of building and loan associations, their organization and administration.
3. In the said law, the capital of the corporation was not permitted to exceed P3M, but Act No. 2092 amended the statute,
permitting capitalization to the amount of ten millions
4. El Hogar took advantage of the amendment of Act No. 1459 and amended its AOI as a result thereof, stating that the
amount of capital must not exceed what has been stated in Act No. 2092. This resulted to El Hogar having 5,826
shareholders, 125,750 shares with paid-up value of P8.7M. The corporation paid P7.16M to its withdrawing stockholders.
5. The Government of the Philippine Islands filed an action against El Hogar due to the alleged illegal holding title to real
property for a period exceeding five (5) years after the same was bought in a foreclosure sale. Sec.13(5) of the Corporation
Law states that corporations must dispose of real estate obtained within 5 years from receiving the title. The Philippine
Government also prays that El Hogar be excluded from all corporate rights and privileges and effecting a final dissolution
of said corporation.
6. It appears from the records that El Hogar was the holder of a recorded mortgage on the San Clemente land as security
for a P24K loan to El Hogar. However, shareholders and borrowers defaulted in payment so El Hogar foreclosed the
mortgage and purchased the land during the auction sale. A deed of conveyance in favor of El Hogar was executed and
sent to the Register of Deeds of Tarlac with a request that the certificate of title be cancelled and a new one be issued in
favor of El Hogar from the Register of Deeds of Tarlac. However, no reply was received. El Hogar filed a complaint with
the Chief of the General Land Registration Office. The certificate of title to the San Clemente land was received by El
Hogar and a board resolution authorizing Benzon to find a buyer was issued.
7. Alcantara, the buyer of the land, was given extension of time to make payment but defaulted so the contract treated
rescinded. Respondent acquired title in December 1920 until the property was finally sold to Felipa Alberto in July 1926.
The interval exceeded 5 years but the period did not commence to run until May 7, 1921 when the register of deeds
delivered the new certificate of title.
8. During the period before May 1921, El Hogar was not in a position to pass an indefeasible title to any purchaser.
Therefore, El Hogar cannot be held accountable for this delay which was not due to its fault. Likewise, the period from
March 25, 1926 to April 20, 1926 must not be part of the five-year period because this was the period where respondent
was under the obligation to sell the property to Alcantara prior to the contract’s rescission due to Alcantara’s non-payment.
9. Another circumstance causing the delay is the fact that El Hogar purchased the property in the full amount of the loan
made by the former owner which is nearly P24K when it was subsequently found that the property was not salable and
later sold for P6K notwithstanding El Hogar’s efforts to find a purchaser upon better terms.
ISSUE:
Whether or not the directors of El Hogar Filipino, instead of serving without pay or receiving nominal pay or a fixed
salary, have been receiving large compensation out of the profits of the respondent.
HELD: No. The power to fix the compensation of directors, if any, is left to the corporation, to be determined in its by-
laws. If a mistake has been made, or the rule adopted in the by-laws has been found to work harmful results, the remedy is
in the hands of the stockholders who have the power at any lawful meeting to change the rule.

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Case Digest
RATIO:
Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net profit shown by the annual balance sheet is
distributed to the directors in proportion to their attendance at meetings of the board. The compensation paid to the
directors from time to time since the organization was organized in 1910 to the end of the year 1925, together with the
number of meetings of the board held each year.
The compensation accruing to the directorate as a whole has been divided among the members actually present at the
different meetings. It was found that the attendance of the membership at the board meetings has been extraordinarily
good. Thus, during the years 1920 to 1925, inclusive, when the board was composed of nine members, the attendance has
regularly been eight, with the exception of two years when the average attendance was seven. It is insisted in the brief for
the Attorney-General that the payment of the compensation indicated is excessive and prejudicial to the interests of the
shareholders at large. For the respondent, attention is directed to the fact that the liberal policy adopted by the association
with respect to the compensation of the directors has had highly beneficial results, not only in securing a constant
attendance on the part of the membership, but in obtaining their intelligent attention to the affairs of the association.
The Corporation Law does not undertake to prescribe the rate of compensation for the directors of corporations. The power
to fixed the compensation they shall receive, if any, is left to the corporation, to be determined in its by-laws(Act No. 1459,
sec. 21). Pursuant to this authority the compensation for the directors of El Hogar Filipino has been fixed in section 92 of
its by-laws, as already stated. The justice and property of this provision was a proper matter for the shareholders when the
by-laws were framed; and the circumstance that, with the growth of the corporation, the amount paid as compensation to
the directors has increased beyond what would probably be necessary to secure adequate service from them is matter that
cannot be corrected in this action; nor can it properly be made a basis for depriving the respondent of its franchise, or even
for enjoining it from compliance with the provisions of its own by-laws. If a mistake has been made, or the rule adopted in
the by-laws meeting to change the rule. The remedy, if any, seems to lie rather in publicity and competition, rather than in
a court proceeding.
CASE LAW/ DOCTRINE:

The power to fix the compensation of directors, if any, is left to the corporation, to be determined in its by-laws. If a
mistake has been made, or the rule adopted in the by-laws has been found to work harmful results, the remedy is in the
hands of the stockholders who have the power at any lawful meeting to change the rule.

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Case Digest
138BARRETTO v. LA PREVISORA AUTHOR: Rhona Burce
December 8, 1932 G.R. No. L-34719
TOPIC: Fixing Compensation of Directors and Officers The power granted to corporations to grant salaries to their
PONENTE:Ostrand, J. board of directors refers only to providing compensation for
the future services of directors, officers, and employees
thereof after the adoption of its by-laws.
FACTS
1.Plaintiffs Alberto Barretto, Jose de Amusategui, and Jose Barretto, had been directors of the defendant corporation La
Previsora Filipina, a mutual building and loan association.
2. They filed a case against La Previsora for each of them to recover 1% of the net profits of said corporation for the year
1929, which amounted to P50,727.53. The said amount was in accordance with the amendment of the by-laws(Article 68-
A) of the defendant corporation, which was made at a general meeting of the stockholders.
3. Defendant filed a motion to dismiss on the ground that the plaintiffs had not shown a cause of action but this was denied
by the court.
4. The court then rendered its decision holding that the defendant, by presenting its motion to dismiss the complaint, had
impliedly waived its right to present its evidence, and rendering judgment in favor of each of the plaintiffs and against the
defendant.
5. Defendant’s motion for reconsideration was denied and so it moved for a new trial on the ground that the decision was
contrary to law and the weight of evidence. Again, the trial court denied the motion.
6. The defendant filed its exception to said order and gave notice of its intention to appeal from said decision and orders,
and the case has been brought to this court by way of bill of exceptions.
ISSUE: Whether or not the plaintiffs are entitled to recover the said amount from the net profits of defendant La Previsora,
in accordance with the corporation’s amended by-laws.
HELD: No. Article 68-A of the amended by-laws of the defendant corporation upon which the action is based, does not
under the law, as applied to the express provisions thereof, create any legal obligation on its part to pay to the persons
named therein, including the plaintiffs, such a life gratuity or pension out of its net profits. A by-law provision of this
nature must be regarded as clearly beyond the lawful powers of a mutual building and loan association, such as the
defendant corporation.
RATIO:
1. While such associations are expressly authorized by the Corporation Law to adopt by-laws for their government, section
20, of that Act, as construed by this court in the case of Fleischer vs. Botica Nolasco Co. (47 Phil., 583), expressly limits
such authority to the adoption of by-laws, which are not inconsistent with the provisions of the law. The appellees contend
that the article in question is merely a provision for the compensation of directors, which is not only consistent with but
also expressly authorized by section 21 of the Corporation Law. We cannot agree with this contention. The authority
conferred upon corporations in that section refers only to providing compensation for the future services of directors,
officers, and employees thereof after the adoption of the by-law or other provisions in relation thereto, and cannot in any
sense be held to authorize the giving, as in this case, of continuous compensation to particular directors after their
employment has terminated for past services rendered gratuitously by them to the corporation.To permit the transaction
involved in this case would be to create an obligation unknown to the law, and to countenance a misapplication of the
funds of the defendant building and loan association to the prejudice of the substantial right of its shareholders.
2. The said by-law cannot be held to establish a contractual relation between the parties to this action, because the essential
elements of a contract are lacking. The article, which the appellees rely upon, is merely a by-law provision adopted by the
stockholders of the defendant corporation, without any action having been taken in relation thereto by its board of
directors. The law is settled that contracts between a corporation and third persons must be made by or under the authority
of its board of directors and not by its stockholders. Hence, the action of the stockholders in such matters is only advisory
and not in any wise binding on the corporation.
3. There could not be a contract without mutual consent, and it appears that the plaintiffs did not consent to the provisions
CORPORATION LAW
Case Digest
of the by-law in question, but, on the contrary, they objected to and voted against it in the stockholders' meeting in which it
was adopted. Furthermore, the said by-laws shown on its face that there was no valid consideration for the supposed
obligation mentioned therein. It is clearly an attempt to give in the future to certain directors’ compensation for past
services gratuitously rendered by them to the corporation. Such a provision is without consideration, and imposes no
obligation on the corporation, which can be enforced by action at law.
CASE LAW/ DOCTRINE:
An amendment to the by-laws of a loan and building association which provides for the payment of life pension to the
persons named therein for past services they have gratuitously rendered to the association cannot be held to be in
consonance with the power granted to corporations to grant salaries to their board of directors. The authority conferred
upon corporations refers only to providing compensation for the future services of directors, officers, and employees
thereof after the adoption of the by-law or other provision in relation thereto, and cannot in any sense be held to authorize
the giving of continuous compensation to particular directors after their employment has terminated for past services
rendered gratuitously by them to the corporation.
Note:
Building and loan associations are peculiar and special corporations. They are founded upon principles of strict mutuality
and equality of benefits and obligations, and the trend of the more recent decisions is that any contract made or by-law
provision adopted by such an association in contravention of the statute is ultra vires and void.
Article 68 of the amendedby-laws of the corporation, as translated, reads as follows:
”Beginning January 1,1929, and during the existence of "La Previsora Filipina", Mutual Building and Loan Association, a
sum equivalent to four per cent (4%) of the net profits of the corporation during the year shall be paid to Mr. Antonio Ma.
Barretto or his heirs at the end of every fiscal year. The payment of such remuneration shall be deemed a just
compensation agreed upon by the corporation and Mr. Antonio Ma. Barretto (1) for the services rendered by him in
founding and organizing the association (2) for disbursements and neither financial sacrifices made by him for the benefit
of the association during the first two years of its existence, that is, during the period from February 25, 1926, to
December 31, 1927; (3) for the assignment and transfer to the association by Mr. Antonio Ma. Barretto, of the "Combined
Tables of Triple Transaction", invented and perfected by him, which are actually serving as a basis for the business
operations of the corporation. xxx xxx xxx It is hereby understood that this article of the by-laws constitutes a formal
contract between the corporation and Mr. Antonio Ma. Barretto, which contract shall not be susceptible of modification
except by mutual agreement of the parties.”
** The original text of Article 68 in this case was in Spanish. This translation is from Dolores M. Viuda De Barretto, et
al., v. La Previsora Filipina (G.R. No. L-38084, December 21, 1933). The amount to be recovered was amended from 1%
to 4% net profits of the corporation.

CORPORATION LAW
Case Digest
139 Central Coop Exchange vs. Tibe AUTHOR: Bea Mationg
G.R. No. L-27972 June 30, 1970
Granting of transportation allowance, per diems, and
TOPIC: Fixing Compensation of Directors and Officers discretionary fund are not within the scope of the
PONENTE: Reyes, J. Corporation’s by-laws.
FACTS:
1. Petitioner (Central Coop Exchange) filed a complaint against respondent Tibe for the refund of certain amounts received
by the latter from the corporation, while he served as a member of the board of directors of the Exchange. The petitioner is
a national federation of farmers' cooperative marketing associations or FACOMAS which is scattered throughout the
country; its single majority stockholder is the former Agricultural Credit and Cooperative Financing Administration
(ACCFA), now Agricultural Credit Administration (ACA).
2. As a member of the petitioner's board of directors from 23 May 1958 to 26 May 1960, representing FACOMAS in
Eastern Visayas, respondent Concordio Tibe, Sr. drew and collected from petitioner CCE cash advances amounting to
P5,668.00; of this sum, respondent had, admittedly, already liquidated P3,317.25, leaving the sum of P2,350.75 still to be
accounted for. By admission of the petitioner the sum of P2,350.75 has been further reduced to P2,133.45 as of 31 January
1963 on account of partial payments made after suit was filed. Respondent Tibe had also drawn several sums, amounting
to P14,436.95, representing commutable per diems for attending meetings of the Board of Directors in Manila, per diems
and transportation expenses for FACOMA visitations, representation expenses and cummutable discretionary funds. All
these sums were disbursed with the approval of general manager, treasurer and auditor of CCE.
3. Section 8 of the By-Laws of petitioner federation provides:
The compensation, if any, and the per diems for attendance at meetings of the members of the Board of Directors shall be
determined by the members at any annual meeting or special meeting of the Exchange called for the purpose.
4. In the annual meeting of the stockholders, held in Manila on 31 January 1956, it was resolved that members of the board
of directors be entitled to actual transportation expenses, actual expenses while waiting, allowances for every visitations
outside is being allowed, commutable allowance, discretionary funds.
ISSUE:
WON the board of directors of the CCE had the power and authority to adopt various resolutions which appropriated the
funds of the corporation for the above-enumerated expenses (e.g. transportation, monthly commutable allowance,
discretionary funds, and per diems) for the members of the said board.
HELD: NO. The questioned resolutions are contrary to the By-Laws of the federation and, therefore, are not within the
power of the board of directors to enact
RATIO:
The law is well-settled that directors of corporations presumptively serve without compensation and in the absence of an
express agreement or a resolution in relation thereto, no claim can be asserted therefor. Thus it has been held that there can
be no recovery of compensation, unless expressly provided for, when a director serves as president or vice president, as
secretary, as treasurer or cashier, as a member of an executive committee, as chairman of a building committee, or similar.
Thus, the directors, in assigning themselves additional duties, such as the visitation of FACOMAS, acted within their
power, but, by voting for themselves compensation for such additional duties, they acted in excess of their authority, as
expressed in the By-Laws.
Nor may the directors rely on Section 28 of the Corporation Law, giving the exercise of corporate powers and the control
of the corporation's business and property to the board of directors, or on Section 1 of Article VI of the By-Laws,
empowering the board with "general supervision and control of the affairs and property of the Exchange," as justifications
for the adoption of the questioned resolutions, because these provisions of the law and the By-Laws pertain to the board's
general powers merely and do not extend to giving the members of the said board the compensations stated in the
resolution, as the matter of providing for their compensations are specifically withheld from the board of directors, and
reserved to the stockholders.
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Case Digest
CASE LAW/ DOCTRINE:

The law is well-settled that directors of corporations presumptively serve without compensation and in the absence of an
express agreement or a resolution in relation thereto, no claim can be asserted therefor (Sec. 2110, 5 Fletcher 375-376).
Thus it has been held that there can be no recovery of compensation, unless expressly provided for, when a director serves
as president or vice president, as secretary, as treasurer or cashier, as a member of an executive committee, as chairman of
a building committee, or similar offices (Sec. 2112, 5, Fletcher 381-382). (Alvendia, The Law of Private Corporations in
the Philippines, pages 275-276)
Thus, the directors, in assigning themselves additional duties, such as the visitation of FACOMAS, acted within their
power, but, by voting for themselves compensation for such additional duties, they acted in excess of their authority, as
expressed in the By-Laws.

CORPORATION LAW
Case Digest
140 Fogelson v American Woolen Co. AUTHOR: Mercado, Christopher Dann C.
TOPIC: Fixing Compensation of Directors and Officers
FACTS
1. The subject of this complaint is a proposed retirement plan, which will be effective on Jan. 1, 1949, of the
defendant-corporation where the retirement age is fixed at 65 and the pension to be paid annually by the
corporation to an employee after his retirement is based on the salary of the employee and length of service both
before and after the effective date of the retirement plan.
2. The plan is to be administered by means of a pension trust and it is proposed to pay into this trust at once
$4,657,292 to fund that part of the pensions based on past services of employees.
3. The president of the corporation will be eligible for retirement on June 1, 1949, and under the plan will thereafter
be entitled to receive an annual pension of $54,220 for life.
4. The complaint brought by the plaintiff alleges that such pension is:
o "excessive and unconscionable";
o that the purpose of funding past service benefits by a single payment is to insure to the president that
he will receive such pension irrespective of the future financial capacity of the corporation;
o that the proposal to fund past service benefits by a single payment, instead of in installments over a
term of years, disregards the custom and usage of other companies with respect to retirement income
plans, and disregards the inadequate cash position of the defendant which during 1947 obtained a bank
loan of $10,000,000 that still remains unpaid.
o Nonetheless, it does not contend that it is not within the power of the directors to establish a retirement
plan.
5. The prayer of the complaint is for an injunction against setting up the proposed retirement plan.
6. Subsequently, the proposed retirement plan was approved by the Commissioner of Internal Revenue, which made
the defendant to move for summary judgment.
7. The trial court expressed the opinion that there was "no colorable reason to disturb the exercise by the directors of
their judgment and discretion in the discharge of their duties."
8. The trial court decreed a summary judgment.
9. Thus, this petition before the court, contending that the proposed retirement plan constitutes a waste of corporate
assets, and that a full-blown trial must be held, instead of a summary judgment..
ISSUE: Whether or not the court may take cognizance of the case and interfere with the business judgment of the board of
directors
HELD: Yes. Courts are properly reluctant to interfere with the business judgment of corporate directors; they do so only if
there has been so clear an abuse of discretion as to amount to legal waste.
RATIO:
A retirement plan which provides a very large pension to an officer who has served to within one year of the retirement age
without any expectation of receiving a pension, would seem analogous to a gift or bonus.
The size of a bonus may raise a justiciable inquiry as to whether it amounts to spoliation or waste of corporate property.
The tenable reasons for the adoption of a retirement plan are that it serves as an inducement to competent personnel to
accept employment and retain it until the retirement age, and also accords with present day notions of justice to
superannuated employees. It would seem that the second consideration can have little weight in the case of an officer
whose salary for an undisclosed number of years was $100,000 and for the year immediately preceding adoption of the
plan, $151,250. We do not say that a pension of $54,220 to such an officer cannot be justified, but, if justified, it must be
because it is in the interest of the employer to insure to even those who receive so high a salary that they may retire on a
pension computed upon the same percentage formula as the lowest salaried employees.
Remanded.

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Case Digest
CASE LAW/ DOCTRINE:
Courts are properly reluctant to interfere with the business judgment of corporate directors; they do so only if there has
been so clear an abuse of discretion as to amount to legal waste.

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Case Digest
141. Kerbs v. California Eastern Airways AUTHOR: soldier of love
(Date, G.R. No.) Take note of ratification in each compensation.
TOPIC: Duties of Directors and Controlling Stockholders
Duty of Diligence: Business Judgment Rule
(b) Fixing Compensation of Directors and Officers
PONENTE: WOLCOTT, J
FACTS
1. The defendant, a Delaware corporation, is engaged in the business of owning, operating and leasing aircraft. It had
lost over $726,000 from 1946-47.
2. In December, 1947, Mr. de Saint-Phalle, the present Chairman of the Board, accepted the office of president. He
made substantial changes but the defendant still petitioned for the United States District Court of Delaware for an
order under Chapter XI of the Bankruptcy Act
3. Immediately thereafter, under the direction of Mr. de Saint-Phalle, the defendant dismissed 85% of its personnel,
stopped operating its aircraft, leased them to other concerns, and converted its aircraft from freight to passenger
carriers. By September of 1948, the defendant's operations had become profitable. In 1949, the defendant's net
profits amounted to $212,435 and in the summer of that year it made a substantial payment to creditors.
4. In May of 1949, a plan of arrangement with creditors, having been approved by the District Court, Mr. de Saint-
Phalle persuaded Messrs. Solomon, Grace and Robinson to become directors of the defendant. They were elected
in August, 1949 and, thereafter, Mr. Solomon became president of the defendant.
5. In December, 1950, the defendant was discharged from the Chapter XI proceedings. Its net profits for 1950 were
$244,163.58. They had a contract with the United States for the use of some of its planes in the Tokyo airlift
because of the Korean War.
6. In October, 1950, a stock option plan and a profit-sharing plan were adopted and a special meeting of stockholders
7. The stock option plan provides that 250,000 shares of the defendant's unissued stock be made subject to options to
purchase at the price of $1 per share, to be granted in designated amounts to named executives of the company.
8. The profit-sharing plan provides that when the quarterly earnings of the defendant exceed $30,000 before federal
income taxes, 10% of any additional quarterly earnings shall be distributed among named officers and executive
personnel of the defendant in accordance with a percentage scale. If during any quarterly period earnings should be
less than $30,000, then the cumulative deficiency plus any operating loss is to be carried forward to succeeding
quarterly periods. Names of the beneficiaries are the same in profit-sharing and stock option plan.
9. Both the stock option plan and the profit-sharing plan were adopted at a meeting of Directors held October 24,
1950, at which eight directors were present, of whom five were beneficiaries under the plans. The plaintiffs
accordingly attack both plans on the ground that the votes of interested directors were required for their adoption
and that, therefore, the action of the board was illegal. Pointing out that one-third of a Board of eleven is four, the
plaintiffs argue that the by-law of the defendant providing for a quorum of three is invalid because it contravenes
the statute.
ISSUE: 1) WON the stock option plan is deficient
2) WON the profit-sharing plan was invalid as it was not adopted by disinterested directors.
HELD: 1) YES. Because it is not reasonably calculated to insure that the defendant will receive the contemplated benefits
2) NO. the court ruled it only as voidable. If there was effective ratification by the stockholders that the profit-
sharing plan is valid.

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Case Digest
RATIO:
1. • The validity of a stock option plan under which selected personnel of a corporation may acquire a stock interest
in the corporation depends directly upon the existence of consideration to the corporation and the inclusion in the
plan of conditions, or the existence of circumstances which may be expected to insure that the contemplated
consideration will in fact pass to the corporation.
• No rule of thumb can be devised to test the sufficiency of the conditions which are urged as insurance that the
corporation will receive the contemplated benefit. The most that can be said is that in each case there must be some
element which, within reason, can be expected to lead to the desired end. What that element may be can well differ
in each case.
• The defendant rests its case upon the argument that the circumstances surrounding the plan before us will insure
that the beneficiaries of the plan will remain in the employ of the company and that, thus, the contemplated benefit
will inure to the corporation. It points to the fact that the options may be exercised only while the employees
remain in the employ of the company.
• The plan and options issued hereunder, accordingly, do not of themselves insure that the benefit of retaining the
services of the employee to whom the option is granted will inure to the corporation, nor is there any showing of
surrounding circumstances which would insure the same result.
2. • In view of the present earnings of the corporation, the amounts to be paid under the plan do not seem shockingly
large. There is nothing in the record before us to demonstrate that the persons to whom the amounts will be paid
will not render services bearing a reasonable relation to those amounts.
• It is the general rule that the votes of interested directors of a corporation will not be counted in determining
whether proposed action has received the affirmative vote of a majority of the Board of Directors
• Consequently, the result is that while the profit-sharing plan received the affirmative vote of eight directors, that
vote did not amount to adoption of the plan because the votes of interested directors were required to be counted in
order to obtain a quorum at the meeting.
• Because the votes of interested directors were required to be counted for quorum purposes at the meeting of
October 24, 1950, the profit-sharing plan was not legally adopted, if its legality depends solely on the action of the
Board. As we have pointed out, however, illegal action of a Board of Directors is absolutely void only when that
action is ultra vires, a gift of corporate assets to directors, illegal in purpose, or fraudulent. If it does not fall within
any of these prohibited classifications the directors' action is voidable only and thus subject to ratification by
stockholders.
CASE LAW/ DOCTRINE:
Because of the existence of majority stock ratification, the rule that interested directors are entitled to no presumption
arising from the good faith exercise of business judgment has no application.

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Case Digest
142 STRONG v. REPIDE AUTHOR: JANNA
May 3, 1909, 41 Phil 947 Special case wherein a director (Repide) has the duty to
TOPIC: Duty of Diligence – Using inside information disclose his insider info. affecting value of stocks to a
PONTENTE: PECKHAM, J. shareholder (such as Mrs. Strong/her agent). Fiduciary
relationship existed in this case, as Repide acted as the “agent”
of the company in sale negotiations with the Government
FACTS
1. 1902 – The U.S. Govt. started considering the importance and the possibility of acquiring friar lands in the
Philippines. Various inquiries were made in its behalf as to such possibility, and as to probable expenses.
2. The lands were not owned by the same persons, but were divided among different and separate owners. The Phil.
Sugar Estates Devt. Co. Ltd. owned Dominican lands which formed nearly half the value of all friar lands.
3. Repide is the majority stockholder of said company( 30,400 out of the 42,030 issued shares)
4. July 5, 1903 – Governor of the Philippine Islands offered to buy all the friar lands for P5,943,218.47 in gold.
Repide rejected the offer, in his capacity as majority stockholder, without consulting other shareholders.
5. Different owners of the lands, including those from Repide’s co. were willing and anxious to sell, pegging their sale
price at $13,700 for all such lands. Repide refused sale – still holding out in hopes of a better offer.
6. Repide was aware that if the sale does happen, the land’s and company’s value = almost nothing. Company paid no
dividends, only lived off its credit, could not even pay taxes, and only the land was of substantial value.
7. Sept. 1903 – though holding out, Repide took steps to purchase 800 shares of capital stocks owned by Mrs. Strong, in
possession of her Jones (agent). Jones’ office = next door, but instead of going directly, Repide employed Kauffman.
Kauffman then hired a broker, Mr. Sloan and told the latter that the stock is for a member of his wife’s family.
8. Sloan contacted Mrs. Strong’s husband, who then referred him to Mr. Jones. Both Sloan and Jones had no knowledge
or suspicion that Repide is the actual buyer.
9. Not knowing such fact, Jones sold the 800 shares of stock for $16,000 Mexican currency (only 1/10th of their worth,
2-3 months after sale). Jones, as Mrs. Strong’s agent, would not have sold it at such price if he knew Repide who was
the buyer, as that would have raised flags Repide’s interest to buy more stock = sign of price going up.
10. No information about facts affecting the value of the stock was made known to Jones. Probable value of the shares
was unknown to anyone but Repide. Jones sold the stocks to invest in property that would pay dividends, because to
his knowledge nothing to expect from the company; no prospect of sale of land any time soon.
11. Oct. 1903 – further negotiations lead to another offer by the Governor, this time for $7,535,000.
12. Repide stopped refusing after: (1) other owners consented to pay his company P335,000 of the purchase price of their
land; and (2) the Govt. consented to exclude from the sale, 1,000 hectares of land owned by the company.
13. Dec. 21, 1903 – contract for sale was signed by Repide as owner in fact of the company.
14. January 12, 1904 – Spouses Eleanor Erica Strong and Richard P. Strong commenced action in the CFI of Manila
against Repide on the following grounds: (1) shares were sold by her agent (Jones) without her authority; and (2)
Repide fraudulently concealed from her agent, the facts affecting the value of the stock so sold and delivered.

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Case Digest
ISSUE: Whether it was the duty of Repide, acting in good faith, to disclose to Jones, as agent of the plaintiff, the facts
bearing upon or which might affect the value of the stock.
HELD: YES, because as majority stockholder, director, administrator general and chief negotiator for the sale of the lands
of the whole company, there existed a fiduciary relationship between him and shareholders (like Mrs. Jones) because he
was substantially acting as their agent.
RATIO:
1. GENERAL RULE: relations between directors and shareholders in a business corporation are not of such a
fiduciary nature as to make it the duty of a director to disclose to a shareholder the general knowledge which he
may possess regarding the value of the shares of the company before he purchases any from a shareholder
2. HOWEVER: Even though a director may not be under the obligation of a fiduciary nature to disclose to a
shareholder his knowledge affecting the value of the shares, that duty may exist in special cases, and did exist upon
the facts in this case.
3. Facts clearly indicate that a director of a corporation owning friar lands in the Philippine Islands, and who
controlled the action of the corporation, had so concealed his exclusive knowledge of the impending sale to the
government from a shareholder from whom he purchased, through an agent, shares in the corporation, that the
concealment was in violation of his duty as a director to disclose such knowledge, and amounted to deceit
sufficient to avoid the sale; and, under such circumstances, it was immaterial whether the shareholder's agent did
or did not have power to sell the stock.
4. While the method of payment cannot have induced the vendor's consent to a sale, where that method tended to
conceal the identity of the purchaser and was part of a scheme to conceal facts, the knowledge of which would
have resulted in vendor's refusal to sell, evidence as to the payment is admissible to show the fraudulent intent and
scheme of the purchaser.
CASE LAW/ DOCTRINE:
“A director upon whose action the value of the shares depends cannot avail of his knowledge of what his own action will
be to acquire shares from those whom he intentionally keeps in ignorance of his expected action and the resulting value of
the shares.”
“Where a sale made through an agent of the vendor has been effected by the fraud and deceit of the vendee, the sale cannot
stand whether or not the vendor's agent had power to sell.”

CORPORATION LAW
Case Digest
143 Taylor vs Wright AUTHOR:twinkol
159 P 2d 980 (1945) “dikapwedenggumamitng decoy para mabilimoang shares
TOPIC: Using inside information ng stockholders mo.”
PONENTE: Peters, P. J. Directors/officers should disclose information especially in
transactions where they are buying stocks from their
stockholders
FACTS
1. During the fall of 1935 some of the stockholders of the company became dissatisfied with the way Johnson and the
Wrights were running the company. The financial statement lent to the stockholders shows that the company was being
operated at a loss which increases every year.
2. Knowing the financial condition of the company, Wright hired Stowell to ascertain the attitudes of the various groups of
stockholders and offer to buy the shares of dissatisfied stockholders who wished to sell. It is highly significant that
Stowell's sole compensation for services rendered was to be a commission of 20 cents per share for each share of stock
purchased.
3. Mrs. Taylor, one of the major stockholders, was contacted by Stowell through her cousin. At first, she was offered to
sell her stocks at $3750 and was raised to $4000. With the advice from Johnson, even though in her own opinion that this
offer is still too low, she sold her stocks.
4. Rumors came in that Mrs. Taylor’s stocks were bought by an “insider”. At first she didn’t believe such rumors, but on
the 3rd time, she became suspicious and investigated.
5. Mrs. Taylor testified that she did not know Stowell was acting for a director, and that had she known that fact she would
not have sold at such a price. It is this transaction that is challenged in this proceeding.
ISSUE: whether directors and officers of a company owe any duty at all to stockholders in relation to transactions whereby
the officers and directors buy for themselves shares of stock from the stockholders
HELD: YES
RATIO: The minority rule, which recognizes the director's obligation to the stockholders individually as well as
collectively, and refuses to permit him to profit at the latters' expense by the use of information obtained as a result of his
official position and duties. This view, while generally conceded to be in the numerical minority, is followed by able
courts, and text-writers who have examined the subject,"
While it is true that a numerical majority of the decided cases have adopted the legalistic view that a director owes no duty
at all to the stockholders, a substantial minority have adopted the more realistic view that such a duty exists because the
stockholders have placed the directors in a strategic position where they can secure first-hand knowledge of important
developments, and where they can make it appear the shares are much less valuable than they really are. The astonishing
thing is that practically every legal writer in this field has approved the so-called minority view.
The detailed information a director has of corporate affairs is in a very real sense property of the corporation, and that no
director should be permitted to use such information for his own benefit at the expense of his stockholders. The so-called
majority rule permits a director to secure for himself profits rightfully belonging to all. Such a rule offends the moral sense,
and is contrary to our modern concept of the duty of a director towards those he represents.
Although the numerical weight of authority is in favor of the so-called majority rule, the harshness and obvious unfairness
of that rule, has led many of the states that originally aligned themselves with the majority rule to adopt an exception to
that rule to ameliorate its harshness. This exception is referred to as follows in the American Trust Co. case, supra, page
57: "Conceding the absence of a fiduciary relationship in the ordinary case, they [some of the states that have adopted the
so-called majority view] nevertheless hold that where special circumstances or facts are present which make it inequitable
for the director to withhold information from the stockholder, the duty to disclose arises, and concealment is a fraud."

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE: Directors and officers of a company owe a duty to stockholders in relation to transactions
whereby the officers and directors buy for themselves shares of stock from the stockholders.
(Minority rule and special facts: the same.)

CONCURRING OPINION: Knight, J and Ward, J.
They concur. (seriously, walangbagosasinabisa decision, ewanko kung bakit pa silanagseparate concurring opinion.

CORPORATION LAW
Case Digest
144 Gokongwei v SEC AUTHOR: N. Manalo
(April 11, 1979; G.R. No. L-45911) “Ang kay Pedro ay kay Pedro, at ang kay Juan ay kay Juan”
TOPIC: Using Inside Information
PONTENTE: ANTONIO, J.
FACTS
1. Petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction, arose out of
two cases filed by petitioner with the Securities and Exchange Commission
2. SEC CASE NO 1375: On October 22, 1976, petitioner, as stockholder of respondent 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.
3. Petitioner alleged that he had all the qualifications to be a director of respondent corporation, being a Substantial
stockholder thereof; that as a stockholder, petitioner 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, respondents purposely provided
for petitioner's disqualification and deprived him of his vested right as afore-mentioned hence the amended by-laws are
null and void.
*The respondent opposed that the petition is premature; that petitioner is estopped from questioning the amendments on
the ground of lack of authority of the Board. since he failed, to object to other amendments made on the basis of the same
1961 authorization: that petitioner has not availed of his intra-corporate remedy for the nullification of the amendment,
which is to secure its repeal by vote of the stockholders representing a majority of the subscribed capital stock at any
regular or special meeting.
4. Petitioner was rejected by the stockholders in his bid to secure a seat in the Board of Directors on the basic issue that
petitioner was engaged in a competitive business and his securing a seat would have subjected respondent corporation to
grave disadvantages; that "petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual
meeting; that thereafter the Board of Directors amended the by-laws as afore-stated.
5. Hence, this petition

ISSUE: WON the election of petitioner to the Board of SMC can bring about an illegal situation (use of inside
information)
HELD: Yes
There is here a statutory recognition of the anti-competitive dangers which may arise when an individual simultaneously
acts as a director of two or more competing corporations. A common director of two or more competing corporations
would have access to confidential sales, pricing and marketing information and would be in a position to coordinate
policies or to aid one corporation at the expense of another, thereby stifling competition.

CORPORATION LAW
Case Digest
RATIO:
Shared information on cost accounting may lead to price fixing. Certainly, shared information on production, orders,
shipments, capacity and inventories may lead to control of production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San Miguel Corporation,
the essence of competition in a free market for the purpose of serving the lowest priced goods to the consuming public
would be frustrated, The competitor could so manipulate the prices of his products or vary its marketing strategies by
region or by brand in order to get the most out of the consumers. Where the two competing firms control a substantial
segment of the market this could lead to collusion and combination in restraint of trade. Reason and experience point to
the inevitable conclusion that the inherent tendency of interlocking directorates between companies that are related to
each other as competitors is to blunt the edge of rivalry between the corporations, to seek out ways of compromising
opposing interests, and thus eliminate competition.
CASE LAW/ DOCTRINE:

There is here a statutory recognition of the anti-competitive dangers which may arise when an individual simultaneously
acts as a director of two or more competing corporations. A common director of two or more competing corporations
would have access to confidential sales, pricing and marketing information and would be in a position to coordinate
policies or to aid one corporation at the expense of another, thereby stifling competition.

CORPORATION LAW
Case Digest
145. Singer v Carlisle Author: Sarah
27 NYS 2d 19; 1941 Note:
Topic: Seizing Corporate Opportunity
Ponente: Sheintag
Facts:
1. Plaintiffs are stockholders of the United Corporation which owns all stock of its subsidiary, New York United
Corporation.
2. Both companies were engaged in the business of underwriting securities in public utility holding and operating
companies.
3. United Corporation was also engaged in the business of owning and holding such securities.
4. Defendants (directors of the 2 corporation, officers of the United Corporation, partners of J.P. Morgan & Co. ,
partners of Drexel & Co., Morgan, Stanley, Inc., Bonbright & Co., Inc. and two officers and stockholders of the
latter) are engaged in the underwriting business in competition with the Untied and New York Corporation.
5. It is alleged that in 1929, United Corporation acquired substantial blocks of the voting stock of various holding and
operating companies.; that from 1929 to present the corporation obtained funds by public issuance of securities;
that the underwriting business and large ensuing profits were obtained by J.P. Mogran, Stanley & Co., Inc., as
underwriters, and the United Corporation and New York United Corporation were not permitted to participate.
6. Plaintiffs charge that the defendants of the United Corporation and New York United Corporation, who acted with
the defendant bank, to obtain the underwriting business, and that the defendant bank fraudulently caused the
corporations to use their influence and control over their subsidiaries in order to induce the corporations to award
the underwriting business to the defendant bankers.
Issue: WON defendants utilized their domination and influence in order to control the business for themselves.
Held: No because the allegations in the complaint of conspiracy of directors to obtain corporate opportunity were
deficient.
Ratio:
The directors of the United Corporations and New York United Corporation have the duty to make every effort consonant
with good, honest judgment to obtain for those corporations as much of the underwriting business as possible, and to make
this feild of activity as profitable as it could be. This does not mean that the plaintiffs were required to do anything
detrimental to the affairs of the corporations. They could not lawfully conduct themselves in a manner detrimental to the
interests of the United Corporation and New York Untied Corporation.
However, in the case at bar, there was a failure to incorporate the essential allegations which may be corrected upon
amendment. There is no allegation when the securities and what securities were issued and that the same might have been
underwritten by United.
Directorship in 2 competing corporations does not in and of itself constitute a wrong. It is only when a business
opportunity arises which places the director in a position of serving two masters, and when, dominated by one, he neglects
his duty to the other, that a wrong has been done.
Case Law/Doctrine:
Seizing Corporate Opportunity (Sec. 34)
- If a director acquires for himself, by virtue of his office, a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of the corporation, he must account to the corporation for all
such profits by refunding the same. However, if his act was ratified by 2/3 stockholders' vote, he need not refund
said profits. This provision applies even though the director may have risked his own funds in the venture.
- Note: This provision is to be distinguished from Sec. 32 on contracts of self-dealing directors: contracts of self-
dealing directors are voidable at the option of the corporation even if it has not suffered any injury; on the other
hand, Sec. 34 applies only if the corporation has been prejudiced by the contract.
146 IRVING TRUST CO. v. DEUTSCH AUTHOR: De Guzman, Bien

November 5, 1934, 73 F.2d 121
TOPIC: Seizing Corporate Opportunity
PONENTE:
CORPORATION LAW
Case Digest
FACTS
1. Defendant Bell was employed by Acoustic Products Company, a Delaware corporation chartered to deal in
musical equipment, to negotiate a deal with Reynolds and W.R. Reynolds & Co. for a patent held by De Forest
Company.
2. De Forest was in receivership and Reynolds was in control of the company under contract.
3. Acoustic needed the patent to carry out its business. Bell failed in negotiating a deal, but Bell with the assistance of
Biddle was offered participation in the acquisition of De Forest.
4. Acoustic tried to raise capital to acquire a minority interest in De Forest, but was unable.
5. The directors of Acoustic agreed to buy the shares individually and made a large profit. The trustee of Acoustic in
bankruptcy brought suit against the acquiring individuals for the profits.
6. The court reversed the district court's dismissal of the claims against appellee board members because there was no
basis for appellees' contention that the prohibition against corporate officers acting on their own behalf was
removed where the corporation itself was financially unable to enter into the transaction.
7. The court further reversed dismissal of the action against appellee agent because, even if his agency was
disregarded, once he knowingly joined appellee board members in their personal venture antagonistic to their trust,
he became jointly and severally liable with them for the profits of the enterprise.
ISSUE: Whether or not Mr. Deutsch is not liable because resigned his position as president?
HELD: No. Mr. Deutsh is liable because he knew the transactions.
RATIO:
1. The defendant Bell was Acoustic's agent in the original negotiations with Reynolds, and it is urged by the plaintiff
that as such agent he was a fiduciary precluded from making profits out of the subject-matter of his agency. On his
behalf it is contended that his agency was ended when he delivered to Acoustic the written offer of Reynolds &
Co. and that his participation in the Biddle syndicate was not by virtue of his former agency relationship nor
because of any information he had obtained as Acoustic's agent; that he stands like any stranger to whom the
syndicate might have offered a participation. But, even if the fact of his agency be disregarded, we think there is an
applicable principle which requires him to account, namely, that one who knowingly joins a fiduciary in an
enterprise where the personal interest of the latter is or may be antagonistic to his trust becomes jointly and
severally liable with him for the profits of the enterprise. Although Bell testified that "My knowledge of what
Acoustic did or intended to do with respect to Reynolds' offer of March 31st was limited to what Deutsch told me
around the 9th of April," and although precisely what he was told does not appear, nevertheless Bell says that on
April 7th or 9th he agreed with Mr. Deutsch that, if the latter was not successful in raising the purchase money for
the stock from his own associates, he would join him to the extent of $25,000. This agreement, made at a time
when the offer was still open for acceptance by the corporation, brings Bell within the principle above enunciated.
2. The only directors on the board at the time this release was executed who knew of the De Forest transaction were
the defendants Hammond, Biddle, and Bell. None of the other directors appears to have had any notion concerning
it and Deutsch did not make any disclosure. The company had never made any claim against him on account of the
stock, and no intention to relinquish such a claim can be found. Since Deutsch at the time of the transaction was in
a fiduciary relation to Acoustic, the general release cannot be held to include this transaction without a full and
frank disclosure by Deutsch of the circumstances. The cases on which defendants rely did not concern fiduciary
relations and are distinguishable on that basis.
CASE LAW/ DOCTRINE:directors could not appropriate the opportunity to themselves even where it is shown that the
corporation isfinancially unable to purchase.

CORPORATION LAW
Case Digest
147 Litwin v. Allen AUTHOR: Danna
18 December 1940, 25 N.Y.S. 2d 667 Note: This is also case #124, under the topic of “Duty of
TOPIC: Seizing Corporate Opportunity Diligence: Business Judgment Rule”
PONENTE: Shientag, J.
Brief Summary of the Facts:
• This is a stockholders derivative suit against the
directors of Guaranty Trust Company (Trust), its
subsidiary Guaranty Company of New York,
(Guaranty), and J.P. Morgan & Co., (J.P.).
• Upon the resale of their stock after the close of
Guaranty Company's syndicate period, most of the
Defendants made a substantial profit. It is claimed
that these profits belong to Guaranty Company on
the 'corporate opportunity' theory.
FACTS
1. Alleghany Corporation was organized as a holding company to furnish a corporate instrumentality to provide funds for
investment in railroad securities.
2. Upon its organization, its organizers sold to J. P. Morgan & Co. 1,250,000 shares of common stock (CS) at 20 together
with $35,000,000 principal amount of collateral trust bonds, and $25,000,000 of cumulative 5 1/2% preferred stock
(PS). As purchasers of these securities, J. P. Morgan & Co. had the complete disposal of them.
3. In the independent conduct of their business, J. P. Morgan & Co. arranged with Guaranty Company. Guaranty
Company was to sell publicly all the PS and 500,000 shares of the CS. For this, an underwriting contract was signed.
J. P. Morgan & Co. undertook the sale of the $35,000,000 of bonds, in which Guaranty Company also had a
participation.
4. The arrangements between J. P. Morgan & Co. and Guaranty Company for the underwriting by the Guaranty
Company of the PS and CS offering, and participation by the Guaranty Company in the bond offering, were made in
the form of oral commitments about the middle of January 1929.
5. On the other hand, the offer by J. P. Morgan & Co. to certain Defendants of Alleghany CS for themselves was not
made until after the fixation of Guaranty Company's position (between January 25 and February 1); and was not heard
of by the recipients until that time.
6. At the time the stock was offered to these Defendants, there was no public market whatever.
7. The arrangement for the sale of the CS between J. P. Morgan & Co. and Guaranty Company (which was written in the
underwriting agreement) was an undertaking by the Guaranty Company to underwrite the sale of the shares at $24 per
share. The contract provided that Guaranty Company “will find purchasers for all of such shares of Preferred and
Common stock, or yourself (Guaranty Company) to take and pay for, all of such shares of Preferred and Common
stock for which you shall be unable to find purchasers”.
Guaranty Company's compensation for these services and for the services of associated underwriters was a
commission of $ 4 per share for each share of said Preferred Stock and $ 4 per share for each share of said Common
Stock, less taxes.
8. Likewise, in the said agreement, J. P. Morgan & Co. further undertook to sell and deliver to Guaranty Company or to
purchasers found by Guaranty Company the 500,000 shares of CS at $24 per share.
9. With respect to the 750,000 shares of CS they retained, J. P. Morgan & Co. made different arrangements. This amount
being more than what prudence indicates them to keep, J. P. Morgan & Co. sold about 500,000 shares to people whom
they had business relations with.
10. Apparently, as it developed, the market in the CS opened at a substantial premium. Thus, most of the defendants, upon
the resale of their stock after the close of Guaranty Company's syndicate period, made a substantial profit. Thus,
Guaranty Company claims that, under the 'corporate opportunity' theory, such profits belong to them. The question
was raised at trial why 40,000 shares were not added to Guaranty Company's public offering since doing so would give
it at least the $4 commission to which it was entitled by virtue of the underwriting agreement on the 500,000 shares.
11. Plaintiff’s contention: Guaranty Company made a profit from the underwriting of the 500,000 shares of $1,263,600.
Moreover, Guaranty Company could have profitably disposed of the additional 40,000 shares if they had been offered
CORPORATION LAW
Case Digest
to the Company by the directors and officers within a reasonably short time after the original issue.
ISSUE: Whether or not the substantial profits belong to Guaranty Company
HELD: No, because the Company was employed for a commission to retail 500,000 shares which it did not want for its
own purposes at all.
RATIO:
1. In order to permit the appropriation in this action of defendants' Alleghany stock profits for the benefit of Guaranty
Company, plaintiffs would, under the authorities, be required to establish (a) that the shares were in contemplation of
equity offered to the Guaranty Company, i.e., were either offered to it in terms or offered to defendants as fiduciaries
of Guaranty Company, or (b) that Guaranty Company had some legitimate right or expectancy in these shares; that is,
that the circumstances imposed upon the defendants a 'mandate' to buy for the corporation. This corporate right or
expectancy, this mandate upon directors to act for the corporation, may arise from various circumstances; such as, for
example, the fact that directors had undertaken to negotiate in the field on behalf of the corporation, or that the
corporation was in need of the particular business opportunity to the knowledge of the directors, or that the business
opportunity was seized and developed at the expense, and with the facilities of the corporation.
2. It is noteworthy that in cases which have imposed this type of liability upon fiduciaries, the thing determined by the
court to be the subject of the trust was a thing of special and unique value to the cestui; for example, real estate, a
proprietary formula valuable to the corporation's business, patents indispensable or valuable to its business, a
competing enterprise or one required for the growth and expansion of the corporation's business or the like.
3. The question to be determined is, have the directors profited at the expense of their corporation; have they gained
because of disloyalty to its interests and welfare?
4. The Company was employed for a commission to retail 500,000 shares which it did not want for its own purposes at
all. These facts deprive the instant case of any substantial resemblance to the corporate opportunity cases.
5. Defendants bought their stock and owned it just like other purchasers from J. P. Morgan & Co., except that they were
not free to sell it until the Company had completed its merchandising operation. They were but a few of 250 investors
to whom J. P. Morgan & Co. sold 575,000 shares which, far from having to Guaranty Company the features of special
or unique value present in all the corporate opportunity cases, were of no interest to it at all.
6. It is fair to assume that Guaranty Company knew, in a general way at least, that the 500,000 share public offering was
the limit of the Company's interest in the situation. Under these circumstances the directors' vote recording this fact,
although desirable, would have been a formality, the absence of which should not affect the rights of the parties.
7. There is nothing substantial to the contention that the Alleghany stock transaction operated on the minds of the
directors as a 'favor'. Clearly these stock purchases had no influence upon the independent judgment of the defendant
directors in connection with the three remaining transactions complained of.
CASE LAW/ DOCTRINE:
In order to successfully state a claim allowing for appropriation of a director's privately-purchased stock profits for the
benefit of the company which he directs on the theory of corporate opportunity, a plaintiff is required to establish (a) that
the shares were in contemplation of equity offered to the company, or (b) that the company had some legitimate right or
expectancy in these shares; that is, that the circumstances imposed upon the director a "mandate" to buy for the
corporation.

CORPORATION LAW
Case Digest
148Globe Woolen Co. V. Utica Gas & Electric, AUTHOR:Palomique, Ernesto III C.
121 NE 378 (1918) Maynard, president and chief stockholder of Globe but a
TOPIC:Interlocking Drectors nominal Stockholder in Utica Gas, obtained a cheap, 10-
PONENTE:Cardozo, J. year contract for Utica to supply power. Maynard did not
vote during the meeting for the approval of the contract.
FACTS
1. Globe Woolen Co. (Globe Woolen) owns two mills in Utica. Utica Gas & Electric (Utica) generates and sells
electricity for light and power. Maynard is Globe Woolen's chief stockholder, president and board member.
2. Maynard is also a director of Utica and chairman of its executive committee. He had a single share of Utica's
stock to get the position but returned the share and has never owned stock in Utica ever since.
3. Globe Woolen was considering switching over to electrical power from steam power.Globe Woolen wanted to
ensure that the cost of electricity and the switch over would be cost effective.
4. Eventually, the parties agreed to a contract for the worsted mill. Utica proposed to supply electricity at a rate of
$.0104 per kilowatt hour and guaranteed that the cost of heat, light and power would produce a savings of $300 per
month from the cost of using steam power.
5. A trial period was to run until July, 1, 1907 and then at Globe Woolen's option the contract was to run for five
years with an option for Globe Woolen to renew for another five years.
6. Utica made preparations to install new equipment. The contract was then presented to Utica's executive committee.
Maynard was silent on all issues and the other members were told the rate and that it would be profitable.
7. The contract was ratified. Maynard was excused from voting. The parties next addressed the woolen mill. The
same general agreement was reached but a new provision was added; the contract was to apply to current used
for extensions or additions to the mills and that in the event of a shortage of electricity, Globe Woolen would
be a preferred customer except the city of Utica.
8. The contract was ratified by Utica's executive committee. Nothing was said of the new provisions. Maynard did
not vote again.Globe Woolen made the changes at his mills at a cost of $21,000. It became apparent immediately
that Utica had made a losing contract. Miscalculations had been made and Globe Woolen began to dye more yarn
and that required more power.
9. Eventually, in 1911, Utica gave notice of rescission. Utica had supplied $60,000-69,500.75 in electricity
depending on its normal billing rates and had gotten nothing from Globe Woolen and even owed it
$11,721,41.It was estimated that losses would exceed $300,000.
10. Globe Woolen sued Utica for performance.
11. The trial court ruled for Utica, finding the contracts unenforceable because they were unfair, oppressive, and made
under the dominating influence of a common director. The appellate court affirmed. Globe appealed to this court,
arguing that since Maynard had abstained from voting on the contracts, he and Globe were shielded from these
claims.
ISSUE:Is the duty of loyalty owed by a board member to his company discharged simply by refusing to vote on interested
issues? (Is Maynard Liable?)
HELD: NO. Such duty is not discharged. (YES, Maynard is liable) Judgment affirmed. Contracts were annulled.

CORPORATION LAW
Case Digest
RATIO
Where one is a director of two corporations he holds the relation of trustee to both, and when a contract involving
important interests of both for a long time in the future is being negotiated, such trustee is free to stand aloof, while the
other directors of both corporations act, if all is equitable and fair. He cannot, however, rid himself of the duty to warn and
denounce if there is improvidence or oppression, either apparent on the surface, or lurking beneath the surface, but visible
to him by reason of his superior knowledge of facts and conditions involved.
Where a harsh and unfair contract, resulting in great profit to one corporation at the expense of the other, is brought about
by the dominating, or at least potent and persuasive, influence of a director of both corporations, who was the president
and chief stockholder of the corporation which secured the advantage, and only nominally a stockholder of the other,
having no interest therein, such contract is voidable and should be annulled, notwithstanding the dual director refused to
vote, and was excused from voting, at the directors' meeting of the corporation suffering the loss, which accepted and
ratified the unfair contract.
CASE LAW/ DOCTRINE: The duty of loyalty owed by a board member to his company is not discharged simply by
refusing to vote on interested issues.

CORPORATION LAW
Case Digest
149 DBP v CA, Remington Industrial Sales Corp. AUTHOR: Keith Meridores
August 16, 2001, GR No. 126200 Interlocking Directors: a director occupies such a position in
TOPIC:Duties of directors and Controlling Stockholders; 2 corporations dealing with each other.
interlocking Directors [Remington Corp invokes the principle that a contract
PONTENTE:Kapunan, J. between 2 corporations having interlocking directors is
invalid in cases of fraud whereby one corporation is
prejudiced.]
This is not applicable in this case. Remington Corp, though
prejudiced, is a 3rd party; it does not have interlocking
directors with the other corporations.
FACTS:
Background on how the issue between Petitioner and Pvt. Respondent arose:
1. Marinduque Mining Corp (Marinduque) obtained loans from DBP and PNB secured by mortgages on all its properties.
2. Marinduque also bought construction material from private respondent Remington. Thus, Remington is a creditor.
3. Marinduque failed to pay Remington. Remington brought suit for collection and damages.
3. Marinduque also failed to pay its loans to both banks, thus the latter extra-judicially foreclosed the properties.
4. PNB and DBP assigned the foreclosed properties to Nonoc Mining, Maricalum Mining and Island Cement to continue
the operations to prevent deterioration to the foreclosed assets/ properties. (paramapakinabangan, sayangnaman kung
nakatenggalang)
5. Remington amended its complaint (in #3) to also include PNB and DBP in view of the foreclosure of practically all
properties of Marinduque (walangnaiwanparakay Remington)
Main Topic:
1. Remington, through 2 amendments to its complaint, included Nonoc Mining, Maricalum Mining, and Island Cement.
2. Remington Contends that they all must be treated as one entity and their corporate veil should be disregarded since:
a. all the entities (Nonoc, Maricalum, and Island) were owned by PNB and DBP
b. personnel, key officers, and other workers of the 3 entities mentioned were personnel of Marinduque, Remington
asserts that all that happened was that Marinduque changed its name.
c. all the entities had the same place of business
d. all the entities (Nonoc, Maricalum, and Island) were created by the gov’t in pursuit of business.
3. The RTC ruled in favor of Remington.
4. DBP appealed to the CA.
5. CA sustained RTC. CA made reference to 2 principles in CORPO LAW. ( you’ll find out later, both are inapplicable)
- 1st: Transactions between corporations with interlocking directors resulting in the prejudice to one of the
corporations.
- 2nd: “Directors x xx who are creditors”.
6. Hence this petition by DBP to the SC.
7. Final contentions:
DBP: Remington has no cause of action against it or PNB, nor against their transferees.
Remington: the transfer of the properties (to the 3 entities) was made in fraud of creditors.
ISSUE:
Whether or not, by virtue of the contentions (especially pertaining to personnel and key officers) of Remington, the 3
entities can be considered as one?
HELD:
No.

CORPORATION LAW
Case Digest
RATIO:
1. The 2 principle referenced to by the CA are inapplicable because: (respectively)
- 1st rule does not apply in this case since the corporation allegedly prejudiced (Remington) is a third party, not
one of the corporations with interlocking directors (Marinduque Mining and DBP). [The principle pre-supposes
that the corporations involved have the same directors and officers and one of the corporation is prejudiced.]
- 2nd rule does not apply because the creditor of Marinduque Mining is DBP, not the directors of Marinduque Mining.
2. The SC does not find any fraud on the part of Marinduque Mining and its transferees to warrant the piercing of the
corporate veil.
- PNB and DBP are mandated by law to foreclose on the mortgage when the past due account had incurred arrearages of
more than 20% of the total outstanding obligation. Section 1 of Presidential Decree No. 385. The banks had no choice but
to obey the statutory command.
3. The SC also finds no bad faith on the part of DBP by its creation of the 3 entities.
- By the nature of DBP (a banking institution) it is not allowed to engage in mining. The creation of the three corporations
was necessary to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose
their value. (habang di pa nabebentang PNB tska DBP, pakinabanggannalangmuna)
CASE LAW/ DOCTRINE:
A contract between 2 corporations having interlocking directors is invalid in cases of fraud whereby one corporation is
prejudiced. This pre-supposes that the corporations involved have the same directors and officers and one of the
corporations is prejudiced.
The creation by DBP as the mother company of the three mining corporations to manage and operate the assets acquired in
the foreclosure sale lest they deteriorate from non-use and lose their value, does not indicate fraud or wrongdoing and will
not constitute application of the piercing doctrine.

CORPORATION LAW
Case Digest
150 Insuranshares Corp. v. Northern Fiscal AUTHOR: Marvin
Corporation
10 September 1940, 35 F. Supp 22 Brief Summary of the Facts:
TOPIC: Duty of Controlling Interest • Plaintiff is an investment trust, specializing in
PONENTE: KIRKPATRICK, D.J shares of small life insurance companies.
• Corporation seeks to recover damages against its
former officers, directors, certain of its former
stockholders, and others
• Control of the corporation was sold to a group who
robbed it of most of its assets.
• The sale of control was of a minority, but
controlling, interest.
Synopsis of Rule of Law: The transfer of the shares of the

stockholders owning controlling interest in the corporation
to outsiders whose main purpose was to divest the
corporation of its assets leaving its mere shell to the
remaining stockholders constitute fraud. Such controlling
stockholders would be liable to the corporation and the other
stockholders.
FACTS
There are two groups involved in the case:
• Management group- defendants who, prior to 21 December 1937, were the owners of 75,933 of the corporation's
total outstanding 284,032 shares
• Boston group - defendants, Robb, Morris and Solomont, who bought control and who, with their satellites, looted
the corporation
1. 21 December 1937 - The Management group transferred the control of the corporation to the Boston group, none of
whom had ever had any interest of any kind in it.
2. The control included the plenary power (under the by-laws) to sell, exchange or transfer all of the securities in the
corporation's portfolio, as well as access to and physical possession of them.
3. Immediate and complete passing of control was ensured by the successive resignation of the old directors. Each time
there would be a resignation, a new member of the board would be elected, on the nomination of the Boston group.
4. The Management group also sold and delivered their stock to the Boston group.
5. Defendant’s contention: the transfer was merely a sale of stock. The passing of control was merely a normal
concomitant.
ISSUE: Whether or not the Management group is liable to the corporation for the sale of stock
HELD: Yes, becausethe owners of control are under a duty not to transfer it to outsiders if the circumstances surrounding
the proposed transfer are such as to awaken suspicion and put a prudent man on his guard —unless a reasonably adequate
investigation discloses such facts as would convince a reasonable person that no fraud is intended or likely to result.

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RATIO:
8. The Boston group was interested only in having a free hand with the corporation's portfolio for a few weeks, and all
they needed for that purpose was to be able to name and control the officers and directors.
9. The Boston group bought only about 27% of the outstanding issue, and, throughout their operations, they were never
anything but minority stockholders.
10. The purchase of stock assured them, temporarily, of noninterference from stockholders, since the majority, who had
bought for investment, could be counted on to remain inert. (The sellers were really interested only in getting as much
money as possible for what they had to sell.)
11. It would have been absurd to expect such acquiescence from the Management group, had they retained any stock
interest, and equally absurd to expect them to part with control, without at the same time getting out of their
investment in the corporation.
12. The price is strongly indicative of the true nature of the transaction.Selling price: $3.60; its over-the-counter market
price was $1 to $1.25
13. Those who control a corporation, either through majority stock ownership, ownership of large blocks of stock less than
a majority, officeholding, management contracts, or otherwise, owe some duty to the corporation in respect of the
transfer of the control to outsiders. Such persons may not be wholly oblivious of the interests of everyone but
themselves, even in the act of parting with control, and that, under certain circumstances, they may be held liable for
whatever injury to the corporation made possible by the transfer.
14. The owners of control are under a duty not to transfer it to outsiders if the circumstances surrounding the proposed
transfer are such as to awaken suspicion and put a prudent man on his guard —unless a reasonably adequate
investigation discloses such facts as would convince a reasonable person that no fraud is intended or likely to result.
15. If, after investigation, the sellers are deceived by false representations, there may be no liability; but if the
circumstances put the seller on notice and if no adequate investigation is made and harm follows, then liability follows.
16. The facts and circumstances of the case were known to the sellers, and were sufficient to indicate that the Boston
group was acquiring the control of the corporation by improper means and for an improper purpose.
If Hepburn had good reason to suspect that the purchase was to be financed in toto with the corporation's assets, it
would be fair warning of the fraudulent nature of the situation.
17. There plainly was a duty upon the sellers to make a genuine effort to obtain and verify such information as they
reasonably could get about the means by which the purchase was to be financed and the character, aims and
responsibility of the purchasers, or, in the absence of adequate information, to refrain from making the sale.
CASE LAW/ DOCTRINE:
The transfer of the shares of the stockholders owning controlling interest in the corporation to outsiders whose main
purpose was to divest the corporation of its assets leaving its mere shell to the remaining stockholders constitute fraud.
Such controlling stockholders would be liable to the corporation and the other stockholders.

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Case Digest
151 Africa v. PCGG AUTHOR: Pat
G.R. No. 83831, January 9, 1992
TOPIC: Extent of and Limitations on Right Note: 4 consolidated cases (G.R. No. 83831, 85597, 85621,
PONTENTE: Regalado, J. 85594) pursuant to the SC Resolution involving the
sequestration of Eastern Telecommunication Philippines,
Inc. (ETPI) by the Presidential Commission on Good
Government (PCGG).
FACTS
5. PCGG sequestered ETPI, and PCGG filed in the Sandiganbayan an action for reconveyance, reversion, accounting,
and restitution of the alleged ill-gotten ETPI shares and damages.
6. After PCGG sequestered ETPI, the sequestration order was partially lifted when 40% of the shares of stock (Class B)
owned by Cable and Wireless, Ltd. were freed from the effects of sequestration.
7. July 22, 1987: PCGG filed with the Sandiganbayan Civil Case No.0009.
8. January 29, 1988: There was an annual stockholders meeting.
Villanueva (PCGG nominee)
Mabanta and De los Angeles (Foreign investors nominee)
Cable and Wireless Ltd. and Jose Africa (absent) = were elected as members of the board of directors
9. An organizational meeting was later held, where:
Villanueva was elected as president and general manager
Desuasido, Velasco, Payos were elected as acting corporate secretary, acting treasurer, acting assistant corporate
secretary respectively
10. The nomination and election of PCGG nominees to the ETPI Board of Directors, as well as election of its new officers
triggered proceedings before the Sandiganbayan and Supreme Court
G.R. No. 83831
1. Victor Africa, who claims to be an employee of ETPI with the position (VP, General Counsel, Corporate Secretary,
Special Assistant to the Chairman) filed with the SC a petition for injunction seeking to enjoin the PCGG and its
nominees to the board of directors and the newly-installed officers of ETPI from implementing their alleged illegal,
invalid and immoral act of ousting him from his offices and positions at the ETPI pending the determination of
whether they have validly, legally and morally assumed their supposed positions and offices as "directors" and/or
"officers" of ETPI.
2. Africa contends that:
The reasons of PCGG-sponsored board of directors for ousting him (need to conserve company funds and loss of
confidence) are arbitrary, evidencing that they have an oppressive attitude towards him
Their clear intent to harass him into refraining from questioning before the courts all the illegal acts of said PCGG-
sponsored board causing ETPI damages because they constitute dissipation of assets
3. Africa informed the Court that while a verbal agreement to maintain status quo was reached, respondent Villanueva
circulated an inter-office memorandum easing out the legitimate members of the board from their rooms in the
executive offices for the benefit of the newly-installed members of the questioned PCGG board
4. July 15, 1988: Petitioner Africa was allegedly forcibly taken out of his office on the basis of a PCGG order which
petitioner claimed was addressed not to then PCGG Commissioner Laureta, but to 3 other PCGG officials (Conejos,
Rivera, Romero). Petitioner Africa sought to have Laureta declared in contempt of court. Petitioner also sought the
issuance of a writ of preliminary mandatory injunction ordering respondents to open his office and allow him access.
G.R. No. 85594
1. Plaintiffs questioned the order of PCGG leading to the election of defendants (Mabanta, De Los Angeles, Velasco,
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Case Digest
Cable and Wireless) to the ETPI Board of Directors.
2. Claiming to be the duly elected members of the ETPI Board of Directors during the January 4, 1988 special
stockholders meeting, plaintiffs prayed that defendants be removed from their ETPI positions, and that an injunction
be issued perpetually restraining the PCGG from electing, designating and supporting the defendants in their ETPI
roles.
3. The Clerk of Court of the Sandiganbayan issued, upong request of the counsel for Jose Africa et. Al, a subpoena duces
tecum and ad testificandum ordering PCGG to produce the stock and transfer book and all stubs of the outstanding
certificates of ETPI.
4. Three days after or October 24, 1988, another subpoena was issued ordering Assistant Solicitor General Desuasido to
produce the “minutes of all meetings of the Board of Directors and Stockholders of ETPI from January 29, 1988 to
date.”
5. PCGG moved to quash both subpoenae, but was denied by the Sandiganbayan.
6. Hence, PCGG filed this petition for certiorari assailing grave abuse of discretion that the Sandiganbayan has no
jurisdiction and prayed for the issuance of TRO to enjoin them from enforcing the subpoenas.
ISSUE:
Whether or not the issuance by the Sandiganbayan of the subpoena duces tecum and ad testificandum ordering the PCGG
to testify and produce the stock and transfer book, all stubs of the outstanding stock certificates of ETPI and the minutes of
all meetings of the board of directors and stockholders of ETPI is valid.
HELD:
Yes, it is valid.
RATIO:
1. The law and jurisprudence on the jurisdiction of the Sandiganbayan over cases for the recovery of "ill-gotten wealth"
are now settled. In PCGG vs. Hon. Emmanuel G. Peña, etc., et al., 20 this Court held:
. . . Under Section 2 of the President's Executive Order No. 14 issued on May 7, 1986, all cases of the
Commission regarding "the Funds, Moneys, Assets, and Properties Illegally Acquired or Misappropriated
by Former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their Close Relatives,
Subordinates, Business Associates, Dummies, Agents, or Nominees" whether civil or criminal, are lodged
within the "exclusive and original jurisdiction of the Sandiganbayan" and all incidents arising from,
incidental to, or related to, such cases necessarily fall likewise under the Sandiganbayan's exclusive and
original jurisdiction, subject to review on certiorari exclusively by the Supreme Court.
2. In upholding therein the right of a stockholder of a sequestered company to inspect and/or examine the records of a
corporation pursuant to Section 74 of the Corporation Code, the Court found nothing in Executive Orders Nos. 1, 2
and 14, as well as in BASECO, to indicate an implied amendment of the Corporation Code, much less an implied
modification of a stockholder's right of inspection as guaranteed by Section 74 of the Corporation Code.
CASE LAW/ DOCTRINE:
The only express limitation on the right of inspection, according to the Court, is that (1) the right of inspection should be
exercised at reasonable hours on business days; (2) the person demanding the right to examine and copy excerpts from the
corporate records and minutes has not improperly used any information secured through any previous examination of the
records of such corporation; and (3) the demand is made in good faith or for a legitimate purpose.

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Case Digest
152 PARDO v. HERCULES LUMBER AUTHOR: Yayie Lanting
August 1, 1924 G.R. No. L-22442 A by-law unduly restricting the right of inspection is
TOPIC: Remedies Available if Inspection Refused undoubtedly invalid.
PONENTE: Street, J
FACTS:
1. Antonio Pardo, petitioner, is a stockholder in the Hercules Lumber Company, Inc. He seeks by original proceeding in
the Supreme Court to obtain a writ of mandamus to compel the respondents to permit him and his duly authorized agent
and representative to examine the records and business transactions of said company.
2. Respondent Ignacio Ferrer, as acting secretary of the said company, has refused to permit the petitioner or his agent to
inspect the records and business transactions of the said Hercules Lumber, at times desired by the petitioner.
3. Section 51 of Act No. 1459 gives the petitioner, by himself or proper representative, to exercise the right of inspection
conferred. The provision was under the consideration the Court in the case of Philpotts vs. Philippine Manufacturing Co.,
and Berry (40 Phil., 471), where the Court held that the right of examination there conceded to the stockholder may be
exercised either by a stockholder in person or by any duly authorized agent or representative.
4. The defense of the respondent rests upon article 10 of the By-laws of the respondent corporation it is declared that
"Every shareholder may examine the books of the company and other documents pertaining to the same upon the days
which the board of directors shall annually fix." It is further averred that at the directors' meeting of the respondent
corporation held on February 16, 1924, the board passed a resolution to the following effect:
“The board also resolved to call the usual general (meeting of shareholders) for March 30 of the present year,
with notice to the shareholders that the books of the company are at their disposition from the 15th to 25th of the same
month for examination, in appropriate hours.”
The contention for the respondent is that this resolution of the board constitutes a lawful restriction on the right conferred
by statute; and it is insisted that as the petitioner has not availed himself of the permission to inspect the books and
transactions of the company within the ten days thus defined, his right to inspection and examination is lost, at least for this
year.
5. Also, the respondents alleges that petitioner seeks is desired for ulterior purposes in connection with a competitive firm
with which the petitioner is alleged to be connected. It is also insisted that one of the purposes of the petitioner is to obtain
evidence preparatory to the institution of an action which he means to bring against the corporation by reason of a contract
of employment which once existed between the corporation and himself.
ISSUE:
Whether or not the petitioner has lost his right to inspection and examination of the records of the company?
HELD:
No. Petitioner still has the right to inspect the records because neither the executive officers nor the board of directors have
the power to deprive his right.
RATIO:
The general right given by the statute may not be lawfully abridged to the extent attempted in this resolution. It may be
admitted that the officials in charge of a corporation may deny inspection when sought at unusual hours or under other
improper conditions; but neither the executive officers nor the board of directors have the power to deprive a stockholder
of the right altogether. A by-law unduly restricting the right of inspection is undoubtedly invalid. Under a statute similar to
our own it has been held that the statutory right of inspection is not affected by the adoption by the board of directors of a
resolution providing for the closing of transfer books thirty days before an election. (State vs. St. Louis Railroad Co., 29
Mo., Ap., 301.)
Generally speaking, the motive of the shareholder exercising the right is immaterial. (7 R.C.L., 327.)
We are of the opinion that, upon the allegations of the petition and the admissions of the answer, the petitioner is entitled to
relief. The demurrer is, therefore, sustained; and the writ of mandamus will issue as prayed, with the costs against the
respondent.

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CASE LAW/ DOCTRINE:
It will be noted that our statute declares that the right of inspection can be exercised "at reasonable hours." This means at
reasonable hours on business days throughout the year, and not merely during some arbitrary period of a few days chosen
by the directors.
*note from Campos book:

The Pardo case is a later decision than the Philpotts case. Are these two cases necessarily inconsistent with each other?
Note that the court in the Pardo case stated that as a general rule, motive is immaterial. Any doubt raised by these
seemingly conflicting decisions has been settled by section 74 of the Code.
Sec 74. xxx and Provided, further, That it shall be a defense to any action under this section that the person demanding
to examine and copy excerpts from the corporation’s records and minutes has improperly used any information secured
through any prior examination of the records or minutes of such corporations or of any other corporation, or was not acting
in good faith or for a legitimate purpose in making his demand.

CORPORATION LAW
Case Digest
153 GONZALES V PNB AUTHOR: Jade
May 30, 1983 GR#L-33320
TOPIC: Rights of Stockholders
PONTENTE: Vazquez, J.
FACTS
In 27 April 1967, Ramon Gonzales, as a taxpayer filed a case against Sec. Antonio Raquiza of Public Works and
Communications, the Philippine National Bank, etc. He questioned the letters of credit PNB has extended for the importation
of the Republic of the Philippines of public works equipment. He then expressed and made known his intention to acquire
one share of stock from Congressman Justiniano Montano. The stock was transferred to petitioners name the following day.
The petitioner, in his dual capacity as citizen and stockholder filed 3 other cases against the bank.
Ramon Gonzales instituted a special civil action for mandamus against PNB. He prayed that PNB be ordered to allow him to
look into the books and records of PNB in order to satisfy himself as to the truth of the published report on the banks
activities:
1. Guaranteeing the obligation of Southern Negros Development Corporation in the purchase of a US$23M sugar mill
to be financed by Japanese suppliers and financiers
2. Financing the construction of the P21M Cebu-Mactan Bridge
3. Financing the construction of Passi Sugar Mills
PNB did not allow the petitioner to inspect its books. The trial court also dismissed Gonzales’ petition for mandamus. The
petition was denied on the grounds that the right of the stockholder to inspect the record of the business transactions of the
corporation granted under Section 51 of the former Corporation Law (Act 1459 as amended) is not absolute but limited to
purposes related to the interest of the stockholder, must be asked for in good faith for a specific and honest purpose and not to
gratify curiosity or for speculative or vicious purposes and that such examination would violate the confidentiality of the
records of the bank as provided in Section 16 of its Charter, RA 1300, as amended and that petitioner has not exhausted his
administrative remedies.
Petitioner alleged that the lower court erred when it ruled that his improper motive disqualifies him to exercise the right of a
stockholder to such inspection under Section 51 of Act 1459 as amended (the old Corporation Law).
ISSUE: Whether or not petitioner has the right to inspect the books and records of the defendant bank, PNB, for he is a
stockholder.
HELD: Petition is dismissed.
RATIO:
Petitioner may no longer invoke his contentions based on Section 51 of Act 1459, as amended. The old Corporation Law
already got replaced by Batas Pambansa 68 otherwise known as the Corporation Code of the Philippines.
The rights of a stockholder in Section 51 of Act 1459 was retained but with modifications. The second and third paragraphs
of Section 74 provides expressly required conditions for such examinations: that the one requesting it must not have been
guilty of using improperly any information through a prior examination, and that the person asking for such examination must
be acting in good faith and for a legitimate purpose in making his demand.
Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of PNB, he has not
set forth the reasons and the purposes for his desire to inspect, except to satisfy himself as to the truth of published reports
regarding certain transactions entered into by the bank and to question their validity.
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Case Digest
The circumstances under which he acquired one share of stock in the bank purposely to exercise the right of inspection do not
argue in favor of his good faith and proper motivation. He sought to be a stockholder in order to pry into transactions entered
into by the bank and his obvious purpose was to arm himself with materials which he can use against the responded bank for
acts done by the latter when petitioner was a total stranger to the same.
PNB is not an ordinary corporation because it has its own charter. Therefore it is not governed by the Corporation Code of the
Philippines. The provision of the Section 74 of BP 68 may not be reconciled with the provisions of the Charter of PNB. It is
not right to claim that the right of inspection under Section 74 of BP 68 may apply in a supplementary capacity to the charter
of the responded bank.
CASE LAW/ DOCTRINE:

Paragraph 2 and 3 of Section 74 of BP 68 – Corporation Code of the Philippines
The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by
anydirector, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand,
writing,for a copy of excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the
corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall
beliable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which
shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of
the
board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees
who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the
person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used
anyinformation secured through any prior examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making his demand.

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Case Digest
154 VERAGUTH v ISABELA SUGAR CO. AUTHOR: Krystelle
G.R. No. L-37064; October 4, 1932
TOPIC: Remedies Available if Inspection Refused (Lifted from the book of Campos):
PONENTE: Malcolm, J. The court did not order the corporation to send the petitioner
the proper notice of all future meetings. Was the issue of
whether he was entitled to notice of future meetings an
"academic question?" Suppose the secretary fails or refuses
to send the stockholder notice of any future meeting, may
the secretary be cited for contempt despite the lack of a
specific order? If not, then the stockholder is left with no
remedy except to file another petition before the courts.
FACTS
1. The parties to this action are Eugenio Veraguth, a director and stockholder of the Isabela Sugar Company, Inc.,
who is the petitioner, and the Isabela Sugar Company, Inc., Gil Montilla, acting president of the company, and
Agustin B. Montilla, secretary of the company, who are the respondents.
2. Director Veraguth telegraphing the secretary of the company, asking the latter to forward in the shortest
possible time a certified copy of the resolution of the board of directors concerning the payment of attorney's
fees in the case against the Isabela Sugar Company and others.
3. To this the secretary made answer by letter stating that, since the minutes of the meeting in question had not
been signed by the directors present, a certified copy could not be furnished and that as to other proceedings of
the stockholders a request should be made to the president of the Isabela Sugar Company, Inc.
4. It further appears that the board of directors adopted a resolution providing for inspection of the books and the
taking of copies "by authority of the President of the corporation previously obtained in each case."
5. The petitioner prays: (a) That the respondents be required within five days from receipt of notice of this
petition to show cause why they refuse to notify the petitioner, as director, of the regular and special meetings
of the board of directors, and to place at his disposal at reasonable hours, the minutes, and documents, and
books of the aforesaid corporation, for his inspection as director and stockholder, and to issue, upon payment
of the fees, certified copies of any documentation in connection with said minutes, documents, and books of
the corporation; and (b) that, in view of the memoranda and hearing of the parties, a final and absolute writ of
mandamus be issued to each and all of the respondents to notify immediately the petitioner within the
reglamentary period, of all regular and special meetings of the board of directors of the Isabela Sugar Central
Company, Inc., and to place at his disposal at reasonable hours the minutes, documents, and books of said
corporation for his inspection as director and stockholder, and to issue immediately, upon payment of the fees,
certified copies of any documentation in connection with said minutes, documents, and the books of the
aforesaid corporation.
ISSUE: Whether or not the petitioner can compel the secretary of the corporation by writ of mandamus to furnish certified
copies of minutes, documents, and the books of the corporation enforcing his right of inspection without first having the of
the approval of the President.
HELD: No. Petitioner has not made out a case for relief by mandamus. Directors of a corporation have the unqualified
right to inspect the books and records of the corporation at all reasonable times. We do not conceive, however, that a
director or stockholder has any absolute right to secure certified copies of the minutes of the corporation until these
minutes have been written up and approved by the directors.
RATIO:
Directors of a corporation have the unqualified right to inspect the books and records of the corporation at all reasonable
times. Pretexts may not be put forward by officers of corporations to keep a director or shareholder from inspecting the
books and minutes of the corporation, and the right of inspection is not to be denied on the ground that the director or
shareholder is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. A director
or stockholder can not of course make copies, abstracts, and memoranda of documents, books, and papers as an incident to
the right of inspection, but cannot, without an order of a court, be permitted to take books from the office of the
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Case Digest
corporation. We do not conceive, however, that a director or stockholder has any absolute right to secure certified copies of
the minutes of the corporation until these minutes have been written up and approved by the directors.
Combining the facts and the law, we do not think that anything improper occurred when the secretary declined to furnish
certified copies of minutes which had not been approved by the board of directors, and that while so much of the last
resolution of the board of directors as provides for prior approval of the president of the corporation before the books of
the corporation can be inspected puts an illegal obstacle in the way of a stockholder or director, that resolution, so far as we
are aware, has not been enforced to the detriment of anyone. In addition, it should be said that this is a family dispute, the
petitioner and the individual respondents belonging to the same family; that a test case between the petitioner and the
respondents has not been begun in the Court of First Instance of Occidental Negros involving hundreds of thousands of
pesos, and that the appellate court should not intrude its views to give an advantage to either party. We rule that the
petitioner has not made out a case for relief by mandamus.
CASE LAW/ DOCTRINE:
The Corporation Law, section 51, provides that:
All business corporations shall keep and carefully preserve a record of all business transactions, and a minute of all
meetings of directors, members, or stockholders, in which shall be set forth in detail the time and place of holding the
meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the
meeting. . . .
The record of all business transactions of the corporation and the minutes of any meeting shall be open to the
inspection of any director, member, or stockholder of the corporation at reasonable hours.
A. Vickers, J.
The writ prayed for should be granted.
In the majority opinion it is stated that the meeting in question having already been held, the failure of the defendants to
notify the plaintiff of said meeting is now merely an academic question. I cannot agree with that conclusion. The plaintiff
seeks the protection of his right to a notice of all meetings of the board of directors, and prays that the defendant officers be
required to perform their duties in accordance with the law. It is obvious that if the defendant officers should again fail to
notify the plaintiff of any meeting of the board of directors, he would be in no better position than he is at the present time.
Under the theory of the majority opinion the plaintiff would have no redress.
As to the second ground of plaintiff's complaint, or the refusal of the secretary of the corporation to allow the plaintiff to
read the resolution adopted on April 21, 1932, on the ground that it had not been signed by the directors, the plaintiff was
clearly within his rights in demanding that he be given an opportunity to examine said resolution. It does not appear that
there was any necessity for the directors to sign the resolution in question. Such a resolution was a part of the secretary's
minutes of the meeting, which would ordinarily be reported for approval at the next meeting. In any event the directors had
adopted the resolution, and whether it was to be signed or not, the plaintiff as a director of the corporation had a right to
see it.
As to the fact that ill-feeling exists between the parties and another suit between them is now pending, that seems to me
only an additional reason why the plaintiff should be protected in the lawful rights which he now seeks to enforce.
B. Butte, J.
I concur in the foregoing dissent insofar as it relates to the actions of the respondent corporation and its officers in denying
to the petitioner, as stockholder and as director, the rights which statutes confer upon him to examine and make or receive
copies of any and all of the books and papers of the corporation pertaining to the conduct of its business. The record shows
clearly that the officers and remaining directors have adopted a policy of obstruction toward the petitioner in this respect
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and imposed for the future, by resolution, illegal conditions upon the petitioner's exercise of the said right.

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Case Digest
155. JOHN GOKONGWEI, JR., petitioner, AUTHOR: Revy Neri
vs. SECURITIES AND EXCHANGE COMMISSION,
ANDRES M. SORIANO, JOSE M. SORIANO, There is no question that stockholders are entitled to inspect
ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO the books and records of a corporation in order to
BUNAO, WALTHRODE B. CONDE, MIGUEL investigate the conduct of the management, determine the
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL financial condition of the corporation, and generally take an
CORPORATION, EMIGDIO TANJUATCO, SR., and account of the stewardship of the officers and directors.
EDUARDO R. VISAYA, respondents.
G.R. No. L-45911 April 11, 1979
TOPIC: Remedies Available if inspection refused
PONENTE: Antonio, J.
FACTS
1. Petitioner, as stockholder of respondent 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.
2. It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing thereof be
cancelled, and that individual respondents be made to pay damages, in specified amounts, to petitioner.
3. In connection with the same case, petitioner filed with the Securities and Exchange Commission an "Urgent
Motion for Production and Inspection of Documents", alleging that the Secretary of respondent corporation
refused to allow him to inspect its records despite request made by petitioner for production of certain documents
enumerated in the request, and that respondent 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.
4. Among the documents requested to be copied were (a) minutes of the stockholder's meeting field on March 13,
1961, (b) copy of the management contract between San Miguel Corporation and A. Soriano Corporation
(ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d) authority of the stockholders to invest
the funds of respondent corporation in San Miguel International, Inc.; and (e) lists of salaries, allowances, bonuses,
and other compensation, if any, received by Andres M. Soriano, Jr. and/or its successor-in-interest.
5. It was opposed by respondents, alleging, among others that the motion has no legal basis; that the demand is not
based on good faith; that the motion is premature since the materiality or relevance of the evidence sought cannot
be determined until the issues are joined, that it fails to show good cause and constitutes continued harassment, and
that some of the information sought are not part of the records of the corporation and, therefore, privileged.
6. Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection of
documents was filed by all the respondents.
ISSUE:
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.
HELD:
Yes, considering that the foreign subsidiary is wholly owned by respondent 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
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Case Digest
subsidiary which are in respondent corporation's possession and control.
RATIO:
1. 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."
2. 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 ownership.
3. 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.
4. 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.
5. 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.
6. In the Nash case, The Supreme Court of New York held that the contractual right of former stockholders to inspect
books and records of the corporation included the right to inspect corporation's subsidiaries' books and records
which were in corporation's possession and control in its office in New York."
7. In the Bailey case, stockholders of a corporation were held entitled to inspect the records of a controlled subsidiary
corporation which used the same offices and had Identical officers and directors.
CASE LAW/ DOCTRINE:
It appears to be 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.

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Case Digest
156 Cojuangco v. Roxas AUTHOR:
April 16, 1991; G.R. No. 91925 Rosa Cecilia K. Alfafara
TOPIC:Remedies Available if Inspection Refused PCGG only has powers of administration. (No acts of
PONTENTE:GANCAYCO, J. ownership.)
FACTS
1.Petitioners are stockholders of San Miguel Corporation (SMC).
2. On April 18, 1989, the annual meeting of shareholders of SMC was held. Among the matters taken up was the election
of 15 members of the board of directors for the ensuing year. Petitioners were among the 24 nominees to the board.
3.On said meeting, there were 140,849,970 shares outstanding. Present were 133,224,130 shares or 94.58%, either in
person or by proxy.
4. Presidential Commission on Good Government (PCGG) claims that some of the shares of stock were under
sequestration, thus, PCGG was allowed to represent and vote the shares of stocks of the following
shareholders.(Collectively referred to as "corporate shares" in the case)
5. Representatives of the corporate shares present at the meeting claimed that the shares are not under sequestration; or that
if they are under sequestration, the PCGG had no right to vote the same.
6. They were, however, overruled.
7. Result of the election: The top 15 individuals were elected. (PCGG’s vote was counted.)
8. Petitioners allege that the 27,211,770 shares or a total of 408,176,550 votes representing the “corporate shares”, were
illegally cast by PCGG and should be counted in favor of petitioners.That if they were allowed to vote their corresponding
shares accordingly, then they would obtain enough votes to be elected.
9. On May 31, 1989, petitioners filed with the Sandiganbayan a petition for quo warranto impleading as respondents the 15
candidates who were declared elected members of the board of directors of SMC.
10. On November 16, 1989, a resolution was rendered by the Sandiganbayan affirming its jurisdiction over the petition but
dismissing it for lack of cause of action on the ground that the PCGG has the right to vote sequestered shares.
11. Thus, the petitioners filed the pet. for certiorari before the Supreme Court.
ISSUE:(1) Whether or not PCGG can validly vote in the board of directors election.
(2) Whether or not PCGG can acquire access on records of the company.
HELD: (1) No, in BASECO v. PCGG, it was settled that PCGG cannot exercise acts of dominion over property
sequestered. It may not vote sequestered shares of stock or elect members of the board of directors of a corporation.
** Since PCGG cannot exercise acts of dominion, PCGG can, however, safeguard such shares by restraining their sale,
encumbrance, assignment or any other disposition during the period of sequestration.
(2) Yes, the PCGG must be able to observe and monitor the carrying out of the business of the corporation as to
discover in a timely manner any move or effort on the part of the registered owners of the sequestered stock, alone or in
concert with other shareholders, to conceal, waste and dissipate the assets of the corporation, or the sequestered shares
themselves, and seasonably to bring such move or effort to the attention of the Sandiganbayan for appropriate action.
RATIO:
1. The act of sequestration, freezing or provisional takeover of property does not import or bring about a divestment of title
over said property; does not make the PCGG the owner thereof.
2. The PCGG may exercise only powers of administration over the property or business sequestered or provisionally taken
over, much like a court-appointed receiver, such as to bring and defend actions in its own name; receive rents; collect debts
due; pay outstanding debts; and generally do such other acts and things as may be necessary to fulfill its mission as
conservator and administrator.
3. There is no doubt that petitioners have the right to vote their shares at the shareholders meeting even if they are
sequestered.
4. Besides, there are other means by which the said shares may be preserved and their dissipation prevented. The PCGG
may restrain their sale, encumbrance, assignment or any other disposition during the period of sequestration. It may
monitor the business operations of petitioners as to said shares. It need not vote the shares in order to accomplish its role as
conservator.
5. PCGG must be stayed in its indiscriminate takeover of and voting of shares allegedlyill-gotten in the case. It is only after
appropriate judicial proceedings when a clear determination is made that said shares are truly ill-gotten when such a
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Case Digest
takeover and exercise of acts of strict ownership by the PCGG are justified.
6. Thus, it is necessary to achieve a balancing or reconciliation between the stockholder's right to vote and the
conservator's statutory duty to recover and in the process thereof, to conserve assets, thought to be ill-gotten wealth, until
final judicial determination of the character of such assets or until a final compromise agreement between the parties is
reached.
7. The main 2 types of situations that need to be addressed are the ff: (1) where the sequestered shares of stock constitute a
distinct minority of the voting shares of the corporation involved and (2) where the sequestered shares of stock constitute a
majority of the voting shares of the corporation concerned.
8. With regard to number 1: the Court considers and so holds that in order to enable the PCGG to perform its functions as
conservator of the sequestered shares of stock pending final determination by the courts as to whether or not the same
constitute ill-gotten wealth or a final compromise agreement between the parties, the PCGG must be represented in the
Board of Directors of the corporation and of its majority-owned subsidiaries or affiliates and in the Executive Committee
(or its equivalent) and the Audit Committee thereof, in at least an ex officio (i.e., non-voting) capacity. The PCGG
representative must have a right of full access to and inspection of (including the right to obtain copies of) the books,
records and all other papers of the corporation relating to its business, as well as a right to receive copies of reports to the
Board of Directors, its Executive (or equivalent) and Audit Committees. By such representation and rights of full access,
the PCGG must be able so to observe and monitor the carrying out of the business of the corporation as to discover in a
timely manner any move or effort on the part of the registered owners of the sequestered stock, alone or in concert with
other shareholders, to conceal, waste and dissipate the assets of the corporation, or the sequestered shares themselves, and
seasonably to bring such move or effort to the attention of the Sandiganbayan for appropriate action.
9. Whether a particular case falls within the first or the second type of situation described above, the following safeguards
are indispensably necessary:
1.The sequestered shares and any stock dividends pertaining to such shares, may not be sold,
transferred, alienated, mortgaged, or otherwise disposed of and no such sale, transfer or other
disposition shall be registered in the books of the corporation, pending final judicial resolution of the
question of ill-gotten wealth or a final compromise agreement between the parties; and
2. Dividend and liquidating distributions shall not be delivered to the registered stockholders of the
sequestered shares, including stock dividends pertaining to such shares, but shall instead be
deposited in an escrow, interest-bearing, account in a first class bank or banks, acceptable to the
Sandiganbayan, to be held by such banks for the benefit of whoever is held by final judicial decision
or final compromise agreement, to be entitled to the shares involved.
CASE LAW/ DOCTRINE:
The PCGG representative must have a right of full access to and inspection of (including the right to obtain copies of) the
books, records and all other papers of the corporation relating to its business, as well as a right to receive copies of reports
to the Board of Directors, its Executive (or equivalent) and Audit Committees.

CORPORATION LAW
Case Digest
157Hi-Yield Realty vs. CA AUTHOR: Arthur Archie Tiu
June 23, 2009G.R. No. 168863 - A derivative action is a suit by a shareholder to
TOPIC:Derivative Suits enforce a corporate cause of action.
PONTENTE:QUISUMBING, J.
FACTS
1. Roberto, on behalf of Honorio Torres & Sons, Inc. (HTSI), filed a petition for annulment of Real Estate Mortage
and Forclosure sale over 2 parcels of Land (Makati and Quezon City).
2. Suit was filed against the Torres, The ROD, and Hi-yield Reality Inc(Petitioner).
3. A few months later, Petioner moved to dismiss on grounds of improper venue and insufficient docket fees. This
was denied. MR was also denied
4. CA also dismissed the Petition agreeing with the RTC that it was a derivative suit and foreclosure was merely
incidental to the main action.
ISSUE:WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE ANNULMENT OF
REAL ESTATE MORTGAGE AND FORECLOSURE SALE IN THE COMPLAINT IS MERELY INCIDENTAL [TO]
THE DERIVATIVE SUIT.
HELD: No.
RATIO:
- Respondents maintain that the action is primarily a derivative suit to redress the alleged unauthorized acts of its
corporate officers and major stockholders in connection with the lands. They postulate that the nullification of the
mortgage and foreclosure sale would just be a logical consequence of a decision adverse to said officers and
stockholders.
- A derivative action is a suit by a shareholder to enforce a corporate cause of action. Under the Corporation Code,
where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. But an
individual stockholder may be permitted to institute a derivative suit on behalf of the corporation 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 control of the corporation. In such actions, the corporation is the real party-in-interest while the
suing stockholder, on behalf of the corporation, is only a nominal party
- Filipinas Port Services, Inc. v. Go, The following stock holders can file a derivative suit
- a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the
number of his shares not being material;
- b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to heed his plea; and
- c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused
to the corporation and not to the particular stockholder bringing the suit
- not every suit filed on behalf of the corporation is a derivative suit. For a derivative suit to prosper, the minority
stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative
cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him
in the suit.
- Roberto alleged in his petition that earnest efforts were made to reach a compromise among family
members/stockholders before he filed the case. He maintains that Leonora Torres held 55% of the outstanding
shares while Ma. Theresa, Glenn and Stephanie excluded him from the affairs of the corporation. Even more
glaring was the fact that from June 10, 1992, when the first mortgage deed was executed until July 23, 2002, when
the properties mortgaged were foreclosed, the Board of Directors of HTSI did nothing to rectify the alleged
unauthorized transactions of Leonora. Clearly, Roberto could not expect relief from the board.
CASE LAW/ DOCTRINE:
-A derivative action is a suit by a shareholder to enforce a corporate cause of action. Under the Corporation Code, where a
corporation is an injured party, its power to sue is lodged with its board of directors or trustees. But an individual
stockholder may be permitted to institute a derivative suit on behalf of the corporation 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 control of the
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Case Digest
corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder, on behalf of the
corporation, is only a nominal party

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Case Digest
158 Juan D. Evangelista et. al., plaintiffs and appellants AUTHOR: Ched
vs. Rafael Santos, defendant and appellee.
May 19, 1950 L-1721
TOPIC: Derivative suits
PONENTE: Reyes
FACTS
1. Plaintiffs are minority stock holders of Vitali Lumber Company, Inc.(corp. organized to exploit a lumber concession in
Zamboanga).
2. Rafael Santos holds more than 50% of stocks of Vitali Lumber Company, Inc.
3. As the major stock holder, he’s always been the president, manager, and treasurer of Vitali.
4. Plaintiffs claim that in Santos’ triple capacity, through fault, negligence, and abandonment, allowed the lumbe
concession to lapse, and its properties and assets (machineries, buildings, warehouses, etc.) to disappear.
5. Santos’ actions resulted to the ruin of the corporation and total depreciation of the company’s stocks.
6. Complaint prays for judgment requiring Santos to:
a) render an account of his administration of the corporate affairs and assets;
b) pay plaintiffs the value of their share on the assets (equivalent value of the stocks they hold);
c) pay costs of suit and other remedy as may be just and equitable.
7. The complaint did not give plaintiff’s residence but was delivered to where he “allegedly” resides (Pasay).
8. Santos filed for the dismissal of the case in the lower court (he is a resident of Iloilo City and not of Pasay).
Lower court – granted motion to dismiss (improper venue and lack of cause of action).
ISSUE: Main Issue: WON the plaintiffs have a right to sue Santos for their benefit.
2nd Issue: WON the dismissal on the ground of improper venue was valid.
HELD: 1. NO.
2. YES.
RATIO:
1.The complaint shows that the action is for damages resulting from mismanagement of the affairs and assets of the
corporation by its principal officer, it being alleged that defendant's maladministration has brought about the ruin of the
corporation and the consequent loss of value of its stocks. The injury complained of is thus primarily to the corporation, so
that the suit for the damages claimed should be by the corporation rather than by the stockholders (3 Fletcher, Cyclopedia
of Corporation pp. 977-980). The stockholders may not directly claim those damages for themselves for that would result
in the appropriation by, and the distribution among them of part of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities, something which cannot be legally done in view of section 16 of
the Corporation Law, which provides:
No shall corporation shall make or declare any stock or bond dividend or any dividend whatsoever from the profits
arising from its business, or divide or distribute its capital stock or property other than actual profits among its
members or stockholders until after the payment of its debts and the termination of its existence by limitation or
lawful dissolution.
But while it is to the corporation that the action should pertain in cases of this nature, however, if the officers of the
corporation, who are the ones called upon to protect their rights, refuse to sue, or where a demand upon them to file the
necessary suit would be futile because they are the very ones to be sued or because they hold the controlling interest in the
corporation, then in that case any one of the stockholders is allowed to bring suit (3 Fletcher's Cyclopedia of Corporations,
pp. 977-980). But in that case it is the corporation itself and not the plaintiff stockholder that is the real property in interest,
so that such damages as may be recovered shall pertain to the corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In
other words, it is a derivative suit brought by a stockholder as the nominal party plaintiff for the benefit of the corporation,
which is the real property in interest (13 Fletcher, Cyclopedia of Corporations, p. 295).

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Case Digest
In the present case, the plaintiff stockholders have brought the action not for the benefit of the corporation but for their
own benefit, since they ask that the defendant make good the losses occasioned by his mismanagement and pay to them the
value of their respective participation in the corporate assets on the basis of their respective holdings. Clearly, this cannot
be done until all corporate debts, if there be any, are paid and the existence of the corporation terminated by the limitation
of its charter or by lawful dissolution in view of the provisions of section 16 of the Corporation Law.
While plaintiffs ask for remedy to which they are not entitled unless the requirement of section 16 of the Corporation Law
be first complied with, we note that the action stated in their complaint is susceptible of being converted into a derivative
suit for the benefit of the corporation by a mere change in the prayer. Such amendment, however, is not possible now,
since the complaint has been filed in the wrong court, so that the same has to be dismissed.
2. It is important to remember that the laying of the venue of an action is not left to plaintiff's caprice. The matter is
regulated by the Rules of Court. And in actions like the present, which is one in personam, the regulation applicable is that
contained in section 1 of Rule 5, which provides:
Civil actions in Courts of First Instance may be commenced and tried where the defendant or any of the defendant
resides or may be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff.
Objection to improper venue may be interposed at any time prior to the trial. (Moran's Comments on the Rules of Court,
Vol. I, 2nd ed., p. 108.) Section 1 of Rule 5 may seem, at first blush, to authorize the laying of the venue in the province
where the defendant "may be found." But this phrase has already been held to have a limited application. It is the same
phrase used in section 377 of Act 190 from which section 1 of Rule 5 was taken, and as construed by this Court it applies
only to cases where defendant has no residence in the Philippine Islands.
The fact that defendant was sojourning in Pasay t the time he was served with summons does not make him a resident of
that place for purposes of venue. Residence is "the permanent home, the place to which, whenever absent for business or
pleasure, one intends to return, ..."
CASE LAW/ DOCTRINE:
The plaintiff stockholders have brought the action not for the benefit of the corporation but for their own benefit, since
they ask that the defendant make good the losses occasioned by his mismanagement and pay to them the value of their
respective participation in the corporate assets on the basis of their respective holdings.
Clearly, this cannot be done until all corporate debts, if there be any, are paid and the existence of the corporation
terminated by the limitation of its charter or by lawful dissolution in view of the provisions of section 16 of the
Corporation Law.

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Case Digest
159 - Republic Bank, represented by Damaso Perez v. AUTHOR: De Silva, Denison
Cuaderno, Dizon, Roman, et al. Note: Perez, a stockholder of Rep. Bank, filed a suit in
G.R. No. L-22399, March 30, 1967 behalf of Rep. Bank against Cuaderno, Dizon, and Roman
TOPIC: IX. Derivative Suits, (2) Requirements Relating to (BoD of Republic Bank) because of Roman’s alleged
Derivative Suits fraudulent appointment of Cuaderno and Dizon.
PONTENTE: J.B.L., J.
Circumstance that the Court allowed the derivative suit:
Authority from the corporation would be futile because the
BoD themselves are being sued for fraudulent acts.
FACTS
1. Damaso Perez, a stockholder of the Republic Bank, instituted a derivative suit for and in behalf of said Bank, against
Miguel Cuaderno, Bienvenido Dizon, BOD of the Republic Bank, and the Monetary Board of the Central Bank of the
Philippines.
2. Paragraph 6 of the Complaint: That the relator herein filed the present derivative suit without any further demand
on the Board of Directors of the Republic Bank for the reason that such formal demand to institute the present
complaint would be a futile formality since the members of the board are personally chosen by defendant Pablo Roman
himself.
3. Perez had complained to the Monetary Board of the Central Bank against certain frauds allegedly committed by
defendant Roman (chairman of the Board of Directors of the Republic Bank), and of its Executive Loan Committee.
4. Roman fraudulently granted or caused to be granted loans amounting to almost P4M to fictitious persons and to their
close friends, relatives and/or employees, who were in reality their dummies, on the basis of fictitious and inflated
appraised values of real estate properties.
5. Acting upon the complaint, then Central Bank Governor Cuaderno and the Monetary Board ordered an investigation;
they reported that certain mortgage loans amounting to P2.3M were granted in violation of sections 77, 78 and 88 of the
General Banking Act.
6. Acting on said reports, the Monetary Board, ordered a new BoD of the Bank to be elected, which was done, and
subsequently approved.
7. The Monetary Board accepted Roman’s offer to put up adequate security for the questioned loans made by the Bank,
and such security was made a condition for the resumption of the Bank's normal operations.
8. Subsequently, the Central Bank through its Governor, Cuaderno, referred to the DOJ special prosecutors the banking
frauds and violations of the Banking Act, for investigation and prosecution, but no information was filed until Cuaderno’s
retirement in 1961.
9. Other similar frauds against Roman were discovered, prompting him to engage Cuaderno as technical consultant at P12,
500/month salary, and selected Dizon as chairman of the BoD of Republic Bank as to neutralize the impending action
against him. Perez then alleged that such appointment was motivated by bad faith, done to protect Roman from criminal
prosecution, the compensation of Cuaderno was unconscionable, and that the selection of Dizon is in violation of the Anti-
Graft and Corrupt Practices Act.
10. Perez prays for a writ of preliminary injunction against Monetary Board, the BoD, and Roman from confirming,
recognizing, and appointing Cuaderno (technical consultant) and Dizon (chairman of the board).
11. CFI – dismissed Perez’s petition (reason: there were still 8 pending cases in the different branches of the CFI between
the same parties).
12. Defendant’s contention: action is improper because the plaintiff was not authorized by the corporation to bring suit in
its behalf.
ISSUE: 1. Whether or not the Perez, a stockholder, can interfere by filing a derivative suit against the defendants without
any further demand on the Board of Directors of Republic Bank
2. Sub-issue: Whether the action of Perez amounts to a quo warranto proceeding (I added this just in case)
HELD: 1. Yes, the Court held that Philippine jurisprudence is settled that an individual stockholder is permitted to institute
a derivative or representative 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
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Case Digest
the real party in interest.
2. No, the suit is aimed at preventing the waste or diversion of corporate funds in paying officers appointed solely to
protect Pablo Roman from criminal prosecution, and not to carry on the corporation's bank business.
RATIO:
1. Perez neither alleging nor vindicating his own individual interest or prejudice, but the interest of the Republic
Bank and the damage caused to it. The action he has brought is a derivative one, expressly manifested to be for and
in behalf of the Republic Bank, because it was futile to demand action by the corporation, since its Directors were
nominees and creatures of defendant Pablo Roman (Complaint, p. 6). The frauds charged by plaintiff are frauds
against the Bank that redounded to its prejudice.
2. The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of Bienvenido
Dizon to head the Board of Directors of the Republic Bank, were made only to shield Pablo Roman from criminal
prosecution and not to further the interests of the Bank, and avers that both men are Roman's alter egos. There is
no denying that the facts thus pleaded in the complaint constitute a cause of action for the bank: if the questioned
appointments were made solely to protect Roman from criminal prosecution, by a Board composed by Roman's
creatures and nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an unlawful
wastage or diversion of corporate funds, since the Republic Bank would have no interest in shielding
Roman, and the directors in approving the appointments would be committing a breach of trust; the Bank,
therefore, could sue to nullify the appointments, enjoin disbursement of its funds to pay them, and recover
those paid out for the purpose.
3. Authority from the Republic Bank could not be expected as the suit is aimed to nullify the action taken by the
manager and the board of directors of the Republic Bank; and any demand for intra-corporate remedy would be
futile, as expressly pleaded in the complaint. These circumstances permit a stockholder to bring a derivative
suit (Evangelista vs. Santos, 86 Phil. 394). (YUNG BoD NA YUNG MGA GAGO, TAPOS SA KANILA PA
HIHINGI NG AUTHORITY TO SUE SI PEREZ, hiyang hiya naman ako sa kanila.)
4. Furthermore, the Court held that no other stockholder has chosen to make common cause with plaintiff Perez
is irrelevant, since the smallness of plaintiff's holdings is no ground for denying him relief (Ashwander vs.
TVA, 80 L. Ed. 688).
5. Decision: reversed and set aside the decision of the CFI.
CASE LAW/ DOCTRINE:
Philippine jurisprudence is settled that an individual stockholder is permitted to institute a derivative or representative 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.
The smallness of plaintiff's holdings is no ground for denying him relief (derivative suit).

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Case Digest
160 REYES V TAN AUTHOR: Gelene Guevara
G.R. No. L-16982, September 30, 1961 Notes:
TOPIC: REQUIREMENTS RELATING TO
DERIVATIVE SUITS
PONTENTE: LABRADOR, J.
FACTS
1. This is an action instituted by a stockholder plaintiff Justiniani of Roxas-Kalaw Textile Mills, Inc. praying for the
appointment of a receiver of the said corporation and a a judgment marking defendants jointly and severally liable
for the damages they caused to the corporation.
2. The case is filed against the corporation’s board of directors (defendants Cesar K. Roxas, Adelia K. Roxas,
Benjamin M. Roxas, Jose Ma. Barcelona and Morris Wilson) for the purchases made by Manager Dalamal in New
York supposedly for raw materials such as greige cloth, rayon and grey goods for the textile mill and shipped to
the Philippines, but it turned out that what was bought were finished products (such as West Point Khaki rayon
suiting materials dyed in the piece, finished rayon tafetta in cubes, cotton eyelets, etc) from United Commercial
Company of New York and Indian Commercial Company where said manager had interests. Said purchases led to
the central bank’s stoppage of all dollar allocations in favor of said corporation which in turn paralyzed the entire
operation of the corporation.
3. It is alleged that said directors failed to act on the fraudulent purchases by the manager for a period of two (2)
years, thus, forcing plaintiff to bring this derivative suit. (the plaintiff and other members of the board of directors
urged defendants to proceed against Dalamal, exposing his offense to the Central Bank, and to initiate suit against
Dalamal for his fraud against the corporation but, defendants refused to proceed against Dalamal and instead
continued to deal with the Indian Commercial Company to the damage and prejudice of the corporation)
ISSUE: Whether the breach of trust committed justifies the derivate suit filed by the plaintiff on behalf of the corporation?
HELD: YES. The importation of textiles instead of raw materials, as well as the failure of the Board of Directors to take
action against those directly responsible for the misuse of dollar allocations constitute fraud, or consent thereto on the part
of the directors. Therefore, a breach of trust was committed which justified the derivative suit by a minority stockholder on
behalf of the corporation.
RATIO:
1. In the eyes of the court below, as well as in our own, the importation of textiles instead of raw materials, as
well as the failure of the Board of Directors to take action against those directly responsible for the misuse
of dollar allocations constitute fraud, or consent thereto on the part of the directors. Therefore, a breach of
trust was committed which justified the derivative suit by a minority stockholder on behalf of the corporation.
2. It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust — not of mere
error of judgment or abuse of discretion — and intracorporate remedy is futile or useless, a stockholder may
institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring
about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders.
An illustration of a suit of this kind is found in the case of Pascual vs. Del Saz Orozco (19 Phil. 82), decided by
this Court as early as 1911. In that case, the Banco Español-Filipino suffered heavy losses due to fraudulent
connivance between a depositor and an employee of the bank, which losses, it was contended, could have been
avoided if the president and directors had been more vigilant in the administration of the affairs of the bank. The
stockholders constituting the minority brought a suit in behalf of the bank against the directors to recover damages,
and this over the objection of the majority of the stockholders and the directors. This court held that the suit could
properly be maintained.
3. The claim that respondent Justiniani did not take steps to remedy the illegal importation for a period of two years
is also without merit. During that period of time respondent had the right to assume and expect that the directors
would remedy the anomalous situation of the corporation brought about by their own wrong doing. Only after such
period of time had elapsed could respondent conclude that the directors were remiss in their duty to protect the
corporation property and business.
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Case Digest
161 San Miguel Corporation v. Ernest Kahn, et. al. AUTHOR: Myk
11 August 1989 G. R. No. 85339 Neptunia Corporation Limited was Hongkong based
TOPIC: Derivative Suits: Requisite Relating to Derivative company, a wholly owned subsidiary of San Miguel
Suits International which is, in turn, a wholly owned subsidiary of
PONENTE: Narvasa, J. San Miguel Corporation.
FACTS:
1. 15 December 1983 – 33,133,266 shares of the outstanding capital stock of the San Miguel Corporation were
acquired by fourteen (14) other corporations.
a. These were placed under Voting Trust Agreement in favor of Andres Soriano, Jr. He died later on.
b. Eduardo M. Cojuangco, Jr. was elected Substitute Trustee with power to delegate the trusteeship in writing
to Andres Soriano III.
2. 26 March 1986 – by virtue of an agreement Soriano bought the shares of the 14 corporations at the price of
P100.00 per share amounting P3,313,326,600.00.
a. This Agreement revoked the voting trust
3. Neptunia Corporation Limited was the actual buyer of the shares according to the respondents and made a down
payment of P500,000,000.00.
4. The 33,133,266 SMC shares were sequestered by the Presidential Commission on Good Government (PCGG) on
the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a close associate and dummy of former
President Marcos; and,
5. The order was lifted later on since the shares were 'owned by 1.3 million coconut farmers and Cojuangco owned
only 2 shares.
6. The order was re-imposed and forbade the SMC corporate Secretary to register any transfer or encumbrance of any
of the stock without the PCGG's prior written authority.
7. San Miguel suspended payment of the other instalments of the price to the fourteen (14) seller corporations.
8. PCGG directed San Miguel Corporation to issue qualifying shares in the corporation to seven (7) individuals,
including de los Angeles, from the sequestered shares registered as street certificates under the control of Anscor-
Hagedorn Securities, Inc., to be held in trust by the 7 persons for the benefit of Anscor-Hagedom Securities, Inc.
9. December 1986 – SMC Board decided to assume the loans incurred by Neptunia for the down payment
a. According to the BOD nothing is illegal in the assumption of liability for the loans since Neptunia was an
indirectly wholly owned subsidiary of SMC and that there was no additional expense or exposure for the
SMC Group, and there were tax and other benefits which would redound to the SMC group of companies.
10. De Los Angeles, impugned the resolution contending that what they resolved at the meeting was to conduct further
study on the assumption of the loan and it would have deleterious effects. He was however overruled by private
respondents.
11. When his efforts to obtain relief within the corporation and later the PCGG proved futile, he repaired to the
Securities and Exchange Commission (SEC).
ISSUE: Whether or not de los Angeles has personality to bring suit in behalf of the corporation because his stockholding is
miniscule.
HELD: Yes, de los Angeles has personality to bring suit in behalf of the corporation because ownership by a stockholder
of stock in his own right suffices to invest him with standing to bring a derivative action for the benefit of the corporation.
RATIO:
Even if de los Angeles owns 20 shares (owned by him since 1977) representing 00001644% of the total number of
outstanding shares (121,645,860) he may file a derivative suit since he does not need to fairly and adequately represent the
interests of the minority stockholders.
The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a
derivative action for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own
behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him,
individually, but in behalf and for the benefit of the corporation.

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Case Digest
CASE LAW/ DOCTRINE:
The requisites for a derivative suit:
1. the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of
his shares not being material;
2. he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to heed his plea; and,
3. the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to
the corporation and not to the particular stockholder bringing the suit.
**The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a
derivative action for the benefit of the corporation.
**The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his
own particular right, or the redress of a wrong committed against him, individually, but in behalf and for the benefit of the
corporation.

CORPORATION LAW
Case Digest
162 Ellingwood v. Wolf’s Head Oil Refining AUTHOR: Jelena
April 26, 1944, 30 A. 2d 743 The corporation did not declare dividends before 1942 for 2
TOPIC:Shares of Stock: Kinds; (b) Preferred Stocks; (ii) years then declared and paid a full 6% dividend on the
As to Voting Right Preferred Stock. Preferred Stockholders participated in the
PONENTE:RICHARDS election of the BOD in 1943.
---Holders of Preferred Stocks were entitled to vote for the
BOD and for all other purposes at the annual Stockholders’
meeting in 1943.
FACTS
1.Ellingwood in his capacity as a common stockholder of Wolf's Head Oil Refining Company(originally incorporated in
1929 under corporate name Wolverine-Empire Refining Co.)
2. The present name of the corporation was acquired by an amendment to its charter in November, 1940.
3. The charter provided for both preferred and common stock. The authorized number of shares of preferred stock being
50,000 (46,100 outstanding), and the authorized number of shares of common stock being 30,000 (all outstanding).
4. The right of the corporation to redeem the preferred stock, and the respective rights of both the preferred and common
stock in the event of any liquidation, dissolution of or winding up of the affairs of the corporation are set forth in Article IV
of the certificate of incorporation.Likewise the dividend and voting rights of both the preferred and common stock are set
forth in Article V of the certificate of incorporation.
5.The corporation’s AOI includes: a)guarantees to the holders of Preferred Stock “cumulative dividends at the rate of 6%
for each and every fiscal year of the company” b)gives exclusive voting power to holders of Common Stock c)holders of
Preferred Stocks have no voting power
d)“that if at any time the corporation shall be in default in respect to the declaration and payment of dividends in the
amount of 2 years’ dividends on the Preferred Stocks, then the holders of a majority of the Preferred Stocks shall have an
election to exercise the sole right to vote for the election of Directors and for all other purposes, until the corporation shall
have declared and paid for a period of a full year at 6% dividend on the Preferred Stocks”
6. The by-laws of corporation fix its fiscal year as the calendar year, and that it shall be managed by a board of directors
consisting of seven who are to be elected at the annual meeting of the stockholders (every first Monday of May).
7. The corporation's charter provided that the common stockholders had the exclusive right to elect directors, except that
the preferred stockholders could so vote at any time that the corporation was in default with respect to the declaration and
payment of two years' dividends on the preferred stock.
8. The corporation had defaulted in the declaration and payment of dividends (2 years worth) on its outstanding preferred
stock.
9. Regardless of the default, the preferred stockholders did not elect to exercise the sole right to vote for the election of
directors at the annual stockholders' meeting on May 6, 1935.
10. But at the annual meeting of the stockholders held on May 4, 1936, the holders of the preferred stock of the corporation
did assume to exercise the sole voting rights claimed by them under the above-quoted provisions of Article V of the
certificate of incorporation and continued to exercise such voting rights down to and including the year 1942.
11. After the preferred stockholders acquired the sole right to vote for the election of directors and for all other purposes in
1936, they continued to exercise that right until 1943 when common stockholders claimed that the sole right to vote for the
election of directors and for all other purposes had reverted to them under the provisions of Article V. They relied upon the
fact that during the year 1942, and for the period of a full year prior to May 3, 1943, a six per cent dividend had been paid
on the preferred stock.
12. On May 1943, the preferred stock holders as well as the common stockholders held separate meetings and elected
different sets of Board of Directors consisting of 7 people.
13. The Chancellor held that the preferred stockholders were entitled to vote for the election of directors.
ISSUE: Are holders of preferred stocks entitled to vote for the BOD and for all other purposes at the annual Stockholders’
meeting in 1943?
HELD: YES.
Despite the payment of one year's dividend, if the corporation was still in default, the preferred stockholders could avail
themselves of the right to elect directors if they complied with the charter's conditions by giving notice to the corporation
of their decision to exercise that right.
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Case Digest
RATIO:
1. A certificate of incorporation may contain any provision with respect to stock to be issued by corporation and voting
rights to be exercised by stock that is agreed upon by the parties provided the provision agreed to is not against public
policy.
2. The rights of stockholders are contract rights and must be determined from certificate of incorporation.
3. Nothing is to be presumed in favor of preferences attached to stock, and when a corporate charter attempts to confer
preferences on any class of stock provided for by it, the same should be expressed in clear language.
4. In interpreting corporate charter provision, the same method is applied as that which is followed in interpreting written
contracts generally, and the instrument should be considered in its entirety and all of language reviewed together to
determine meaning intended to be given to any portion of it.
5. Where corporate charter provided that if corporation was in default in payment of dividends in amount of two years on
preferred stock, majority of preferred stockholders should have election to exercise sole right to vote until corporation had
declared and paid for period of a full year six per cent. dividend on preferred stock, when a six per cent. dividend for
period of a full year had been paid on preferred stock, sole right to vote reverted to the common stockholders
notwithstanding fact that dividends in amount of two years were due on preferred stock.
6. It is specified in Article IV of the charter, that in case of "liquidation, dissolution or winding up of the affairs of the
corporation," said preferred stockholders shall be entitled to full payment of the par value of their shares and all unpaid
dividends accrued thereon, before any of the assets shall be distributed to the common stockholders. This same article
gives to the board of directors the optional right to redeem the preferred stock in whole or in part, at any time before
January first, 1940, but requires said board of directors to give sixty days' notice to all record holders of said preferred
stock; and in addition thereto to pay in cash to each holder of preferred stock to be redeemed one hundred and ten per cent
of the par value thereof.
7. The language used in the charter describing the conditions under which the preferred stockholders obtain the right to
vote has nothing to say about the time when the arrearage in dividends on said stock shall have accrued. If the position is
taken that the arrearage in dividends must have accrued after the right to vote had reverted to the common stock, the
preferred stockholders would be deprived of the right to vote for the election of directors no matter how great the arrearage
in dividends might be, until additional dividends in the amount of two years' dividends should accrue. This construction
would take from the preferred stockholders the benefit, which we think the charter intended to confer upon them.
CASE LAW/ DOCTRINE:
Where corporate charter provided that if corporation was in default in payment of dividends in amount of two years on
preferred stock, majority of preferred stockholders should have election to exercise sole right to vote until corporation had
declared and paid for period of a full year six per cent. dividend on preferred stock, if corporation was still in default in
amount of two years dividends on preferred stock, when six per cent. dividend was paid on preferred stock for period of
full year, preferred stockholders could avail themselves of right to vote by giving notice to corporation of their decision to
exercise that right.
DISSENTING OPINION:
LAYTON, Chief Justice:
The use of the words "continuing privilege and right" in the last sentence of the paragraph, was very clearly meant as
saving the exhaustion of the right of election as against one exercise of it, and permitting a shifting and reshifting of the
voting power as conditions of default and the ending of them may successively occur.
If the parties had intended to say that the holders of the preferred shares were empowered to exercise the right of election
at any time when dividends on the preference shares were in default for two years, it would have been easy to express that
intent in simple language. What the parties did say was that if at any time dividends on the preference stock to the amount
of two years' dividends should be in arrears, upon the exercise of the right of election, the voting power attached to the
preferred shares until a full year's dividend had been paid on the preferred shares.
TERRY, Judge :
I am of the opinion that the right of election that existed prior to 1942 was terminated in the year 1942, and that the voting
power shifted as of then to the holders of the common stock. The language of the fourth sentence does not enlarge the
rights previously granted to the holders of the preferred stock in the first sentence, nor can it be said to grant a new voting
right to either the preferred or language is to make it plain that the right of the preferred to exercise an election, and the
subsequent right of the common to a reversion, when once vested would not be forever lost, but that they become
contingent, so to speak, and may be regained as rights in praesenti when another state of events occur to satisfy the
CORPORATION LAW
Case Digest
conditions upon which the exercise of those rights respectively depend. This sentence was designed to preserve the rights,
but not the particular condition which gave rise to the exercise thereof.

CORPORATION LAW
Case Digest
163 GAMBOA v. TEVES AUTHOR : Franch Galanza
G.R. No. 176579 June 28,2011
TOPIC: As to Voting Right
PONENTE: Carpio, J.
FACTS
1. This is a petition to nullify the sale of shares of stock of Philippine Telecommunications Investment Corporation
(PTIC) by the government of the Republic of the Philippines, acting through the Inter-Agency Privatization Council
(IPC), to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific), a
Hong Kong-based investment management and holding company and a shareholder of the Philippine Long Distance
Telephone Company (PLDT).
2. The petitioner questioned the sale on the ground that it also involved an indirect sale of 12million shares (or about
6.3 percent of the outstanding common shares) of PLDT owned by PTIC to First Pacific.
3. With the this sale, First Pacific’s common shareholdings in PLDT increased from 30.7 percent to 37 percent,
thereby increasing the total common shareholdings of foreigners in PLDT to about 81.47%. This, according to the
petitioner, violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the
capital of a public utility to not more than 40%.
4. Section 11 states that, No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws
of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by
the Congress when the common good so requires. The State shall encourage equity participation in public utilities
bythe general public. The participation of foreign investors in the governing body of any public utility enterprise shall
be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or
association must be citizens of the Philippines.
ISSUE:
Does the term “capital” in Section 11, Article XII of the Constitution refer to the total common shares only, or to the
total outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a public utility?
HELD:
The Court partly granted the petition and held that the term “capital” in Section 11, Article XII of the Constitution
refers only to shares of stock entitled to vote in the election of directors of a public utility, or in the instant case, to the
total common shares of PLDT.
RATIO:
1. The term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock
comprising both common and non-voting preferred shares of PLDT.
2. Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the
corporation. This is exercised through his vote in the election of directors because it is the board of directors that
controls or manages the corporation. In the absence of provisions in the articles of incorporation denying voting rights
to preferred shares, preferred shares have the same voting rights as common shares. However, preferred shareholders
are often excluded from any control, that is, deprived of the right to vote in the election of directors and on other
matters, on the theory that the preferred shareholders are merely investors in the corporation for income in the same
manner as bondholders. xxx.
3. Considering that common shares have voting rights which translate to control, as opposed to preferred shares which
usually have no voting rights, the term “capital” in Section 11, Article XII of the Constitution refers only to common
shares. However, if the preferred shares also have the right to vote in the election of directors, then the term “capital”
shall include such preferred shares because the right to participate in the control or management of the corporation is
exercised through the right to vote in the election of directors. In short, the term “capital” in Section 11, Article XII of
the Constitution refers only to shares of stock that can vote in the election of directors.
4. Mere legal title is insufficient to meet the 60 percent Filipino-owned “capital” required in the Constitution. Full
beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is

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Case Digest
required. The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional mandate. Otherwise, the corporation is “considered as non-
Philippine national[s].”
5. To construe broadly the term “capital” as the total outstanding capital stock, including both common and non-
voting preferred shares, grossly contravenes the intent and letter of the Constitution that the “State shall develop a
self-reliant and independent national economy effectively controlled by Filipinos.” A broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily equates to control of the public utility.
6. We shall illustrate the glaring anomaly in giving a broad definition to the term “capital.” Let us assume that a
corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned by
Filipinos, with both classes of share having a par value of one peso (P1.00) per share. Under the broad definition of
the term “capital,” such corporation would be considered compliant with the 40 percent constitutional limit on foreign
equity of public utilities since the overwhelming majority, or more than 99.999 percent, of the total outstanding
capital stock is Filipino owned. This is obviously absurd.
7. The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipinos
in accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is constitutionally required for the State’s grant of authority to
operate a public utility. The undisputed fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-
voting and earn only 1/70 of the dividends that PLDT common shares earn, grossly violates the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership of a public utility.
8. In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the dividends, of
PLDT. This directly contravenes the express command in Section 11, Article XII of the Constitution that “[n]o
franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to
corporations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such
citizens.
CASE LAW/ DOCTRINE:

Considering that common shares have voting rights which translate to control, as opposed to preferred shares which
usually have no voting rights, the term “capital” in Section 11, Article XII of the Constitution refers only to common
shares. If the preferred shares also have the right to vote in the election of directors, then the term “capital” shall
include such preferred shares because the right to participate in the control or management of the corporation is
exercised through the right to vote in the election of directors. In short, the term “capital” in Section 11, Article XII of
the Constitution refers only to shares of stock that can vote in the election of directors.
DISSENTING

CORPORATION LAW
Case Digest
164 HAY v. HAY AUTHOR: Rhona Burce
May 1, 1951230 P.2d 791
TOPIC:Preference upon Liquidation Appellant administrator challenged a decision of the Superior Court for
PONENTE:Donworth, J. Spokane County (Washington), which entered a declaratory judgment
holding that appellee preferred stockholders of a corporation, upon its
liquidation, were entitled to receive accrued dividends from its assets.
FACTS
1. The Big Bend Land Company, a Washington corporation, wasorganized in 1901 to conduct a general real-estate
business, to borrow and loan money, and to buy and sell merchandise.
2.The liquidating trustees of the corporation instituted an action to secure a declaratory judgment construing Article VI of
its amended articles of incorporation.
3. The trial court rendered judgment in favor of the preferred stock. It declared that the amended articles of incorporation
required that the holders of the cumulative preferred stock receive from the assets of the corporation an amount equal to
6% per annum computed on the par value of each share from the date of issuance thereof to date of liquidation. On the
other hand, the holders of the common stock were not entitled to receive any distribution of assets until payment of the 6%
per annum accrued dividend to the preferred stockholders had been fully made.
4. Edward T. Hay appealed. He is the administrator of the estate of Fayette H. Imhoff, deceased. (Note: Hindi detailed
masyado yung mga parties involved)
5. Prior to December 27, 1921, the capital stock of The Big Bend Land Company consisted entirely of common stock. On
that date Article VI of the articles of incorporation was amended. Part of the amended articled provides that:
"(d) In the event of any liquidation, dissolution or winding up of the Corporation the holders of the preferred stock shall be
entitled to be paid in full the par value thereof, and all accrued unpaid dividends thereon before any sum shall be paid to
or any assets distributed among the holders of the common stock, but after payment to the holders of the preferred stock of
the amounts payable to them as hereinbefore provided, the remaining assets and funds of the Corporation shall be paid to
and distributed among the holders of the common stock." (Note: italicized words constitute the crux of this controversy)
6. The holders of the preferred stock have received from the liquidating trustees the par value thereof; there are no
corporate creditors involved; and no dividends on the cumulative preferred stock have ever been declared or paid.
7. No surplus profits are available with which to pay the accumulated dividends. However, there is a substantial
amount of assets on hand, but they would all be absorbed if they should be applied in payment of accrued dividends on the
preferred stock.
8. Appellant Hay’s contention: "all accrued unpaid dividends" means that before there can be a dividend there must be
surplus profits, and that, since none ever existed, the right to such dividends never accrued and therefore none are payable.
9.Respondents’ Raymond Hay et al.,contention: subdivision (d) of the Amended Article VI of the articles of
incorporation authorizes the payment of accumulated and unpaid dividends out of assets upon liquidation of the
corporation, even though there be no surplus profits available; the corporation being in the process of liquidation, there can
be no impairment of its capital and, therefore, there is no longer any purpose in restricting the payment of dividends to
surplus profits.
10. In other words, pinag-aawayan nila kungyung mga preferred stockholders of cumulative preferred stock muna ang
entitled to be paid accrued dividends from the corporate assets bago yung mga common stockholdersmakapag-participate
sa distribution ng assets. ☺This isupon liquidation of the corporation.
ISSUE:Whether or not the holders of cumulative preferred stock upon liquidation of the corporation are entitled to be paid
accrued dividends from the corporate assets before the common stockholders become entitled to participate in the
distribution thereof, the corporation having no earned surplus or net profits.
HELD: Yes. The stockholders contracted between themselves with respect to the division of the assets in case of
liquidation. Their agreement was that the preferred stockholders should receive the par value of their stock plus an amount
equal to "all accrued unpaid dividends thereon" before any assets should be distributed to the common stockholders.

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Case Digest
RATIO:
1. It should be noted that the articles contain no condition to the effect that the surplus profits must be equal to, or greater
than, the total of all accrued unpaid dividends before such distribution could be made. The parties were contracting with
reference to a possible future liquidation, a situation where the statutory prohibition against declaration of dividends out of
capital had no application.
2. Appellant's construction of the subparagraph (d) of Amended Article VI as being subject to an implied condition that
such cumulative dividends are payable only out of surplus profits, is contrary to the fundamental concept of the law of
corporations. Appellant's construction of subparagraph (d) is based upon a failure to recognize the vital distinction between
a corporation which is a going concern and one which is in liquidation.
3. The reference to "all accrued and unpaid dividends" in subparagraph (d) is the only practical yardstick by which the
total share of the assets (which the preferred stockholders were to receive upon liquidation) could be measured. At the time
the amended article was drafted and adopted, the quoted phrase was the most definite way that the preferential rights
of the preferred stockholders could have been described. It stated the method by which the amount distributable to
the preferred stockholders could be computed in the event of a liquidation in the future.
4. The proper construction of an agreement similar to subparagraph (d) of Amended Article VI was adopted in Fawkes v.
Farm Lands Inv. Co., supra, the court saying: "The provisions of the preference agreement amount to nothing more than a
plan for the division of the property of the corporation upon its dissolution, and the measure or standard of such division
was the dividend ratefixed by the articles of incorporation to be paid to the owners of the preferred stock.
CASE LAW/ DOCTRINE:
Where the articles of incorporation of a corporation provide that in case of the liquidation of the corporation the holders of
the preferred stock shall be entitled to be paid in full the par value thereof "and all accrued unpaid dividends thereon"
before any sum is paid to or any assets distributed among the holders of the common stock, the preferred stockholders,
upon the liquidation of the corporation, are entitled to receive from the corporate assets a sum equal to all accrued unpaid
dividends as well as the par value of the preferred stock before the common stockholders become entitled to participate in
the distribution of such assets, even though the corporation had no earned surplus or net profits.
In such a case, the payment of the accrued unpaid dividends to the preferred stockholders from the corporate assets is not
in violation of Rem. Rev. Stat., ß 3823, forbidding the declaration of dividends except from net profits; since such statute
specifically provides that it shall not be construed to prevent a distribution of assets upon a dissolution after the payment of
corporate debts.
DISSENTING:Grady, J.:
“It seems to me that the purpose of subdivision (d), when considered along with all of the other subdivisions of Amended
Article VI and Rem. Rev. Stat., § 3823, was to provide that, when the corporation was liquidated and dissolved, the
preferred stockholders were entitled to have a redemption made of their stock and to receive any dividends which had at
any time been made by the trustees out of net profits but had not been paid to them, before any should be paid to or any
assets distributed among the holders of the common stock. I can find nothing in subdivision (d) that authorizes the making
of dividends out of assets upon liquidation and dissolution.”

CORPORATION LAW
Case Digest
165 Augusta Trust Co vs. Augusta Hallowell AUTHOR: Bea Mationg
134 Me. 314 (1938)
TOPIC: Preferred Stockholder is not a Creditor Preferred stockholders ceased to be creditors.
PONENTE: Strugis, J.
FACTS:
1. The defendant railroad company had outstanding bonds secured by mortgage. These bonds gave the holders the right to
convert into preferred stocks of the company.
2. The certificates of the preferred stock read:
“This stock is part of an issue limited two hundred fifty thousand dollars par value. The holder is entitled to receive and
the company is bound to pay hereon a fixed yearly dividend of four per centum, payable half-yearly in January 1 and July
1. This share is redeemable on or after July 1, 1911 at 104 and accrued interest, and will be redeemed xxxxxx The payment
of principal and dividends is equally secured by a trust mortgage”.
3. On the back of the certificate is the statement that it was issued in exchange for an equal amount of principal of the
bonds and was equally and ratably secured with the bonds by the mortgage.
4. An action to foreclose the mortgage was brought and the issue on preferred shares as to the rights of the holders was also
questioned.
ISSUE:
WON the holders have the right to these preferred shares to share in the proceeds on the sale of the mortgaged property
HELD:
No. The preference given to the holders of the preferred stock in the conversion agreements were not authorized by statute
when it was made. It must be emphasized that it is within the power of the legislature that corporations may issue
certificates in the form of certificates of preferred stocks, so-called making the holders creditors of the corporation as well
as stock-holders, and giving them lien upon the property of a corporation with a priority over other creditors.
RATIO:
By surrendering their bonds through mortgaging, the bondholders of the companies ceased to be creditors and became
mere stockholders. The preferred stockholders are not entitled to share in assets of the companies until all creditors have
been paid in full.
All facts and circumstances convincingly characterize the preferred stock issued by the street railway companies as
preferred stock. In each instance, the stockholders voted increases in the capital stock by the creation of preferred stock.
The holders of this stock had a right to vote in the election of directors and were entitled to receive fixed yearly dividends
payable semi-annually at the times therein specified.
CASE LAW/ DOCTRINE:
By surrendering their bonds through mortgaging, the bondholders of the companies ceased to be creditors and became
mere stockholders. The preferred stockholders are not entitled to share in assets of the companies until all creditors have
been paid in full.

CORPORATION LAW
Case Digest
166 TIRSO GARCIA, in his capacity as receiver of the AUTHOR: Mercado, Christopher Dann C.
Mercantile Bank of China, plaintiff-appellee,
vs. Defendant, a stockholder of the plaintiff-corporation, is a
LIM CHU SING, defendant-appellant. surety of a person who has a debt with the plaintiff. Upon
default of the principal, the plaintiff-bank told defendant to
Ponente: Justice Villa-Real
issue notes, which the latter did. Also, the plaintiff
compensated the indebtedness of the principal to value of
TOPIC: Nature of Subscription Contract? (there is
the shares of stocks of the defendant in the corporation. The
something wrong with this topic. The case does not speak
SC said, “okay ka lang? hindi creditor ni corpo si defendant.
of any subscription contract at all)
Hindi utang ng corpo ang stocks! Anung icocompensate
mo!?”
FACTS
1. The debt which is the subject matter of the complaint was not an indebtedness of the defendant but of Lim Cuan
Sy, who had an account with the plaintiff bank in the form of "trust receipts" guaranteed by the defendant as surety
and with chattel mortgage securities.
2. As Lim Cuan Sy defaulted in his payment, the plaintiff bank, without the knowledge and consent of the defendant,
foreclosed the chattel mortgage and privately sold the property covered thereby.
3. Subsequently, the plaintiff required the defendant (surety) to sign a promissory note for the sum of P19,105.17.
4. The defendant-appellant, Lim Chu Sing, executed and delivered to the plaintiff-bank promissory note with interest
thereon at 6 per cent per annum, payable monthly, that in case of defendant's default in the payment, as they
become due, the entire amount or the unpaid balance thereof together with interest thereon, shall become due and
payable on demand.
5. The defendant being a stockholder of the plaintiff-bank to P10,000, the plaintiff bank compensated the
indebtedness of Lim Cuan Sy with that of the stocks of the defendant, leaving an unpaid balance of P9,105.17.
6. Thus, the defendant-appellant brought this case before the RTC questioning the validity of compensation made by
the plaintiff-bank.
7. RTC ruled in favor of the plaintiff-bank. So did the CA.
8. Thus, this case before the court.
ISSUE: Whether or not it is proper to compensate the defendant’s indebtedness of P9,105.17, with the sum of P10,000
representing the value of his shares of stock with the plaintiff entity, the Mercantile Bank of China.
HELD: No. A share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness
and, therefore, it is not a credit.
RATIO:
Stockholders, as such, are not creditors of the corporation. It is the prevailing doctrine of the American courts, repeatedly
asserted in the broadest terms, that the capital stock of a corporation is a trust fund to be used more particularly for the
security of creditors of the corporation, who presumably deal with it on the credit of its capital stock. Therefore, the
defendant-appellant Lim Chu Sing not being a creditor of the Mercantile Bank of China, although the latter is a creditor of
the former, there is no sufficient ground to justify compensation.
CASE LAW/ DOCTRINE:
A share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness and, therefore,
it is not a credit

CORPORATION LAW
Case Digest
167 Utah Hotel Co. V. Madsen AUTHOR: iskoba ng pag ibig
June 4, 1913, 43 Utah 285; 134 P. 577; 1913 Utah LEXIS
71
TOPIC: Nature of Subscription Contract
(a) Pre-incorporation Subscription
PONENTE: FRICK, J
FACTS
1. Appellant admitted he signed an agreement:
"Salt Lake City, Utah, April 19, 1909. We, the undersigned, residents of the State of Utah, in consideration of one
dollar to each by the other subscribers paid, do hereby subscribe in the proportion hereinafter set opposite our
respective names, for the stock of a company to be organized, under the laws of the State of Utah, with a capital
stock of fifteen hundred thousand ($ 1,500,000) dollars, divided into fifteen thousand (15,000) shares of the par
value of one hundred ($ 100) dollars each. The principal place of business to be located in Salt Lake City, Utah.
The name of the company to be the Utah Hotel Company. The general purpose of the company will be the
erection and ownership of a first class hotel to be built on the northeast intersection of South Temple and Main
streets, Salt Lake City, Utah, and such other places as may be provided in the articles of association, which are to
be hereafter adopted. The payment on the above subscription shall be payable in sums not to exceed ten per cent
of the amount by us subscribed in any one month."
2. Respondent alleged:
a. Appellant and a large group signed the agreement and he take 50 shares of capital stock
b. Corp. was duly made according to the agreement
c. calls for the payment of the amounts subscribed for by the several subscribers were duly made in the
proportions and within the time specified in said agreement
d. Appellant was duly notified but failed to pay
3. Appellant introduced no evidence. He argued that recovery was barred because the subscription had not been
merged into the articles of incorporation. Further, he argued that he had not become a stockholder because of his
failure to pay the requisite amount.
4. Court favored respondent. Thus this appeal
ISSUE: WON the agreement herein is valid.
HELD: YES.
RATIO:
Comp. Laws 1907, secs. 314, 315, 316, and 332, providing for the organization of business corporations, does not require
that the subscribers to a subscription for the capital stock shall sign the articles of incorporation or that the subscription
contract shall be incorporated into the articles in order to be enforceable; it being perfectly competent for the subscribers
to make a separate specific agreement to take and pay for a specified amount of the stock of the corporation to be issued
when the corporation is organized, which will be valid and enforceable whether the subscribers sign the articles of
incorporation or not.
The court found that it was unnecessary for all of the subscribers to sign the articles of incorporation in order to ratify the
subscription. Further, it was unnecessary for the stock subscriber to pay a required amount to commence the business
because the requisite amount had already been paid in property of the business. Finally, the fact that the stock subscriber
had not paid on request could not be used to defend against his own refusal.
OUTCOME: The court affirmed the trial court's judgment and denied rehearing.

CORPORATION LAW
Case Digest
168 WALLACE v. ECLIPSE POCAHONTAS COAL CO. AUTHOR: JANNA
Feb. 4, 1919, 98 SE. 293 (1919) Wallace, as a pre-incorporation subscriber, is not limited
TOPIC: Pre-incorporation Subscription to monetary value of stocks he is entitled via contract, but
PONENTE: MILLER may instead compel issuance of the stock certificates.
FACTS
1. Case for specific performance of a contract.
2. December 16, 1917 – Wallace entered into a contract (supplemented by another, on January 18) with Perkins and
Griffith. The latter acted for themselves and their associates, O’Keefe and Weller.
3. Perkins et al. are promoters of defendant corp., Eclipse Pocahontas Coal Co.
4. Corporation was organized after for the purpose of taking over and operating 600 acres of coal in McDowell county.
5. Option for a lease on the 600 acre tract was then owned and controlled by Wallace.
6. Substance of contract entered into by Wallace and Perkins et al.:

a. Wallace would transfer/assign lease to the property first to Griffith, as trustee, and his associates, then to the
corporation when formed.
b. Perkins, Griffith, O’Keefe and Weller would advance and supply the necessary money for the purchase price for
said lease ($2,500) to fully equip property for coal operation under lease.
c. Wallace was to receive in stock enough to represent a 1/5 interest fully paid up in the corporation
7. It is alleged that of the $25,000 capital stock authorized, Wallace was entitled to receive at least fifty shares of stock of
defendant corp, but only five shares had been issued to him.
8. Wallace alleges full and complete performance on his part, and failure and refusal of defendant co. and its promoters to
execute contract on their part.
9. Answers of Weller and O’Keefe deny authority of Griffith and Perkins to bind them, and want of notice of the alleged
rights of Wallace.
10. “Holly Stover” (not a party to the suit), claims to own 70 shares of stock of the corporation, and appeared by petition
to deny authority of promoters to make the alleged contract with Wallace, and brought up issue of want of notice
thereof and its binding effect on him and the corporation if made.
11. Court found for Wallace. Adjudged that only practicable relief = recovery from the promoters, sum of $1,700 each,
found to be equivalent value of the 43 shares of stock he was deprived of, being 1/5 of the 1/5 of issued shares, less 5
delivered to him, and two shares* given to him by another stockholder (*no bearing on case).
12. Wallace contends that he was erroneously limited to money decrees against the promoters for sums aggregating to the
par value of the 43 out of 250 shares, instead of either: (1) impressing upon the entire property and plant of the
corporation as a trust, his 1/5th undivided interest according to contract; (2) a decree requiring defendant corporation to
issue and deliver his 43 shares; or (3) if not entitled to either, to decree against the corporation and its promoters the
actual value of the shares to which he is entitled to from the contract, and not just the par value.
ISSUE: (1) Whether Wallace is entitled to compel specific performance of the contract for delivery of stocks to which he
is entitled to; (2) Whether the court erred in limiting Wallace to a money decree against the promoting shareholders
HELD: (1)YES, because under his contract to which he complied, Wallace’s position relative to the corporation is that of
a subscriber to capital stock of the corporation. One who has paid his subscription to the capital stock of the corporation
may by bill in equity compel the issuance of proper certificates therefore. (2) YES, because promoters of a corporation not
yet organized are regarded as agents of the corporation, and such contracts are binding on the latter after organization and
acceptance thereof by it.

CORPORATION LAW
Case Digest
RATIO:
1. There can be no doubt that the plaintiff’s position was that of a subscriber to the capital stock of the corporation.
His contract was to sell and convey or cause to be conveyed to the corporation the leasehold, and to accept payment
fully paid up in stock to the value of the property once fully equipped for mining and producing coal.
2. Wallace was entitled to an easily ascertainable amount of stock after the equipment was completed. Being so entitled, a
court of equity by its mandatory jurisdiction may compel specific performance.
3. The lower court was in error in limiting Wallace to a money decree severally against the promoting shareholders. While
they are no doubt liable jointly as well as severally, so is the corporation liable, either for the number of shares to which
plaintiff may be entitled under the contract, if ascertainable or obtainable, or if not, a money decree should be given
against the corporation and Perkins, Griffith, Weller and O’Keefe, jointly for the value of the 1/5 of the property
equipped for one operation has already started.
COURT DECISION:
1. Reverse the decree and remand to the circuit court for ascertainment of value of plant and property of defendant
corporation fully equipped with one operation as indicated.
2. If the capital stock then authorized and unissued or issued and outstanding and held by the said Griffith, Perkins,
Weller and O'Keffe is sufficient to represent in value Wallace’s 1/5 interest in said property, such number of shares
shall be decreed to be issued or transferred on the books to Wallace
3. If not, a money decree for the value of Wallace’s interest in the property equipped, with interest, shall be decreed
against the corporation and said stockholders jointly
CASE LAW/ DOCTRINE:
“[O]ne who has paid his subscription to the capital stock of the corporation may by bill in equity compel the issuance of
proper certificates therefor.
“[W]hen shares of stock have some peculiar value to a purchaser and cannot be purchased on the market, or their value is
not ascertainable with any degree of certainty, the purchaser may require specific performance of his contract.
“Mandamus will lie at the suit of a purchaser to compel a corporation and its officers to transfer on its books shares to
which it had been adjudicated he was entitled.”
“One who sells and transfers to a corporation a lease […] pursuant to a contract made with the promoters thereof and
accepted by the corporation when organized in consideration of stock in the corporation to be issued to him fully paid
up sufficient to represent [his] interest […], is entitled under his contract properly construed to stand in the position of
a subscriber to so much of the stock as his contract calls for and may in equity enforce specific performance thereof
against promoting stockholders and corporation.”**
**paragraph was too specific to the case, so I removed phrases to make it a more “general” doctrine. Please see original if
deemed necessary.

CORPORATION LAW
Case Digest
169. Bayla vs Silang Traffic AUTHOR: Twinkle
73 Phil 557 (1942) Magkaiba ang subscription sa purchase.
TOPIC: Post Incorporation Subscription
PONENTE: Ozaeta, J
FACTS
Two Consolidated cases.
48195- Bayla vs Silang
48196–Silang vs Bayla
1. Sofronio T. Bayla, Josefa Naval, and Paz Toledo agreed to take and pay shares of stock from Silang Traffic Inc., Co.
Part of the agreement includes:
“That the said subscriber further agrees that if he fails to pay any of said installment when due… then the said
shares are to revert to the seller and the payments already made are to be forfeited in favor of said seller, and the latter may
then take possession, without resorting to court proceedings.”
2. Then in a resolution made by the BOD, to settle the civil case wherein the corporation is involved, its rescinded the
contracts and it further stated that the payment should be paid back to the people listed therein – which includes BAYLA,
NAVAL and TOLEDO.
3. However, Silang Traffic said that Bayla and the two others on the date thereof "their subscribed shares of stock had
already automatically reverted to the defendant, and the installments paid by them had already been forfeited"
4. The trial court absolved Silang from the complaint and declared the BOD resolution null and void. And the payments of
Bayla forfeited.
5. CA affirmed dismissal of complaint. But ordered to pay the subscription payments back to Bayla, et al.
ISSUE:
a) Is the resolution valid?
b) Was the contract a subscription or a purchase?
HELD:
a) YES.
b) PURCHASE.
RATIO:
a) The contract in question being one of purchase and not subscription as we have heretofore pointed out, we see no
legal impediment to its rescission by agreement of the parties. According to the resolution of August 1, 1937, the
recission was made for the good of the corporation and in order to terminate the then pending civil case
involving the validity of the sale of the shares in question among others. To that rescission the herein
petitioners apparently agreed, as shown by their demand for the refund of the amounts they had paid as provided in
said resolution. It appears from the record that said civil case was subsequently dismissed, and that the purchasers
of shares of stock, other than the herein petitioners, who were mentioned in said resolution were able to benefit by
said resolution. It would be an unjust discrimination to deny the same benefit to the herein petitioners.
b) The parties litigant, the trial court, and the Court of Appeals have interpreted or considered the said agreement as a
contract of subscription to the capital stock of the respondent corporation. It should be noted, however, that said
agreement is entitled "Agreement for Installment Sale of Shares in the Silang Traffic Company, Inc.,"; that while
the purchaser is designated as "subscriber," the corporation is described as "seller"; that the agreement was entered
into on March 30, 1935, long after the incorporation and organization of the corporation, which took place in 1927;
and that the price of the stock was payable in quarterly installments spread over a period of five years. It also
appears that in civil case No. 3125 of the Court of First Instance of Cavite mentioned in the resolution of August 1,
CORPORATION LAW
Case Digest
1937, the right of the corporation to sell the shares of stock to the person named in said resolution (including
herein petitioners) was impugned by the plaintiffs in said case, who claimed a preferred right to buy said shares.
It seems clear from the terms of the contracts in question that they are contracts of sale and not of
subscription. The lower courts erred in overlooking the distinction between subscription and purchase "A
subscription, properly speaking, is the mutual agreement of the subscribers to take and pay for the stock of a
corporation, while a purchase is an independent agreement between the individual and the corporation to buy
shares of stock from it at stipulated price." (18 C. J. S., 760.) In some particulars the rules governing subscriptions
and sales of shares are different. For instance, the provisions of our Corporation Law regarding calls for unpaid
subscription and assessment of stock (sections 37-50) do not apply to a purchase of stock. Likewise the rule that
corporation has no legal capacity to release an original subscriber to its capital stock from the obligation to pay for
his shares, is inapplicable to a contract of purchase of shares.
CASE LAW/ DOCTRINE:

Whether a particular contract is a subscription or a sale of stock is a matter of construction and depends upon its terms and
the intention of the parties
A subscription, properly speaking, is the mutual agreement of the subscribers to take and pay for the stock of a
corporation, while a purchase is an independent agreement between the individual and the corporation to buy shares of
stock from it at stipulated price."

CORPORATION LAW
Case Digest
170 Stokes v. Continental Trust Co. AUTHOR: N. Manalo
(November 13, 1906, 186 NY 285) Kumita at lumaki si corporation, kaya nagdecide na
TOPIC: The Pre emptive Rights to Shares: Remedies when magissue ng new shares of stocks. Si plaintiff isa sa original
denied stockholders. Si corporation HINDI inoffer at binenta kay
PONTENTE: Vann J., plaintiff yun new shares, thus lumiit yun shares at voting
rights ni plaintiff
FACTS
1. The defendant is a domestic banking corporation, with a capital stock of $ 500,000, consisting of 5,000 shares of the par
value of $ 100 each.
The plaintiff was one of the original stockholders and had power, before the increase of stock, to vote on 221 shares of
stock, out of a total of 5,000, at any meeting held by the stockholders for any purpose.
On the 2nd of January, 1902, Blair & Company made proposition to the defendant that f the latter will issue new shares of
stock, Blair will buy it.
** Plaintiff notified the defendant that he wished to subscribe for his proportionate share of the new stock, if issued,
and at no time did he waive his right to subscribe for the same. Before the special meeting, he had not been definitely
notified by the defendant that he could not receive his proportionate part of the increase, but was informed that his
proposition would "be taken under consideration."
2. A resolution to increase the stock was adopted in the stockholders’ meeting.
3. Thereupon the plaintiff demanded from the defendant the right to subscribe for 221 shares of the new stock at par, and
offered to pay immediately for the same, which demand was refused.
4. A resolution directing a sale to Blair & Company at $ 450 a share was then adopted. The plaintiff voted for the first
resolution but against the last, and before the adoption of the latter he protested against the proposed sale of his
proportionate share of the stock and again demanded the right to subscribe and pay for the same, but the demand was
refused.
5. Although the plaintiff formally renewed his demand for 221 shares of the new stock at par and tendered payment
therefor, it was refused upon the ground that the stock had already been issued to Blair & Company. Owing in part to the
offer of Blair & Company, the market price of the stock had increased from $ 450 to $ 700 per share. By the action of the
majority, taken against his will and protest, he now has only one-half the voting power that he had before, because the
number of shares has been doubled while he still owns but 221.
6. plaintiff filed an action to compel the defendant to issue to him the said shares at par value. He alleged that he had the
right to subscribe for such proportion of the increase, as his holdings bore to all the stock before the increase was made
7. The trial court ruled in favor of appellant, granting him substantial damages. The appellate court reversed, finding
appellant had no increased entitlements.
8. Court of Appeals reversed the appellate court and partially reinstated the decision of the lower tribunal, holding that
appellant was deserving of damages only amounting to a difference in the market value of his prior stock.

CORPORATION LAW
Case Digest
ISSUE: Whether the plaintiff has the right over the new stocks
HELD: Yes
a stockholder has an inherent right to a proportionate share of new stock issued for money only and not to purchase
property for the purposes of the corporation or to effect a consolidation, and while he can waive that right, he cannot be
deprived of it without his consent except when the stock is issued at a fixed price not less than par and he is given the right
to take at that price in proportion to his holding, or in some other equitable way that will enable him to protect his interest
by acting on his own judgment and using his own resources. This rule is just to all and tends to prevent the tyranny of
majorities which needs restraint, as well as virtual attempts to blackmail by small minorities which should be prevented.
RATIO:
The plaintiff had an absolute right to the new stock in proportion to his holding of the old and he gave notice that he
wanted it. It was his property and could not be disposed of without his consent. He did not consent. He protested in due
time, and the sale was made in defiance of his protest. While in connection with his protest he demanded the right to
subscribe at par, that demand was entirely proper when made, because the price had not then been fixed. After the price
was fixed it was the duty of the defendant to offer him his proportion at that price, for it had notice that he had not
acquiesced in the proposed sale of his share, but wanted it himself. The directors were under the legal obligation to give
him an opportunity to purchase at the price fixed before they could sell his property to a third party, even with the approval
of a large majority of the stockholders. If he had remained silent and had made no request or protest he would have waived
his rights, but after he had given notice that he wanted his part and had protested against the sale thereof, the defendant was
bound to offer it to him at the price fixed by the stockholders. By selling to strangers without thus offering to sell to him,
the defendant wrongfully deprived him of his property and is liable for such damages as he actually sustained.
REMEDY: He May Recover Damages upon Sale of His Share of New Stock to Third Party -- Measure of Damages.
Where a stockholder in a domestic corporation consented to an increase of capital stock, but protested against the
acceptance of a proposition to sell the new stock, when issued, to a third party at a fixed price, and demanded the right to
subscribe and pay for his proportionate share of the new stock at par, which demand was refused by the corporation and a
resolution thereafter adopted directing the sale of all the new stock, when issued, to a third party at a fixed price, which
was less than the market value of such stock at the time it was issued and delivered, such stockholder, by demanding his
proportionate share of the new stock at par, did not thereby waive his right to take it at the fixed price at which it was sold
to the outside party, since the price was not fixed until after he had made his demand. After the price was fixed it was the
duty of the directors of the corporation to give him an opportunity to purchase at that price before they could sell his
property to a third party, even with the approval of a large majority of the stockholders. The stock having been sold to a
third party without any opportunity being given to the stockholder to take it at the fixed price, he can recover from
the corporation the difference between the value of his stock at that price and the market value of the stock upon
the day that it was delivered to the third party.
CASE LAW/ DOCTRINE:
a stockholder has an inherent right to a proportionate share of new stock issued for money only and not to purchase
property for the purposes of the corporation or to effect a consolidation, and while he can waive that right, he cannot be
deprived of it without his consent except when the stock is issued at a fixed price not less than par and he is given the right
to take at that price in proportion to his holding, or in some other equitable way that will enable him to protect his interest
by acting on his own judgment and using his own resources. This rule is just to all and tends to prevent the tyranny of
majorities which needs restraint, as well as virtual attempts to blackmail by small minorities which should be prevented.

CORPORATION LAW
Case Digest
171 Thom v. Baltimore Trust Co. AUTHOR: Sarah
15 January 1930, 148 A. 234 Notes: No right to purchase the increased capital stock when
TOPIC: The Pre-Emptive Right to Shares: Remedies when the amount of the stock was not actually paid.
denied
PONENTE: Urner
FACTS
1.At a meeting of stockholders of the Baltimore Trust Company, the holders of more than 2/3 of the its outstanding shares
approved the plan of its directors to merge its interest with the National Union Bank of Maryland Bank.
2. The plan provides that the trust company would issue 15,000 shares of its stock at a valuation of $112/share, for the
purpose of acquiring 10,000 share of the said bank at a valuation of $168/share.
3. The contract was to be consummated only at the least 70% of the bank stock could be delivered upon agreed terms.
4. The requisite increase of the trust company's capital stock was authorized by a charter amendment duly adopted by its
stockholders.
5. A contemporaneous amendment of the charter provided: "Upon any increased issue of stock, the stockholders shall have
the pro rata preferential right to subscribe therefore at such price and on such terms as the board of directors may in each
instance fix. In the event of the issue of any additional stock of the company for the purpose of accomplishing the merger
with or of acquiring any other bank or trust company or other property, the directors may issue said stock without
preferential subscription rights to stockholders or with preferential subscription rights to such extent and on such terms as
the board may in each instance deem proper."
7. Plaintiffs, as stockholders (owner of 6,416 of 70,000 shares of the trust company’s capital stock), filed a complaint
protested against the merger agreement and the use of proposed new issue of stock for the exchange purposes (which
involved a disregard of the privilege of proportional purchase upon which the plaintiffs insisted).
8. The 10,000 shares of the bank stock were made available for delivery to the trust company upon the merger terms and
the new issue of 15,000 shares of the trust company’s stock was required for the acquisition of the bank stock at the
valuations specified in the agreement.
9. Lower Court: Plaintiff’s pre-emptive right to repurchase the stocks was not enforceable on the ground that they were to
be issued in payment for property, which consisted of stock from another bank.
10. Court of Appeals: Affirmed.
ISSUE: Whether or not the stockholders of Baltimore Trust Company were entitled to the right to purchase a due
proportion of a supplemental issue of its capital stock.
HELD: No. The amendments that conferred the right to stockholders to purchase the stocks was not enforceable on the
ground that the privilege could not be exercised consistently with the object that the disposition of the additional stock was
legally designed to accomplish.
RATIO:
Independently of the charters, the stockholders of a corporation have a preferential right to purchase new issues of shares,
to the proportional extent of their respective interests in the capital stock then outstanding, when the privilege can be
exercised consistently with the object which the disposition of the additional stock is legally designed to accomplish. In
the present case, every SH of the bank, for each of the shares, was to receive 1 1/2 shares of the stock company (share in
exchange for property). It would not be feasible to consummate a transfer based upon such consideration if the preemptive
right were to be held enforceable with respect to every new issue of stock regardless of the object of the disposition.
Stockholders in a trust company had no pre-emptive rights as regards an issue of new stock, all of which was to be utilized
for the purpose of the acquisition by the company of the stock in a certain bank.

CORPORATION LAW
Case Digest
172 Fuller v. Krogh AUTHOR: De Guzman, Bien
(1962)113 n.w.2d 25 Match Dollar by Dollar
TOPIC:Remedies when Denied
PONENTE: Hallows, J;
FACTS
1. On December, 1954, both Fuller and Krogh had issued to themselves 218 shares of stock, payments for which were
periodically made by each and equalized by April of 1955. The goal was to match “dollar by dollar”
2.After the issuance of the last of the 218 shares. When the certificate for new 84 shares was issued to Krogh for cash, only
25 shares were issued to Fuller for cash.There was no matching of dollars.Nor was there any matching of dollars when
Krogh invested $5,000 for 50 shares. (Fuller admitted testified he did not match Krogh because he did not have the
money.)Fuller was the president of the corporation.
3. There was an accounting issue excepting for the allowance of $4,000 for Krogh's supervisory services. Krogh was
entitled a compensation. Certificates Nos. 12, 13, and 22, totaling 175 shares, were received in part payment of Krogh's
claim for materials, supplies, and labor he furnished the corporation.Krough now has the majority of the stocks.
4. Fuller now claims that his pre-emptive right to be sold of the shares first.
5. The Trial Court sided with Krogh: “If Fuller has any claim to equalize his stockholding with that of Krogh, it must be
found in his pre-emptive right as a stockholder.”
ISSUE:
1. Whether or not Fuller had pre-emptive rights to purchase stock previously authorized but unissued and
2. Whether or not Fuller had waived those rights.
HELD:
1. Yes, Fuller had pre-emptive rights not only when Krogh was issued stock for money. A debt calls for payment in
money which the recognition and exercise of the pre-emptive rights would furnish.
2. Yes, conclude he waived his rights.Fuller and his wife constituted the majority of the board of directors and Fuller
was president. He signed the certificates.
RATIO:
1. A pre-emptive right of a shareholder in a corporation is recognized so universally as to have become axiomatic in
corporation law.Generally, the pre-emptive right of a stockholder is his right to retain and maintain his relative and
proportionate voice and influence in the control and management of the affairs of a corporation by purchasing an
amount of capital stock to be issued and sold by the corporation proportionate to his then holdings before the stock
can be sold to others, whether they be outsiders or stockholders.The right exists whether the stock issued
represents an increase in the authorized capitalization of the corporation or represents previously authorized but
unissued stock.In that case, it is also pointed out if the stock purchased by the corporation had been carried upon
its books as a liability and treated as an asset, the pre-emptive right might not attach, but the directors in disposing
of such shares could only do so in the honest exercise of their discretion and with the utmost good faith for the
benefit of all shareholders and not so as to give one group of shareholders a benefit or advantage over another.
The pre-emptive right exists where the corporation acquires its stock and cancels or returns it to the status of
authorized but unissued shares, but does not exist as to treasury shares which are considered issued but not
outstanding. The pre-emptive right exists only upon the issuance of shares of stock, which is not to be confused
with the certificate evidencing the ownership of shares of stock.
In the case, Krogh argues Fuller had no pre-emptive rights because the 175 shares were issued for property and
services desperately needed by Cormier. We find no agreement to exchange property or services for stock or that
Cormier could only secure such material and services for Cormier on the basis of stock.In the cases of stock
issued in payment of a pre-existing debt, we do not see any reason why pre-emptive rights should be denied.
2. At the time the stock was issued, Fuller and his wife constituted the majority of the board of directors and Fuller
was president. He signed the certificates. He knew of each transaction for the issuance of stock and the reason
therefor. As a director and president, he had as much duty as Krogh, if not more, to go through the formality, if
required, of offering the stock to himself as a stockholder. He was aware of his pre-emptive rights and of the
CORPORATION LAW
Case Digest
intended issues of stock to Krogh; and under the circumstances he and Krogh dealt with each other and with the
corporation, he had notice and the opportunity to exercise his pre-emptive rights, which he did not within any
reasonable time.
CASE LAW/ DOCTRINE:

The pre-emptive right is regarded as inherent in the stockholder's status, is appurtenant to the stock, belongs to the owner,
and its existence is not dependent on the articles of incorporation.The pre-emptive right of a shareholder, however, has
well-recognized limitations. The articles of incorporation may limit or deny the right.A shareholder having pre-emptive
rights is entitled to the opportunity to purchase his proportionate share. In cases where the shareholders do not know or
have notice of the intended issue of stock, such opportunity must be afforded by notice and by fixing a reasonable time
within which the shareholders may exercise such right.
On principle, it would seem the pre-emptive right of a shareholder should not be denied when property is to be
taken as consideration for the stock excepting in those peculiar circumstances when the corporation has great need
for the particular property, and the issuance of the stock, therefore, is the only practical and feasible method by
which the corporation can acquire it for the best interest of all the stockholders.

CORPORATION LAW
Case Digest
173 DUNLAY v. AVENUE M. GARAGE & REPAIR AUTHOR: Danna
18 March 1930, 170 N.E. 917
TOPIC: The Pre-Emptive Right to Shares - Remedies • This is a minority stockholder's action which seeks
When Denied to compel defendant directors to return to defendant
PONENTE: Pound corporation certain shares of stock that were alleged
to have been issued improperly
FACTS
1. Plaintiff - holder of twenty shares in defendant corporation
2. Action was brought to compel the defendants Ageno and Montalbine to return to the Defendant Corporation 76 shares
of its capital stock which were alleged to have been issued to them improperly.
3. Prior to 14 March 1927 - All the capital stock of the defendant corporation had been issued, except for 76 shares
which consisted of unissued authorized capital stock
4. 14 March 1927 - At a special meeting of the board of directors, they adopted a resolution wherein they:
• issued 50 shares of the aforementioned unissued stock to Graham, to satisfy a debt they owed him
• Graham transferred the stock to Guinan
• Guinan transferred the stock to Montalbine, Ageno’s sister
• issued 26 shares to Ageno to satisfy debts they owed him.
5. Prior to the issuance of the stock, Plaintiff's faction owned 378 shares of the total issued stock of 724 shares. (They
were the controlling faction.)
6. When the 26 shares were issued to the Ageno faction, it was still short of a majority. HOWEVER, it afterwards
became the controlling faction since Ageno purchased 76 shares from Mr. May (another stockholder), and the
Graham shares by Montalbine.
7. Plaintiff’s contention: A breach of trust was committed by Ageno since it is a rule that officers nor directors may not
purchase unissued capital stock, which would result in giving them control of the corporation, when they didn’t first
afford to existing stockholders the right to participate pro rata in the purchase of the remaining unissued capital stock.
8. Defendant’s contention: Since the 76 shares of stock were not a new issue, nor treasury stock, but merely unissued
authorized capital stock, the directors had a right to sell them to any one at par, unless they were conspiring to injure
the corporation or another stockholder.
ISSUE: Whether or not the sale of the stock acquired by Ageno constituted a breach of trust
HELD: No, because the shares were issued for full value and in good faith to discharge a debt, to raise money to meet
corporate obligations and to enable the corporation to carry on its business. The questioned shares did not give his faction
the control of the corporation. Control was obtained only when the additional shares were legitimately purchased from
Graham and May.
RATIO:
1. In respect to the balance of shares constituting the initial authorized issue, as distinguished from new shares, the case
is different. The subscribers ordinarily take such shares with the clear understanding that the subscription shall be
completed before they may rely on the preservation of their proportional status. The understanding may, however, be
otherwise. The issued stock may be related to the unissued stock as stock for immediate issue to stock for future
expansion. In such case the pre-emptive right might not be denied. It has been too loosely stated that "a corporation
may use its original unissued authorized capital stock for any legitimate or lawful purpose it sees fit." If the issue of
the unissued original shares, whenever authorized, is reasonably necessary to raise money to be used in the business
of the corporation rather than the expansion of such business beyond the original limits, the original shareholders
have no right to count on obtaining and keeping their proportionate part of the original stock.
2. Directors must always be free from fraud in their relations with their shareholders. Fair dealing is required. One
formula of fair dealing is universally recognized, i.e.: Directors may not authorize the issue of unissued stock to
themselves for the primary purpose of converting them from minority to majority stockholders.
CASE LAW/ DOCTRINE:
If the issue of unissued original shares, whenever authorized, is reasonably necessary to raise money to be used in the
business of the corporation, the original shareholders have no right to count on obtaining and keeping their proportionate
part of the original stock.

CORPORATION LAW
Case Digest
174 Ross Transport Inc. (Williams) v. Crothers, AUTHOR:Palomique, Ernesto III C.
45 A.2d 267 (1946)
TOPIC:The Pre-Emptive Right to Shares [(f) Remedies Stockholders' derivative suit to enforce pre-emptive rights
when Denied] upon the issuance and sale of certain shares of the corporate
PONENTE:Marbury, C.J. stock to a director and to the family of the corporation's
president and director without opportunity to buy being
given to other stockholders
FACTS
12. Charles T. Crothers and his brother Edmund W. Crothers (appellees) are stockholders of Ross Transport Inc.
13. Wallace Williams (president), William B. Ross (general manager), Gervase R. Sinclair, F. DuPont Thomson and
James W. Hughes were the directors of the said corporation.
14. The corporation was organized to operate a fleet of buses to transport employees of Triumph Explosives, Inc., to
and from its plant at Elkton, Maryland.
15. The authorized stock was 5000 shares of no par value. At the organization meeting a resolution was passed
authorizing the sale of this stock at $ 20 a share, and providing that stock to the value of $ 30,000 be offered for
sale. This limited the stock to be issued to 1500 shares.
16. Sometime in July 1942, Mr. Sinclair died.
17. Charles T. Crothers purchased the Sinclair stock, 200 shares, at $ 20 and 5% interest from the date of issuance.
18. On August 26, stocks were issued to the wife and daughters of Wallace Williams and to William B. Ross, totaling
365 shares in all, and increasing the outstanding stock to 1400 shares. All of this stock was issued at the set price
of $ 20.00 a share. The stock issued to the Williams family was paid by Mr. Williams' check for $ 4800. Mr. Ross
paid the company $ 2500 for his stock.
19. As a result of these purchases by Williams and Rossthe stock books showed that the Williams family had
590 shares, Ross had 150 shares, Hughes had 150 shares, Thomson had 150 shares, Whitelaw had 10 shares,
Edmund W. Crothers had 100 shares and Charles T. Crothers had 250 shares. (Lumalabasnasila Williams ang
may controlling share.)
20. The purpose of the suit is to set aside the issuance of 40 shares of stock to Elizabeth B. Williams, 100 shares of
stock to Corrine Williams, 100 shares of stock to Lois Williams Young and 125 shares of stock to William B.
Ross.
21. The appellees (Crothers) give two reasons for their contention that the stock sales of August 26th were void:
a. First, because they deprive them and the other original stockholders of their pre-emptive rights to
purchase a proportionate amount of the remaining shares, and,
b. Second, because, in selling to themselves and their nominees, Williams and Ross have abused their
trust as officers and directors. They claim to be injured in two ways. Their voting powers have been
proportionately lessened, and the control of the company has passed to Williams and Ross. And the
amount paid in dividends has to be divided among 365 more shares of stock to the consequent financial
loss of the holders of the original shares.
22. The appellants (Williams) as a defense claims that the sale of this additional stock to a director and to the family
of the president and director without any further authority than the original resolution, and without opportunity to
buy given to other stockholders, is sought to be justified on the ground that it was originally planned, and that the
money was needed to purchase additional buses at a cost of about $ 16,000. (Basically sinasabinilana they were
in good faith)
23. However, the facts show that there is no such need. The company was an immediate financial success. It was
engaged in a special business, of which it had a monopoly, and in which it could not help making money so long
as Triumph Explosives continued to operate its large plant, employing the workmen the Transport Corporation
hauled.
ISSUE:Whether or not the issuance of shares of stock should be set aside.
HELD: Yes,the issuance and sale of certain shares of the corporate stock, constituting the balance of the originally
authorized issue, to a director and to the family of the corporation's president and director without opportunity to buy being
given to other stockholders, where it was not shown that the corporation needed the money so badly and was in such
CORPORATION LAW
Case Digest
financial condition that the sale of the additional stock to the two directors was the only way the money could be obtained,
must be set aside as a constructive fraud upon the other stockholders.
RATIO
In a sale of additional stock by appellant directors to themselves, appellant directors had the burden of demonstrating the
complete equity of the transactions. Appellant directors did not demonstrate that the corporation needed the money or that
sale of stock was only way to obtain that money. Instead, corporation was in good financial condition and necessary
equipment purchases could have been arranged through a financial institution. The court held that stock sale should be set
aside as a constructive fraud upon the other stockholders because appellants, as directors of corporation, were required to
promote the interest of all shareholders and not to advance their own individual interests.
If sir asks about the exception to the pre-emptive right:
“It has been held that in the case that pre-emptive rights do not exist where the stock about to be issued is part of the
original issue. This exception is based upon the fact that the original subscribers took their stock on the implied
understanding that the incorporators could complete the sale of the remaining stock to obtain the capital thought necessary
to start the business. But this gives rise to an exception to the exception, where conditions have changed since the original
issue. The stock sold the Williams family and Ross was part of the original issue, and it is claimed by the appellants
that it comes within the exception, and the appellees and the other stockholders have no pre-emptive rights.”
HOWEVER: The doctrine of pre-emptive right is not affected by the identity of the purchasers of the issued stock.
What it is concerned with is who did not get it. But when officers and directors sell to themselves, and thereby gain
an advantage, both in value and in voting power, another situation arises, which it does not require the assertion of
a pre-emptive right to deal with.
CASE LAW/ DOCTRINE:The doctrine known as the pre-emptive right of shareholders is a judicial interpretation of
general principles of corporation law. Existing stockholders are the owners of the business, and are entitled to have that
ownership continued in the same proportion. Therefore, when additional stock is issued, those already having shares, are
held to have the first right to buy the new stock in proportion to their holdings.

CORPORATION LAW
Case Digest
175 Merritt-Chapman & Scoot Corp. v NY Trust Co. AUTHOR: Keith Meridores
November 8, 1950, 184 F. 2d 954 (This presupposes you already have knowledge about Debt
TOPIC:Financing the Corporation; Debt Securities; Securities, and what a dividend is; so please, read up)
Convertible Securities; Stock Options Note: Provisions in the contract of the security may give the
PONTENTE:J. Thomas Swan holder the privilege to exchange his class of securities with
another class. (e.g. he can exchange his 1 preferred share to
2 common shares) It may also be provided the period within
which to exercise this privilege.
Note: At times, instead of giving this privilege, what’s given
is a “stock option warrant.” This gives the holder the option
to purchase stocks at a specified price and can be exercised
at any time within a specified period.
Note: dividend can either be paid out as cash (cash
dividend) or paid out as additional stocks (stock dividend,
scrip dividend). An example of stock dividend: company
releases 40% stock dividend for common shares, now your
1 common stock is now 1.4 common stocks. Get it? This
case concerns with stock dividend.
FACTS:
1. Merritt-Chapman (Merritt a.k.a. Corporation) entered into a “trust deed” with NY Trust and Co. (trustee)
2. Merritt issued warrants in 1928.
3. The warrants provide that the bearer is entitled to purchase “full-paid and non-assessable” shares of common stock of
the Corporation upon surrender of the warrant and payment of the purchase price, which is $30.00. The warrants are to be
surrendered with the trustee.
4. Pursuant to Merritt and NY Trust’s“trust deed”, 40,000 shares of the Corporation are to be delivered to the trustee to
insure that stock purchasable under the warrants would be available.
5. Merritt issued a resolution granting stock dividend in the amount of 40% per share to its stockholders who hold such
legally issued and outstanding shares of said common stock. (The stocks deposited with NY Trust is also covered)
- the dividend for the issued and outstanding shares is payable on Oct. 16, 1950
- the dividend for authorized but unissued shares is payable on Sept. 15, 1950
6. The resolution also directed that the holders of the warrants and the trustee the 60 day notice required by Article 3, sec.
10 of their “trust deed.” It provides “…during such period of sixty days, the holders of Warrants outstanding hereunder
may purchase stock in accordance with such Warrants and be entitled in respect of shares so purchased to all of the rights
of the other holders of similar stock of the Corporation.”
7. The controversy arose when the 2 parties contends 2 different matters:
- Merritt contends that a holder of a warrant must exercise his warrant (i.e. see #3) in order to have a share in the stock
dividend (i.e. see #5)
- NY Trust on the other hand contends that Merritt must deposit 40% of the stock that was already deposited with them.
So that whoever holds a warrant and wishes to avail of the warrant will receive 1.4 shares. The stock allotted by Merritt
for those who want to avail of the warrant is also covered by the stock dividend released.
8. The lower court ruled in favor of the Corporation.
9. NY Trust contends that in ruling in favor of the Corporation, it disregarded Article 3, sec. 7 of their “trust deed” which
provides, “…upon the exercise of Warrants, deliver in the manner herein provided, with any shares of common stock
purchased thereunder, but without additional consideration therefor, such number of shares as may be equal to such stock
dividend, if the same had been declared upon the common stock so purchased.”
ISSUE:
1. Whether or not the 60 days provision in their “trust deed” is deemed as a period within which the warrant holders
must exercise their rights or else it is deemed forfeited?
2. Whether or not Merritt should deposit 40% of the stock that was already deposited with NY Trust?

CORPORATION LAW
Case Digest
HELD:
1. No. The language of Sec. 10 is not aptly chosen to express such a forfeiture.
2. Yes. If Merritt will not deposit the additional 40%, the stocks allotted for those who want to avail of their warrants
will be diluted.
RATIO:
Issue 1:
1. The appellee (Merritt) must, and does, contend that the notice provision is for the purpose of giving the warrant holders
notice that unless they exercise their warrants by the record date, they will forfeit those promised rights. Certainly the
language of section 10 is not aptly chosen to express such a forfeiture.
2. The trust deed did not set any time limit specifying when the warrant holders must exercise their option.
3. The appellee points to section 10 as setting such a limit. By it the corporation merely promised to give the warrant
holders and the trustee a sixty day notice 'in case the Corporation shall pay any stock dividend'- or take other specified
action- 'to the end that, during such period of sixty days, the holders of Warrants outstanding hereunder may purchase
stock in accordance with such Warrants and be entitled in respect to shares so purchased to all the rights of other holders of
similar stock of the Corporation.'
4. The warrants gave the holders thereof the privilege, unlimited in time, to purchase an aggregate of 40,000 authorized but
unissued shares.
Issue 2:
1. If the corporation were at liberty to declare stock dividends without making provision for warrant holders, the
percentage of interest in the common-stock capital of the corporate enterprise which the warrant holders would acquire, if
they thereafter purchased the shares subject to warrants, could be reduced practically to the point of extinction.
The relevant portion of their “Trust Deed” (read the underlined portion)
Section 7. As long as the Warrants shall remain valid and outstanding, the Corporation will not pay any dividends on its
common stock payable in stock of any class (such dividend being herein sometimes called 'stock dividend'), unless the
Corporation shall deposit in trust with the Trustee stock certificates of the character above described in Section 3 of this
Article III representing an amount of stock (of whatever class) of the Corporation equal to the amount of such stock
dividend, if the same had been declared upon the common stock represented by the stock certificates then held in trust by
the Trustee hereunder, and the Trustee shall, out of such additional stock certificates so deposited in trust with it on
account of such stock dividend, upon the exercise of Warrants, deliver in the manner herein provided, with any shares of
common stock purchased thereunder, but without additional consideration therefor, such number of shares as may be
equal to such stock dividend, if the same had been declared upon the common stock so purchased; and as provided in
Section 5 of this Article III, the Corporation will from time to time issue and deliver to the Trustee such stock scrip
certificates as may be required from time to time to enable the Trustee upon the exercise of Warrants to make any and all
deliveries in respect of any such stock dividend.
2. The purpose of section 7 was to supply such protection. It is a covenant by the corporation.
CASE LAW/ DOCTRINE:
*see author’s note above*
DISSENTING/CONCURRING OPINION: Clark, J.(Dissenting)
Clark reasoned that the provisions for notice appearing in the warrant there involved must have been intended to limit the
power of the warrant holder to assert rights with respect to the stock dividend because no other purposes for the time
limitation in the notice could be conceived. Why, he wrote, "should the draftsmen have painted the lily further unless the
sixty days was intended as a definite period for the taking of some action?"

CORPORATION LAW
Case Digest
176 John Kelley Co. v. CIR AUTHOR: Marvin
326 U.S. 521; 1946 Two tax cases turned upon the question whether payments
TOPIC: Hybrid Securities made under certain corporate obligations were interest or
PONENTE: STEPHENS, Circuit Judge dividends. Although the facts were quite similar, the
characteristics of the obligations in question and the
surrounding circumstances were of such a nature that it was
reasonably possible to reach the conclusion that the
payments were interest to creditors in one case and
dividends to stockholders in the other case
FACTS
1. In the Kelley case, a corporation, all of whose common and preferred stock was owned directly or as trustee by members
of a family group, was reorganized by authorizing the issue of $250,000 income debenture bearer bonds, issued under a
trust indenture, calling for 8% interest, noncumulative. They were offered only to shareholders of the taxpayer, but were
assignable. The debentures were payable in twenty years, with payment of general interest conditioned upon the
sufficiency of the net income to meet the obligation. The debenture holders had priority of payment over stockholders, but
were subordinated to all other creditors. The debentures were redeemable at the taxpayer's option, and carried the usual
acceleration provisions for specific defaults. The debenture holders had no right to participate in management. Debentures
were issued to the amount of $150,000 face value. The greater part, $114,648, was issued in exchange for the original
preferred, with six percent cumulative guaranteed dividends at its retirement price and the balance sold to stockholders at
par, which was eventually paid with sums obtained by the purchasers from common stock dividends. Common stock was
owned in the same proportions by the same stockholders before and after the reorganization.
2. In the Talbot Mills case, the taxpayer was a corporation which, prior to its recapitalization, had a capital stock of five
thousand shares of the par value of $100, or $500,000. All of the stock, with the exception of some qualifying shares, was
held by members, through blood or marriage, of the Talbot family. In an effort to adjust the capital structure to the
advantage of the taxpayer, the company was recapitalized, just prior to the beginning of the fiscal year in question, by each
stockholder surrendering four-fifths of his stock and taking in lieu thereof registered notes in aggregate face value equal to
the aggregate par value of the stock retired. This amounted to an issue of $400,000 in notes to the then stockholders. These
notes were dated October 2, 1939, and were payable to a specific payee or his assignees on December 1, 1964. They bore
annual interest at a rate not to exceed 10% nor less than 2%, subject to a computation that took into consideration the net
earnings of the corporation for the fiscal year ended last previous to the annual interest paying date. There was therefore a
minimum amount of 2% and a maximum of 10% due annually, and, between these limits, the interest payable varied in
accordance with company earnings. The notes were transferable only by the owner's endorsement and the notation of the
transfer by the company. The interest was cumulative, and payment might be deferred until the note's maturity when
"necessary by reason of the condition of the corporation." Dividends could not be paid until all then due interest on the
notes was satisfied. The notes limited the corporation's right to mortgage its real assets. The notes could be subordinated by
action of the Board of Directors to any obligation maturing not later than the maturity of the notes. For the fiscal year in
question, the maximum payment of 10% was made on the notes.

CORPORATION LAW
Case Digest
ISSUE:
What is the treatment of payment of the interest in the securities issued by both companies?
HELD:
Kelly Case – Interest
Talbot Mills Case - Dividends
RATIO:
Because preferred shares and bonds are created by contract, it is possible to create stock which approximates the
characteristics of debt securities. Hybrid securities, as the name implies, therefore combine the features of preferred shares
and bonds.
Determining the true nature of the security is crucial for tax purposes. The American courts use the following criteria:
(1) Is the corporation liable to pay back the investor at a fixed maturity date?
(2) Is interest payable unconditionally at definite intervals, or is it dependent on earnings?
(3) Does the security rank at least equally with the claims of other creditors, or is it subordinate to them?
In the Kelly case, the annual payments made were interest on indebtedness (therefore, a bond is held) because there were
sales of the debentures as well as exchanges of preferred stock for debentures, a promise to pay a certain annual amount if
earned, a priority for the debentures over common stock and a definite maturity date in the reasonable future.
In the Talbot Mills case, the annual payments made were dividends and not interest (therefore, shares are held), because of
the presence of fluctuating annual payments with a 2% minimum, and the limitation of the issue of notes to stockholders in
exchange only for stock. Besides, it is the Tax Court which has final determination of all tax issues which are not clearly
delineated by law.
WHAT IS THE NATURE OF THE SECURITY AND THE PAYMENT MADE?
Stocks Bonds
WHAT IS PAID? Interest Dividends
TO WHOM PAID? Creditor-investor Stockholder
WHEN PAID? Whether the corporation has profits or Only if there are profits
not
NATURE Expense Not an expense
TAXABILITY Can be deducted for tax purposes CANNOT be deducted
MATURITY DATE? Yes No
RANK ON Ranked together with other corporate Superior to stockholders, inferior to corporate
DISSOLUTION creditors creditors
CASE LAW/ DOCTRINE:
Hybrid securities, as the name implies, therefore combine the features of preferred shares and bonds.

CORPORATION LAW
Case Digest
177 Jordan Co. v. Allen AUTHOR: Pat
85 F. Supp 437 August 4, 1949 Jordan Company – engaged in real estate business,
TOPIC: Hybrid Securities incorporated in Georgia on October 8, 1903, with authorized
PONENTE: Davis, J. capital stock of $100K and the privilege of increasing it to
$500K
FACTS:
11. June 18, 1904: the first meeting of stockholders of Jordan Company was held:
− Gunby Jordan, O.S. Jordan and Ralph Jordan subscribed to all of the stock which was issued, which is $100,000 of
common stock
− Shareholders authorized the directors to issue $40,000 of debenture stock by a resolution which referred to said
stock as a “form of obligation in the nature of certificates of indebtedness.”
12. Thereafter, the shareholders adopted by-laws containing:
− the form of the certificate which to be issued to the holders of debenture stock, and this form conformed
substantially with the charter, with one very significant exception:
o Whereas the charter provided that the holders of debenture stock should rank pari passu with general
creditors upon dissolution, the certificate as set out in the by-laws (and as subsequently issued to the
holders thereof) provided that, upon dissolution the holders of debenture stock should rank after the
general creditors, equally with each other and prior to the holders of common stock.
13. The $40,000 of debenture stock authorized at this meeting was issued after a resolution of the Board of Directors dated
October 13, 1905. Eventually, stockholders individually authorized the issuance of the remaining $60,000 of debenture
stock permitted by its charter.
14. February 13, 1918: at a stockholders’ meeting:
− In view of the fact that the war eliminated any reasonable "hope for early use of its funds as loans to builders", it
decided to retire the debenture stock.
− The minutes of the meeting state that the stock would automatically mature in 1924.
− The resolution adopted authorized the holders of common stock to exchange their debenture stock for additional
common stock, and authorized the Company officials to purchase all other debenture stock
o Said resolution further empowered the officials to accept from such debenture stockholders, as a loan for a
period not to exceed one year, at 6% interest, an amount not to exceed the avails of the debenture stock so
sold to the corporation.
15. In accordance with the resolution so adopted, the entire issue of debenture stock outstanding was retired in 1918.
16. February 7, 1923: the charter of Jordan Company was amended to extend the life of the corporation for a period of 25
years commencing October 8, 1923 and to allow the corporation to increase its capital stock, to any amount not
exceeding $2,000,000.
17. January 16, 1925: at a stockholders meeting, the Directors had recommended the new issue of $100,000 of debenture
stock. The resolution adopted provided that:
18. The certificates issued to the holders were identical with those issued in 1905, except for the provision which was
printed across the face of each certificate in red ink: "After thirty days notice to the holder, this certificate is
redeemable on any interest date at $105 per share together with all unpaid accrued interest thereon."
19. The Company paid the "interest" on the debenture stock regularly.
20. Prior to 1940 a portion of this issue was retired and during the years 1940, 1941, 1942, 1943 and 1944 the debenture
stock remaining outstanding amounted to $97,100.
21. During each of the taxable years ending on December 31st of each of the above mentioned years, the company paid to
the holders of said debenture stock amounts aggregating $5,826. The Company deducted the sum of $5,826 as interest
paid on outstanding obligations for each of the taxable years ending December 31, 1940, 1941, 1942, 1943 and 1944.
These deductions were disallowed by the Commissioner on the grounds that they were payments of dividends rather
than payments of interest and the deficiency assessments resulting from such disallowance were made.
22. October 30, 1945, the Company paid to Allen, as Collector of Internal Revenue, taxes and interest, due as a result of
the disallowance in the amount of $9,643.75.
23. December 27, 1946 the corporation filed its claim for refund. Commissioner did not reply, the Jordan Company filed
this suit.
24. The President, Vice-President and Treasurer of the taxpayer also testified that they always considered the debenture
CORPORATION LAW
Case Digest
stock as an indebtedness and the payments made thereon as interest. They and the bookkeeper further testified that the
debenture stock and the quarterly payments were thus treated on the books of the company. The audits of the company
books, however, show no definite treatment. The balance sheet in some years lists the stocks as a liability; in others the
audit lists the holders thereof with the holders of common stock, and in most years carries the debenture stock as a
kind of hybrid, listing it between items entitled "Liabilities" and those, such as capital stock, listed under "Net Worth
and Surplus".
25. While the corporate officials testified that they treated the payments made on these certificates as interest, in the body
of the preferred stock certificates issued by the Company, the payments to be made on the debenture stock are referred
to as "dividends".
26. During the years in question all but approximately 375 shares of the debenture stock were held by holders of the
Common Stock in the company or members of their families.
ISSUE:
Whether the payments made to the holders of the Debenture Stock of The Jordan Company in 1940, 1941,
1942, 1943 and 1944 were:
− in payments of interest on outstanding obligations as contended by the taxpayer, OR
− dividends paid on invested capital as determined by the Commissioner
HELD:
They were dividends paid on invested capital as determined by the Commissioner. They were stock, and the payments
made to the holders thereof were dividends; thus, not deductible.
RATIO:
There is no precise formula to determine the true nature of the securities involved, but the courts have set forth certain
factors which are significant.
1. Treatment by the parties; 2. Maturity date and right to enforce collection; 3. Rank on dissolution; 4. Uniform rate of
interest payable or income payable only out of profits; 5. Participation in management and the right to vote.
Participation in management and the right to vote – The absence of voting and managerial rights or the presence of only
extremely limited rights, is of probative value only, since it is common both to bonds and preferred stock.
Treatment by the parties- Evidence shows that Jordan Company treated the debenture stocks as an obligation and the
payments thereon as interest. But, this factor alone is not, and has never been held to be sufficient basis for determining the
true nature of the securities involved.
Rank on dissolution – In this case, the holders of the debenture stock, by the provisions of the debenture certificates,
ranked ahead of the other stockholders but inferior to general creditors. While not of itself indecisive, this is one factor
strongly indicating that the holders were sharing in the risk of the venture in a manner more compatible with the status of
stockholders than creditors.
Maturity date and right to enforce collection – The Fifth Circuit has repeatedly held that the existence of a fixed maturity
date for the principal sum, together with a right to enforce payment of said sum as a debt in case of default, is the most
significant, if not the essential feature of a debtor and creditor as opposed to a stock. It is one of the fundamental
characteristics of a debt that there is a definite determinable date on which the principal falls due.
In this case, the obligation set forth in the debenture stock certificate clearly had no maturity date. The absence of a
maturity date and the right to enforce payment of the principal sum by legal action, when considered in connection with
the other factors above outlined, leads the court to the conclusion that the securities here involved were stocks and not
obligations.

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Case Digest
CASE LAW/ DOCTRINE: The absence of a maturity date and the right to enforce payment of the principal sum
by legal action, when considered in connection with the other factors above outlined, leads the court to the
conclusion that the securities here involved were stocks and not obligations.

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Case Digest
178 Aladdin Hotel Co. v. Bloom AUTHOR: Yayie Lanting
January 2, 1953 200 F.2d 627
TOPIC: The Trust Indenture
PONENTE:Gardner
FACTS
1. The case was a class suit where Josephine Bloom, as plaintiff, sought for herself and other 130 members who were
minority bondholders of the Aladdin Hotel Company.
2. The defendants are Aladdin Hotel Company, a corporation, Jones Family (owners of a majority of the stock of the Hotel
Company and controlling members of its Board of Directors and dominated and controlled all acts and policies of the
Hotel Company; they were also the owners and holders of more than two-thirds of the principal amount of said bonds,
being the owners of more than 72 per cent thereof) and Mississippi Valley Trust Company, a corporation.
3. On September 1, 1938, the Aladdin Hotel Company executed and delivered a series of 647 bonds aggregating in
principal amount the sum of $250,000.00; the bonds were made payable on September 1, 1948.
4.Bloom alleged that:
a. defendant Mississippi Valley Trust Company certified the modifications as provided in the trust deed;
b. that the purported changes were made on application of the Hotel Company and with the consent of the holders of
two-thirds in principal value of the outstanding bonds;
c. that no notice of said application for change in the due date of the bonds(from Sept. 1, 1948 to Sept. 1, 1958) was
given to the mortgage bondholders and that plaintiff did not consent nor agree to the modification.
d. the modifications were invalid because not made in good faith and were not for the equal benefit of all bondholders
but were made corruptly for the benefit of the defendants and such modification deprived plaintiff and the other mortgage
bondholders of their rights and property
e. that said modification extended for ten additional years the powers and compensation of the Mississippi Valley Trust
Company as trustee
5. Bloom prayed for a declaratory judgment declaring and holding that the purported modifications, waivers and
certifications are illegal, inequitable and void; that she and all other bondholders of the defendant Aladdin Hotel Company
have judgment against defendant Aladdin Hotel Company for the principal amount of the bonds held by each of them with
interest from September 1, 1948 until the payment of such principal and interest.
6. The trial court entered judgment against the Aladdin Hotel Company but dismissed as to all individual defendants,
including the Mississippi Valley Trust Company. The judgment was a money judgment for the amount due on plaintiff's
bonds.
7.Aladdin Hotel seek for reversal and one of the contentions was that the modification of the provisions of the trust deed
extending the time of maturity of the bonds was effected in strict compliance with the provisions of the contract of the
parties and hence was binding on all the bondholders
8.The trust deed contained provision that:
'In the event the Company shall propose any change, modification, alteration or extension of the bonds issued hereunder or
this Indenture, such change, if approved by the holders of not less than two-thirds in face amount of the bonds at the time
outstanding, shall be binding and effective upon all of the holders of the then outstanding bonds, provided, however, that
such modification, change, alteration or extension shall affect all of the outstanding bonds similarly.'
The bonds, including those held by plaintiff, contained the following:
'The terms of this bond or of the Indenture securing the same may be modified, extended, changed or altered by agreement
between the Company and the holders of two-thirds or more in face amount of bonds of this issue at the time outstanding.
Any default under the Indenture may be waived by the holders of two-thirds or more in fact amount of the Bonds at the
time outstanding.'
The bonds also contained the following provision:
'For a more particular description of the covenants of the Company as well as a description of the mortgaged property,
of the nature and extent of the security, of the rights of the holders of the bonds and of the terms and conditions upon
which the bonds are issued and secured, reference is made to said General Mortgage Deed of Trust.'
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Case Digest
ISSUE:
Whether or not the modifications on the bonds were invalid?
HELD:
NO. Modifications were valid. It appears without dispute that the modification here under consideration was made in strict
compliance with the provisions contained in the trust deed and by reference embodied in the bonds. The Hotel Company
made the application to the trustee and it was approved by the holders of more than two-thirds in face amount of the bonds
at the time outstanding.
RATIO:
That contract made no provision for notice. It required that such application have the approval of those holding two-thirds
or more in face value of the bonds. The so-called Joneses were the controlling stockholders of the Hotel Company and
were its officers and the court found that the alteration was advantageous to the Hotel Company. Their security was greatly
improved in value by the management and it is inconceivable that the Joneses should deliberately act to the prejudice or
detriment of the bondholders when they held and owned some 72 per cent of the entire outstanding bond issue. It is urged
that because the Joneses were acting in a dual capacity they became trustees for the other bondholders and that as such it
was incumbent upon them to do no act detrimental to the rights of the bondholders. If the Joneses as holders of the
majority of the outstanding bonds became under the circumstances trustees for all bondholders, then in consenting to the
change they were acting as agents for all bondholders. The rights of the bondholders, however, are to be determined by
their contract and courts will not make or remake a contract merely because one of the parties thereto may become
dissatisfied with its provisions, but if legal will interpret and enforce it.
In the deed of trust and bonds in this case, there are provisions empowering bondholders of 2/3 of the principal amount or
more, by agreement with the company, to modify and extend the date of payment of the bonds provided such extension
affected all bonds alike. When this was done, the bondholders only followed such provisions in good faith. The company
benefited because of such move, and the bondholders were not necessarily prejudiced, as defendants Joneses in this case
were themselves owners of 72% of the bond issue.
CASE LAW/ DOCTRINE:
The rights of bondholders are to be determined by their contract and courts will not make or remake a contract merely
because one of the parties may become dissatisfied with its provisions. If the contract is legal, the courts will interpret and
enforce it.

CORPORATION LAW
Case Digest
179 Triplex Shoe Co. v. Rice & Hutchins Inc. AUTHOR: Jade Lorenzo
1930 17 Del. Ch. 356
TOPIC: CONSIDERATION FOR ISSUANCE OF PREFERRED and COMMON SHARES
SHARES CONSIDERATION
PONTENTE: Pennewill, CJ
FACTS:
This is an appeal from the decision of the Chancellor on case 152 A. 342 A.L.R. 932 in determining who were duly elected
directors of the Triplex Shoe Company at the last annual stockholders meeting held on 28 January 1929.
Triplex Shoe Company was incorporated on 13 December 1919. According to its certificate of incorporation, it had a total
authorized capital stock of $150,000 divided into 750 preferred shares, with par value of $100 each. The remaining
$75,000 are shares in common stock without par value. It was not stated what were the preference fo the preferred stocks.
The 1st meeting of directors were held on 8 January 1920. Elected directors were Albert Dillman - President, Elmer Solly-
Vice President & Secretary and Louis Dillman - Treasurer. It was resolved during this board meeting that in consideration
of their services rendered in organizing and managing the company at a much smaller compensation, the elected directors
will be receiving additional shares of the common stock of the company (compensation as promoters): ALBERT
DILLMAN - 376 ; LOUIS DILLMAN - 114 ; and ELMER SOLLY - 50. The common stocks were fully paid and non-
assessable and included in thr original subscription to capital stock made by the 3 directors. Elmer Solly transferred his 50
shares to the other 2. This gave Albert Dillman a total of 401 shares and Louis Dillman 139 shares. Before 28 February
1921, 121 common shares were issued to different persons.
On 28 February 1921, a special stockholders meeting resolved to amend the certificate of incorporation. The amendment
provided the following:
26. the total authorized capital stock consist of 2375 preferred shares with par value of $100 each ; aggregate amount =
$237,500
27. the total authorized capital stock also consist of 175 common shares without par value
28. the sole voting power shall reside in the holders of common stock (shares)
The amendment was only filed in the office of the Secretary of State on 20 January 1922.
On 5 April 1921, Rice & Hutchins, Inc. purchased 249 shares of preferred stock (paid thru merchandise). As bonus, R&H
was given 83 shares of common stock (basis: 1 common share per 3 preferred shares).
On 28 January 1929, the annual stockholders meeting was held. A contest developed over the election of directors and 2
tickets were presented: A supported by R&H and B supported by the Dillman faction. Ticket B was declared to have been
elected.
The validity of the election was assailed on the ground that the voting power resides in the holders of common shares. The
Chancellor decided that there was NO valid and outstanding common stock at the time of the election and that the
preferred stock was legally voted.
ISSUE: Was there any legally issued and outstanding common stock that voted for ticket B in 1929?
HELD: The decree of the Chancellor is affirmed.

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Case Digest
RATIO:
In the original certificate of incorporation, there were 2 classes of stocks: preferred with par value, and a common without
par value. Contrary to the requirements of the law, no preference was stated for the preferred stocks.
There was no case in the past that held the validity of a stock issued contrary to the law.The common stocks issued before
and after the amendment of the articles of incorporation were invalid because the consideration was never fixed as required
by the law (provision in Delaware Incorporation Law). The certificate of incorporation did not confer upon the Board of
Directors authority to fix the consideration for no par value stocks. The stockholders never fixed the consideration as well.
It can be concluded that all no par value stocks were invalid at the time of the election and not entitled to vote.
The no par value shares issued to Dillman and Solly during the first board meeting in 1920 were for consideration of their
services rendered during the company's promotional stage, and still held to be improper or unlawful considerations, for as
admitted by the appellants, services to be rendered in the future are not lawful considerations for the issuance of stocks.
It is further contested that if the no par value stocks were invalid and not entitled to vote, the preferred stocks that voted for
ticket A was not entitled to vote also because per the amended certificate of incorporation, the sole voting power resides in
the common stockholders. However, the Court ruled that such provision means that if there is any common stock legally
issued, outstanding and entitled to vote, the preferres stock cannot vote. But, if there is no such common stock, the
situation is as if there were no common stocks issued at all. A corporation cannot function if the particular class of stock
that is given the sole right to vote has not been legally issued and cannot vote.
CASE LAW/ DOCTRINE:
Delaware Incorporation Law provides that "capital stock without par value, whether common or preferred, may be issued
by the corporation from time to time for such consideration as may be fixed from time to time by the Board of Directors
pursuant to the certificate of incorporation or in any amendment or if not provided by certificate or amendment,then by
consent of the holders of 2/3 of each class of outstanding and entitled to vote stocks...."
Consideration for the issuance of shares - Whenever a corporation issues shares, it must receive a consideration equal to
or at least their par issued value. The consideration for the issuance of a particular stock may be in cash or in any form
allowed by law. It may include services which have already been performed as long as they are capable of valuation and
are fairly valued (Section 62, Corporation Code of the Philippines).
DISSENTING/CONCURRING OPINION: n/a

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Case Digest
180 McCARTY v LANGDEAU AUTHOR: Krystelle
337 S.W.2d 407; June 22, 1960
TOPIC: Considerattion for Issuance of Shares: Liability on On appeal, the court held that: (1) if a note were accepted in
Watered Stocks payment for the stock, Tex. Const. art. 12, § 6 did not
PONENTE: Hughes, J. provide that either the note, or the stock issued for it, was
void; (2) regardless of whether the contract was construed as
a contract for the present issuance of shares of stock that
were to be held as security for the note or for the issuance of
shares of stock periodically as the note was paid, it was
enforceable; (3) the buyer's liability on the contract was not
affected by the nonproduction of the note; (4) the life
insurance company's periodic issuance of shares of stock
required the conclusion that the contract was accepted by
the company; and (5) the course of dealing between the
parties refuted the contention that the contract was
terminated by the company.
FACTS
11. The appellant (McCarty) and the appellee (Langdeau) executed a written agreement whereby the former agreed to
purchase from Estate Life Insurance Company its 19,370 shares of its no par stock at $20 per share. Appellant
made a $ 20 cash downpayment and agreed to give a note for the balance due. When the company was placed in
receivership, appellant still owe the insurance company a sum of $379,280 under such contract. The receiver
brought an action to collect on the note for the amount due.
12. Appellant's contention is that the above contract is void since it violates Art. 12, Sec. 6 of the Texas Constitution,
Vernon's Ann.St., which provides that, "no corporation shall issue stock or bonds except for money paid, labor
done or property actually received, and all fictitious increase of stock or indebtedness shall be void."
13. By way of summary judgment, appellee, C. H. Langdeau, Receiver of Estate Life Insurance Company, was
awarded judgment against John L. McCarty for the sum of $379,280, with 6% interest thereon from the date of
judgment, and costs.
14. Hence, this appeal.
ISSUE: Whether or not the contract/ agreement entered into by the appellant and appellee was void, thus, the insurance
company cannot recover the balance due.
HELD: No. The Texas Constitution simply prohibits the issuance of corporate stock, except for money paid, labor done, or
property actually received. There is nothing showing that the stock subscribed for by appellant was ever issued, and, under
the facts alleged, it cannot reasonably be said that the contract entered into between appellant and appellee was in
contravention of the Constitution.
RATIO:
The court there affirmed a recovery by the corporation on a note given for stock, the stock being tendered upon payment of
the note.
The law is much stronger where, as here, the rights of creditors of the corporation are involved. In such cases even though
the stock is issued, liability on the notes given in payment of such stock is enforced.
The Constitution of Texas only prohibits the issuance of stock until it is fully paid for. Therefore, where a note is given for
stock, if it is understood that the stock will not be "issued" to the subscriber until the note is paid, the contract is valid and
not illegal. It is well settled that where a contract is susceptible of two constructions, one making it legal and another an
illegal contract, the former construction will be adopted. The Constitution of Texas simply prohibits the issuance of
corporate stock, except for money paid, labor done, or property actually received.
There is no declaration in Tex. Const. art. 12, § 6 that a transaction in which something other than money, property, or
labor is received in payment for the corporation's stock, shall be utterly void. If a security be accepted in payment for the
CORPORATION LAW
Case Digest
stock, such, for instance, as a subscriber's note, which is not property for such a purpose, the Constitution does not say
either that it, or the stock issued for it, shall be void. The acceptance of the note in payment for the stock and the issuance
of the stock are only interdicted. The word "void" is used but once in the constitutional provision, and that, it is to be noted,
is not in the clause which prohibits the issuance of stock for other than money, property or labor.
The rights of a creditor of a corporation against those owing the corporation for unpaid stock subscriptions are measured
by the original stock subscription contract, and not by the terms of the subscription notes, which are, as to the creditor, but
evidence of the liability of the subscriber.
CASE LAW/ DOCTRINE:
The Constitution of Texas only prohibits the issuance of stock until it is fully paid for. Therefore, where a note is given for
stock, if it is understood that the stock will not be "issued" to the subscriber until the note is paid, the contract is valid and
not illegal. It is well settled that where a contract is susceptible of two constructions, one making it legal and another an
illegal contract, the former construction will be adopted. The Constitution of Texas simply prohibits the issuance of
corporate stock, except for money paid, labor done, or property actually received.

CORPORATION LAW
Case Digest
181. C. D. RHODE, Respondent, v. AUTHOR: Revy Neri
DOCK -HOP COMPANY (a
Corporation), et al., Appellants The innocent purchaser of watered stocks is thus treated like
L. A. No. 5189 November 20, 1920 the holder in good faith of a negotiable instrument, based on
TOPIC: Liability on Watered Stock the policy of encouraging the free transferability of shares as
PONENTE: OLNEY a means of enhancing the growth of commerce and industry.
Apparently the remedy of the defrauded creditor would be
against the original owner of the watered stocks.
FACTS
1. This is an action by the judgment creditor of a corporation against certain of its stockholders, seeking to
collect from them what are claimed to be unpaid balances on the par value of their shares.
2. That only 25 cents on the dollar had been paid in on the par value of their shares.
3. Defendants, in their defense, denied that they were either subscribers or stockholders
ISSUE:
1. WON the defendants are required, because of the creditor’s claim, to make up any difference which may exist
between what was actually paid on their stock and its par value.
HELD:
4. Stockholders not liable. The transferee of watered stock who takes it in ignorance of its real character is not
required, even at the suit of a creditor of the company, to pay in anything more upon it.
RATIO:
1. The stockholder is held upon the principle that one giving credit to a corporation is entitled to rely upon
its ostensible capitalization as the basis for the credit given, and that when the corporation issues watered
stock and thereby assumes an ostensible capitalization in excess of its real assets, the transaction
necessarily involves the misleading of subsequent creditors, and, whether done with that purpose actually
in mind or not, is at least a constructive fraud upon such creditors.
2. In other words, the essence of the right of the creditor to brush aside the issuance of the stock as fully
paid and to show that it was not such and to compel the payment of the balance upon it, is that its
issuance as fully paid was as to him a fraud.
CASE LAW/ DOCTRINE:
One who is only a transferee of watered stock, and did not participate in the transaction whereby it was
originally issued and who took his stock unaware of the character of that transaction, cannot be compelled to
make good the false representation as to the capital of the company which he had no part in making and the
responsibility for which he has done nothing to assume.

CORPORATION LAW
Case Digest
182 BING CROSBY MINUTE MAID CORP. v. AUTHOR:
EATON Rosa Cecilia K. Alfafara
May 15, 1956; 46 Cal. 2d 484; 297 P. 2d 5 The plaintiff (judgment creditor of the corporation) brought
TOPIC:Liability on watered stocks the complaint against a shareholder of the corporation to
PONENTE: SHENK recover the difference between the par value of stock issued
to him and the fair value of the consideration he paid for the
stock.
FACTS
1.The defendant formed a corporation to acquire his going frozen foods business.
2. The Commissioner of Corporations issued a permit authorizing the corporation to sell and issue not more than 4,500
shares of $10 par value stock to the defendant and other named individuals in consideration of the transfer of the business.
3. The permit provided that 1,022 shares be deposited in escrow and not be transferred without the written consent of the
commissioner, and that the escrowed shares not be sold or issued until the prospective shareholders named in the permit
waived certain rights to dividends and to participation in any distribution of assets. (Note: Escrow- Money or a written instrument
such as a deed that, by agreement between two parties, is held by a neutral third party until all conditions of the agreement are met.)
4. The corporation placed 1,022 shares in escrow in his name pursuant to the provisions of the permit.
5. The remaining 3,478 shares were issued outright to the defendant and after three years were transferred to the other
persons named in the permit.
6. Although the 1,022 shares were listed on the corporate records as held by the defendant (accompanied by the notation
"escrowed"), they were never released from escrow.
7. The corporation had financial difficulties and executed an assignment of its assets for the benefit of creditors to a credit
association.
8. The plaintiff recovered a judgment against the corporation.
9. A writ of execution on the judgment was returned unsatisfied.
10. The corporation became insolvent.
11. The judgment creditor filed an action against the shareholder who formed the corporation.
12. Superior Court of San Diego County: In favor of the judgment creditor. (Finding that the shareholder was liable for the
difference between the par value of stock issued to him and the value of the consideration he paid for the stock.
13. On appeal, from the judgment and order granting a new trial, the shareholder contended that he never became the
owner of the shares deposited in escrow under a permit issued by the Commissioner of Corporations. (Appeal denied.)
ISSUE: Whether or not a shareholder is personally liable to the judgment creditor if a watered stock is involved.
HELD: Yes, creditors who rely on the misrepresentation of the corporation’s capital involved in an issue of “watered”
stock are entitled to recover the “water” from the holders of the stock.
However, the court also ruled that the misrepresentation theory applied with respect to the shareholder's liability as a
holder of watered stock. The reliance by the judgment creditor was a prerequisite to liability under the misrepresentation
theory, and that the trial court was justified in ordering a new trial because of the absence of a finding on the issue of
reliance.
RATIO:
1. In California a shareholder is ordinarily not personally liable for the debts of the corporation; he undertakes only the risk
that his shares may become worthless. An exception to this rule of limited liability is that a subscriber to shares who pays
in only part of what he agreed to pay is liable to creditors for the balance.
2. Holders of watered stock are generally held liable to the corporation's creditors for the difference between the par value
of the stock and the amount paid in.
3. The liability of a holder of watered stock is based on one of two theories: the misrepresentation theory or the statutory
obligation theory. Under the misrepresentation theory the issue of watered stock is viewed as a misrepresentation of the
corporation's capital. Creditors who rely on this misrepresentation are entitled to recover the "water" from the holders of
the watered shares. Under the statutory obligation theory the holder of watered stock is held responsible to creditors
whether or not they have relied on an overvaluation of corporate capital.
4. In the case, the defendant alleged that in extending credit to the corporation the plaintiff did not rely on the par value of
the shares issued, but only on independent investigation and reports as to the corporation's current cash position, its
physical assets and its business experience.
CORPORATION LAW
Case Digest
5. The plaintiff's district manager admitted that during the period when the plaintiff extended credit to the corporation, (1)
the district manager believed that the original capital of the corporation amounted to only $ 25,000, and (2) the only
financial statement of the corporation that the plaintiff ever saw showed a capital stock account of less than $ 33,000.
These admissions would be sufficient to support a finding that the plaintiff did not rely on any misrepresentation arising
out of the issuance of watered stock. The court made no finding on the issue of reliance. If the misrepresentation theory
prevails in California, that issue was material and the defendant was entitled to a finding thereon.
6.The court has held that the misrepresentation theory a person who extended credit to a corporation (1) before the watered
stock was issued, or (2) with full knowledge that watered stock was outstanding, cannot recover from the holders of the
watered stock. These decisions indicate that under the misrepresentation theory reliance by the creditor is a prerequisite to
the liability of a holder of watered stock.
7. The trial court was therefore justified in ordering a new trial because of the absence of a finding on the issue. It is
unnecessary to further consider the defendant's appeal from the judgment.
CASE LAW/ DOCTRINE:
Under the misrepresentation theory, the creditors who rely on the misrepresentation of the corporation’s capital stock are
entitled to recover the “water” from holders of the watered stock. Reliance of creditors on the misrepresentation is
material.However, under the statutory obligation theory, reliance of creditors on the capital stock of the corporation is
irrelevant. (In the Philippines, the statutory obligation theory is prevailing.)

CORPORATION LAW
Case Digest
183Velasco vs. Poizat AUTHOR: Arthur Archie Tiu
March 15, 1918G.R. No. L-11528 - A stock subscription is a contract between the
TOPIC:Consideration for Issuance of Shares; How corporation on one side, and the subscriber on the other, and
Payment of Shares Enforced; Court Action courts will enforce it for or against either
PONTENTE:STREET, J.
FACTS
- Plaitiff in case as assignee in insolvency of “The Philippine Chemical Product Company” seeks to recover From
Poizat (Defendant) the sum of P 1,500 upon a subscription made to the corporate stock of the company
- Company’s principal place of business is in Manila with a capital of P50,000, divided into 500 shares.
- The defendant subscribed for 20 shares of the stock of the company, an paid in upon his subscription the sum of
P500, the par value of 5 shares . The action was brought to recover the amount subscribed upon the remaining
shares.
- Defendant was a stockholder in the company since its inception and acted as manager and treasurer.
- A meeting of the BODs was held. The first order of business was a proposal that the directors, or shareholders, of
the company should make good by new subscriptions, in proportion to their respective holdings, 15 shares which
had been surrendered by Infante (25% of the 20 shares had been paid leaving 15 shares upaid) The second order
was that Poizat, who was absent, should be required to pay the amount of his subscription upon the 15 shares for
which he was still indebted to the company.
- The resolution says that “ in case he should refuse to make such payment, the management of the corporation
should be authorized to undertake judicial proceedings against him.”
- When the notification reached Poizat, he replied he had been told that he was relieved from his subscription on the
terms conceded to Infante.
- CFI ruled in favor of the defendant
ISSUE:WHETER OR NOT POIZAT IS LIABLE FOR THE UNPAID STOCKS?

HELD: Yes
RATIO:
- A stock subscription is a contract between the corporation on one side, and the subscriber on the other, and courts
will enforce it for or against either. It is a rule, accepted by the Supreme Court of the United States, that a
subscription for shares of stock does not require an express promise to pay the amount subscribed, as the law
implies a promise to pay on the part of the subscribe
- Section 36 of the Corporation Law clearly recognizes that a stock subscription is subsisting liability from the time
the subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is
relieved from such liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount
of the share subscribed by him as he would be to pay any other debt, and the right of the company to demand
payment is no less incontestable.
- No attempt is made in the Corporation Law to define the precise conditions under which an action may be
maintained upon a stock subscription, as such conditions should be determined with reference to the rules
governing contract liability in general
- in this case that a matured stock subscription is unpaid, none of the provisions contained in section 38 to 48,
inclusive, of Act No. 1459 can be permitted to obstruct or impede the action to recover thereon. By virtue of the
first subsection of section 36 of the Insolvency Law (Act No. 1956) the assignee of the insolvent corporation
succeeds to all the corporate rights of action vested in the corporation prior to its insolvency; and the assignee
therefore has the same freedom with respect to suing upon the stock subscription as the directors themselves would
have had under section 49 above cited.
- defendant is liable for P1,500, the amount of his subscription upon the unpaid shares. Under section 36 of the
Corporation Law he is also liable for interest at the lawful rate from the date of his subscription, unless relieved
from this liability by the by-laws of the company.
- The defendant inferentially admits in his letter of July 27, 1914, that his subscription had been made prior to July
13, 1914. It resulted that in our opinion he should be held liable for interest from that date.

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Case Digest
CASE LAW/ DOCTRINE:
- -Section 36 of the Corporation Law clearly recognizes that a stock subscription is subsisting liability from the time
the subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from
such liability by the by-laws of the corporation

CORPORATION LAW
Case Digest
184 Irineo Baltazar vs. Lingayen Gulf Electric Power AUTHOR: Ched
Co., Inc. “If the entire subscribed shares of stock are not paid, the
L-16236, L-16237, L-16238 June 30, 1965 paid shares of stock may not be deprived of the right to vote,
TOPIC: Enforcement of payment of shares in court until the entire subscribed shares of stock are fully paid,
PONENTE: Paredes including interest.”
FACTS (consolidated case)
1. L-16236 (Irineo Baltazar. Lingayen Gulf, Ungson, Estrada, Fernandez, Yuzon, and Acena), L-16237 (Marvin Rose v.
Lingayen Gulf, Ungson, Estrada, Fernandez, Yuzon, and Acena), L-16238 (Baltazar and Rose v. Bernardo Acena).
2. The Lingayen Gulf Electric Power Inc., (CORPORATION) has principal office at Lingayen, Pangasinan.
3. Its authorized capital stock id P 300,000.00 (divided into 3,000 shares of voting stock at P 100.00 par value per share).
4. Baltazar subscribed to 600 (P 60,000.00) and Rose to 400 (P 40, 000.00) shares of capital stock (they’re incorporators).
5. It’s said that it has always been the practice and procedure of the corporation to issue certificate sof stock to individual
subscribers for unpaid shares of stock.
6. Baltazar, of his 600 shares, only paid for the 535 shares (corporation issued to him fully paid up and non-assessable
certificates of stock for the 535 shares). He transferred some to third persons and acquired new ones, left him with 341
shares (fully paid and non-assessable) and 65 shares (P 65,000.00) with no certificate.
7. Of Rose’s 400 shares, 375 were fully paid (covered b issued certificates).
8. Ungson, Estrada, Fernandez, and Yuzon (small stock holders) all holds not more than 100 fully paid-up shares of stock
(P 10,000.00 par value). Acena (incorporator and stock holder) who owns 600 shares of stock (certs. were issued to him),
was the largest individual stockholder.
9. Ungson, Estrada, Fernandez, and Yuzon constituted the majority of the holdover 7 member Board of Directors (2 of
them were elected through Acena’s vote [Ungson group] and the other 2 were by the plaintiff’s group’s vote [Baltazar
group]). The Ungson group and baltazar group holds (almost) equal shares of stocks.
10. the date of the stockholders meeting has been fixed in their by-laws (1st Tuesday of Feb. of every year), but for 1955, it
was to be held on May 1 for electing new officers and Board of Directors (start of the year 1955, there’s been a fight for the
control and management of the corporation).
11. The Ungson group which had been in control of the Corporation since Jan. 1, 1955, passed 3 resolutions (to retain
control) in the Board’s regular meeting (Jan. 30, 1955).
a) Reso. 2 - all watered stocks issued to Acena, Baltazar, Rose and Jubenville “of no value and cancelled from the books of
the Corporation.”
b) Reso. 3 – resolved that “all unpaid subscriptions should bear interest annually from the year of subscription and any or
all payments made on unpaid subscriptions should be credited to pay interest first, then the capital debt after all interest is
fully paid. All shares of stock issued in favor of any stockholder of the corporation on account of payments on unpaid
subscriptions without the interest - accrued and collectible having been fully paid from date of subscription shall be
declared of no value and cancelled from the books.”
c) Reso. 4 – resolved that “”
12. With the resolutions, the Ungson group has been threatening to expel and oust the Baltazar group, and depriving them
of their right to vote in the annual stockholder’s meeting (May 1, 1955).
13. In Baltazar and Rose’s complaint, they prayed that a writ of preliminary injunction be issued against the defendants (to
desist and refrain from carrying out the 3 resolutions), to allow them to vote in the stockholders’ meeting, and to be paid
damages. Trial court granted and issued Preliminary Injunction (April 29, 1955).
14. The defendants, in their answer, that the 3 resolutions were made to “bolster the faith in the assets of the corporation”
and that the issuance of the writ of injunction for holding the election of the Board was beyond the court’s jurisdiction.
They also said that when the control and management of the corporation was still in the hands of the plaintiffs (especially
Rose), the corporation suffered financial collapse because of the plaintiffs inefficiency and they even attempted to release
themselves from liability. They prayed that the resolutions be declared legal and valid (Aug. 8, 1955 – lower court
dismissed plaintiffs counterclaims against Acena, Ungson and Fernandez).
15. Sept. 13, 1958, a tentative amicable settlement was formulated and entered into by some of the parties (before presiding
Judge Jesus Morfe, in the three cases):
a) As to the so-called water stocks P30,000.00 each of the holders of said stock, namely, Irineo Baltazar, Marvin Rose, and Bernardo Acena, will
return to the corporation P3,500 each of said stocks, thereby retaining P6,500 worth of stocks to be considered as valid for each under this
compromise;
b) With respect to Dr. Bernardo Acena, of the certificates of stock allegedly representing, his profit, he will return to the corporation P3,500 of said
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share of stock and retain P7,500 worth thereof ;
c) With respect to the interest on unpaid balance of subscription it is agreed that the subscribers with unpaid subscription be given the opportunity to
pay in two installments, the first installment to cover one-half of the unpaid balance to be paid in three months, and the second installment will be for
the remaining unpaid half payable in another three months, from the time of the approval of this agreements, with the understanding that those who
comply with this arrangement will not pay interest on the balance of their subscription, for the date of incorporation up to the grant of franchise on
February 24, 1948, which shall be deemed as condoned, and from 1948 they will pay only as interest 3% compounded annually, it being understood
that failure of any subscriber to pay any of the installment here provided will subject the stockholders concerned to the provision of the corporation law
of the payment of 6% interest compounded quarterly.
d) All claims and counterclaims other than those covered by the preceding paragraph of stipulation will be deemed dismissed without prejudice, in all
these three cases;
e) All the resolutions of the Board and the stockholders involved in these instant cases will be deemed modified in accordance with this agreement.
16. Feb. 20, 1959, lower court approved the agreement and required parties to comply.
17. March 14, 1959, defendants filed a Motion for Reconsideration (court’s decision was partly against the spirit and
intention of the parties to the agreement and portions of the decision carried “prejudicial eventualities,” asking that decision
be amended in the sense that “payment of ibligations of delinquent incorporators has been reduced by the agreement under
par. 3 and 5”).
18. March 18, 1959, Baltazar and Rose filed a petition for immediate execution and for preliminary injunction and/or
mandamus ordering the defendants to immediately hold the delayed stockholders’ meeting and to allow everyone with
unpaid subscriptions to vote at the meeting.
19. March 25, 1959, the lower court issued an amending decision (in favor of defendants).
20. April 4, 1959, plaintiffs filed a motion for reconsideration and/or new trial. On July, 16, 1959, trial court REVERSED
its amending decision (“this Court hereby expressly rules that all shares of the capital stock of the defendant corporation covered by fully paid
capital stock shares certificates are entitled to vote in all meetings of the stockholders of this corporation, and Resolutions Nos. 2, 3 and 4 of
defendant's corporation's Board of Directors are hereby nullified insofar as they are inconsistent with this ruling.”).
21. August 14, 1959, defendants filed another appeal (not stated where, but SC na sya ata).
22. Defendants claim that resolution No. 4 withdrawing or nullifying the voting power of all the shares of stock is valid,
despite the existence of partial payments, evidenced by certificates issued. They invoke the ruling in the Fua Cun v.
Summers case (44 Phil, 705, March 27, 1923):
In the absence of special agreement to the contrary, a subscriber for a certain number of shares of stock does not,
upon payment of one-half of the subscription price, become entitled to the issuance of certificates for one-half of the
number of shares subscribed for; the subscriber's right consists only in equity entitling him to a certificate for the total
number of shares subscribed for by him upon payment of the remaining portion of the subscription price.
23. Pending decision, the parties were required to show cause why the cases should not be dismissed for having become
moot or academic, in view of the fact that the appellees, taking advantage of the decision of the trial court, "had paid all
other delinquencies and interest thereon," but the appellants manifested that these cases should be decided on the issues
raised, to determine, once and for all, the voting rights of the other delinquent subscribers, in the election of the company's
Board of Directors which had been suspended since May 1, 1955, because of the litigation.
ISSUE: WON a stockholder has a right to vote despite the fact the he only partially paid for his subscription.
HELD: YES.

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RATIO:
!!! The cases at bar do not come under the aegis of the principle enunciated in the Fua Cun v. Summers case, because it was
the practice and procedure, since the inception of the corporation, to issue certificates of stock to its individual subscribers
for unpaid shares of stock and gave voting power to shares of stock fully paid. And even though no agreement existed, the
ruling in said case, does not now reflect the correct view on the matter, for better than an agreement or practice, there is the
law, which renders the said case of Fua Cun-Summers, obsolescent. Section 37 of the Corporation Law, as amended by Act
No. 3518, approved on March 1, 1929, six (6) years after the promulgation of the Fua-Summers case (decided in 1923),
provides:
SEC. 37.No certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof, or the full
subscription in the case of no par stock, has been paid by him to the corporation. Subscribed shares not fully paid up may
be voted provided no subscription is unpaid and delinquent.
In the cases at bar, the defendant-corporation had chosen to apply payments by its stockholders to definite shares of the
capital stock of the corporation and had fully paid capital stock shares certificates for said payments; its call for payment of
unpaid subscription and its declaration of delinquency for non-payment of said call affecting only the remaining number of
shares of its capital stock for which no fully paid capital stock shares certificates have been issued, "and only these have
been legally shorn of their voting rights by said declaration of delinquency."
EXPRESS RULING OF THE SC: "that all shares of the capital stocks of the defendant corporation covered by fully paid
capital stock shares of certificates are entitled to vote in all meetings of the stockholders of this corporation and resolutions
Nos. 2, 3 and 4 (Exhs. C, C-1 and C-2) of defendant corporation's Board of Directors are hereby nullified insofar as they
are inconsistent with this ruling."
If a stockholder, in a stock corporation, subscribes to a certain number of shares of stock, and makes partial payments for
which he is issued certificates of stock, is he entitled to vote the latter, notwithstanding the fact that he has not paid the
balance of his subscription, which has been called for payment or declared delinquent.
If a stockholder subscribes to a certain number of shares of stock and makes partial payment only, which is applied to
corresponding stocks issued to him, but is declared delinquent as to the rest, with interest, it is held that previous payments
on account of capital may not be first applied to interest, thus diminishing the voting power of the shares of stock already
paid. In other words, if the entire subscribed shares of stock are not paid, the paid shares of stocks may not be deprived of
the right to vote, until the entire subscribed shares of stock are fully paid, including interest.
CASE LAW/ DOCTRINE:
If a stockholder, in a stock corporation, subscribes to a certain number of shares of stock, and makes partial payments for
which he is issued certificates of stock, is he entitled to vote the latter, notwithstanding the fact that he has not paid the
balance of his subscription, which has been called for payment or declared delinquent.
If a stockholder subscribes to a certain number of shares of stock and makes partial payment only, which is applied to
corresponding stocks issued to him, but is declared delinquent as to the rest, with interest, it is held that previous payments
on account of capital may not be first applied to interest, thus diminishing the voting power of the shares of stock already
paid. In other words, if the entire subscribed shares of stock are not paid, the paid shares of stocks may not be deprived of
the right to vote, until the entire subscribed shares of stock are fully paid, including interest.

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Case Digest
185 Miranda, judicial administratrix of the intestate AUTHOR: De Silva, Denison
estate of her deceased father, Alberto Miranda v. The Note: Romana, filed a suit to recover the amount of shares
Tarlac Rice Mill Co. of her deceased husband who was a stockholder in the
G.R. No. L-35961, 02 December 1932 corporation. Alberto Miranda gave authority to the officers
TOPIC: XI. Consideration for Issuance of Shares: How of the corporation, in accordance with the subscription
Payment of Shares Enforced: (b) Court Action contract voluntary executed by Miranda, for or to increase
PONTENTE: Vickers, J. the capital of the corporation.
FACTS
1. Nature: appeal by Romana Miranda from a decision of CFI of Tarlac dismissing the case.
2. Alberto Miranda executed a written contract whereby he subscribed for 100 shares of the capital stock of a
corporation named Tarlac Rice Mill Company, Inc. for the purpose of operating a rice mill in Tarlac.
3. The par value of each share was P100 and Alberto Miranda obligated himself to pay to the treasurer of the corporation
or its assign the sum of P10, 000 as follows: year 1926-1k; 1927-2k; 1928-2k; 1929-2.5k; 1930-2.5k.
4. Alberto Miranda executed a public document "assigned" mortgaged, or transferred in lieu of cash for the benefit and to
the credit of the Tarlac Rice Mill Company, Inc., a corporation to be organized, the parcel of land in the land records of the
Province of Tarlac and to appoint either jointly, to Evaristo Magbag (President and Treasurer), Eusebio Cabrera and
Marcos Puno (Vice-Presidents), and C.M. Dizon (attorney) in accordance with the subscription contract voluntary
executed by Miranda, for or to increase the capital of the said Tarlac Rice Mill Company, Inc., in order to carry out the
purposes for which such firm is to be organized.
5. The president and vice-president and C. M. Dizon, acting on behalf of said corporation and Alberto Miranda, borrowed
P10, 000 from Mariano Tablante.
6. The sum of P10, 000 obtained from Tablante was retained by the corporation. When the promissory note became due,
Alberto Miranda arranged for an extension of time. He then sold the parcel of land under pacto de retro to Vicente Panlilio
for P10, 000, and paid Mariano Tablante.
7. Alberto Miranda died. The defendant corporation ceased to operate from 1928 and the other stockholders have not paid
for their shares and that no action was taken by the corporation to require them to do so.
8. Appellant’s contention: the officers of the corporation violated the terms of the power of attorney in mortgaging the land
for P10,000, because the only sum then due and payable by Alberto Miranda to the corporation was P3,000, and that when
the remaining installments of the stock subscription became due, Alberto Miranda was under no obligation to pay them,
because the corporation had already ceased to do business, and it had taken no steps to compel the other stockholders to
pay for the shares for which they had subscribed.
ISSUE: Whether or not the officers of the corporation violated the terms of the power of attorney in mortgaging the land
HELD: No, the phrase "in accordance with the subscription contract" found in the power of attorney probably was
intended to mean "in pursuance of the subscription agreement", that is, it referred to the obligation.
RATIO:
1. The Court held that it is true that the property was mortgaged on February 19, 1927 the amount due from Alberto
Miranda in accordance with the subscription agreement was only P3,000, and it is likewise true that it does not
appear from the evidence that any call was issued by the directors for the payment of any subscriptions.
2. The fact that Alberto Miranda agreed to pay the amount of his subscription installments on certain fixed dates did
not prevent him from authorizing the officers of the corporation as his attorneys-in-fact to pay his
subscription prior to the dates fixed in the subscription agreement.
3. Under the circumstances, it seems to us that it would be a strained construction of the power of attorney, taking
into consideration the whole document, to hold that the officers of the corporation acting as attorneys-in-fact- of
Alberto Miranda were authorized to mortgage or convey the land for only the amount then due from Alberto
Miranda in accordance with the subscription agreement.
4. The Court is inclined to the view that it was the intention of the parties that the property should be mortgaged
immediately for a sum not to exceed P10, 000, not only for the purpose of paying the subscription agreement
of Alberto Miranda, but also for the purpose, as stated in the power of attorney, of increasing the capital of
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the corporation, not the capital stock, in order to carry out the purposes for which it was to be organized.
5. The phrase "in accordance with the subscription contract" found in the power of attorney probably was
intended to mean "in pursuance of the subscription agreement", that is, it referred to the obligation, and had
no particular reference to the dates when the different installments were to be paid.
6. Section 38 of the Corporation Law provides that the board of directors of every corporation may at any time
declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same with
interest accrued thereon or such percentage of said unpaid subscriptions as it may deem necessary.
7. When this action was filed the last of the installments had already become payable in accordance with the
subscription agreement. It must be borne in mind that this is not an action by the corporation to recover on a
subscription agreement, but an action by the administratrix of a stockholder to recover what was paid in to the
corporation by the stockholder.
8. It does not appear from the evidence whether or not the corporation has any debts. Neither the fact that the
corporation has ceased to do business nor the fact that the other stockholders have not been required to pay for
their shares in accordance with their subscription agreement justifies us in ordering the corporation to return to the
plaintiff the amount paid in by Alberto Miranda. If the directors have failed to perform their duty with respect to
the other stockholders, the law provides a remedy.
CASE LAW/ DOCTRINE: (This is the doctrine related to “Court Action” based on the syllabus) The Court held that a
stock subscription is a contract between the corporation and the subscriber, and courts will enforce it for or against
either; that a corporation has no legal capacity to release a subscriber to its capital stock from the obligation to pay for his
shares, and that any agreement to this effect is invalid.
DISSENTING/CONCURRING OPINION: Dissenting by Abad Santos, J.
The power of attorney was given for the purpose of carrying out the subscription agreement, Exhibit A. The two
documents should, therefore, be construed together. The authority to mortgage the property described in Exhibit B was
granted in order to pay the amount or amounts that might become due and payable on the subscription agreement. Now,
under our law unpaid subscriptions to the capital stock of a corporation do not become due and payable until so declared
by the board of directors.
Section 38 of the Corporation Law provides: "The board of directors or trustees of any stock corporation formed,
organized, or existing under this Act may at any time declare due and payable to the corporation unpaid subscriptions to
the capital stock and may collect the same with interest accrued thereon or such percentage of said unpaid subscription as it
may deem necessary.
The provisions of law above quoted are clear and specific, and by their very language compliance with them is mandatory.
The reasons for the enactment of such specific and mandatory provisions are not far to seek. They are based upon sound
considerations of public policy. They are intended to safeguard the rights of stockholders and to subject them only to
quality of assessment.
In the case at bar, we cannot even indulge in the presumption that there was a call for subscriptions, for it is agreed by the
parties that, with the exception of Alberto Miranda, none of the other stockholders of the defendant corporation has paid or
been required to pay on his subscription. Thus we see here practiced by the directors of the defendant corporation the very
favoritism which the statutory provisions above mentioned seek to avert. And yet this court is going to sanction such an
evil practice.

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Case Digest
186 DA SILVA V ABOITIZ & COMPANY, INC. AUTHOR: Gelene Guevara
G.R. No. L-19893, March 31, 1923
TOPIC: HOW PAYMENT OF SHARES ENFORCED –
COURT ACTION
PONTENTE: ARAULLO, C.J.
FACTS
1. Da Silva subscribed for 650 shares of stock of Aboitiz & Company Inc., with a value of P500 each. He only paid
for the value of 200 shares, for which he became indebted to the corporation in the amount of P255, 000,
representing the unpaid value of his subscription.
2. The secretary of the corporation notified him of a resolution passed by its Board of Directors declaring the unpaid
subscriptions to have become due and demandable on May 31, 1922. The resolution also stated that all such shares
which remain unpaid will be declared delinquent and will be advertised for sale at a public auction.
3. This prompted Da Silva to file a complaint in the CFI against the corporation asking the court to enjoin the latter
from holding the sale. He alleged that under article 46 of the corporation’s By-laws “all the shares subscribed to by
the incorporation that were not paid for at the time of the incorporation, shall be paid out of the 70 per cent of the
profit obtained, the same to be distributed among the subscribers, who shall not receive any dividend until said
shares were paid in full”. Da Silva contended that the defendant corporation violated this article when it declared
his unpaid subscription due and demandable because Art. 46 prescribes an operative method of paying for the
shares continuously until their full amortization; thus, the act of the corporation violated and disregarded his right
vested under the said by-laws. The CFI dismissed the case.
ISSUE: Whether ,under the provision of article 46 of the by-laws of the defendant corporation, the latter may declare the
unpaid shares delinquent, or collect their value by another method different from that prescribed in Article 46
HELD: YES. In this case, instead of applying said 70 per cent of the profit on the payment of the shares that may
have not been fully paid, the Board of Directors elected to avail themselves of the first remedy granted to it by law
(sale of delinquent shares), and declared that payment of De Silva’s subscription to 450 shares which had not been fully
paid by him was due and delinquent, and performed all the other acts subsequent to said declaration, as it is deemed
disadvantageous to the corporation to apply a part of the profit realized or to be realized to the payment of his subscription.
De Silva has no right to prevent the Board from following, any other method than that mentioned in the law, for the very
reason that the law does not give stockholders any right in connection with the determination of the question whether or
not there should be deducted from the 70% of the profit distributable among the stockholders such amount as may be
deemed fit for the payment of subscriptions due and unpaid.
RATIO:
1. ART. 46. The net profit resulting from the annual liquidation shall be distributed as follows: Ten per cent (10%) for the
Board of Directors and in the manner prescribed in article twenty-six (26) of these by-laws; ten per cent (10%) for the
general manager; ten per cent (10%) for the reserve fund, and seventy per cent (70%) for the shareholders in equal parts;
Provided, however, That from this seventy per cent dividend the Board of Directors may deduct such amount as it may
deem fit for the payment of the unpaid subscription to the capital stock and not pay any dividend to the holders of the said
unpaid shares until they are fully paid; Provided, further, That when all the shares have been paid in full as provided in the
preceding paragraph, the Board of Directors may also deduct such amount as it may deem fit for the creation of an
emergency special fund, or extraordinary reserve fund when in its judgment the same may convenient for the development
of the business of the corporation or for meeting any such contingencies as may arise from its operation, whenever the
distributable dividend is found, after the foregoing deduction, to be not less than ten per cent (10%) of the paid up capital
stock.
No dividend shall be declared or paid, except when there remains a net profit after the payment of all the expenses
incurred, or allowances made, by the corporation to carry out the operation of its business; so that no such dividend may be
declared as may affect the capital of the corporation.
2. As will be seen from the context of the said article, its first part specifies the manner in which the net profit from the
annual liquidation should be distributed, fixing a certain per cent for the board of directors; another for the general
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Case Digest
manager; another for the reserve fund, and the remaining 70 per cent to be distributed in equal parts among the
shareholders. But it authorizes or empowers the board of directors to collect the value of the shares subscribed to
and not fully paid by deducting from the 70 per cent, distributable in equal parts among the shareholders, such
amount as may be deemed convenient, to be applied on the payment of the said shares, and not to pay the
subscriber until the same are fully paid up. In no other way can the words "Provided, however, that from this seventy
per cent dividend the board of directors may deduct such amount as it may deem fit for the payment, etc." And this is so
clear that in that same article the board of directors is also authorized to create a special emergency fund or
extraordinary reserve fund, when, in its judgment, and in case all the shares subscribed to have been fully paid, the same
is convenient for the development of the business of the corporation or for meeting any such contingencies as my arise
from its operation, applying said 70 per cent of the profit on the payment of the shares that may have not been fully
paid, provided that the distributable dividend remaining after the deduction to be made for the creation of the said special
emergency fund or extraordinary reserve fund is not less than 10 per cent of the capital actually paid. So that it is
discretionary on the part of the board of directors to do whatever is provided in the said article relative to the
application of a part of the 70 per cent of the profit distributable in equal parts on the payment of the shares
subscribed to and not fully paid, and to the creation of a special emergency fund or extraordinary reserve fund; and
the fact itself that said special fund may not be created when the dividend appearing to be distributable, after deducting
from the said 70 per cent the amount to be applied on the payment of the unpaid subscription, is less than 10 per cent of the
capital actually paid, shows that it is the board of directors and not the delinquent subscriber that may and must judge and
decide whether or not such value must be paid out of a part of the 70 per cent of the profit distributable in equal parts
among the shareholders, as provided in the first part of the said article. It lies therefore, within the discretion of the board
of directors to make use of such authority.
3. If the board of directors does not wish to make, or does not make, use of said authority it has two other remedies for
accomplishing the same purpose – sale of delinquent shares or court action. In the instant case the board of directors of
the defendant corporation elected to avail itself of the first of said two remedies, and, complying strictly with the
provisions of sections 37 to 49, inclusive, of the Corporation Law, which is binding upon it and its stockholders. It being
an artificial entity created by virtue of that same law (sec. 2), the board of directors made use of the discretionary
power granted to it by that law and declared that payment of plaintiff's subscription to 450 shares which had not
been paid by him was due, and that said shares were delinquent, and performed all the other acts subsequent to
said declaration that are mentioned in the complaint, as it did not deem it advantageous to the corporation to apply
on the payment of said shares, as was authorized by the by-law, a part of the profit that was, or might have been
realized, and was distributable among the stockholders in equal parts, as to the existence of which profit no
allegation is made in the complaint, or to enforce payment of such shares by bringing in court the proper action
against the debtor or delinquent stockholders. It is, however, alleged by the appellant that the by-law of the corporation
being of the nature of a contract between it and its stockholders or members, and article 46 of the by-laws of the said
corporation providing an operative method for the payment of stock subscriptions continuously until the full amortization
thereof, application cannot be made in the present case of the provisions above cited of the Corporation Law for the
purpose contemplated by the defendant, as the provision of said article must prevail against that law.
4. Admitting that the provision of article 46 of the said by-laws maybe regarded as a contract between the defendant
corporation and its stockholders , yet as it is only to the board of directors of the corporation that said articles gives
the authority or right to apply on the payment of unpaid subscriptions such amount of the 70 per cent of the profit
distributable among the shareholders in equal parts as may be deemed fit, it cannot be maintained that the said article
has prescribe an operative method for the payment of said subscription continuously until their full amortization, or, what
would be the same thing, that said article has prescribe that sole and exclusive method for that purpose, for, in the first
place, the adoption of that method for the purpose of collecting the value of subscriptions due and unpaid lies,
according to said article, within the discretion of the board of directions, that is, it is subject to this condition, and this
can in no way be reconciled with the idea of method, which implies something fixed as a rule or permanent standard, and
not variable at the will of somebody and according to the circumstances; and, in the second place, in connection with the
provision of the said article relative to the aforesaid discretionary power of the board of directors to adopt that method,
there is also the discretionary power granted the same board of directors to avail itself, for the same purpose, to either of
the two remedies prescribed in sections 38 to 49, inclusive, of the aforecited Corporation Law.
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Case Digest
187 National Exchange v. Dexter AUTHOR: Myk

25 February 1928 G.R. No. L-27872 National Exchange Co., Inc. is suing Dexter as the assignee
TOPIC: Consideration for issuance of shares: How of C. S. Solomon & Co.
payment of shares enforced: court action The term of payment of Dexter is unlawful for it obligates
PONENTE: Street, J. the subscriber to pay nothing for the shares except as
dividends may accrue upon the stock.
FACTS
1. Dexter subscribed to 300 share of corporate stock of C. S. Solomon & Co. payable from the first dividends
declared on any and all shares owned by him in the company until the full amount of his subscriptions are paid.
2. When dividend was declared in January 1920 P15,000 was paid leaving a balance of P15,000.
3. Beyond this nothing has been paid by Dexter since dividend has not been declared.
4. Ruling of the trial court: stipulation is invalid.
ISSUE: Whether or not the subscription to the effect that the subscription is payable from the first dividends declared on
the shares has the effect of relieving the subscriber from personal liability in an action to recover the value of the shares.
Dexter’s contention:
1. A corporation can accept subscriptions upon any special terms not prohibited by law, public policy and if would
not constitute as fraud upon fellow stockholders or creditors of the corporation.
2. A collateral agreement with a subscriber to stock that his subscription shall not be collectible except from
dividends on the stock is valid as between the parties and a complete defense to a suit on notes given for the
amount of the subscription.
HELD: The stipulation is invalid because under the Corp Code no corporation shall issue stock or bonds except in
exchange for actual cash paid to the corporation or for property actually received by it at a fair valuation equal to the par
value of the stock or bonds so issued.
RATIO:
1. FIRST CONTETION:
A. The prohibition against the issuance of shares by corporations except for actual cash to the par value of the
stock to its full equivalent in property is enshrined in both the organic and statutory law of the Philippines.
a. Organic Act of July 1, 1902 Section 74: "That all franchises, privileges, or concessions granted under
this Act shall forbid the issue of stock or bonds except in exchange for actual cash or for property at a
fair valuation equal to the par value of the stock or bonds so issued"
b. Act No. 1459, Sec. 16 as amended by Act No. 2792, Sec. 2: Pursuant to this provision we find that the
Philippine Commission inserted in the Corporation Law, enacted March 1, 1906, the following
provision: ". . . no corporation shall issue stock or bonds except in exchange for actual cash paid to the
corporation or for property actually received by it at a fair valuation equal to the par value of the stock
or bonds so issued."
B. The purpose for this provision is to
a. To secure absolute equality stockholders with respect to their liability upon stock subscriptions.
b. Conditions attached to subscriptions, which, if valid, lessen the capital of the company, are a fraud
upon the grantor of the franchise, and upon those who may become creditors of the corporation, and
upon unconditional stockholders."
C. Application in this case:
a. The term of payment of Dexter is unlawful for this stipulation obligates the subscriber to pay nothing
for the shares except as dividends may accrue upon the stock. In the contingency that dividends are not
paid, there is no liability at all.
b. This is discrimination in favor of the particular subscriber, and hence it is unlawful.
2. SECOND CONTENTION
A. No, because there is a statutory provision prohibiting such agreements.
a. It is conceivable that the power of the corporation to make terms with the purchaser would be greater
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Case Digest
where the shares which are the subject of the transaction have been acquired by the corporation in
course of commerce, after they have already been once issued. But the shares with which are here
concerned are not of this sort.
CASE LAW/ DOCTRINE:

There is no distinction as to the liability of the subscriber between shares subscribed before incorporation and shares
subscribed after. All are bound to pay full value in cash or its equivalent and any attempt to discriminate in favor of one
subscriber by relieving him of this liability wholly or in part is forbidden.
Corpus Juris:
Nor has a corporation the power to receive a subscription upon such terms as will operate as a fraud upon the other
subscribers or stockholders by subjecting the particular subscriber to lighter burdens, or by giving him greater rights and
privileges, or as a fraud upon creditors of the corporation by withdrawing or decreasing the capital. It is well settled
therefore, as a general rule, that an agreement between a corporation and a particular subscriber, by which the subscription
is not to be payable, or is to be payable in part only, whether it is for the purpose of pretending that the stock is really
greater than it is, or for the purpose of preventing the predominance of certain stockholders, or for any other purpose, is
illegal and void as in fraud of other stockholders or creditors, or both, and cannot be either enforced by the subscriber or
interposed as a defense in an action on the subscription.

CORPORATION LAW
Case Digest
188LUMALAN v. CURA AUTHOR: Jelena
March 21, 1934, G.R. No. L-39861 Lumalan was directed to pay for unpaid subscribed shares of
TOPIC:How Payment of Shares Enforced – (b) Court stock, his property was levied upon.
Action
PONENTE:GODDARD, J. Dizon& Co. can collect the payment for the unpaid stock
and is directed to credit Lumalan’s payment to the
Corporation’s creditors (P13,840 against the judgment for
P15,109) and issue him the 300 shares of stock upon his
payment of the remaining amount he owes.
FACTS
1. Dizon& Co., Inc., is a corporation duly organized under the laws of the Philippine Islands with its central office in the
City of Manila.
2. Plaintiff-appellee BonifacioLumanlan, subscribed for 300 shares of stock of said corporation at a par value of P50 or
a total of P15,000.
3. Julio Valenzuela, Pedro Santos and Francisco Escoto, creditors of this corporation, filed suit against it in the Court of
First Instance of Manila, praying that a receiver be appointed, as it appeared that the corporation at that time had no assets
except credits against those who had subscribed for shares of stock.
4. The court named Tayag as receiver for the purpose of collecting, said subscriptions.
5. As BonifacioLumanlan failed to pay the full amount of stock, the receiver, filed a suit against him in the Court of First
Instance of Manila for collection.
6. In that case Lumanlan was sentenced to pay the corporation the above-mentioned sum of P15,109 with legal interest
thereon.
7. Lumanlan appealed from this decision.
8. The creditors, some of the directors and the majority of the stockholders held several meetings in which it was agreed in
substance that subscribers for the capital stock who were in default should pay the creditors; Lumanlan was designated to
pay the debt of the corporation to Julio Valenzuela, one of the petitioners as payment for the loan received from the
corporation.
9. Notwithstanding the payment made by Lumanlan to Valenzuela, the corporation, asked for the execution of the sentence
and by virtue of an order of execution the provincial sheriff levied upon two parcels of land belonging to Lumanlan.
10. Lumanlan brought this case to collect from Dizon& Co., Inc., and to prevent the sheriff from selling the two parcels of
land.
ISSUE:Whether or not the corporation has a right to collect all unpaid stock subscriptions and any other amounts, which
may be due it.
HELD: YES.
It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which the creditors have a
right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the payment of its debts.
RATIO:
It appears from the record that during the trial of the case now under consideration, the Bank of the Philippine Islands
appeared in this case as assignee in the "Involuntary Insolvency of Dizon& Co., Inc. That bank was appointed assignee in
case No. 43065 of the Court of First Instance of the City of Manila on November 28, 1932. It is therefore evident that there
are still other creditors of Dizon& Co., Inc. This being the case that corporation has a right to collect all unpaid stock
subscriptions and any other amounts which may be due it.
The Corporation Law clearly recognizes that a stock subscription is a subsisting liability from the time the subscription is
made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from such liability by the
by-laws of the corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as he would
CORPORATION LAW
Case Digest
be to pay any other debt, and the right of the company to demand payment is no less incontestable.
The judgment of the trial court is modified in accordance with the above and Dizon& Co., Inc., is ordered to credit
BonifacioLumanlan with the sum of P13,840 against the judgment for P15,109,; to issue to BonifacioLumanlan 300 shares
of its capital stock upon payment by him of thesum of P1,269 with interest thereon at 6 per cent per annum. The
preliminary injunction issued in this case is hereby dissolved for the purpose of enabling Dizon& Co., Inc., to ask for a
new order of execution in case No. 37492, Court of First Instance of Manila, for the sum of P1,269 with interest thereon as
stated above.
CASE LAW/ DOCTRINE:

Subscriptions to the capital of a corporation constitute a fund to which the creditors have a right to look for satisfaction of
their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to
realize assets for the payment of its debts.

CORPORATION LAW
Case Digest
189 FUA CUN v. SUMMERS AUTHOR: Franch Galanza
96 PHIL 577, GR NO L-19441 A subscriber does not become the owner of a particular
TOPIC: Rights and Obligations of Holders of Unpaid but number of shares corresponding to the amount he already
Non-delinquent Stock paid but merely holds a right of equity in the total number of
PONENTE: Ostrand, J. shares subscribed. Complete ownership over the total
number of shares subscribed will only vest with the
stockholder upon payment of the whole subscription price.
FACTS
1. On August 26, 1920, Chua Soco subscribed for five hundred shares of stock of the defendant Banking Corporation
at a par value of P100 per share, paying the sum of P25,000, one-half of the subscription price, in cash, for which a
receipt was issued.
2. Chua Soco executed a promissory note in favor of the plaintiff Fua Cun for the sum of P25,000 payable in ninety
days and drawing interest at the rate of 1 per cent per month, securing the note with a chattel mortgage on the
shares of stock subscribed for by Chua Soco, who also endorsed the receipt above mentioned and delivered it to
the mortgagee.
3. The plaintiff took the receipt to the manager of the defendant Bank and informed him of the transaction with Chua
Soco, but was told to await action upon the matter by the Board of Directors.
4. Chua Soco appears to have become indebted to the China Banking Corporation in the sum of P37,731.68 for
dishonored acceptances of commercial paper and in an action brought against him to recover this amount, Chua
Soco's interest in the five hundred shares subscribed for was attached and the receipt seized by the sheriff. The
attachment was levied after the defendant bank had received notice of the facts that the receipt had been endorsed
over to the plaintiff.
5. Fua Cun brought the present action maintaining that by virtue of the payment of the one-half of the subscription
price of five hundred shares Chua Soco in effect became the owner of two hundred and fifty shares and praying
that his, the plaintiff's, lien on said shares, by virtue of the chattel mortgage, be declared to hold priority over the
claim of the defendant Banking Corporation; that the defendants be ordered to deliver the receipt in question to
him; and that he be awarded the sum of P5,000 in damages for wrongful attachment.
ISSUE: Whether or not Chua Soco, in paying one-half of the subscription price of five hundred shares, in effect became
the owner of two hundred and fifty shares.
HELD: NO. Chua Soco did NOT, by paying ½ of the subscription price of the 500 shares of stock, in effect became the
owner of 250 shares. The attachment on such 500 shares was due to the non-payment of drafts accepted by Chua and had
no direct connection with the shares of stock in question. But, as against the rights of Fua, the Bank had no lien unless by
virtue of the attachment.
RATIO:
1. Such attachment was levied after the Bank had received notice of the assignment of Chua Soco’s interests to Fua. It
follows that as against these rights the Bank holds no lien whatever. Thus, Chua Soco acquired the right to 250 shares of
stock through the P25,000 payment, upon which Fua holds a lien superior to that of the Bank. The receipt evidencing the
P25,000 payment must be surrendered to Fua.
2. Equity in shares of stock may be assigned and the assignment is valid as between the parties and as to persons to whom
notice is brought home.
3. A subscriber does not become the owner of a particular number of shares corresponding to the amount he already paid
but merely holds a right of equity in the total number of shares subscribed. Complete ownership over the total number of
shares subscribed will only vest with the stockholder upon payment of the whole subscription price.
CASE LAW/ DOCTRINE:
A subscriber does not become the owner of a particular number of shares corresponding to the amount he already paid but
merely holds a right of equity in the total number of shares subscribed. Complete ownership over the total number of
shares subscribed will only vest with the stockholder upon payment of the whole subscription price.
CONCURRING OPINION:

CORPORATION LAW
Case Digest
190BALTAZAR V. LINGAYEN GULF ELECRTIC POWER AUTHOR: Rhona Burce

June 30, 1965 G.R. No. 16236
TOPIC: Rights and Obligations of Unpaid but Non-delinquent Stock Subscribed shares not fully paid up may be voted
PONENTE:Paredes, J. provided no subscription is unpaid and delinquent.
FACTS
1.The Lingayen Gulf Electric Power Co., Inc., hasan authorized capital stock of P300.000.00 divided into 3,000 shares of
voting stock at P100.00 par value, per share.
2. Plaintiffs Baltazar and Rose, were among the incorporators, having subscribed to 600 and 400 shares of the capital
stock, or a total par value of P60,000.00 and P40,000, respectively.
3. It is alleged that it has always been the practice and procedure of the Corporation, to issue certificates of stock to its
individual subscribers for unpaid shares of stock.
4. Of the 600 shares of capital stock subscribed by Baltazar, he had fully paid 535 shares of stock, and the Corporation
issued to him several fully paid-up and non-assessable certificates of stock, corresponding to the 535 shares.
5. On the other hand, of the 400 shares of stock subscribed by Rose, he had 375 shares of fully paid stock, duly covered by
certificates of stock issued to him.
6. Defendants Ungson, Estrada, Fernandez and Yuson were small stockholders of the Corporation, all holding a total
number of fully paid-up shares of stock, of not more than 100 shares, with a par value of P10,000.00; defendant Acena,
was likewise an incorporator and stockholder, holding 600 shares of stock, for which certificate of stock were issued to
him and as such, was the largest individual stockholder thereof.
7. The Ungson group constituted the majority of the holdover seven-member Board of Directors of the Corporation. They
had been in complete control of the management and property of the Corporation since January 1, 1955; and in order to
continue retaining such control, the group passed three (3) resolutionsduring its regular meeting of the Board of Directors,
held on January 30, 1955. Three majority members of the Board objected to the said resolutions.
a. Resolution No. 2 declared “allwatered stocks issued to Acena, Baltazar, Rose and Jubenville, "of no value and
consequently cancelled from the books of the Corporation."
b. Resolution No. 3 resolved that "all unpaid subscriptions should bear interest annually from the year of
subscription on the basis of quarterly payments and any or all payments already made on said unpaid
subscriptions should be credited to pay interest first, then the capital debt after all interest is fully paid. All shares
of stock issued to and in favor of any stockholder or stockholders xxx xxx xxx on accounts of payments
on unpaid subscriptions without the interest thereon - accrued and collectible having been fully paid from the date of
subscription as required by the Corporation Law, shall be declared of no value and cancelled from its books, xxx xxx
xxx ”
c. Resolution No. 4 resolved that "any and all shares of stock of the Lingayen Gulf Electric Power Co., Inc., issued as
fully paid-up to stockholders whose subscription to a number of shares has been declared delinquent with the
accrued interest on the unpaid thereof per Resolution No. 42, S. 1954, of the Board of Directors which has been duly
published in the `Manila Chronicle,' are hereby incapacitated to utilize or avail of the voting power until such
delinquency with the accrued interest is fully paid-up as indicated in Resolution No. 3, S. 1955.
8. The Ungson group was actually threatening and procuring to expel and oust the Baltazar group for the ultimate purpose
of depriving them of their right to vote in the annual stockholders' meeting scheduled for May 1, 1955.
9. Accordingly, plaintiffs Baltazar and Rose filed a complaint against the defendants and prayed that a writ of preliminary
injunction be issued against the latter, enjoining them to desist and refrainfrom carrying out the objects and purposes of the
three resolutions.
10. Claim of defendants:
— Resolution No. 4, which withdraws or nullifies the voting power of all the aforesaid shares of stock is valid,
notwithstanding the existence of partial payments, evidenced by certificates duly issued. They invoke the ruling laid down
by the Court in the Fua Cun vs. Summers Case.

CORPORATION LAW
Case Digest
— If Baltazar subscribed to 600 shares of stock in a single subscription, and he merely paid for 300 shares, for which he
was given fully paid certificates for 300 shares, he cannot vote said 300shares, in any meeting of the Corporation, until he
shall have paid the remaining 300 shares of stock.
ISSUE:
1. Whether or not a stockholder, in a stock corporation who subscribes to a certainnumber of shares of stock and he pays
only partially, for which he is issued certificates of stock, is entitled to vote the latter, even ifhe has not paid the balance of
his subscription, which has been called for payment or declared delinquent?
2. If the entire subscribed shares of stock are not paid, can the paid shares of stock be deprived of the right to vote until the
entire subscribed shares of stock are fully paid, including interest?
HELD:
1. Yes. A stockholder has the right to vote issued stocks although his balance of subscription is unpaid.
2. No. Previous payments applied to capital may not be later applied to interest on unpaid balance of subscription.
RATIO:
First issue:
1. Defendants invoke the ruling laid down by the Court in the Fua Cun v. Summers case (44 Phil, 705, March 27, 1923)
pertinent portion of which states: In the absence of special agreement to the contrary, a subscriber for a certain number of
shares of stock does not, upon payment of one-half of the subscription price, become entitled to the issuance of certificates
for one-half of the number of shares subscribed for; the subscriber's right consists only in equity entitling him to a
certificate for the total number of shares subscribed for by him upon payment of the remaining portion of the subscription
price.
2. The case at bar do not come under the aegis of the principle enunciated in the Fua Cun v. Summers case, because it was
the practice and procedure, since the inception of the corporation, to issue certificates of stock to its individual subscribers
for unpaid shares of stock and gave voting power to shares of stock fully paid. And even though no agreement existed, the
ruling in said case, does not now reflect the correct view on the matter, for better than an agreement or practice, there is the
law (Sec. 37 of the Corporation Law), which renders the said case of Fua Cun-Summers, obsolescent.
3. Section 37 of the Corporation Law, was approved six (6) years after the promulgation of the Fua-Summers case and
provides that: “No certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof, or the
full subscription in the case of no par stock, has been paid by him to the corporation. Subscribed shares not fully paid up
may be voted provided no subscription is unpaid and delinquent.”
4. The present law requires as a condition before a share holder can vote his shares, that his full subscription be paid in the
case of no par value stock; and in case of stock corporation with par value, the stockholder can vote the shares fully
paid by him only, irrespective of the unpaid delinquent shares.
5. In the case at bar, the defendant-corporation had chosen to apply payments by its stockholders to definite shares of the
capital stock of the corporation; its call for payment of unpaid subscription and its declaration of delinquency for non-
payment of said call affects only the remaining number of shares of its capital stock for which no fully paid capital stock
shares certificates have been issued, "and only these have been legally shorn of their voting rights by said declaration of
delinquency."
Second issue:
6. Defendants invoke Art. 1253 of the NCC which provides that "if the debt produces interest, payment of the principal
shall not be deemed to have been made until the interests have been covered," and relying on an opinion of the Securities
and Exchange Commission, claim that said unilateral nullification and/or cancellation of previously issued capital stock
shares certificates was valid.
7. This provision of law only applies in the absence of verbal or written agreement, to the contrary; it is likewise merely
directory, and not mandatory.
8. In the present case, the defendant-corporation had applied the payments made by the stockholders to the full par
value of the shares of stock subscribed by them, instead of the accepted interest, as shown by the capital stock
shares certificate issued for the payments made, and the stockholders had accepted such certificates issued for such
payments. This being the case, the said application of payments must be deemed to have been agreed upon by the
Corporation and the stockholders, and the same cannot now be changed without the consent of the stockholders concerned.
9. The Corporation Law and the by-laws of the defendant Corporation do not contain any provision, prohibiting
CORPORATION LAW
Case Digest
the application of stockholders' payments to the full par value of a corporation's capital stock, ahead of the
payment of accrued interest for unpaid subscriptions. It would, therefore, result that a corporation may, upon request of
an interested stockholder, as his option, apply payment by them to the full par value of shares of capital leaving its
collection later of the accrued interest on unpaid subscriptions, and that once such option has been exercised and the
corresponding stock certificates have been issued, the corporation cannot, by a unilateral act, legally nullify and cancel the
capital stock certificates so issued.
CASE LAW/ DOCTRINE:

Sec. 37. No certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof, or the full
subscription in the case of no par stock, has been paid by him to the corporation. Subscribed shares not fully paid up may
be voted provided no subscription is unpaid and delinquent.

CORPORATION LAW
Case Digest
191 NAVA VS. PEERS MARKETING AUTHOR: Bea Mationg
G.R. No. L-28120 November 25, 1976
TOPIC: Rights and Obligations of Holders but Non- A corporation cannot release an original subscriber from
Delinquent Stock paying for his shares without a valuable consideration.
PONENTE: Aquino, J.
FACTS:
1. It is a case for Mandamus.
2. Teofilo Po as an incorporator subscribed to eighty shares of Peers Marketing Corporation at one hundred pesos a share
or a total par value of eight thousand pesos.
3. Po paid two thousand pesos or twenty-five percent of the amount of his subscription. No certificate of stock was issued
to him or, for that matter, to any incorporator, subscriber or stockholder.
4. Po sold to Ricardo A. Nava for P2,000 of his 80 shares. In the deed of sale Po represented that he was "the absolute and
registered owner of twenty shares" of Peers Marketing Corporation.
5. Nava requested the officers of the corporation to register the sale in the books of the corporation. The request was denied
because Po has not paid fully the amount of his subscription. Nava was informed that Po was delinquent in the payment of
the balance due on his subscription and that the corporation had a claim on his entire subscription of eighty shares which
included the twenty shares that had been sold to Nava.
6. Nava filed this mandamus action in the Court of First Instance of Negros Occidental to compel the corporation and its
executive vice-president and secretary to register the said twenty shares in Nava's name in the corporation's transfer book.
7. Appellant Nava contends that the Fua Cun case is a precedent and was decided under section 36 of the Corporation Law
which provides that "no certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof
has been paid by him to the corporation". Section 36 was amended by Act No. 3518. It is now section 37. Section 37
provides that "no certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof, or
the full subscription in case of no par stock, has been paid by him to the corporation".
ISSUE: WON the officers of Peers Marketing Corporation can be compelled by mandamus to enter in its stock and
transfer book the sale made by Po to Nava of the twenty shares forming part of Po's subscription of eighty shares, with a
total par value of P8,000 and for which Po had paid only P2,000, it being admitted that the corporation has an unpaid claim
of P6,000 as the balance due on Po's subscription and that the twenty shares are not covered by any stock certificate.
HELD: NO. There is no clear legal duty on the part of the officers of the corporation to register the twenty shares in
Nava's name, Hence, there is no cause of action for mandamus. A corporation cannot release an original subscriber from
paying for his shares without a valuable consideration.
RATIO: Apparently, no provision of the by-laws of the corporation covers that situation. The parties did not bother to
submit in evidence the by-laws nor invoke any of its provisions. The corporation can include in its by-laws rules, not
inconsistent with law, governing the transfer of its shares of stock.
The Court held that the transfer made by Po to Nava is not the "alienation, sale, or transfer of stock" that is supposed to be
recorded in the stock and transfer book, as contemplated in section 52 of the Corporation Law.
The following are the shares which may be alienated and are covered by certificate of stocks:
SEC. 35. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president
or the vice-president, countersigned by the secretary or clerk and sealed with the seal of the corporation, shall be issued in
accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of
the certificate indorsed by the owner or his attorney in fact or other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the, parties, until the transfer is entered and noted upon the books of
the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of
the certificate, and the number of shares transferred.
No share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the
CORPORATION LAW
Case Digest
corporation.
SEC. 36. (re voting trust agreement) ...
The certificates of stock so transferred shall be surrendered and cancelled, and new certificates therefor issued to such
person or persons, or corporation, as such trustee or trustees, in which new certificates it shall appear that they are issued
pursuant to said agreement.
The twenty shares in question are not covered by any certificate of stock in Po's name. Moreover, the corporation has a
claim on the said shares for the unpaid balance of Po's subscription. A stock subscription is a subsisting liability from the
time the subscription is made. The subscriber is as much bound to pay his subscription as he would be to pay any other
debt. The right of the corporation to demand payment is no less incontestable.
CASE LAW/ DOCTRINE: A corporation cannot release an original subscriber from paying for his shares without a
valuable consideration.

CORPORATION LAW
Case Digest
192 MAKATI SPORTS CLUB, INC., Petitioner, - AUTHOR: Mercado, Christopher Dann C.
versus -
CECILE H. CHENG, MC FOODS, INC., and McFoods sold his share of stocks prior issuance
RAMON SABARRE, of certificate of stock in his own name. The
Respondents. plaintiff contends that the defendant cannot do so
since he is not yet a stockholder, only
Ponente: Justice Nachura
stockholders can sell their stocks. The Court says,
“Na-ahhh! Mc Food is already a stockholder upon
TOPIC: Certificate of Stock
payment of purchase price and execution of Deed
of Absolute Sale.” (See ratio [3])
FACTS:
1. Plaintiff’s Board of Directors adopted a resolution authorizing the sale of 19 unissued shares.
2. Defendant Cheng was a Treasurer and Director of plaintiff.
3. On July 7, 1995, Hodreal expressed his interest to buy a share, for this purpose he sent the
letter requesting that his name be included in the waiting list.
4. Sometime in November, McFoods expressed interest in acquiring a share of the plaintiff, and
one was acquired with the payment to the plaintiff by McFoods of P1,800,000.
5. On December 15, 1995, the Deed of Absolute Sale was executed by the plaintiff and McFoods.
6. On December 27, 1995, McFoods sent a letter to the plaintiff giving advise of its offer to resell
the share.
7. The certificate of stock was issued to McFoods on January 5, 1996.
8. While the sale between the plaintiff and McFoods was still under negotiations, there were
negotiations between McFoods and Hodreal for the purchase by the latter of a share of the
plaintiff. On November 24, 1995, Hodreal paid McFoods P1,400,000. Another payment
of P1,400,000 was made by Hodreal to McFoods on December 27, 1995, to complete the
purchase price of P2,800,000.
9. In 1997, an investigation was conducted and the membership committee held that there is
prima facie evidence to show that defendant Cheng profited from the transaction because of
her knowledge.
10. Thus, petitioner sought judgment that would order respondents to pay the sum
of P1,000,000.00, representing the amount allegedly defrauded. It also argued that Mc Food
violated the plaintiff’s by-laws on the right of pre-emption of the corporation. Furthermore, it
contended that the transaction between Mc Food and Hordeal is void since the contract was
entered into prior the issuance of the certificate of stock to Mc Food, thus, the former is not yet
a stockholder then.
11. The RTC ruled in favor of the respondent; on appeal, the CA affirmed the RTC’s decision.
12. Thus, this case before the court of last resort.
ISSUE: (1) Whether or not the respondent acted with fraud to realize a profit of P1,000,000 in the
aforementioned transaction between McFoods and Hordeal
(2) Whether or not there was a violation of the plaintiff’s by-laws on right of pre-emption
(3) Whether or not Mc Food has the right to enter into a transaction of sale of the stocks prior issuance of
certificate of stocks in his own name
HELD: (1) No. As early as July 7, 1995, Hodreal already expressed to the MSCI Membership
CORPORATION LAW
Case Digest
Committee his intent to purchase one Class “A” share and even requested if he could be included in
the waiting list of buyers. However, there is no evidence on record that the Membership Committee
acted on this letter by replying to Hodreal if there still were original, unissued shares then or if he
would indeed be included in the waiting list of buyers.
(2) No. McFoods properly complied with the requirement of Section 30(e) of the Amended By-Laws on
MSCI’s pre-emptive rights. Without doubt, MSCI failed to repurchase Mc Foods’ Class “A” share
within the thirty (30) day pre-emptive period as provided by the Amended By-Laws.
(3) No. When McFoods offered for sale one Class “A” share of stock to MSCI for the price
of P2,800,000.00 for the latter to exercise its pre-emptive right as required by Section 30(e) of MSCI’s
Amended By-Laws, it legally had the right to do so since it was already an owner of a Class “A” share
by virtue of its payment on November 28, 1995, and the Deed of Absolute Sale dated December 15,
1995, notwithstanding the fact that the stock certificate was issued only on January 5, 1996.
RATIO:
(1) All that Punzalan did was to inform Cheng of Hodreal’s intent and nothing more, even as Cheng
asked for Hodreal’s contact number. It may also be observed that, although established by
Punzalan’s affidavit that she informed Cheng about Hodreal’s desire to purchase a Class “A”
share and that Cheng asked for Hodreal’s contact number, it is not clear when Punzalan relayed
the information to Cheng or if Cheng indeed initiated contact with Hodreal to peddle Mc Foods’
purchased share.
There is nothing wrong with the fact that the first installment paid by Hodreal preceded the
payment of Mc Foods for the same share of stock to MSCI because eventually Mc Foods became
the owner of a Class “A” share covered by Certificate A 2243. Upon payment by Mc Foods
ofP1,800,000.00 to MSCI and the execution of the Deed of Absolute Sale on December 15, 1995,
it then had the right to demand the delivery of the stock certificate in its name. The right of a
transferee to have stocks transferred to its name is an inherent right flowing from its ownership of
the stocks.
(2) It was only on January 29, 1996, or 32 days after December 28, 1995, when MSCI received Mc
Foods’ letter of offer to sell the share, that Mc Foods and Hodreal executed the Deed of Absolute
Sale over the said share of stock. While Hodreal had the right to demand the immediate
execution of the Deed of Absolute Sale after his full payment of Mc Foods’ Class “A” share, he
did not do so. Perhaps, he wanted to wait for Mc Foods to first comply with the pre-emptive
requirement as set forth in the Amended By-Laws.
(3) A certificate of stock is the paper representative or tangible evidence of the stock itself and of the
various interests therein. The certificate is not a stock in the corporation but is merely evidence of
the holder’s interest and status in the corporation, his ownership of the share represented
thereby. It is not in law the equivalent of such ownership. It expresses the contract between the
corporation and the stockholder, but is not essential to the existence of a share of stock or the
nature of the relation of shareholder to the corporation.
Neither can MSCI argue that Mc Foods was not yet a registered owner of the share of stock when
the latter offered it for resale, in order to void the transfer from Mc Foods to Hodreal. The
CORPORATION LAW
Case Digest
corporation’s obligation to register is ministerial upon the buyer’s acquisition of ownership of the
share of stock. The corporation, either by its board, its by-laws, or the act of its officers, cannot
create restrictions in stock transfers.
CASE LAW/ DOCTRINE:

A certificate of stock is the paper representative or tangible evidence of the stock itself and of the
various interests therein. The certificate is not a stock in the corporation but is merely evidence of the
holder’s interest and status in the corporation, his ownership of the share represented thereby. It is not
in law the equivalent of such ownership. It expresses the contract between the corporation and the
stockholder, but is not essential to the existence of a share of stock or the nature of the relation of
shareholder to the corporation.
The corporation’s obligation to register is ministerial upon the buyer’s acquisition of ownership of the
share of stock. The corporation, either by its board, its by-laws, or the act of its officers, cannot create
restrictions in stock transfers

CORPORATION LAW
Case Digest
193 Republic v. Estate of Hans Menzi AUTHOR: iskoba ng pag-ibig
November 23, 2005 G.R. No. 152578 Consolidated cases.
TOPIC: Certificate of Stock
PONENTE: TINGA, J.
FACTS
1. President Corazon C. Aquino issued Executive Order (EO) No. 1, creating the Presidential Commission on Good
Government (PCGG).
2. Subject of this case are three “blocks” of shares of the Bulleting Publishing Corp., as follows:
a. 154 block – 154, 472 shares
b. 198 block – 198, 052.5 shares
c. 214 block – 214, 424.5 shares
3. In an action for reconveyance earlier decided by the Sandiganbayan, said tribunal decided that:
a. Ff. shares were ill-gotten:
b. 46,000 shares (belonging to the 214 block), under the name of Danding Cojuangco, and the entire 198
block, which were originally under the names of Campos, Cojuangco and Zalamea then subsequently sold
to HMHMI (Hans Menzi Holdings and Mgt. Inc)
c. The 154 block was not ill-gotten
d. The estate of Hans Menzi must thus surrender for cancellation the certificates of stock in its possession
4. This present appeal pertains to the propriety of declaring the 154 block, on the one hand, as not ill-gotten, and the
198 and 214 blocks as ill-gotten.
5. For clarity of presentation, the 154 block, which is the subject of the Republic’s petition in G.R. No. 152578, is
treated separately from the 198 and 214 blocks, which are the subjects of the petitions in G.R. No. 154487 and
G.R. No. 154518.
BLOCK 154: (G.R. No. 152578)
1. In 1957, Menzi purchased the entire interest in Bulletin Publishing

2. In 1961, US Automotive purchased Bulletin shares from Menzi
3. In 1968, a stock option was executed between Menzi and US Automotive giving each other preferential rights
in the purchase of each other’s Bulleting shares
4. Later in the same year, Bulletin’s articles of incorporation were amended to place restrictions on the transfer of
Bulletin shares to non-stockholders where by stockholders seeking to sell must first make an offer to Bulleting
itself.
5. In 1984, Menzi sold the 154 block to US automotive. US Automotive’s VP executed a promissory note in
favor of Menzi
6. Days later, Menzi dies and a petition for the probate of his will was filed. In said proceedings, the executor
moved for the confirmation of the sale of the 154 block; which motion the probate court granted.
7. Subsequently, the executor received 2 checks representing full payment; he in turn, issues a receipt.
BLOCK 198 and 214:
1. HMHMI was incorporated on May 20, 1982 by Menzi, Campos, Cojuangco, Rolando C. Gapud (Gapud) and
Zalamea, with an authorized capital stock of P1, 000,000.00 divided into 100,000 shares with par value of P10.00
each.
2. Deed of Transfer and Conveyance was executed by Menzi, Campos, Cojuangco and Zalamea on August 17, 1983,
transferring the shares of stock registered in their names in various corporations to HMHMI in exchange for
6,000,000 shares of the latter’s capital stock, subject to the approval by the SEC of HMHMI’s Certificate of
Increase of Capital Stock. The shares of stock transferred included the 198 block of Bulletin shares, 90,866.5 of
which were registered in the name of Campos; 90,877 in the name of Cojuangco; and 16,309 in the name of
Zalamea.
3. On February 14, 1984, HMHMI amended its Articles of Incorporation by increasing its authorized capital stock
to P100, 000,000.00 divided into 10,000,000 shares with par value of P10.00 per share.
CORPORATION LAW
Case Digest
4. On January 15, 1986, the law firm of Siguion Reyna, Montecillo & Ongsiako wrote a letter to Bulletin’s corporate
secretary, Atty. Mendoza, requesting that three (3) certificates of stock representing 90,866.5, 90,877, and 16,309
Bulletin shares be issued in favor of HMHMI in exchange for 21 certificates of stock in HMHMI.
5. Atty. Mendoza acknowledged receipt of the 21 certificates of stock but replied that the transfer by Campos,
Cojuangco and Zalamea of their Bulletin shares to HMHMI cannot be recorded in the books of Bulletin because it
was made in violation of Bulletin’s Articles of Incorporation. Bulletin, however, offered to buy the shares at the
price fixed in the Articles of Incorporation.
6. Deed of Sale was executed on February 21, 1986 by Atty. Montecillo whereby HMHMI sold the 198 block to
Bulletin for the amount of P23, 675,195.85.
7. The SEC issued a certification to the effect that as of February 21, 1986, the total subscribed shares of Bulletin was
756,861. Of these, 198,052.5 were treasury shares, leaving the total outstanding shares at 567,808.5.
8. On July 31, 1987, the PCGG received from Bulletin the amount of P8, 173,506.06 as full payment of 46,620.5
Bulletin shares registered in the name of Campos. The receipt stated that “Mr. Jose Y. Campos has waived the
ownership of said shares in favor of the Republic of the Philippines through the Presidential Commission on Good
Government.”
9. A Deed of Assignment was likewise executed by Zalamea on October 15, 1987, assigning and waiving in favor of
the Republic his rights to 121,178 Bulletin shares registered in his name. On the same day, Bulletin issued in favor
of PCGG a check in the amount of P21, 244,926.96 as full payment of Zalamea’s shares.
10. As regards the 214 block, the Sandiganbayan ruled that there is no longer any dispute concerning the ownership of
the 46,620.5 shares held by Campos and the 121,178 shares held by Zalamea in view of the Teehankee Resolution
and the fact that these shares have been waived and assigned to PCGG. In G.R. No. 154487, petitioner Cojuangco
assails paragraphs 1 and 2 of the Sandiganbayan Decision.
ISSUE:
1. WON the sale of the 154 block from Menzi to US Automotive valid.
2. WON the covered shares were validly ceded by Camps and Zalamea to the government?
HELD:
1. YES
2. YES
RATIO:
1. Per the above requisites, a deed of sale, as insisted by the Republic, is not required. In fact, per Rural Bank of Lipa
v. CA, the execution of a deed of sale does not necessarily make the transfer effective as it is the delivery of the
stock certificate duly indorsed by the owner which is the operative act that transfers the shares.
Here, there is no dispute, that delivery and endorsements in favor of US Automotive were made.
Moreover, the executor’s authority to negotiate the transfer is found in the general power of attorney executed by
Menzi. Also, the former’s authority to accept payment springs from Menzi’s will and the order of the probate court
confirming the sale.
As found by the Sandiganbayan, it was Menzi himself who sold to US Automotive, hence the non-inclusion of the
subject shares in Menzi’s will and in the inventory of his estate is attributable to the fact that at the time the
aforesaid were taken, they already belonged to US Automotive.
2. The fact that the stock certificates covering the shares ceded to the Republic (ie, Campos and Zalamea’s portions
in the 214 block), and which were under the names of Campos, Zalamea and Cojuangco (Cojuangco did not cede
his 46,000 shares) were found in Menzi’s possession does not prove that Menzi owned the shares.
A stock certificate is merely a tangible evidence of ownership of shares of stock. Its presence or absence does not
affect the right of the registered owner to dispose of the shares. Accordingly, Campo and Zalamea, as registered
owners, validly ceded their shares in favor of the Government.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
Requisites for a valid transfer per Sec. 63:
1. Between the parties:
• Delivery
• Endorsement
2. To be valid as to third persons:
• Recorded in the books of the corporation
* All other formalities are mere superfluities that do not add to nor detract from the validity of a transfer.

CORPORATION LAW
Case Digest
194 NIELSON & CO. v. LEPANTO CONSOLIDATED AUTHOR: JANNA
MINING CO. Court, in previous case, held that Nielson is entitled to
December 17, 1966, G.R. No. L-21601 stocks equivalent to 10% of net profits of Lepanto, pursuant
TOPIC: Form of Dividends to revised management contract. Court held Nielson is not
PONENTE: ZALDIVAR, J. entitled to stock dividends; instead be paid cash equivalent
FACTS:
1. Lepanto seeks reconsideration of SC's decision rendered Dec. 17, 1966, ordering Lepanto to issue and deliver to
Nielson shares of stock together with fruits thereof.
2. Previous court decision, court declared that pursuant to the modified agreement regarding Nielson's compensation, it
would receive 10% of any dividends declared and paid, and should be paid 10% of the stock dividents that Lepanto
declared during the period of extention of the contract.
3. Lepanto denied declaring stock dividends worth P1M in 1949 and 2M in 1950, and the court had previously awarded
P300k worth of stock to Nielson at the par value of 0.10 per share.
4. In this motion for consideration, Lepanto contends: (1) payment to Nielson of stock dividends as compensation for its
services under the management contract is a violation of the Corporation Law; (2) that such was not the intention of
Lepanto and Nielson that the services of the latter be paid in stock taken out of stock dividends declared by the
former.
ISSUE: Whether or not a corporation can issue stock dividends to a person who is not a stockholder in payment of services
rendered.
HELD: No, because under Sec. 16 of the Corporation Law, stock dividends cannot be issued to a person who is not a
stockholder in payment of services rendered. So in this case, Nielson cannot be paid in shares of stock which form part of
the stock dividends of Lepanto for services it rendered under the management contract.
Court declared Nielson is entitled to payment by Lepanto of P300k in cash, equivalent to 10 percent of the money value of
stock dividends worth P3M from 1949-1950.
CASE LAW/ DOCTRINE:

1. Stock dividends are issued only to stockholders. This is so because only stockholders are entitled to dividends. They
are the only ones who have a right to a proportional share in that part of the surplus which is declared as dividends. A
stock dividend really adds nothing to the interest of the stockholder; the proportional interest of each stockholder
remains the same.
2. If a stockholder is deprived of his stock dividends - and this happens if the shares of stock forming part of the stock
dividends are issued to a non-stockholder — then the proportion of the stockholder's interest changes radically. Stock
dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits
3. A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or authorizing such
dividend. It is, what the term itself implies, a distribution of the shares of stock of the corporation among the
stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of cash, and
is properly payable only out of surplus profits.15 So, a stock dividend is actually two things: (1) a dividend, and (2) the
enforced use of the dividend money to purchase additional shares of stock at par.
4. Term "dividend" both in the technical sense and its ordinary acceptation, is that part or portion of the profits of the
enterprise which the corporation, by its governing agents, sets apart for ratable division among the holders of the
capital stock. It means the fund actually set aside, and declared by the directors of the corporation as dividends and
duly ordered by the director, or by the stockholders at a corporate meeting, to be divided or distributed among the
stockholders according to their respective interests
CORPORATION LAW
Case Digest
5. Sec. 16 of the Corporation Law: “No corporation organized under this Act shall create or issue bills, notes or other
evidence of debt, for circulation as money, and no corporation shall issue stock or bonds except in exchange for actual
cash paid to the corporation or for: (1) property actually received by it at a fair valuation equal to the par or issued
value of the stock or bonds so issued; and in case of disagreement as to their value, the same shall be presumed to be
the assessed value or the value appearing in invoices or other commercial documents, as the case may be; and the
burden or proof that the real present value of the property is greater than the assessed value or value appearing in
invoices or other commercial documents, as the case may be, shall be upon the corporation, or for (2) profits earned by
it but not distributed among its stockholders or members; Provided, however, That no stock or bond dividend shall be
issued without the approval of stockholders representing not less than two-thirds of all stock then outstanding and
entitled to vote at a general meeting of the corporation or at a special meeting duly called for the purpose.
xxx xxx xxx
No corporation shall make or declare any dividend except from the surplus profits arising from its business, or divide
or distribute its capital stock or property other than actual profits among its members or stockholders until after the
payment of its debts and the termination of its existence by limitation or lawful dissolution: Provided, That banking,
savings and loan, and trust corporations may receive deposits and issue certificates of deposit, checks, drafts, and bills
of exchange, and the like in the transaction of the ordinary business of banking, savings and loan, and trust
corporations. (As amended by Act No. 2792, and Act No. 3518; Emphasis supplied.)
ANTECEDENT CASE FACTS:
1. January 30 - 1937 Neilson & Co, Inc. (Nielson) entered into a 5 year management contract with Lepanto
Consolidated Mining Company (Lepanto). It was agreed that Neilson would operate and manage the mining
properties owned by Lepanto for the fee of P2,500/mo. plus 10% participation in net profits from mining operations
.
2. 1940 - dispute arose regarding the computation of the 10% share of Nielson in profits, but Board of directors realized
that contract was unfair to Nielson, so it authorized its President to modify the pertinent provision of the contract
effective January 1, 1940.
3. Modified contract states the ff: Nielson shall receive (1) 10% of the dividends declared and paid, when and as paid
during period of the contract and at the end of each year; (2) 10 % of any depletion reserve that may be set up; and (3)
10% of any amount expended during the year out of suprlus earnings for capital account.
4. Late 1941 - Parties agreed to renew the contract for another 5 years, but the Pacific War broke out in Dec. 1941. Mine
operations were disrupted in January due to the war. Mill, power plant, supplies, and the mines etc. were destroyed
upon orders of the US to prevent the Japanese invaders from utilizing it. Latter still took over the properties by
February and operated the mines during the war.
5. August 1945 - Mining properties were liberated from the Japanese forces, and LEPANTO took over and started
rebuilding and repairing structures, installing machinery, and other necessary acts for the rehabilitation and
reconstruction of the mine.
6. A disagreement arose between NIELSON and LEPANTO shortly after the mine's liberation. Subject of disagreement
was the status of the operating contract that was renewed, which expired in 1947. Terms of the contract states that
management contract shall remain in suspense in case fortuitous event or force majeure adversely affects work of
mining and milling.
7. NIELSON's VIEW: Contract was suspended during war, so contract should be extended for such pd. of suspension
LEPANTO's VIEW: Contract expired in 1947 as originally agreed, because period of suspension due to war did not
operate to extend contract. Parties did not resolve disagreement, and LEPANTO in the meantime continued
reconstruction of the mines, and brought it back to operation in June 1948.

CORPORATION LAW
Case Digest
8. Lepanto declared the following: (1) November 28, 1949 – P1,000,000.00 stock dividends; (2) August 22, 1950 –
stock dividends worth P2,000,000.00.
9. February 6, 1958 - NIELSON filed this action in the CFI to recover certain sums of money representing damages
allegedly suffered by it from LEPANTO's refusal to comply with management contract entered into in Jan. '37.
10. Court decided against Lepanto, and required its compliance according to the modified agreement, ordering issuance
and delivery of shares of stock to Nielson.

CORPORATION LAW
Case Digest
195. Berks vs Crammer AUTHOR: Twinkle
(Date, G.R. No.) I didn’t understand this case. Sorry.
TOPIC: Source of Dividends
PONENTE: Stern, J
FACTS
1. The capital structure of Berks Broadcasting Company was being restructured including the clearing of the Unpaid
Stock Subscriptions account balance ($50,000) with additional investments from the stockholders [write-ups]
($30,000). The $50,000 unpaid stock was reduced to $23,300 and was cancelled in lieu of an item in the same
amount recognizing Goodwill and Promotion Expense. This was further reduced to $20,000 and $4,000 was
reduced from the write-ups.
So now: Write-ups = $26,000 (THIS was wrongfully included in the assets)
2. The net result of this procedure was a surplus of $2,545.94.
3. From that the controlling stockholders through the BOD declared and paid dividends.
4. During the period of declaration and payment of dividends, the sale of the corporation to a new group was
perfected and was just awaiting the approval of the Federal Communications Commission.
5. In this present suit, the new stockholders are suing for the recovery of the dividends paid to the former
stockholders since it has been unlawfully declared from a surplus which included the revaluation increment for the
asset or the unrealized appreciation of its value.
ISSUE: Whether or not dividends may be declared and paid out of surplus which is constituted by the recorded but
unrealized appreciation of corporate assets.
HELD: No.
RATIO:
The Supreme Court declared that such cannot be done.
The surplus from which dividends must be taken must be a bona fide and not an artificial or fictitious one.
It must be founded upon actual earnings or profits and not be dependent for its existence upon a theoretical estimate of an
appreciation in the value of the company’s assets.
Such reappraisals are subject to market fluctuations, or, merely anticipatory of future profit, or, may never be actually
realized as an asset of the company.
Finally, the Business Corporation Law of 1933 expressly disallows such a funding of a dividend declaration and payment.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE: Dividend Declaration Discretionary with Board; Limitations.
General Rule: Whether or not there should be a distribution of dividends in whatever form, such matters are always
subject to the business judgment of the Board of Directors and the courts will not interfere with the former’s discretion.
Exceptions:
(1) When the decision is tainted with bad faith,
(2) When the decision is tainted with fraud,
(3) When the decision is tainted with gross negligence,
OR
(4) When the profits accumulated are in excess of 100% of the corporations paid-in capital stock, UNLESS;
(a) the accumulation is justified by definite expansion projects approved by the Board,
(b) the corporation is prohibited under a loan agreement without the creditor’s consent, and such consent has not been
secured,
(c) Or, it can be clearly shown that the retention is necessary under special circumstances.
Explanation: The justification for this interference with the business judgment and discretion of the corporation’s board of
directors was given in the preamble of Presidential Decree 270 which is as follows:
“WHEREAS, this failure to declare dividends where corporations are able to do so stultifies investor’s interest in
channeling their investible funds in equities even of productive industries and enterprises and thereby retards the economic
growth and development of the country;
“WHEREAS, a more favorable and healthier climate for investments would be promoted if stockholders are able to share
in the profits of corporations whenever possible, the same not being subject to the absolute or arbitrary action of
management on the matter.”

CORPORATION LAW
Case Digest
196 Lich v. United States Rubber AUTHOR: N. Manalo
(July 3, 1941, 39 F. Supp 675 (1941)) Net Profit- is a measure of the profitability of a venture after
TOPIC: Source of Dividends accounting for all costs.
PONTENTE: Smith Annual net earnings - may be productive of net profits, or,
as in the instant case, reductive of the deficit
FACTS
1. The plaintiff, Lich, a holder of non-cumulative preferred stock of the defendant, United States Rubber Company, a
corporation, seeks to enjoin the payment of a dividend on the common stock declared on March 5, 1941. The plaintiff is,
and was during the years in question, the holder of three hundred shares of non-cumulative preferred stock of the
defendant.
2.
Fiscal Year Annual Net Earnings Deficits
1935 $2,231,377.69 $25,870,402.67
1936 $10,172,484.46 $17,204,158.52
1937 8,607,902.92 $10,471,626.89
***The deficit, representing the accrued losses of prior years, existed in 1934 and was carried over into the
succeeding years, varying in each year only as to amount. It definitely appears that in each of the said years the annual net
earnings were applied to the deficit, thereby effecting substantial reductions. There were no dividends declared on either
the preferred or the common stock during the said fiscal year
3. The defendant, in 1938, pursuant to and in accordance with the statute, 1 reconstructed its capital structure. This
reconstruction reduced the capital liability and created a capital surplus, which was applied to the then existing deficit,
resulting in its cancellation.
4. Thereafter, in the years 1938, 1939, and 1940, the deficit having been cancelled, the annual net earnings for each of the
said years were productive of net profits and were available for the declaration and lawful payment of dividends; in each of
the said years dividends on the non-cumulative preferred stock were declared and paid in full. No dividends, however,
were declared on the common stock.
5. On March 5, 1941, the defendant declared a dividend, payable on April 30, 1941, on both the preferred and common
stock. This declaration of dividends, which is herein questioned, specifically contemplates payment from the net profits of
the current year and from no other fund.
6. The defendant, despite the deficit, maintained adequate reserves. These reserves were maintained both prior and
subsequent to the said period. It is to be further noted, however, that the present declaration of dividends does not direct
invasion of the reserves for payment; the reserves are maintained intact.
7. Plaintiff contends that the priority of payment, extends not only to the current year, but to the prior years of 1935, 1936,
and 1937, to the extent of the annual net earnings of the said years; and, that dividends may not be paid on the common
stock at this time until the dividends are paid on the preferred stock for the years in question, either in full or in proportion
to the annual net earnings of those years.
ISSUE: WON there were, in the years in which dividends were not declared, net profits available for the lawful
declaration and payment of dividends, but withheld from the non-cumulative preferred stockholder and retained in the
business
HELD: None
no net profits to which the inchoate right to dividends could have attached. There was, as hereinabove stated, in each of
the said years, a substantial deficit which greatly exceeded the annual net earnings of the corresponding year, and, to the
reduction of which the annual net earnings were applied. It is manifest, therefore, that the annual net earnings of each of
the said years resulted, not in a profit, but in a reduction of the deficit. There was in each of the said years no source from
which dividends could have been paid lawfully; the payment of dividends under the circumstances would have been
CORPORATION LAW
Case Digest
unlawful.
RATIO:
A stock dividend is a conversion of surplus or undivided profits into capital stock, which is distributed among the
stockholders in lieu of cash. It does not affect the proportionate interest of the stockholders in the corporate assets; it does,
however, affect the essence of that interest. The capital is actually increased in an amount equivalent to the charge against
surplus. The interest of the stockholders in the surplus is decreased, but their interest in the capital is correspondingly
increased. The accumulated net profits, instead of being distributed, are capitalized and retained in the business. It,
therefore, seems obvious that the liability of the corporation on the capital stock, issued as a stock dividend in lieu of cash,
cannot be disregarded; in fact, it represents invested capital drawn from surplus in which stockholders had an interest.
It is in effect contended by the plaintiff that the statutory term "net profits" is synonymous with "annual net earnings", and
that in determining the net profits for the years in question, the losses of preceding years, as indicated by the deficit, may
be disregarded. The fallacy of this contention is obvious. This theory would permit that which the statute, hereinabove
quoted, expressly prohibits, to wit, the payment of dividends out of annual net earnings, even though such payment
resulted in an impairment of capital. The payment of dividends out of annual net earning when, as in the immediate case, a
deficit exists, would result in an impairment of capital, in violation of the statute.
If the annual net earnings of a corporation are justifiably applied to legitimate corporate purposes, such as payment of
debts, reduction of deficits, and restoration of impaired capital, the right of non-cumulative preferred stockholders to the
payment of dividends is lost. If the annual net earnings are applied against prior losses and are thereby completely
absorbed, there are no net profits from which dividends may be lawfully paid or to which the inchoate right to dividends
may attach. If the annual net earnings are lawfully expended, the right of non-cumulative preferred stockholders therein is
lost.
CASE LAW/ DOCTRINE:
The payment of dividends from annual net earnings, when the liabilities of a corporation exceed the assets, would be in
derogation of the rights of creditors. The payment of dividends under such circumstances, while debts accrue, would be
contrary, not only to sound business practice, but to the legislative policy.
It is well established that dividends on preferred stock are not payable absolutely and
unconditionally, but only out of the sources designated by the statute, to wit, "surplus" or "net
profits."

CORPORATION LAW
Case Digest
197 Keough v St. Paul Milk Co. AUTHOR: Sarah
14 April 1939, 285 N.W. 809 Note/s:
TOPIC: Dividend Declaration Discretionary with Board
PONENTE: Loring
FACTS
1. This case involves 3 suits.
2. Plaintiff (employee and trustee) brought an action against defendant (employer) which sought (a) to recover salary
alleged to be due (salary suit), (b) to recover shares of stock (stock division suit), and (c) to have certain actions of the
defendant to be annulled (representative suit).
3. Plaintiff, Patrick Keough, was a farmer and a dairy man who conducted milk route in St. Paul.
4. In 1916 Patrick Keough and his brother James re-entered the dairy business as partners with Ryan and Peter A. Hanson.
5. The amount contributed by each is involved in the stock suit; $20,000 by the Keoughs, $15,000 by Ryan, and $5,000 by
Hanson in the form of milk routes.
6. The partnership purchased the Casey Pure Milk Company for $56,500.
7. In the partnership, James Keough transferred his interest to plaintiff.
8. The partners incorporated the St. Paul Milk Company, and the partnership assets and liabilities were turned over to it
and corporate stock was issued to the partners for their respective interests.
9. The authorized capital was $100,000 with authority to conduct business when $50,000 was paid in. Only 597 shares of
$100 par value were issued: 285 were issued to Patrick Keough, 240 to Ryan, and 72 to Hanson.
10. Ryan was selected as president of the corporation, Patrick Keough vice president, and Hanson secretary.
11. In 1930, the corporation purchased from P.J. Keough 185 shares. Hence, the outstanding capital stock was reduced to
41,200.
12. In 1936, the authorized capital stock was increased to $300,000 through an amendment.
13. A six-to-one stock dividend was declared, and the amount necessary to cover the issued shares (2,472 at $100 par or
$247,200) was transferred from the surplus account to the capital account.
14. This dividend increased the number of outstanding shares to 2,884, making a total capital of $288,400.
15. From 15 December 1924, when the corporation paid its first dividend, until October 22, 1935, $169,470 was
distributed among stockholders.
16. On 31December 1936, the corporation had investments of $128,168.72.
17. The record does not disclose mortgages or liens against the corporate property; sales are on a cash basis; merchandise
inventory is small.
18. Plaintiff alleged his right to have a dividend order declared on the premise that those in charge of corporate affairs are
wrongfully withholding profits available for cash dividends.
19. Relying upon the capitalization in 1936 by Ryan and Hanson’s cooperation of large percentage of the accumulated
surplus without the necessity other than to keep it within the corporation, plaintiff claim that the capitalization was to
evade federal taxes.
ISSUE: Whether or not the corporation can be compelled to declare dividends
HELD: Yes. The Court may compel the corporation to declare dividends because it was withheld for unlawful purpose
RATIO:
The mere fact that a large corporate surplus exists is not enough to warrant equitable intervention; the test is good faith
and reasonableness of the policy of retaining the profits. However, where dividends are withheld for an unlawful
purpose, to deprive stockholders of his right to a just proportion of the corporation's profit, the court may compel the
corporation to declare dividends.
We recognize that the surplus capitalized must be regarded as capital since, having been transferred to the capital account,
it of necessity becomes a part of it and becomes characterized by its attributes. However, this does not prevent an
equitable determination of the question here presented. The stock dividend actually accomplished a change in form and
not in substance. "A stock dividend really takes nothing from the property of the corporation, and adds nothing to the
interests of the shareholders. Its property is not diminished, and their interests are not increased." Where profits clearly

CORPORATION LAW
Case Digest
warrant payment of a dividend and the condition of the business is such that payment would be proper, the stockholders
cannot be cut off by a stock dividend when its purpose is wrongfully to keep the profits of the business within the control
of those dominating the affairs so as to be available to them. Such action is oppressive and evinces a bad faith sufficient to
justify equitable intervention.
CASE LAW/ DOCTRINE:
General Rule: BOD has discretion whether or not to declare dividends and in what form.
Exception: Stock dividends, in which case a 2/3 vote of OCS is necessary.
However, such discretion cannot be abused and the BOD cannot accumulate surplus profits unreasonably on the
excuse that it is needed for expansion or reserves.

CORPORATION LAW
Case Digest
198 Dodge v. Ford Motor Co. AUTHOR: De Guzman, Bien
(1919), 170 N.W. 668 Ford was generous man wanted to give the capital stock to
TOPIC:Dividend Declaration Discretionary with Board make room for more employees.
PONENTE:Ostrander, J;
FACTS
1.In 1916, brothers John and Horace Dodge owned 10% of the common shares of the Ford Motor Company. Dodge
Brothers do not have any seat in the Board of Directors. Henry Ford owned 58%of the outstanding commonshares and
controlled the corporation and its board of directors.
2.Starting in 1911, the corporation paid a regular annual dividend of $1.2 million, which was 60%of its capital stock of $2
million but only about 1 percent of its total equity of $114 million. In addition, from 1911 to 1915, the corporation paid
special dividends totaling $41 million.
3. Ford’s business strategy was focused on mass-market cars that were lower priced but appealed to a larger group of
potential customers.To afford to sell cars at a low price the company focused on mass production of cars.
4. In 1916, the corporation announced a new dividend policy of paying no special dividend. Instead, it would reinvest all
earnings except the regular dividend of $1.2 million. The Goal of Ford was “to expand its production capacity; to double
employees salaries; and to cut the price of cars.”
5. The Dodge brothers sued the corporation and the directors to force them to declare a special dividend.
ISSUE:
1. Whether or not can the Board of Directors have absolute discretion on Ford’s stocks without any permission from the
stockholders?
HELD: Yes, It is a well-recognized principle of law that the directors of a corporation, and they alone, have the power to
declare a dividend of the earnings of the corporation, and to determine its amount.
RATIO:
1. It is a well-recognized principle of law that the directors of a corporation, and they alone, have the power to
declare a dividend of the earnings of the corporation, and to determine its amount. Courts will not interfere in the
management of the directors unless it is clearly made to appear that they are guilty of fraud or misappropriation of
the corporate funds, or they refuse to declare a dividend when the corporation has a surplus of net profits which it
can, without detriment to the business, divide among its stockholders, and when a refusal to do so would amount to
such an abuse of discretion as would constitute a fraud, or breach of that good faith that they are bound to exercise
towards the shareholders.
2. Their power over them is absolute so long as they act in the exercise of their honest judgment. They may reserve
of them whatever their judgment approves as necessary or judicious for repairs or improvements, and to meet
contingencies, both present and prospective. And their determination in respect of these matters, if made in good
faith and for honest ends, though the result may show that it was injudicious, is final, and not subject to judicial
revision.
3. Mr. Henry Ford is the dominant force in the business of the Ford Motor Company. No plan of operations could be
adopted unless he consented, and no board of directors can be elected whom he does not favor. One of the
directors of the company has no stock. One share was assigned to him to qualify him for the position, but it is not
claimed that he owns it. A business, one of the largest in the world, and one of the most profitable, has been built
up. It employs many men, at good pay.
CASE LAW/ DOCTRINE:
The judges are not business experts. It is recognized that plans must often be made for a long future, for expected
competition, for a continuing as well as an immediately profitable venture.The experience of the Ford Motor Company is
evidence of capable management of its affairs. It may be noticed, incidentally, that it took from the public the money
required for the execution of its plan, and that the very considerable salaries paid to Mr. Ford and to certain executive
officers and employees were not diminished.

CORPORATION LAW
Case Digest
199 WABASH RAILWAY CO. v. BARCLAY AUTHOR: Danna
6 January 1930, 67 A.L.R. 762
TOPIC: Dividends and Purchase by Corporation of its Respondents, holders of preferred shares, seek to have it
Own Shares - Preference as to Dividends declared that they were entitled to receive preferential
PONENTE: Holmes dividends for each fiscal year from 1915 to 1926, to the
extent that such dividends were earned in those years but
were unpaid, before any dividends were paid on other stock.
FACTS
1. Respondents, holders of preferred stock, brought this action against petitioner corporation.
2. 1915 - The railway company was organized with three classes of capital stock
• Profit Sharing Preferred Stock A - shares of the par value of $100, of Five Per Cent
• Convertible Preferred Stock B - shares of the par value of $100, of Five Per Cent
• Common stock - shares of the par value of $100
3. 1915-1926 - There were net earnings in most of the years. However, for a number of years, there was no dividend, or
less than five per cent, was paid on Class A.
4. $16,000,000 net earnings that could have been used for the payment were used instead on improvements and
additions to the property and equipment of the road. The expenditures were proper and were made in good faith.
Moreover, the money could not have been applied to dividends consistently with the duties of the Road.
5. Now, the Company is more prosperous and proposes to pay dividends not only to A, but also to B and to the common
stock.
6. Respondents contention: The Company is not entitled to pay dividends to B and to the common stock until it has paid
them unpaid preferential dividends for the prior fiscal years in which it had net earnings that might have been applied
to them but were not.
ISSUE: Whether or not respondents are entitled to receive the alleged “unpaid preferential dividends” for the prior fiscal
years
HELD: No, because respondent's stock certificates provided that preferential dividends were noncumulative. Thus,
respondents were entitled only to a dividend if declared out of annual profits. If those profits were justifiably applied by
the directors to capital improvements and no dividend was declared within the year, the claim for that year was gone and
could not be asserted at a later date.
RATIO:
1. When, as was the case here, the dividends in each fiscal year were declared to be non-cumulative and no net income
could be so applied within the fiscal year referred to in the certificate, the right for that year was gone. If the right is
extended further upon some conception of policy, it is enlarged beyond the meaning of the contract and the common
and reasonable understanding of men.
2. The Preferred A dividend is "preferential" but not guaranteed or made a charge upon any earnings, any more than a
cumulative dividend is made a charge on earnings. Each fiscal year is a separate accounting period to determine the
amount of the non-cumulative dividends which the Preferred A stockholders are entitled to receive in and for that
year, but not for any other purpose. The preference is not limited to dividends which may be declared by the Board in
the exercise of its ordinary discretion. The dividend right is given by the contract, not by any dividend declaration.
The contract provided that the Preferred A stock "is entitled to receive preferential dividends in each year."
CASE LAW/ DOCTRINE:
In the case of non-cumulative stock entitled only to a dividend if declared out of annual profits, if those profits are
justifiably applied by the directors to capital improvements and no dividend is declared within the year, the claim for that
year is gone and cannot be asserted at a later date.
Even if there are net earnings, the holder of stock, preferred as well as common, is entitled to have a dividend declared
only out of such part of them as can be applied to dividends consistently with a wise administration of a going concern.

CORPORATION LAW
Case Digest
200 Burk et al. v. Ottawa Gas & Electric Co., AUTHOR:Palomique, Ernesto III C.
123 Pac 875 (1912) Stockholders were asking for declaration of dividends which
TOPIC:Preference as to Dividends were allegedly used to pay as necessary expenses in
PONENTE:Smith, J. conducting the business of the corporation.
FACTS
1. Ottawa Gas & Electric Co. was involved in a franchise to construct and maintain a natural gas plant in the city of
Ottawa for the term of twenty-five years.
2. Burk along with the other preferred stockholders of Ottawa Gas & Electric Co. filed an action against its board of
directors to:
a. require the directors to account for all the property and assets of the corporation,
b. declare such dividends from the net profits of the business of such co. as should have been declared since
1 Jan. 1906, and
c. restrain the officers and directors during the pendency of the action from paying out any of the money or
disposing of the assets of the company except such amounts as should be necessary to pay the actual
necessary current expenses of conducting the business of the corporation.
3. Ottawa maintained that it was unable to declare a dividend because its funds were exhausted by expenditures that
it was obliged to make. The principal expenditure was for extensions of the company's plant.
4. The district court found that these extensions "were necessary and for the betterment of the plant and the
accommodation of the patrons."Hence this appeal.
ISSUE:Whether or not the preferred stockholder has a right to a declaration and payment of dividends in this case.
HELD: Technically, yes. But the Court here remanded the case to the trial court for more determinative proceedings
because the manner and nature of the expenditures for the extensions or expansions of the company’s plant was not clearly
illustrated.
RATIO:
The trial court used the term "necessary" as meaning merely that the extensions were advisable as a matter of good
management, for the benefit of the business. If it is so interpreted this court is of the opinion that the funds so employed
were wrongfully diverted from the payment of dividends to the plaintiffs. The directors of the corporation owed a
positive duty to pay a dividend to the preferred stockholders whenever in any year there were net profits available.
The funds that might be used for that purpose could not rightfully be expended for extensions merely for the benefit of the
business, nor could they be withheld to meet the expenses of the nest year.
The fair interpretation of the contract between Ottawa and its stockholders is that if in any year net profits are earned, a
dividend is to be declared. To hold otherwise, meaning if the Board of Directors had absolute discretion when to declare
dividends and when not to, when the corporation has funds for such dividends, would result in temptation to unfair dealing,
giving one party the option to pay the other or not. In the case at bar, the accumulated profits would be lost forever since
the dividends were non-cumulative.
Preferred stockholders, however, are not generally creditors until dividends are declared. In the case at bar, if dividends
should have been declared to such stockholders, they are considered creditors from that time.
CASE LAW/ DOCTRINE:

General Rule: the right of the stockholders to be paid dividends vests as soon as the same have been lawfully declared by
the Board of Directors. From that time, it becomes a debt owing by the corporation to each stockholder and no revocation
of the dividends can be made.
The reason for this rule is based on reasons of policy which is to prevent the misleading of investors and the probable
effect which a revocation may have on the stability of transactions involving shares of stock.
Exception: It does not apply where the declaration of dividends was:

(1) Not yet announced or communicated to the public, or,
(2) When stock dividends are declared since these are not distributions but
CORPORATION LAW
Case Digest
merely represent changes in the capital structure.

CORPORATION LAW
Case Digest
201 McClaran v Crescent Planing Mill Co. AUTHOR: Keith Meridores
February 27, 1906, 117 Mo. App. 40 (Court of Appeals) Take note: right of the stockholder to the dividends vests as
TOPIC: When Right to Dividends Vests; Right of soon as it is declared by the BoD. The corp. now becomes
Transferee indebted to the stockholder for what it declared as
PONTENTE: Judge Moses N. Sale dividends.
Jist: BoD authorized release of cash dividend which was to
(Unusual but important note: McClaran is the counsel of the be paid in 4 equal installments. After payment of the first
plaintiff. McClaran is NOT the stockholder. The installment, sabay bawi. BoD puts up several defenses as to
stockholder died, McClaran is just the administrator of the why the 3 remaining installments will no longer be paid.
stockholder) (read on)
FACTS
1. Crescent Planing Mill Co., a manufacturing corp in St. Louis, Missouri, through its board of directors, declared a cash
dividend. Their reason for declaring such was because they had ample surplus of funds.
2. The cash dividend was to be divided into 4 equal installments (1903: Feb. 15; Apr. 1; Jul. 1; Oct. 1)
3. No other board resolution followed, and the funds for the dividends weren’t set aside. (take note of this, this will be one
of the defenses of the corp. later on)
4. The corp. paid the 1st of 4 installments (the Feb. 1 installment).
5. When April came (time to pay the 2nd installment), the board held a meeting and resolved that they had overestimated
their surplus funds, thus, they’re revoking and rescinding the 3 remaining installments indefinitely. (Don’t dwell too much
and make it a point of conflict what’s the difference of revoking and rescinding. Basta binawi ng corp yung sinabi nila)
6. The stockholder requested from the corp. it pay its 2nd installment of $235.50; which was obviously refused.
7. The stockholder filed an action for recovery of the alleged amount.
8. Corp. puts up the ff. defense:
- Funds weren’t actually set aside for payment of the dividends
- Their resolution (in #5) superseded their dividend declaration (in #1).
9. Lower Court: in favor of the stockholder.
10. Corp. appealed to the CA of Missouri.
11. Stockholder died. McClaran, his counsel was appointed as administrator.
12. The corp. through its counsel contends:
- The phrase “set aside” is included in the definition of dividends, thus the BoD needs to set aside funds for the dividends.
- He cites a case, (Ford v East Hampton) and says that the BoD in that case validly rescinded its declaration of dividends.
So why shouldn’t they also be allowed to do the same?
ISSUE:
1. Whether or not the mere declaration of distribution of dividends by the corp. creates a debt in favor of the stockholders
despite the corp. not setting aside of funds for it?
2. Whether or not the corp. can rescind its declaration that it will distribute dividends and thus not pay the installments not
yet paid?
HELD:
1. Yes.
2. No.

CORPORATION LAW
Case Digest
RATIO:
Issue 1
1. it appears that the principle obtains that the mere declaration of the dividend, without more, by competent authority
under proper circumstances, creates a debt against the corporation in favor of the stockholder the same as any other general
creditor of the concern [this means, upon declaration of dividends by the BoD and if they weren’t able to set aside funds,
the stockholders who are entitled to receive it has a status of a general creditor; BUT nevertheless! They still have the
right to the dividends] ;
2. whereas, the setting apart of a fund after or concurrent with the declaration, out of which the debt thus created is to be
paid, passes one step further toward securing the payment of the identical fund to the shareholder inasmuch as the law
treats the setting apart of such fund as a payment to the corporation as trustee for the use of the stockholder, on which fund
the stockholder has a lien, and to which fund he has rights superior to the general creditor. [pero, in the event na i-set aside
yung funds, what happens is that the corp is now a holder in trust for THAT funds for those stockholders who are entitled
to it. Baga, they have a better right now compared to a general creditor]
3. Explanation: In sum, when the BoD declares stock dividends, it is already liable. It doesn’t matter if they put aside
specific funds for that purpose. The only effect of setting aside funds upon declaration of dividends is that, it puts the
stockholders entitled in a better position compared to general creditors.
Issue 2
1. a cash dividend, properly and fairly declared, cannot be revoked by the subsequent action of the corporation, for if, by
the declaration of the dividend, the corporation thereby becomes the debtor of the stockholder, it goes without saying that
the debtor cannot revoke, recall or rescind the debt or otherwise absolve itself from its payment by any action on its part
against or without the consent of the creditor.
2. The resolution of April 11th, attempting to so do, was of no force.
3. The case cited by the counsel for the corp. (tignan mo yung #12, yung Ford v East Hampton) is inapplicable.
4. In that case it appears that the board of directors made and declared a dividend, but before notifying any of the
stockholders except the directors themselves who were present, and without having set apart a fund for its payment,
rescinded and recalled their action declaring the same. (Hindi pa alam ng stockholders na nagdeclare, so pwede pa bawiin
ng BoD)
5. It is preposterous to say that such debt can be cancelled by the action of the debtor (the corp.) without the consent of the
creditor (stockholders).
CASE LAW/ DOCTRINE:
1. When the directors of a corporation formally declare a dividend out of the profits existing at the time it is
declared, the relation of debtor and creditor is established between the corporation and the stockholders; a debt is
created against the corporation and in favor of each stockholder for the amount of the dividend due him on his
stock.
2. It is not necessary for the directors to go further and set apart a fund for the payment of the dividend; in that case, a trust
fund would be set apart for the use of the stockholders, giving them rights thereto superior to the general creditors.
3. When a dividend has been properly and formally declared, it cannot be rescinded by any subsequent action of the
corporation, because a debtor cannot revoke or rescind his debt.

CORPORATION LAW
Case Digest
202 Cojuangco v. Sandiganbayan AUTHOR: Marvin
586 SCRA 790 (2009)
TOPIC: When Right to Dividends Vests; Rights of He who owns the shares must also own the dividends of
Transferee whatever kind.
PONENTE: CARPIO MORALES, J.
FACTS
27. Respondent Republic of the Philippines (Republic) filed before the Sandiganbayan a "Complaint for Reconveyance,
Reversion, Accounting, Restitution and Damages,", praying for the recovery of alleged ill-gotten wealth from the late
President Marcos and former First Lady Imelda Marcos and their cronies, including some 2.4 million shares of stock in
the Philippine Long Distance Telephone Company (PLDT).
28. The complaint, which was later amended to implead herein petitioners Ramon and Imelda Cojuangco (the
Cojuangcos), alleged that the Marcoses ill-gotten wealth included shares in the PLDT covered by shares of stock in the
Philippine Telecommunications Investment Corporation (PTIC), registered in the name of Prime Holdings, Inc.
(PrimeHoldings).
29. The Sandiganbayan dismissed the complaint with respect to the recovery of the PLDT shares, hence, the Republic
appealed to the Supreme Court. The Supreme Court ruled in favor of the Republic, declaring it to be the owner of
111,415 PTIC shares registered in the name of Prime Holdings. Sandiganbayan granted the Motion for the Issuance of
a Writ of Execution with respect to the reconveyance of the shares issued by PLDT in favor of PTIC, but denied the
prayer for accounting of dividends.
ISSUE:
Whether the Republic, having transferred the shares to a third party, is entitled to the dividends, interests, and earnings.
HELD:
Yes. The owner of the shares is the one who is entitled to its fruits. The transferor has the right to dividends as against the
corporation without notice of transfer but it serves as trustee of the real owner of the dividends, subject to the contract
between the transferor and transferee as to who is entitled to receive the dividends.
RATIO:
1. Although the inclusion of the dividends, interests, and earnings of the 111,415 PTIC shares as belonging to the Republic
was not mentioned in the dispositive portion of the Court’s Decision, it is clear from its body that what was being
adjudicated in favor of the Republic was the whole block of shares and the fruits thereof, said shares having been found to
be part of the Marcoses’ ill-gotten wealth, and therefore, public money. It would be absurd to award the shares to the
Republic as their owner and not include the dividends and interests accruing thereto. An owner who cannot exercise the
“juses” or attributes of ownership - the right to possess, to use and enjoy, to abuse or consume, to accessories, to dispose or
alienate, to recoveror vindicate, and to the fruits - is a crippled owner.
2. The term "dividend" in its technical sense and ordinary acceptation is that part or portion of the profits of the enterprise
which the corporation, by its governing agents, sets apart for ratable division among the holders of the capital stock. It is a
payment to the stockholders of a corporation as a return upon their investment and the right thereto is an incident of
ownership of stock.
3. Dividends are payable to the stockholders of record as of the date of the declaration of dividends or holders of record on
a certain future date, as the case may be, unless the parties have agreed otherwise. And a transfer of shares which is not
recorded in the books of the corporation is valid only as between the parties, hence, the transferor has the right to dividends
as against the corporation without notice of transfer but it serves as trustee of the real owner of the dividends, subject to the
contract between the transferor and transferee as to who is entitled to receive the dividends.
4. It is thus clear that the Republic is entitled to the dividends accruing from the subject 111,415 shares since 1986 when
they were sequestered up to the time they were transferred to Metro Pacific via the Sale and Purchase Agreement of
February 28, 2007; and that the Republic has since the latter date been serving as trustee of those dividends for the
MetroPacific up to the present, subject to the terms and conditions of the said agreement they entered into

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
Ownership is a relation in law by virtue of which a thing pertaining to one person is completely subjected to his will in
everything not prohibited by law or the concurrence with the rights of another. Its traditional elements or attributes include
jus utendi or the right to receive from the thing what it produces
203 Marcus v. RH Macy AUTHOR: Pat

74 N.E. 2d 228 May 15, 1947
TOPIC: Amendment Changing Stockholder’s Rights
PONENTE: Lewis, J.
FACTS:
1. RH Macy & Co., Inc., notified its stockholders that at its annual meeting it would act on a proposal to give preferred
stockholders voting rights, equal to those which common stockholders' were entitled.
2. Prior to the meeting, Marcus (a common stockholder and the registered owner of fifty shares of the common stock),
notified the corporation that she objected to the proposed actions and demanded payment for the common stock then
owned by her.
3. October 30, 1945: at the stockholders’ meeting, the proposal to amend the certificate of incorporation was approved
and Marcus’ stock was voted against the amendment.
4. Marcus brought an action to determine the value (appraisal) of her stock as a basis for the enforcement of payment for
it.
5. The trial court denied her application for the appointment of appraisers to evaluate her stock and her petition was
dismissed.
6. The appellate court affirmed the order of the trial court.
Contentions of RH Macy & Co., Inc:
• Of the 1,656,000 shares of RH Macy & Co., Inc., Marcus only owned 50 shares of common stock outstanding
• That "The effect of the amendment upon Marcus’ stock (if any) was so trivial and insignificant that it may fairly be
described as de minimis."
• That if Marcus had a bona fide desire to sell her stock at market value she could have done so on October 30,
1945, for approximately three times the amount of her investment and at more than twenty points per share above
its book value.
ISSUE:
Whether Marcus may invoke Sec.38(d) of the NY Stock Corporation Law as a means legally appropriate to accomplish the
appraisal of her stock and to enforce payment therefor.
HELD:
Yes. By limiting the voting power of Marcus’ common shares to a proportionate extent as it did, the corporate action was
of such a character as to afford her a legal basis to invoke the procedure prescribed by N.Y. Stock Corp. Law § 38(9)(d), as
a means to accomplish the appraisal of her stock and payment for it. The Court ordered the matter to be remitted to Special
Term for further proceedings.
RATIO:
1. The amendment to the RH Macy’s certificate of incorporation, granted to the holders of the corporation's preferred
stock additional rights which increased their voting privileges from a right to vote only in specified contingencies to
voting rights equal to those of the holders of the corporation's common stock.
• By granting to the 165,600 preferred shares then outstanding voting rights equal share for share to those to which
the holders of common stock are entitled, the aggregate number of shares having voting rights equal to those of the
common shares was substantially increased and thereby the voting power of each common share outstanding, was
CORPORATION LAW
Case Digest
altered by the resulting prorata diminution of its potential worth as a factor in the management of the corporation's
affairs.
2. We conclude that such an alteration or limitation in the voting power of the common shares held by the appellant
Marcus – when she sent a formal written notice of her objection - was sufficient to qualify her to invoke the statutory
procedure under Sec.38(d).
3. RH Macy was given the right to alter the "privileges or voting powers of any shares previously authorized, or the
restrictions or qualifications thereof * * *." But that statutory right was burdened with conditions set forth in section
38(d):
"9. If the certificate * * *
(d) abolishes any voting right of the holders of shares of any class or limits their voting rights, except as the same may be
limited by the voting rights given to new shares of any class authorized by the certificate; any holder of any such shares
not in favor of such action may at any time prior to the vote authorizing such action * * * object to such action and
demand payment for his stock, and thereupon such stockholder or the corporation shall have the right, subject to the
conditions and provisions of section twenty-one, to have such stock appraised and paid for as provided in said section.
Such objection and demand must be in writing and filed with the corporation."
4. Section 38 permits an appraisal only when an amended certificate alters the preferential rights of the outstanding stock
of a corporation as between the different classes of stock * * * it does not apply to a case where such rights are left
unchanged as between themselves, but are both made subject to a new issue of stock." ( Matter of Kinney, supra.)
CASE LAW/ DOCTRINE:
A corporation may file a certificate amending the "privileges or voting powers of any shares previously
authorized, or the restrictions or qualifications thereof" but "If the certificate * * * abolishes any voting right of
the holders of shares of any class or limits their voting rights, except as the same may be limited by the voting
rights given to new shares of any class authorized by the certificate * * * any holder of any such shares not in
favor of such action may at any time prior to the vote authorizing such action * * * object to such action and
demand payment for his stock, and thereupon such stockholder or the corporation shall have the right, subject to
the conditions and provisions of section twenty-one, to have such stock appraised and paid for as provided in
said section. Such objection and demand must be in writing and filed with the corporation." (§ 38, subd. 9, par.
[d]; italics supplied.)
Where preferred stockholders of a corporation had a right to vote only in specified contingencies, and
the corporation proposed to grant them voting rights equal share for share with common stockholders, a common
stockholder who gave the corporation written notice of her objection and demand for payment, and who
thereafter voted against the proposed amendment, was entitled to invoke the statutory procedure for an appraisal
of and payment for her stock. The amendment had the effect of limiting the voting power of each common share
by a resulting prorata diminution of its potential worth as a factor in the management of the corporation's affairs.
The preferred stock here was not a new issue.

CORPORATION LAW
Case Digest
204 PHILIPPINE TRUST COMPANY v. RIVERA AUTHOR: Yayie Lanting
January 29, 1923 G.R. No. L-19761
TOPIC: Decrease of Capital Stock
PONENTE:Street, J.
FACTS
1. Cooperativa Naval Filipina was duly incorporated, with a capital of P100,000, divided into one thousand shares of a par
value of P100 each. Among the incorporators of this company was numbered the defendant Marciano Rivera.
2. Marciano Rivera subscribed for 450 shares representing a value of P45,000, the remainder of the stock being taken by
other persons.
3. The company became insolvent and went into the hands of the Philippine Trust Company, as assignee in bankruptcy;
and by it this action was instituted to recover one-half of the stock subscription of the defendant, which admittedly has
never been paid
4. The reason of Rivera of his failure to pay the entire subscriptions is that not long after the company had been
incorporated, a resolution was adopted by the stockholders that the capital should be reduced by 50% and the subscribers
are released to pay any unpaid balance of their subscription in excess of 50% of the capital. It seems to have been supposed
that the subscription of the various shareholders had been cancelled to the extent stated; and fully paid certificate were
issued to each shareholders for one-half of his subscription.
5. The trial judge having given judgment in favor of the plaintiff for the amount sued for, the defendant appealed.
ISSUE:
Whether or not the reduction of the corporate capital by releasing the subscribers from payment of their subscription is
valid and proper
HELD:
No. The resolution releasing the shareholders from their obligation to pay 50% of their respective subscriptions was wholly
ineffectual
RATIO:
It is established doctrine that subscription to the capital of a corporation constitute a find to which creditors have a right to
look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has no
power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable
consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner an
under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance
with the statutory regulations is necessary (14 C. J., 498, 620).
In the case before us the resolution releasing the shareholders from their obligation to pay 50 per centum of their respective
subscriptions was an attempted withdrawal of so much capital from the fund upon which the company's creditors were
entitled ultimately to rely and, having been effected without compliance with the statutory requirements, was wholly
ineffectual.
CASE LAW/ DOCTRINE:

Subscription to the capital of a corporation constitute a find to which creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debts
A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his
shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take
place only in the manner an under the conditions prescribed by the statute or the charter or the articles of incorporation.

CORPORATION LAW
Case Digest
205 BLTB v Bitanga AUTHOR: Jade Lorenzo
August 10, 2001 GR 1377934
TOPIC: TRANSFER OF SHARES A person who has purchased stock, and who desires to be recognized as a
PONTENTE: Ynares-Santiago, J. stockholder for the purpose of voting, must secure such a standing by having the
transfer recorded on the corporate books. If registration is refused, he can go to
court to prove his right to have such transfer recorded.
Stock Transfer Book - a record book which lists the owners of shares of stock in a
corporation. It has the details as distinctive number of stocks, number of shares,
name and address of the transferor, name and address of transferee, date of approval
by competent authority, reference number, etc.
FACTS
The Batangas Laguna Tayabas Bus Company Inc. was owned by 4 generations of the Potenciano family. They owned
87.5% of the capital stock if BLTB.
On 28 October 1997, the Potencianos entered into a Sale and Purchase Agreement and sold to BMB Property Holdings,
Inc. represented by its president, Benjamin Bitanga their 21,071,114 shares of stock in BLTB, which represented 47.98%
of the total outstanding capitL stock. The purchase price for such shares was P72,076,425.00. Downpayment worth
P44,354,723.00 was made payable upon signing of the Agreement, while the balance of P27,721,702.00 was payable on 26
November 1997 and upon receipt of pertinent corporate documents (Secretary's Certificate, execution of the Agreement,
SPA in favor of Dolores Potenciano, resignation letters of the Directors of BLTB except Henry John, Michael, and
Candido Potenciano, etc). Bitanga guaranteed to take over the management and operation of the business but shall
surrender it to the Potencianos in case he fails to pay the balance of the purchase price.
On November 1997, Bitanga, et al were elected as directors of the corporation.
During a Board Meeting 8n 14 April 1998, the newly elected directors of BLTB scheduled the annual stockholders
meeting on 19 May 1998 to be held at the principal office of BLTB in San Pablo, Laguna. On 16 May 1998, Michael
Potenciano wrote Bitanga, requesting for a postponement of the stockholders meeting due to the absence of a 30-day
notice. There was no response from Bitanga on whether or not the request for postponement was granted.
On 19 May 1998, the date of the meeting, a notice of postponement was published in the Manila Bulletin. Since there was
no prior notice of postponement, 286 stockholders representing 87% of BLTB shares arrived and majority rejected the
postponement of the meeting. The Potenciano group was re-elected to the Board of Directors.
The Bitanga group refused to relinquish their positions and continued to act as directors and officers of BLTB. The conflict
between the Bitanga group and the Potencianos reached the level of unrest in the company and even violence among
laborers and employees.
Cases filed by both factions:

21 May 1998 - Complaint for Damages and Injunction filed by Bitanga with SEC ; prayer for issuance of TRO denied
at the ex parte hearing conducted by SEC Chairman Perfecto Yasay
25 May 1998 - Complaint for Injunction and Damages with Preliminary Injunction and TRO with SEC filed by
Potenciano; granted by Yasay, enjoining the Bitanga group from acting as officers and directors of BLTB.
8 June 1998 - petition seeking to annul the May 19, 1998 stockholders meeting, filed by Bitanga with SEC ; granted
on 17 June 1998 upon posting a P20M bond ; held that the Bitanga group remains as thr legitimate Board.
29 June 1998 - Potenciano group filed a petition for certiorari with SEC en banc seeking for TRO on the June 17 order
; petition granted 21 July 1998
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Case Digest
22 July 1998 - Bitanga group filed petition for certiorari with the Court of Appeals
29 July 1998 - SEC issued writ of preliminary injunction against Bitanga after the Potencianos posted P20M bond.
23 November 1998 - CA reinstated the order on June 17 declaring Bitanga as the legitimate Board of BLTB
ISSUE:
Whether or not the SEC En Banc erred when it sustained the validity of the stockholders meeting held on 19 May 1998
HELD:
The petition is grsnted. The orders of the SEc En Banc dated July 21, 1998 (and July 27, 1998) are reinstated.
RATIO:
In issuing writ of preliminary injunction against the Bitanga group, the SEC En Banc exercised its wisdom and
competence as a special administrative agency dealing with corporate law issues. It cannot be disputed that until the
registration is accomplished, the transfer cannot be effective as against the corporation. The transfer of shares from the
Potenciano to the Bitanga group has not yet been recorded in the books of the corporation. Hence, the Potenciano group
were the ones entitled to attend and to vote at the stockholders meeting on 19 May 1998. The Bitanga group cannot vote
nor be voted for. The SEC En Banc committed grave abuse of discretion when it concluded that there was no quorum in
the said meeting and declaring the Bitanga group as the legitimate Board.
The purpose of the registration is to enable the transferee to exercise all the rights of a stockholder, including the right to
vote and to be voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons
entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of
record has a right to participate in any meeting. His vote can be properly counted to determine whether a stockholders
resolution was approved, despute the claim of the alleged transferee. On the other hand, a person who has purchased stock,
and who desires to be recognized as a stockholder for the purpose of voting, must secure duch a standing by having the
transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider.
CASE LAW/ DOCTRINE:
Effect of lack of registration - Until registration is accomplished, the transfer, though valid between the parties, cannot be
effective as against the corporation. The unrecorded transferee cannot enjoy the status of a stockholder; he cannot vote nor
be voted for, and he will not be entitled to dividends. The corporation will be protected when it pays dividends to the
registered owner despite a previous transfer of which it had no knowledge (Section 63 - Corporation Code).
Puno, J.
It is not disputed that the Bitanga group has acquired 50.26% of the outstanding capital stock of BLTB after the
Potencianos sold their shares. Dolores Potenciano cannot justify her participation in the said meeting by invoking Section
63 of the Corporation Code and arguing that the sale of the shares of stocks to the Bitanga group was not recorded in the
books of the corporation. Section 63 is intended to protect the interest of the corporation and third persons who may be
prejudiced by the transfer of the shares of stocks. It follows therefore, that as between the parties to the sale, the transfer
shall be valid even if nit recorded in the books of the corporation.
The sellers, the Pitencianos, cannot deny that they no longer have rights as shareholders as they have already relinquished
said rights to the buyer, Bitanga, pursuant to the contract of sale. Unless the sale of the shares is annulled, the rights of the
buyer under the contract must be respected and upheld

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Case Digest
206 USON v DIOSOMITO AUTHOR: Krystelle
G.R. No. L-42135; June 17, 1935
TOPIC: Transfer of Shares: Effect of Lack of Registration No transfer, however, shall be valid, except as between the
PONENTE: Butte, J. parties, until the transfer is entered and noted upon the
books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the
number of the certificate, and the number of shares
transferred.
FACTS
15. Toribia Uson filed a civil action for debt iagainst Vicente Diosomito and that upon institution of said action an
attachment was duly issued and levied upon the property of the defendant Diosomito, including seventy-five
shares of the North Electric Co., Inc., which stood in his name on the books of the company when the attachment
was levied.
16. Subsequently, Uson obtained judgment in said civil case against the defendant Diosomito for the sum of P2,300
with interest and costs.
17. To satisfy said judgment, the sheriff sold said shares at public auction in accordance with law. Uson was the
highest bidder and said shares were adjudicated to her.
18. In the present action, H.P.L. Jollye claims to be the owner of said 75 shares of the North Electric Co., Inc., and
presents a certificate of stock issued to him by the company.
19. There is no dispute that the defendant Vicente Diosomito was the original owner of said shares of stock, having a
par value of P7,500, and he sold said shares to Emeterio Barcelon and delivered to the latter the corresponding
certificates. But Barcelon did not present these certificates to the corporation for registration until the 16th
of September, 1932, when they were cancelled and a new certificate, No. 29, was issued in favor of Barcelon,
who transferred the same of the defendant H.P.L. Jollye to whom a new certificate No. 25 was issued.
20. It will be seen, therefore, that the transfer of said shares by Vicente Diosomito to Barcelon was not registered and
noted on the books of the corporation until September 16, 1932, which was some nine months after the attachment
had been levied on said shares in civil case No. 2525 as above stated.
ISSUE: Whether or not a bona fide transfer of the shares of a corporation, not registered or noted on the books of the
corporation, is valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor
had actual notice of said transfer or not.
HELD: Yes. The transfer from Diosomito to Barcelon was not valid as to Uson since at the time it was attached, the shares
still stood in the name of Diosomito on the books of the corporation.
RATIO:
The court held that the language of the legislature is plain to the effect that the right of the owner of the shares of stock of
a Philippine corporation to transfer the same by delivery of the certificate, whether it be regarded as a statutory or common
law right, is limited and restricted by the express provision that “no transfer, however, shall be valid except as between the
parties, until the transfer is entered and noted upon the books of the corporation.” Therefore, the transfer from Diosomito
to Barcelon was not valid as to Uson since at the time it was attached, the shares still stood in the name of Diosomito on
the books of the corporation.
CASE LAW/ DOCTRINE:
No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of
the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the
certificate, and the number of shares transferred.
CONCURRING OPINION:

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Case Digest
Hull, J.
I agree that the foregoing opinion is sound in reason and upon authority. But I think attention should be called to the case
of Lanci vs. Yangco (52 Phil., 563, 567); which involved a Torrens title and the Land Registration Law, Act No. 496. The
provisions of section 50 of Act No. 496 seem to me analogous to those of section 35 of the Corporation Law, and
consistency would indicate that the judgments in the two cases should be similar.

CORPORATION LAW
Case Digest
207. AQUILINO RIVERA, ISAMU AKASAKO and AUTHOR: Revy Neri
FUJIYAMA HOTEL & RESTAURANT, INC.,
petitioners,vs.THE HON. ALFREDO C. FLORENDO, The case is consider as an ordinary civil action for specific
as Judge of the Court of First Instance of Manila performance, and the case is therefore remanded to the
(Branch XXXVI), LOURDES JUREIDINI and lower court for trial on the merits; the charge of contempt
MILAGROS TSUCHIYA, respondents. against respondent Jureidini is DISMISSED but the order of
G.R. No. L-57586 October 8, 1986 Our Court restraining respondent from taking over the
TOPIC: Remedy if Registration Refused management of the restaurant remains until after this case is
PONENTE: PARAS, J. decided.
FACTS
16. Petitioner corporation (Fujiyama Hotel & Restaurant, Inc.) was organized and register under Philippine laws with a
capital stock of P1,000,000.00 divided into 10,000 shares of P100.00 par value each.
17. Petitioner Rivera increased his subscription from the original 1,250 to a total of 4899 shares. Rivera allegedly just
a front of a Japanese investor named Akasako.
18. Isamu Akasako, a Japanese national and co-petitioner who is allegedly the real owner of the shares of stock in the
name of petitioner Aquilino Rivera, sold 2550 shares of the same to private respondent Milagros Tsuchiya for a
consideration of P440,000.00 with the assurance that Milagros Tsuchiya will be made the President and Lourdes
Jureidini a director after the purchase.
19. After the sale was consummated and the consideration was paid with a receipt of payment therefor shown,
Aquilino Rivera refused to make the indorsement unless he is also paid.
20. It also appears that the other incorporators sold their shares to both respondent Jureidini and Tsuchiya such that
both respondents became the owners of a total of 3300 shares or the majority out of 5,649 outstanding subscribed
shares of the corporation.
21. Private respondents attempted several times to register their stock certificates with the corporation but the latter
refused to register the same.
22. The trial court granted to the respondents by a writ of preliminary injunction the right to manage the company
upon the filing of a bond.
ISSUE:
2. WON Rivera had the right to refuse the indorsement of the shares of stock in question and the Corporation had the
right to refuse the registration of the respondents shares.
HELD:
5. As found in Sec. 63 of the Corporation Code, shares of stock may be transferred by delivery of the certificate after
indorsement by the owner or his attorney-in-fact or other person legally authorized to make the transfer. By this
provision it is evident that Rivera’s indorsement must be obtained before any transfer of the questioned shares is
effected.

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Case Digest
RATIO:
1. SEC. 63. Certificate of stock and transfer of shares. — The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or vice-president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of
stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed
by the owner or his attorney-in- fact or other person legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until the transfer is recorded in the book of the corporation showing
the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and
the number of shares transferred.
2. As confirmed by this Court, "shares of stock may be transferred by delivery to the transferee of the certificate
properly indorsed. 'Title may be vested in the transferee by delivery of the certificate with a written assignment or
indorsement thereof '. There should be compliance with the mode of transfer prescribed by law.
3. It will be recalled that the disputed shares of stock were purchased not from the registered owner but from a
Japanese national who allegedly was the real owner thereof. It was also alleged that the registered owner was only
a dummy of Akasako.
4. As the bone of contention in this case, is the refusal of petitioner Rivera to indorse the shares of stock in question
and the refusal of the Corporation to register private respondents' shares in its books, there is merit in the findings
of the lower court that the present controversy is not an intra-corporate controversy; private respondents are not yet
stockholders; they are only seeking to be registered as stockholders because of an alleged sale of shares of stock to
them. Therefore, as the petition is filed by outsiders not yet members of the corporation, jurisdiction properly
belongs to the regular courts.
5. What it simply involves is a conflict on the ownership of a group of shares between the registered owner and an
outside party. Hence, because of this conflict in ownership rights, a mandatory injunction cannot lie.
CASE LAW/ DOCTRINE:
No advantage may be given to one to the prejudice of the other, a court should not by means of a preliminary injunction
transfer the property in litigation from the possession of one party to another where the legal title is in dispute and the party
having possession asserts ownership thereto.

CORPORATION LAW
Case Digest
208 SANTAMARIA v. HONGKONG SHANGHAI AUTHOR:
BANKING Rosa Cecilia K. Alfafara
August 31, 1951; G.R. No. L-2808 Santamaria was found to be negligent, however, the Court
TOPIC: Forged transfers still ordered to deliver back Cert. 715 (originally 517) to her
PONENTE: BAUTISTA ANGELO, J. since HSBC was also willing to compromise.
FACTS
1. On February, 1937, Josefa T. Santamaria bought 10,000 shares of the Batangas Minerals, Inc., through the offices of
Woo, Uy-Tioco & Naftaly, a stock brokerage firm. She received Stock Certificate No. 517 issued in the name of said firm
and indorsed in bank by it.
2. On March 9, 1937, Santamaria placed an order for the purchase of 10,000 shares of the Crown Mines, Inc. with R.J.
Campos & Co., a brokerage firm, and delivered Certificate No. 517 to the latter as security with the understanding that said
certificate would be returned to her upon payment of the 10,000 Crown Mines, Inc. shares.
3. At the time of the delivery of a stock Certificate No. 517 to R.J. Campos & Co., Inc. (RJCCI) this certificate was in the
same condition as that when Mrs. Santamaria received from Woo, Uy-Tioco & Naftaly, with the sole difference that her
name was later written in lead pencil on the upper right hand corner thereof.
4. Two days later, Santamaria went to RJCCI to pay for her order of the Crown Mines shares and to get back Certificate
No. 517. Cosculluela (RJCCI mngr.) then informed her that RJCCI was no longer allowed to transact business due to a
prohibition order from SEC. She was also informed that her Stock certificate was in the possession of the Hongkong and
Shanghai Banking Corporation (HSBC).
5. Certificate No. 517 came into possession of HSBC because RJCCI had opened an overdraft account with the bank and
in effect it had executed a document of hypothecation, the term of which RJCCI pledged to the said bank "all stocks,
shares and securities which I/we may hereafter come into their possession of my/our account and whether originally
deposited for safe custody only or for any other purpose whatever or which may hereinafter be deposited by me/us in lieu
of or in addition to the Stocks Shares and Securities now deposited or for any other purposes whatsoever."
6. On March 11, 1937, Certificate No. 517, already indorsed by RJCCI to HSBC, was sent by the latter to the office of the
Batangas Minerals, Inc. with the request that the same be cancelled and a new certificate be issued in the name of R.W.
Taplin as trustee and nominee of the banking corporation.
7. As per request, the Batangas Minerals issued Certificate No. 715 in lieu of Certificate No. 517, in the name of Taplin.
8. According to Santamaria, she made the claim to the bank for her certificate. In her interview with Taplin, the bank's
representative, she informed him that the certificate belonged to her, and she demanded that it be returned to her. Taplin
then replied that the bank did not know anything about the transaction had between her and RJCCI and that he could not do
anything until the case of the bank with RJCCI shall have been terminated.
9. In a civil case, RJCCI was declared insolvent. In addition, its president was also convicted of estafa.
10. When Santamaria failed in her efforts to force the civil judgment rendered in her favor in the criminal case because the
accused became insolvent, she filed her complaint in this case on October 11, 1940.
ISSUE: (1) Whether or not Santamaria was chargeable with negligence which gave rise to the case.
(2) Whether or not the Bank was obligated to inquire into the ownership of the certificate.
HELD: (1) Yes, in making said deposit to RJCCI, plaintiff did not take any precaution to protect herself against the
possible misuse of the shares represented by the cert. of stock. She could have asked the corporation (Woo firm) that had
issued said cert. to cancel it and issue another in her name to apprise the holder that she was the owner of said cert.
(2) No, the Bank had no knowledge of the circumstances for which the certificate of stock was delivered to
RJCCI and had a perfect right to assume that RJCCI was lawfully in possession of it due to the fact that it was a street
cert., and was in such form as would entitle any possessor to a transfer of the stock on the books of the corp. concerned.

CORPORATION LAW
Case Digest
RATIO:
1. She is estopped from claiming further title to or interest therein as against a bona fide pledge or transferee thereof, for it
is a well-known rule that a bona fide pledgee or transferee of a stock from the apparent owner is not chargeable with
knowledge of the limitations placed on it by the real owner, or of any secret agreement relating to the use which might be
made of the stock by the holder.
2. On the other hand, it appears that this certificate of stock, indorsed as it was in blank by Woo, Uy-Tioco & Naftaly,
stock brokers, was delivered to HSBC by RJCCI duly indorsed by the latter, pursuant to a letter of hypothecation executed
by RJCCI in favor of said Bank. The said certificate was delivered to the Bank in the ordinary course of business, together
with many other securities, and at the time it was delivered, the Bank had no Knowledge that the shares represented by the
certificate belonged to the plaintiff for, as already said, it was in the form of street certificate which was transferable by
mere delivery. The rule is "where one of two innocent parties must suffer by reason of a wrongful or unauthorized act, the
loss must fall on the one who first trusted the wrong doer and put in his hands the means of inflicting such loss."
3. The Bank was not obligated to look beyond the certificate to ascertain the ownership of the stock at the time it received
the same from RJCCI for it was given to the Bank pursuant to their letter of hypothecation. Even if said certificate had
been in the name of the plaintiff but indorsed in blank, the Bank would still have been justified in believing that RJCCI had
title thereto for the reason that it is a well-known practice that a certificate of stock, indorsed in blank, is deemed quasi
negotiable, and as such the transferee thereof is justified in believing that it belongs to the holder and transferor.
4. The only evidence in record that the certificate in question may have not belonged to RJCCI was Santamaria’s testimony
when she talked to Taplin. However, a mere claim of ownership does not establish the fact of ownership.
5. In addition, the fact that on the right margin of the said certificate, the name of the plaintiff appeared written, granting it
to be true, can not be considered sufficient reason to indicate that its owner was the plaintiff considering that said
certificate was indorsed in blank by her brokers Woo, Uy-Tioco & Naftaly, and it was guaranteed by indorsement in blank
by RJCCI and was transferred in due course by the latter to the Bank under their letter of hypothecation. Said indicium
could at best give the impression that the plaintiff was the original holder of the certificate.
CASE LAW/ DOCTRINE:
A certificate of stock, endorsed in blank, is deemed quasi-negotiable, and as such, the transferee
thereof is justified in believing that it belongs to the transferor.

CORPORATION LAW
Case Digest
209 DE LOS SANTOS v. MCGRATH AUTHOR: Franch Galanza
95 PHIL 577
TOPIC: UNAUTHORIZED TRANFERS; Forged
Transfers
PONTENTE: Concepcion, J.
FACTS:
1. In this case, De Los Santos contends that he acquired 1.6 million shares of the Lepanto Consolidated Mining Co., Inc.
from two people; namely, Juan Campos and Carl Hess, sometime in 1942.
2. The shares are registered in the name of Vicente Madrigal in the books of the corporation.
3. After the war, the property was sequestered by the appropriate state agency since it was classified as Japanese property.
4. As lawyer for the state, the Attorney General argues that the said shares were bought by Madrigal, in trust for, and for
the benefit of the Mitsuis, a Japanese corporation, who is the true owner thereof.
5. After such purchase, Madrigal delivered such shares to the Manila office of the Mitsuis with his blank indorsement on
it. It was just kept there.
6. The said shares were never sold and were most probably lost or stolen during liberation.
ISSUE: Whether or not the contested certificates of stock could be transferred to De Los Santos.
HELD: NO.
1. It cannot be transferred to De Los Santos. It was established that Madrigal never disposed of the said shares in any
manner whatsoever, except by turning over the corresponding stock certificates to the Mitsuis.
2. The managers of Mitsui during the concerned period attest that the Mitsuis neither sold, conveyed, or alienated the said
shares of stock, nor delivered the aforementioned stock certificates, to anybody during the said period.
3. Even one of the evidence of a receipt of the alleged purchase by De Los Santos from Campos and Hess, who were not
the registered owners, was lost though a fire.
4. If the owner of the certificate has indorsed it in blank, and it is stolen from him, no title is acquired by an
innocent purchaser for value.
RATIO:
1. According to the Corporation Law, a share of stock may be transferred by endorsement of thecorresponding stock
certificate, coupled with itsdelivery.
2. The transfer shall not be valid,except as between the parties, until it is entered and noted upon the books of the
corporation.
3. Therefore, thealleged sale by Campos and Hess is not valid except as valid as between them and the plaintiff. It does not
bind Madrigal and Mitsui.
COLLATERAL TRANSFERS
1. Shares of stock being personal property may be the subject matter of pledge or chattel mortgage. Such collateral
transfers are not covered by the registration requirement of Section 63 of the Code since our Supreme Court has held that
such provision applies only to absolute transfer.
2. In other words, the registration in the corporate books of pledges and chattel mortgages of shares cannot have any legal
effect.
3. Where the certificate of stock is delivered to the creditor as a security for the performance of an obligation, the contract
is one of pledge governed by the Civil Code and not by the Chattel Mortgage.
4. A pledge can take effect against third persons only if its date appears in a public instrument.
5. If the certificate of stock is not delivered to the creditor, the transaction must be registered in the chattel mortgage
registry of the province where the principal office of the corporation is located, in order that it may be effective against
third persons.

CORPORATION LAW
Case Digest
CASE LAW/ DOCTRINE:
If the owner of the certificate has indorsed it in blank, and it is stolen from him, no title is acquired by an innocent
purchaser for value.

CORPORATION LAW
Case Digest
210 CHUA GUAN v. SAMAHANG MAGSASAKA AUTHOR: Franch Galanza
62 PHIL 473 (1935)
TOPIC: Collateral Transfers
PONENTE: Butte, J.
FACTS
1. On June 18, 1931, Gonzalo H. Co Toco, the owner of 5,894 shares of the capital stock of Samahang Magsasaka Inc.
represented by 9 certificates having a par value of P5 per share mortgaged said shares to Chua Chiu to guarantee the
payment of a debt of P20,000 due on or before 19 June 1932.
2. The said certificates of stock were delivered with the mortgage to the mortgagee, Chua Chiu. The said mortgage was
duly registered in the office of the registered of deeds of Manila on 23 June 1931, and in the office of the said corporation
on 30 September 1931.
3. On 28 November 1931, Chua Chiu assigned all his right and interest in said mortgage to the Chua Guan and the
assignment in the office of the register of deeds in the City of Manila on 28 December 1931, and in the office of the said
corporation on 4 January 1932.
4. Co Toco defaulted in the payment of said debt at maturity and Chua Guan foreclosed said mortgage and delivered the
certificates of stock and copies of the mortgage and assignment to the sheriff of the City of Manila in order to sell the said
shares at public auction. The sheriff auctioned said shares on 22 December 1932, and the plaintiff having been the highest
bidder for the sum of P14,390, the sheriff executed in his favor a certificate of sale of said shares.
5. The plaintiff tendered the certificates of stock standing in the name of Co Toco to the proper officers of the corporation
for cancellation and demanded that they issue new certificates in the name of Chua Guan. The officers (the individual
defendants) refused and still refuse to issue said new shares in the name of Chua Guan.
6. An action for writ of mandamus was filed with the CFI Nueva Ecija, praying that the defendants transfer the said 5,894
shares of stock to the plaintiff by cancelling the old certificates and issuing new ones in their stead.
7. The parties entered into a stipulation in which the defendants admitted all of the allegations of the complaint and the
plaintiff admitted all of the special defenses in the answer of the defendants, and on this stipulation they submitted the case
for decision.
8. As special defense, the defendants refused to cancel said certificates (Co Toco’s) and to issue new ones in the name of
Chua Guan because prior to the date of the latter’s demand (4 February 1933), 9 attachments had been issued and served
and noted on the books of the corporation against Co Toco’s shares and Chua Guan objected to having these attachments
noted on the new certificates which he demanded.
9. The Supreme Court affirmed the judgment appealed from, holding that the attaching creditors are entitled to priority
over the defectively registered mortgage of the appellant.
ISSUE:
Whether or not the registration of said chattel mortgage in the registry of chattel mortgages in the office of the register of
deeds of Manila, under date of July 23,1931, give constructive notice to the said attaching creditors.
HELD:
YES. The attaching creditors are entitled to priority over the defectively registered mortgage of the appellant.
RATIO:
1. Section 4 of Act No. 1508 provides two ways for executing a valid chattel mortgage which shall be effective against
third persons:
a. The possession of the property mortgage must be delivered to and retained by the mortgagee
b. Without such delivery, the mortgage must be recorded in the proper office or offices of the register or registers of
deeds.
2. As to the proper place of registration of such a mortgage. - Section 4 provides that in such a case the mortgage resides at
the time of making the same or, if he is a non-resident, in the province in which the property is situated; and it also
provides that if the property is situated in a different province from that in which the mortgagor resides the mortgage shall
CORPORATION LAW
Case Digest
be recorded both in the province of the mortgagor's residence and in the province where the property is situated.
3. With respect to a chattel mortgage of shares of stock of a corporation - Registration in the province of the owner's
domicile should be sufficient, those who lend on such security would be confronted with the practical difficulty of being
compelled not only to search the records of every province in which the mortgagor might have been domiciled but also
every province in which a chattel mortgage by any former owner of such shares might be registered. It was not the
intention of the legislature to put this almost prohibitive impediment upon the hypothecation of shares of stock in view of
the great volume of business that is done on the faith of the pledge of shares of stock as collateral.
4. It is a general rule that for purposes of execution, attachment and garnishment, it is not the domicile of the owner of a
certificate but the domicile of the corporation which is decisive.
5. The only safe way to accomplish the hypothecation of share of stock of a Philippine corporation is for the creditor to
insist on the assignment and delivery of the certificate and to obtain the transfer of the legal title to him on the books of the
corporation by the cancellation of the certificate and the issuance of a new one to him.
6. To the debtor, this may be unsatisfactory because it leaves the creditor as the ostensible owner of the shares and the
debtor is forced to rely upon the honesty and solvency of the creditor. The mere possession and retention of the debtor's
certificate by the creditor gives some security to the creditor against an attempted voluntary transfer by the debtor,
provided the by-laws of the corporation expressly enact that transfers may be made only upon the surrender of the
certificate.
6. Section 35 of the Corporation Law (Act No. 1459) - shares of stock "may be transferred by delivery of the certificate
endorsed by the owner or his attorney in fact or other person legally authorized to make the transfer." The use of the verb
"may" does not exclude the possibility that a transfer may be made in a different manner, thus leaving the creditor in an
insecure position even though he has the certificate in his possession. Moreover, the shares still standing in the name of
the debtor on the books of the corporation will be liable to seizure by attachment or levy on execution at the instance of
other creditors
7. Loans upon stock securities should be facilitated in order to foster economic development. The transfer by endorsement
and delivery of a certificate with intention to pledge the shares covered thereby should be sufficient to give legal effect to
that intention and to consummate the juristic act without necessity for registration.
CASE LAW/ DOCTRINE:

1. It is a general rule that for purposes of execution, attachment and garnishment, it is not the domicile of the owner of a
certificate but the domicile of the corporation which is decisive.
2. Loans upon stock securities should be facilitated in order to foster economic development. The transfer by
endorsement and delivery of a certificate with intention to pledge the shares covered thereby should be sufficient to
give legal effect to that intention and to consummate the juristic act without necessity for registration.

CORPORATION LAW
Case Digest
212 Benguet Consolidated Mining Co. v. Pineda, AUTHOR: KC
(defining “organize”) “organization” relates merely to the
98 Phil 771 (1956) systematization and orderly arrangement of the
TOPIC: FAILURE TO ORGANIZE AND COMMENCE internal and managerial affairs and organs of
BUSINESS- CESSATION OF BUSINESS FOR 5 YEARS the petitioner Benguet, and has nothing to do
with the prorogation of its corporate life.
FACTS: Appeal under Rule 43 from a decision of the Securities and Exchange Commissioner, denying the right
of a sociedad anonima to extend its corporate existence by amendment of its original articles of association, or
alternatively, to reform and continue existing under the Corporation Law (Act 1459) beyond the original period.
1. Benguet Consolidated Mining Co was organized on June 24, 1903, as a sociedad anonima regulated by
Articles 151 of the Spanish Code of Commerce of 1886, then in force in the Philippines. Its articles
of association expressly provided that it was organized for a term of fifty (50) years
2. In 1906, the Philippine Commission enacted Act 1459, known as the Corporation Law, to introduce the
American corporation into the Philippine Islands as the standard commercial entity and to hasten the day
when the sociedad anonimas of the Spanish law would be obsolete.
3. Section 75 of the Corporation Law provided, making sociedad anonima subject to the provisions of the
Corporation Law 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.
4. Section 191 of the Corporation Law, the Code of Commerce is repealed in so far as it relates to
sociedades anonimas. The purpose of the commission in repealing this part of the Code of Commerce:
• was to compel commercial entities thereafter organized to incorporate under the Corporation Law, unless
they should prefer to adopt some form or other of the partnership.
• existing sociedades anonimas, which elected to continue their business as such, instead of reforming and
reorganizing under the Corporation Law:
“should continue to be governed by the laws that were in force prior to the passage of this Act `in relation to
their organization and method of transacting business and to the rights of members thereof as between
themselves, but their relations to the public and public officials shall be governed by the provisions of this
Act.”
5. In 1953, the board of directors of Benguet Mining submitted to the Securities and Exchange Commission
an application for them to be allowed to extend the life span of Benguet Mining.
6. Then Commissioner Mariano Pineda denied the application as it ruled that the extension requested is
contrary to Section 18 of the Corporation Law of 1906 which provides that the life of a corporation shall
not be extended by amendment beyond the time fixed in their original articles.
7. Benguet Mining contends that they have a vested right under the Code of Commerce of 1886 because
they were organized under said law; that under said law, Benguet Mining is allowed to extend its life by
simply amending its articles of incorporation; that the prohibition in Section 18 of the Corporation Code

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of 1906 does not apply to sociedades anonimas already existing prior to the Law’s enactment; that even
assuming that the prohibition applies to Benguet Mining, it should be allowed to be reorganized as a
corporation under the said Corporation Law.
8. Benguet contends that the period of corporate life relates to its organization and the rights of its
members inter se, and not to its relations to the public or public officials.
ISSUE: WON Benguet’s period of corporate existence has relation to its “organization”
HELD: NO.
RATIO:
1. The legal definitions of the term “organization” “Organize or `organization,’ as used in reference to
corporations, has a well-understood meaning, which is the election of officers, providing for the
subscription and payment of the capital stock, the adoption of by-laws, and such other steps as are
necessary to endow the legal entity with the capacity to transact the legitimate business for which it
was created.
2. organization” relates merely to the systematization and orderly arrangement of the internal and
managerial affairs and organs of the petitioner Benguet, and has nothing to do with the prorogation of
its corporate life.
3. The duration of its corporate life (and juridical personality) has evident connection with the petitioner’s
relations to the public, and that it bears none to the petitioner’s organization and method of
transacting business,
4. the prohibition contained in Section 18 of the Corporation Law (Act No. 1459) against extension of
corporate life by amendment of the original articles was designed and intended to apply to
“compañias anonimas” that, like petitioner Benguet, were already existing at the passage of said law.
5. This conclusion is reinforced by the avowed policy of the law to hasten the day when compañias
anonimas would be extinct, and replace them with the American type of corporation.
6. It needs no argument to show that if Act No. 1459 allowed existing compañias anonimas to be
governed by the old law in respect to their organization, methods of transacting business and the rights
of the members among themselves, it was precisely in deference to the vested rights already acquired by
the entity and its members at the time the Corporation Law was enacted.

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214 Republic v. Bisaya Land Trans. Co AUTHOR: RAVZ
81 SCRA 9 (1978) - Quo Warranto - A legal proceeding during which
TOPIC: (INVOLUNTARY DISSOLUTION) an individual's right to hold an office or
Quo Warranto proceedings governmental privilege is challenged.
PONENTE: CASTRO, C. J. - Party in Quo warranto: Petitioner: State
Respondent: Corporation
FACTS
1. The Bisaya Land Transportation Company is a corporation organized for the principal purpose of
engaging in the business of land and water transportation. March 21 1959, Republic of the Philippines
filed a petition for quo warranto in the CFI, for the dissolution of the Corporation.
2. Petitioner alleged that respondent corporation had violated and continue to violate the proceeding of the
corporation law and other statutes, by committing acts amounting to forfeiture of the present
corporation’s franchise, rights, misuse and abuse of the terms of its franchise.
3. The petition for Quo Warranto prayed that during the pendency of the action, a receiver be assigned by
the court for the preservation of the assets pursuant to section I (a) of Rule 61 of the Rules of Court.
4. A motion filed by the respondent (except Miguel Cuenco) for the dismissal of the quo warranto on the
grounds of lack of cause of action, prescription, and the failure of the Solicitor General to the court's
permission as required in section 4 of Rule 66 of the Rules of Court.
5. On April 25, 1959, respondent Miguel Cuenco filed his answer admitting certain allegations and
denying others, especially participation in the acts imputed to Respondent Corporation which were
made the basis of the quo warranto proceedings.
6. on February 28, 1962, respondent corporation filed a motion for judgment on consent, manifesting its
consent to and moving for judgment to be rendered ordering the its dissolution and liquidation of assets.
The Respondent Corporation alleged, the pendency of the petition of quo warranto had prejudiced the
corporation its business.
7. The petitioner filed a manifestation stating that the motion for judgment on consent being in accordance
with the petition for quo warranto, the matter of the implementation of the dissolution of Respondent
Corporation be submitted to the discretion of the lower court.
8. On May 27, 1963, respondents (except Miguel Cuenco) filed their motion to withdraw motion for
judgment. The motion was denied by the lower court and granted receivership.
9. The Solicitor General Barredo (now Supreme Court Justice) filed a motion for dismissal of the quo
warranto proceedings, to which Respondent Cuenco opposed.
10. On April 3, 1968, the court a quo issued a resolution granting petitioner's motion for the dismissal of the
action for quo warranto, and dismissing respondent Miguel Cuenco's cross-claim. Hence the appeal.
ISSUE:
1. whether or not the court should should have rendered judgment dissolving appellee corporation on the
strength of its own motion consenting to and praying for its dissolution. NO (see Ratio 1-3)
2. Whether or not the court a quo erred in not holding that the evidence which petitioner had presented in
the hearings established facts constituting practically all the grounds for quo warranto against a
corporation. NO (Ratio 4)
3. Whether or not the Solicitor General is vested with absolute and unlimited power to discontinue the
State's litigation and, accordingly, to have the quo warranto petition dismissed. YES, (Ratio 5-6)
4. Whether or not the court erred in dismissing the cross-claim filed by Miguel Cuenco. NO (Ratio 7)
HELD: The court a quo committed no error in dismissing the quo warranto proceedings, it also stands to reason
that it acted correctly in dismissing appellant Miguel Cuenco's cross- claim. A cross-claim is proper only where
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the cross-claimant stands to be prejudiced by the filing of an action against him. Hence, where such action has
been dismissed, his cross-claim would have no leg to stand on.
RATIO:
1. A motion for judgment on consent is not to be equated with a judgment by confession. The former is
one the provisions and terms of which are settled and a agreed upon by the parties to the action, and
which is entered in the record by the consent and sanction of the court, Hence, there must be an
unqualified agreement among the parties to be bound by the judgment on consent before said judgment
may be entered.
2. A judgment by confession is not a Plea but an affirmative and voluntary act of the defendant himself,
Here, the court exercises a certain amount of supervision over the entry of judgment, as well as
equitable jurisdiction over their subsequent status.
3. The records would show that there was no meeting of the minds among the parties hereto with respect to
the motion for judgment on consent filed by appellee-corporation and agreed to by petitioner appellee.
4. After a very careful and deliberate consideration of the evidence adduced by petitioner, the lower court
came to the conclusion that the same did not really warrant a quo warranto by the State that could truly
justify to decapitate corporate life, and that the corporate acts or missions complained of had not
resulted in substantial injury to the public, nor were they wilful and clearly obdurate. The court found
that the several acts of misuse and misapplication of the funds and/or assets of the Bisaya Land
Transportation Co., Inc. were committed new particularly by the respondent Dr. Manuel Cuenco with
the cooperation of Jose P. Velez, for the commission of which they may be personally held liable.
5. The right of the plaintiff to dismiss an action with the consent of the court is universally recognized with
certain well-defined exceptions. If the plaintiff discovers that the action which he commenced was
brought for purposes of enforcing a right or a benefit, the advisability or necessity of which he later
discovers no longer exists, or that the result of the action would be different from what he had intended,
then he should be permitted to withdraw his action, subject to the approval of the court.
6. The plaintiff should not be required to continue the action, subject to some well-defined exceptions,
when it is not to his advantage so to do. Litigation should be discouraged and not encouraged. Courts
should not with require parties to litigate when they no longer desire so to do. Courts, in granting
permission to dismiss an action, of course, should always take into consideration the effect which said
dismissal would have upon the rights of the defendant.
7. Considering then the nature of a cross-claim, we fail to grasp the logic in appellant Miguel Cuenco's
objection to the dismissal of the main action — the quo warranto proceedings. The withdrawal or
dismissal of said action would effectively prevent him from suffering any prejudice exonerate him from
any liability, to evade or mitigate rules grant him the right to file a cross-claim dismissal of the main
action would not wipe out hi cross-claim, since, if minded to do he may subsequently bring the
corresponding action based thereon.
CASE LAW/ DOCTRINE:
- Honesty rather than dishonesty, good faith rather than bad faith should always be presumed in the
absence of clear contrary evidence.
- Solicitor general vested the power to have the quo warranto petition dismissed, if and when in his
opinion this should be done, general rule seems to be that the plaintiff may do so with the approval
of the court, subject to be defined exceptions (such as, for example, where the answer sets up a
counterclaim which cannot stand independently of the main action).
- ... in the case of a municipality, where the agents of the public are spending public money, we are of the
opinion that such agent should not be required to continue an action when (a) it clearly appears that
there is no longer a necessity therefor, or (b) when it clearly appears that to continue the action,
the result would be prejudicial to the interests of the public. (City of Manila vs. Ruymann, 37 Phil.
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421, 424-425, 427, cited in Metropolitan Water District vs. De los Angeles, 55 Phil. 776, 790.)
- American authorities likewise uphold the power and authority of the state attorney to control and
manage all litigation in behalf of the State, which power involves the power to discontinue the
same if and when, in his opinion, this should be done. (7 Am. Jur. 2d 18- 19).
- Rule 66, section 13 that "Appointment of receiver when corporation dissolved. — The court rendering a
judgment dissolving a corporation shall appoint a receiver of all its assets who shall proceed to
administer the saw in accordance with the proceeding of Rule 59."
- by Rule 17, sections 2 and 4, section 2 further expressly providing that once the answers to the
complaint or petition are filed (and more so when the hearings over a period of years are far advanced)
"an action shall not be dismiss at the plaintiffs instance save upon order of the court and upon such
terms and conditions as the court deems proper."
DISSENTING/CONCURRING OPINION: TEEHANKEE, J., dissenting
Instead of finally settling and determining the intra-corporate dispute between the respondents
stockholders and which now in 1978 after nineteen (19) years leave them as they were and have them
start all over again "to take proper steps to enforce whatever causes of action they may have against
each other," for the following and considerations:
(1) This is the fourth time in its 19-year pendency that the main case for dissolution of
respondent corporation has reached this court and been disposed of without a defective
conclusion of the case or a final adjudication of its merits;
(2) the demands of Public policy and public interest that there be a definitive end to
Litigations and that the courts of justice discharge their main role which is to assist in the
enforcement of the rule of law and the maintenance of peace and order by settling judicial
controversies with finality 3 the case at bar presents a manifest exception to the general
power of the Solicitor General to control and discontinue a litigation on behalf of the
State. From the controlling jurisprudence cited in the main opinion 4 it is evident that
such discontinuance and dismissal of an action may be sanctioned only "when (a) it
clearly appears that there is no longer a necessity therefor, or (b) when it clearly
appears that to continue the action, the result would be prejudicial to the interests of
the public." Here the contrary quite clearly is the case since the imperatives of public
policy and public interest call for the continuation had termination of the case on its
merits.
(3) This is based on a misconception, since the protagonists and principal parties insofar as
the quo warranto action is concerned were and are exclusively the appellee (respondent)
corporation Bisaya Land Transportation Co., Inc. whose dissolution was sought by
the Republic in its petition below and who had moved and Prayed for judgment on
consent for its own dissolution and the appellee (petitioner) Republic which had
admittedly formally expressed its agreement thereto.
(4) This is expressly sanctioned by Rule 17, sections 2 and 4, with section 2 further expressly
providing that once the answers to the complaint or petition are filed (and more so
when the hearings over a period of years are far advanced) "an action shall not be
dismiss at the plaintiffs instance save upon order of the court and upon such terms
and conditions as the court deems proper." The Rule precisely sanctions that the Court
impose terms and conditions for the dismissal of plaintiff's suit, viz in this case that
Miguel Cuenco's cross-claim against the majority directors-stockholders for the benefit of
respondent corporation be maintained for independent adjudication.

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Note: The acts allegedly committed by the corporation:
1. To conceal its illegal transaction, respondent corporation falsely reconstituted its articles of incorporation in
adding new cattle ranch, agriculture, and general merchandise;
2. respondent corporation through its Board of Directors, adopted a resolution authorizing it to acquire 1,024
hectares of public land in Zamboanga and 10,000 hectares of timber concession in Mindanao;
3. respondent officer as Board of Directors of respondent corporation, passed a resolution authorizing the
corporation to lease a pasture land of 2,000 hectares of cattle ranch on a public land;
4. respondent corporation operated a general merchandise store, a business which is neither the, nor incidental to,
principal business for which it was organized,
5. Respondent corporation snowed Mariano Cuenco and Manuel Cuenco to act as president which neither of them
owned a single stock;
6. In violation of its charter and articles of incorporation, as well as applicable statutes concerning its operation, it
engaged in mining by organizing the Jose P. Velez Coal Mines, and allowing said corporation to use the facilities
and assets of respondent corporation;
7. It imported and sold at black market prices to third persons truck spare Parts;
8. It paid its laborers and employees wages below minimum prescribe by law and manipulating its books and
records so as to make it appear that they were paid in accordance with the minimum wage;
9. It deliberately failed to maintain accurate and faithful stock and transfer book, enabling it to defraud the state,
mislead the general public, its creditors, investors and its stockholders.

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217 China Banking Corp. v Michelin & Cie., AUTHOR: RAVZ
58 Phil 261 (1933) - Liquidation as applied to the settlement of the
TOPIC: Distribution of assets after Payment of affairs of a corporation consist of adjusting the
Debts debts and claims, that is, of collecting all that is
PONENTE: Ostrand, J. due the corporation, the settlement and adjustment
of the claims against it and the payment of its just
debts, all claims must be presented for allowance
to the receiver or trustees or other proper persons
during the winding up proceeding.
FACTS
11. George 0’Farrell & Cie., Inc. is a domestic corporation. One of its purposes being that of acting as the
agent and representative of foreign firms for the sale and distribution of their products in the
Philippines.
12. The coporation was the representative of the appellee, M Michelin &Cie., in the Philippines for the
sale and distribution of the rubber tires for motor cars.
13. These business relations between the appellee and the corporation decided to discontinue them and
upon settlement of accounts, it was found that the corporation failed to account for the sum of
P23,268.83. The appellee alleged that this account was disposed by the corporation without its
authority and consent.
14. Gaston O’Farrell, personally, and his attorney-in-fact executed a mortgage in favor of the appellee of a
house belonging to Gaston and of a number shares of stock in the corporation owned by Gaston to
guarantee payment of the said amount and made a partial payment of P1,300 leaving unpaid balance
P21,968.83.
15. On July 9, 1930, The board of directors filed the petition for its dissolution and appoint Gaston
O’Farrell, as receiver and liquidator to wind up the affairs of the corporation. The Corporation had a
balance of P57,601.24 over and above its debts and liabilities. The trial court approved its dissolution
and appointed Gaston O’Farrell as receiver and liquidator.
16. The Appellee, filed its claim against the corporation for the balance amount of P21,968.83 with a
prayer that the claim be allowed as preferred one, on the ground that the said amount represented the
proceeds from the sales of a number of rubber tires. Which was approved by the court. Only the
claimant and the attorney for the receiver was notified of such order.
17. An “ex parte petition” was filed by the appellee praying for an order directing the liquidator to comply
with the courts order within 3days, the court again approved the petition. Again nobody was served
with notice of this order.
18. On September 30,1931, the appellant, China Banking Corporation, filed a motion praying that the
orders issued by the RTC be declared null and void; that appellee’s claim be allowed as an ordinary
claim and the attorneys fee be returned to the funds of the corporation in liquidation for the benefits of
all the creditors. On the ground of want of notice and on the proposition that under the Insolvency Law
appellee’s claim could not and should not have been allowed as preferred claim. Which was affirmed
by the appellate court.
ISSUE: Whether or not lower court erred in rendering its judgment in favor of the appellee, considering the
claim as a preferred claim
HELD: Yes, during the winding up of proceedings after dissolution, no creditor will be permitted by legal
process or other wise to acquire priority, or to enforce his claim against the property held for distribution as
against the rights of other creditors.

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RATIO:
8. In so far as the service of notice is concern, the Court adhere to the rule laid down in Whalen v Pasig
Iron Works, where the Court held that “claims against a corporation in the hands of a receiver
should not be approved and paid without some formal and regular proceeding whereby their
justice and correctness may be inquired into after a reasonable opportunity has been given to
the parties in interest to the present objections and submit evidence in support of such
objection.”
9. The language of both Sec 176 of the code of civil procedure and of sec 66 Corporation code tends to
recognize that in cases of voluntary dissolution there is no occasion for the appointment of a
receiver except under special circumstances and upon proper showing. It is clear that the
legislature intended to let the shareholders have the control of the assets of the corporation upon
dissolution in winding up its affairs.
10. The appointment of the receiver by the court to wind up the affairs of the corporation upon petition of
voluntary dissolution does not empower the court hear and pass on the claims of the creditors of the
corporation at first hand. In such cases the receiver does not act as a receiver of an insolvent
corporation.
11. Appellant contention that the appellee’s claim cannot be allowed as a preferred claim is well taken for
even admitting for the sake of argument that the merchandise of which sale price is the subject of
appellee’s claim was shipped to the corporation under a commission agreement or any other
agreement carrying the obligation to return either the goods or its price, the fact that the merchandise
in the case at bar was no longer in the corporations possession’s nor could the appellee trace the
proceeds from its sale, and this is made manifest by the very fact of the written agreement entered into
between the appellee and the corporation whereby the appellee accepted payment of the obligation by
installments duly secured with a mortgage of property to guarantee its payment. But such is not the
case, it shows that the rubber tires consigned to the corporation were to be sold by the latter and
so much is this true that the uncollected account were turned over to and received by the
appellee’s claim appears to be in the nature of a balance of a current account between the firms
more than anything else.
CASE LAW/ DOCTRINE:
- Section 176 of the Code of Civil Procedure dealing with the appointment of receiver upon decree of
dissolution of a corporation provides that the court may “ xxx appoint a receiver to take charge of the
estate and effects of the corporation and to pay the outstanding debts thereof, and to divide the money
and other properties and shall remain over among the stockholders or members”
- Sec 66 Corporation code provides with respect to decrees of dissolution rendered upon voluntary
application that the court may appoint receiver to collect and take charge of the assets of the
corporation.”
- Sec 78 of the corporation code provides that “said corporations at any time during the three years term
may convey its property to trustees for the benefit of creditors, stockholders and other concerned”

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218 REPUBLIC V MARSMAN Author: KC
44 SCRA 418 (1972)
TOPIC: Distributions of Assets after Payment
of Debts
Ponente: Barredo, J.
Facts:
1. Defendant Corporation was a timber licensee with concessions in the Municipality of Basud and
Mondazo, Camarines Norte.
2. On October 15, 1953 an investigation was conducted leading to the discovery that certain taxes were
due from it on logs produced from its concession. Deputy Collector of Internal Revenue demanded the
payment of P13, 136.00 representing forest charges
3. September 13, 1954, the BIR demanded the total sum of P45,541.66 representing deficiency sales tax,
forest charges, surcharges and penalties.
4. November 8, 1954 demanded P456.12 as 25% surcharge for discharging lumber without permit
5. The three assessments totalling P59,133.78 are the subject matter of the instant case for collection.
6. Defendants admitted receiving notices for payment as shown by the letters signed by corporations
counsel, Atty. Mayo. Still, they failed to pay and even asked for the specifications of the disputed
amount and asked for payment exemption.
7. On April 27, 1956, BIR issued "final tax notices" to the defendant corporation.
8. Defendant corporation protested the assessment of P45,541.66 and reiterated its request for
specification of the items disputing the assessment in question. It also protested the sending of final
notices and requested that they be countermanded or withheld.
9. Finding no merit in the protests of the defendant corporation, a warrant of distraint and levy was
issued against it by the Bureau of Internal Revenue on July 3, 1956
10. The Commissioner of Internal Revenue’s letter dated July 30, 1959, informed the defendant
corporation that if they do not settle the obligation within 5 days from receipt, BIR will file an action
in court.
11. However, Marsman Development Co. was extra-judicially dissolved on April 23, 1954, a fact
admitted in the amended complaint.
ISSUE: WON the present action is already barred under Section 77 of the Corporation Law, Act No. 1459,
which allows the corporate existence of a corporation to continue only for three years after its dissolution, for
the purpose of presenting or defending suits by or against it and to settle and close its affairs
HELD: NO. Although it is an admitted fact that the defendant corporation was extrajudicially dissolved
there is no claim that the affairs of said corporation had already been finally liquidated or settled.
RATIO: The stress given by appellants to the extinction of the corporate and juridical personality as such of
appellant corporation by virtue of its extra-judicial dissolution which admittedly took place on April 23, 1954
is misdirected.
1. The assessments against appellant corporation for deficiency taxes due for its operations since 1947
were made by the BIR on October 15, 1953, September 13, 1954 and November 8, 1954, such that
the first was before its dissolution and the last two not later than six months after such
dissolution.
2. The Government became the creditor of the corporation before the completion of its dissolution
by the liquidation of its assets.
3. Appellant F.H. Burgess, whom it chose as liquidator, became in law the trustee of all its assets for the
benefit of all persons enumerated in Section 78, including its creditors, among whom is the
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Government, for the taxes herein involved.
4. To assume otherwise would render the extra-judicial dissolution illegal and void, since, according to
Section 62 of the Corporation Law, such kind of dissolution is permitted only when it "does not
affect the rights of any creditor having a claim against the corporation."
5. It is immaterial that the present action was filed after the expiration of three years after April 23, 1954,
and assuming that judicial enforcement of taxes may not be initiated after said three years despite the
fact that the actual liquidation has not been terminated and the one in charge thereof is still holding
the assets of the corporation, , definitely established the Government as a creditor of the corporation
for whom the liquidator is supposed to hold assets of the corporation.
Case Law Doctrine:
Section 77 of the Corporation Law does provide that:
Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or
whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be
continued as a body corporate for three years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its
affairs, to dispose of and convey its property and to divide its capital stock, but not for the purpose of
continuing the business for which it was established.
Section 78, adds for clarification:
At any time during said three years said corporation is authorized and empowered to convey all of its property
to trustees for the benefit of members, stock-holders, creditors, and others interested. From and after any such
conveyance by the corporation of its property in trust for the benefit of its members, stockholders, creditors,
and others in interest, all interest which the corporation had in the property terminates, the legal interest vests
in the trustee, and the beneficial interest in the members, stockholders, creditors, or other persons in interest.

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219 TAN TIONG BIO VS CIR AUTHOR: VILLANUEVA, Karyl Stephanie L.
G.R. No. L-15778 April 23, 1962
TOPIC: Effects of Dissolution; Winding up and
liquidation- Distribution of Assets after Payment of Debts
PONENTE: Justice Bautistsa
FACTS
1. Central Syndicate (syndicate for short) a corporation, sent a letter to the Collector of Internal Revenue advising the latter
that (1) it purchased from Dee Hong Lue the surplus properties which the said Dee Hong Lue had bought from the Foreign
Liquidation Commission (2) that it assumed Dee Hong Lue's obligation and would pay a portion of the sales tax on said
surplus goods (3) it was paying P43,750.00 in behalf of Dee Hong Lue as deposit to answer for the payment of said sales
tax
2. The syndicate again wrote the Collector requesting a refund for the purchase price of goods obtained from Dee Hong
Lue was adjusted and reduced. The CIR investigated the matter and the Collector decided that the Central Syndicate was
the importer and original seller of the surplus goods in question and, therefore, the one liable to pay the sales tax. The
Collector denied the request of the syndicate for the refund.
3. The Central Syndicate elevated the case to the Court of Tax Appeals. The Collector filed a motion requiring the
syndicate to file a bond to guarantee the payment of the tax assessed against it.
4. COURT OF TAX APPEALS DECISION: (1)Denied Collector’s motion. On the ground that cannot be legally done it
appearing that the syndicate is already a non-existing entity due to the expiration of its corporate existence (2) dismissing
syndicate’s appeal primarily on the ground that the Central Syndicate has no personality to maintain the action then
pending before it. From this order the syndicate appealed to the Supreme Court wherein it intimated that the appeal should
not be dismissed because it could be substituted by its successors-in-interest.
5. The syndicate was later substituted by its officers and directors (petitioners herein). Court of Tax Appeals proceeded to
hear the case.
6. COURT OF TAX APPEALS DECISION: Petitioners ordered to pay jointly and severally, to the Collector of Internal
Revenue deficiency sales tax and surcharge on the surplus goods purchased by them from the Foreign Liquidation
Commission. Petitioners filed appeal.
ISSUE: W/N the sales tax in question can be enforced against the corporation’s successors-in-interest who are the present
petitioners since the Central Syndicate has already been dissolved because of the expiration of its corporate existence.
HELD: YES. The creditor of a dissolved corporation may follow its assets once they passed into the hands of the
stockholders.
RATIO:
• Net profit of the corporation (from the sale of the surplus goods) and was distributed among the stockholders when
the corporation liquidated and distributed its assets immediately after the sale of the said surplus goods. Petitioners
are therefore the beneficiaries of the defunct corporation and as such should be held liable to pay the taxes in
question.
• The dissolution of a corporation does not extinguish the debts due or owing to it because a creditor of a dissolved
corporation may follow its assets, as in the nature of a trust fund, into the hands of its stockholders.
• With reference to the effect of dissolution upon taxes due from a corporation, "that the hands of the government
cannot, of course, collect taxes from a defunct corporation, it loses thereby none of its rights to assess taxes which
had been due from the corporation, and to collect them from persons, who by reason of transactions with the
corporation, hold property against which the tax can be enforced and that the legal death of the corporation no
more prevents such action than would the physical death of an individual prevent the government from assessing
taxes against him and collecting them from his administrator, who holds the property which the decedent had
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formerly possessed".
***somewhat related:
It was found out that Dee Hong Lue purchased the surplus goods in question not for himself but for the Central Syndicate
(as an agent) which was then in the process of incorporation such that the deed of sale which purports to show that Dee
Hong Lue sold said goods to the syndicate is but a ruse for the syndicate to evade payment of a greater amount of
percentage tax.
CASE LAW/ DOCTRINE:

CORPORATION LAW
Case Digest
220 Pepsi Cola Products Phils., Inc. v Court of AUTHOR: RAVZ
Appeals - a corporation whose corporate existence is
443 SCRA 571 (2004) terminated in any manner continues to be a body
TOPIC: Distribution of assets after Payment of corporate for three (3) years after its dissolution
for purposes of prosecuting and defending suits by
Debts
and against it and to enable it to settle and close its
PONENTE: Callejo, Sr., J.
affairs, culminating in the disposition and
distribution of its remaining assets.
FACTS
19. Pepsi-Cola Products Philippines, Inc. Employees and Workers Union (PCEWU) filed a Complaint
against Pepsi-Cola Distributors of the Philippines (PCDP) with the Department of Labor and
Employment (DOLE) for payment of overtime services on the eight (8) days duly- designated as
Muslim holidays for calendar year 1985.
20. The PCEWU alleged, that in previous years, they had been paid overtime pay for services rendered
during the eight (8) Muslim holidays in their places of assignment, including Dipolog City.
21. On May 26, 1987, the Executive Labor Arbiter (ELA) rendered a Decision in favor of PCEWU,
ordering PCDP to pay the claims of its workers.
22. The respondent appealed the decision to the NLRC. NLRC rendered judgment affirming the decision
of the ELA with modification.
23. The PCDP filed its motion for partial reconsideration of the NLRC decision. Pending resolution of the
said motions, ownership of various Pepsi-Cola bottling plants was transferred to petitioner Pepsi-Cola
Products Philippines, Inc. (PCPPI).
24. The PCDP alleged that it had ceased to exist as a corporation on July 24, 1989 and that it has winded
up its corporate affairs in accordance with law.
25. On February 11, 1992, the NLRC issued a Resolution dismissing the complaint of the PCEWU for the
reason that, with the cessation and dissolution of the corporate existence of the PCDP, rendering any
judgment against it is incapable of execution and satisfaction.
26. Upon appeal, the Appellate court reversed the decision of NLRC.
ISSUE:
1. Whether or not upon the petitioner’s acquisition of the PCDP, the latter lost its corporate personality.
2. Whether or not the decision of the Court of Appeals is null and void in so far it reinstated the decision
of in full without expressing therein the facts and law in which it is based.
HELD:
1. No, Under Section 122 of the Corporation Code, a corporation whose corporate existence is
terminated in any manner continues to be a body corporate for three (3) years after its dissolution for
purposes of prosecuting and defending suits by and against it and to enable it to settle and close its
affairs, culminating in the disposition and distribution of its remaining assets.
2. Yes, the decision of the CA setting aside the decision of the NLRC and reinstating the decision of the
ELA is null and void for lack of jurisdiction.
RATIO:
12. At any time during the said three (3) years, the corporation is authorized and empowered to convey all
of its properties to trustees for the benefit of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of its properties in trust for the benefit
of its stockholders, members, creditors and others in interest, all interest which the corporation had in
the properties terminates the legal interest vests in the trustees, and the beneficial interest in the
CORPORATION LAW
Case Digest
stockholders, members, creditors or other persons in interest.
13. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or
member, who is unknown or cannot be found, shall be escheated to the city or municipality where
such assets are located.
14. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its debts
and liabilities.
15. The termination of the life of a corporate entity does not by itself cause the extinction or diminution of
the rights and liabilities of such entity.
16. If the three-year extended life has expired without a trustee or receiver having been expressly
designated by the corporation, within that period, the board of directors (or trustees) itself, may be
permitted to so continue as "trustees" by legal implication to complete the corporate liquidation.
CASE LAW/ DOCTRINE:
- SEC. 122. Corporate Liquidation. – Every corporation whose charter expires by its own limitation or
is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in
any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against
it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute
its assets, but not for the purpose of continuing the business for which it was established.
-

CORPORATION LAW
Case Digest
221 REYES v. BLOUSE
91 Phil 305 1952 Author: KC
Topic: Compared with Merger and Consolidation
A merger implies necessarily the termination or
cessation of the merged corporations and not
merely a merger of their properties and assets.
Facts:
Plaintiffs instituted an action as minority stockholders of the Laguna Tayabas Bus Co. to restrain its Board of
Directors, defendants, from carrying out a resolution approved by 92½ per cent of the stockholders authorizing
said Board of Directors to take the necessary steps to consolidate the properties and franchises of the Laguna
Tayabas Bus Co. with Batangas Transportation Co. (overview)
1. The grounds on which plaintiffs predicate their action are:

• That the proposed consolidation or merger of the two companies would be prejudicial to the L.T.B. Co.
and to the appellants in particular who do not own shares of stock of B.T. Co.
• That the proposed consolidation or merger was illegal because the unanimous vote of the stockholders
was not secured and that the same was contrary to the spirit of our laws.
2. Counsel for plaintiffs: says that,
• its real purpose is to effect a merger or consolidation, and as such there is no law in the
Philippines under which it may properly be carried out;
3. Counsel for the defendants: says that,
• it is merely an exchange of properties sanctioned by corporation law, even if it be considered
as a consolidation, the same can still be carried out under Commonwealth Act No. 146, section
20, otherwise known as the Public Service Law.
4. Defendants asked for the dismissal of the complaint for there is no sufficient cause of action.
5. Defendants submitted an affidavit of Max Blouse, President of the Laguna Tayabas Bus Co., outlining the
steps to be taken by the Board of Directors in carrying out the merger or consolidation authorized in the
disputed resolution.
6. The disputed resolution purpose was:
• not to dissolve the Laguna Tayabas Bus Co. but merely to transfer its assets to a new
corporation in exchange for its corporation stock.
7. RTC decision: dismissed the complaint and the preliminary injunction was lifted because the acts to be
performed by the defendants, Laguna Tayabas Bus Co., are within the authority granted under Section
28½ of the Corporation Law.
ISSUE:
1. WON the real purpose of the disputed resolution is the merger or consolidation of the properties and
franchises of the Laguna Tayabas Bus Co. with those of the Batangas Transportation Co. within the
meaning of the law
_________________________________________________________________________________
HELD:
1. Yes. The action of the corporation was taken within the provision of our corporation law.
________________________________________________________________________________’
RATIO:
1. A merger implies necessarily the termination or cessation of the merged corporations and not merely a
merger of their properties and assets.
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Case Digest
2. This intent is clearly deducible from the provision that the Laguna Tayabas Bus Co. will not be dissolved
but will continue existing until its stockholders decide to dissolve the same.
3. The two corporations will not lose their corporate existence or personality, or at least the Laguna Tayabas
Bus Co., but will continue to exist even after the consolidation.
4. In other words, what is intended by the resolution:
• merely a consolidation of properties and assets, to be managed and operated by a new corporation,
and not a merger of the corporations themselves.
Granting that the disputed resolution has really the intention and the purpose of carrying out the merger or
consolidation, we believe that this can be carried out in this jurisdiction in the light of our Public Service Law.
1. The claim that the merger or consolidation of two land transportation companies cannot be carried out in
this jurisdiction because it is prohibited by Act No. 2772, is untenable in the light of the very provisions
of said Act.
2. A careful analysis of said act will show that it only regulates the merger or consolidation of railroad
companies, or of a railroad company with any other carrier by land or water.
3. Said Act does not apply to the merger or consolidation of two corporations exclusively engaged in land
transportation.
As to how the merger or consolidation shall be carried out:

The law does not require that there be an express legislative authority, or a unanimous consent of all
stockholders, to effect a merger or consolidation of two corporations.
CASE LAW DOCTRINE:

A merger implies necessarily the termination or cessation of the merged corporations and not merely a merger of
their properties and assets.

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Case Digest
222 EDWARD NELL VS PACIFIC FARMS AUTHOR: VILLANUEVA, Karyl Stephanie L.
G.R. No. L-20850 November 29, 1965
TOPIC: Corporate Combinations: Sale of Substantially all
Assets - Compared with Merger and Consolidation
PONENTE: Justice Concepcion
FACTS
1. Appellant Edward Nell a judgment against Insular Farms for a sum of the unpaid balance of the price of a pump sold by
appellant to Insular Farms. A writ of execution was issue but it returned unsatisfied, stating that Insular Farms had no
leviable property.
2. Note: Appellee Pacific Farms purchased all or substantially all of the shares of stock, as well as the real and personal
properties Insular Farms, including the pumping equipment sold by appellant to Insular Farms. Thereupon, appellee sold
said shares of stock to certain individuals, who forthwith reorganized said corporation; and that the board of directors
thereof, as reorganized, then caused its assets, including its leasehold rights over a public land in Bolinao, Pangasinan, to
be sold to herein appellee for P10,000.00
3. Appellant filed with the Municipal Court the present action against Pacific Farms, Inc. for the collection of the judgment
aforementioned, upon the theory that appellee is the alter ego of Insular Farms because the former had purchased the
shares of stock of Insular Farms.
4. MUNICIPAL COURT, CFI AND CA’S DECISION: dismissed appellant’s complaint. Hence the appeal by certiorari.
ISSUE: W/N the appellee can be held liable for said unpaid obligation of the Insular Farms?
HELD: NO. The purchase of appellee of the shares did not amount to consolidation or merger of the corporations that
would consequently lead to the transferee being liable for the debts and liabilities of the transferor.
RATIO:
• Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not
liable for the debts and liabilities of the transferor, except: (1) where the purchaser expressly or impliedly agrees to
assume such 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
entered into fraudulently in order to escape liability for such debts.
• In the case at bar, there is neither proof nor allegation that appellee had expressly or impliedly agreed to assume
the debt of Insular Farms in favor of appellant herein, or that the appellee is a continuation of Insular Farms, or that
the sale of either the shares of stock or the assets of Insular Farms to the appellee has been entered into
fraudulently, in order to escape liability for the debt of the Insular Farms in favor of appellant herein.
• Neither is it claimed that these transactions have resulted in the consolidation or merger of the Insular Farms and
appellee herein. On the contrary, appellant's theory to the effect that appellee is an alter ego of the Insular Farms
negates such consolidation or merger, for a corporation cannot be its own alter ego.
CASE LAW/ DOCTRINE:

CORPORATION LAW
Case Digest
223 PNB v. Andrada Electric & Engineering Co., 381 AUTHOR: RAVZ
SCRA 244 (2002) - A consolidation is the union of two or more
TOPIC: Compared with Merger and Consolidation existing entities to form a new entity called the
PONENTE: Panganiban, J. consolidated corporation.
- A merger is a union whereby one or more
existing corporations are absorbed by another
corporation that survives and continues the
combined business
FACTS
1. Philippine National Bank (PNB) acquired ownership or management of some assets of Pampanga Sugar Mill
(PASUMIL), which had earlier been foreclosed and purchased at resulting public auction by the Development
Bank of the Philippines (DBP).
2. The plaintiff is engaged in the business of general construction for the repairs and/or construction of different
kinds of machineries and buildings, the defendant PASUMIL engaged the services of plaintiff for electrical
rewinding and repair, most of which were partially paid by the defendant PASUMIL, leaving several unpaid
accounts with the plaintiff amounting to P513,263.80.
3. The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint chiefly on the ground that
the complaint failed to state sufficient allegations to establish a cause of action against both defendants,
inasmuch as there is lack or want of privity of contract between the plaintiff and the two defendants.
4. The motion to dismiss was by the court a quo denied in its Order
5. In their answer, the defendant NASUDECO and PNB reiterated the grounds of its motion to dismiss on the
ground that the complaint does not state a sufficient cause of action against the defendant NASUDECO.
6. Judgment is hereby rendered in favor of plaintiff and against the defendant Corporation, Philippine National
Bank (PNB) NATIONAL SUGAR DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA
SUGAR MILLS (PASUMIL), ordering the latter to pay jointly and severally.
7. Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity for a
corporation to take over and operate the business of another corporation, while disavowing or repudiating any
responsibility, obligation or liability arising therefrom
ISSUE: Whether PNB should be liable for the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and 311,
which expressly authorized PASUMIL and PNB to merge or consolidate.
HELD: NO, The mere fact that the Philippine National Bank (PNB) acquired ownership or management of some
assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased at the resulting
public auction by the Development Bank of the Philippines (DBP), will not make PNB liable for the PASUMIL’s
contractual debts to respondent
RATIO:
1. A consolidation is the union of two or more existing entities to form a new entity called the consolidated
corporation. A merger, on the other hand, is a union whereby one or more existing corporations are
absorbed by another corporation that survives and continues the combined business.
2. The merger, however, does not become effective upon the mere agreement of the constituent
corporations. 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.
3. In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB. The
procedure prescribed under Title IX of the Corporation Code was not followed.
4. In fact, PASUMIL’s corporate existence, as correctly found by the CA, had not been legally extinguished or
terminated. Further, prior to PNB’s acquisition of the foreclosed assets, PASUMIL had previously made
partial payments to respondent for the former’s obligation in the amount of P777,263.80. As of June 27,
CORPORATION LAW
Case Digest
1973, PASUMIL had paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974, another
P14,000.
5. Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent. LOI No.
11 explicitly provides that PNB shall study and submit recommendations on the claims of PASUMIL’s
creditors. Clearly, the corporate separateness between PASUMIL and PNB remains, despite respondent’s
insistence to the contrary.
CASE LAW/ DOCTRINE:
- The merger does not become effective upon the mere agreement of the constituent corporations.
- 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.

CORPORATION LAW
Case Digest
224 Marshall Wells v. Elser, Author: KC
46 Phil 71 (1924)
TOPIC: Effects of Failure to secure SEC
license
Ponente
Facts:
1. Marshall-Wells Company, an Oregon corporation, sued Henry W. Elser & Co., Inc., a domestic corporation,
for the unpaid balance of a bill of goods amounting to P2,660.74, sold by plaintiff to defendant and for
which plaintiff holds accepted drafts.
2. Defendant(ELSER) objected to the complaint on the statutory ground that the plaintiff has not legal capacity
to sue. Defendant claims that,
“The said complaint does not show that the plaintiff has complied with the laws of the Philippine Islands in that
which is required of foreign corporations desiring to do business in the Philippine Islands, neither does it show
that it was authorized to do business in the Philippine Islands.”
3. RTC: sustained the demurrer of the defendant and dismissed the complaint.
ISSUE:
• WON Marshall-Wells has legal capacity to sue
HELD: YES
4. Defendant isolates a portion of one sentence of section 69 of the Corporation Law and asks the court to give
it a literal meaning. Section 69, “No foreign corporation shall be permitted to maintain by itself or assignee
any suit for the recovery of any debt, claim, or demand whatever, unless it shall have the license prescribed
in section 68 of the law.”
5. The object of the statute was not to prevent the foreign corporation from performing single acts, but to
prevent it from acquiring a domicile for the purpose of business without taking the steps necessary to render
it amenable to suit in the local courts.
6. It was never the purpose of the Legislature to exclude a foreign corporation which happens to obtain an
isolated order for business from the Philippines, from securing damages in the Philippine courts, and thus, in
effect, to permit persons to avoid their contracts made with such foreign corporations.
7. The law simply means that no foreign corporation shall be permitted “to transact business in the
Philippine Islands,” as this phrase is known in corporation law, unless it shall have the license required by
CORPORATION LAW
Case Digest
law, and, until it complies with the law, shall not be permitted to maintain any suit in the local courts.
8. A contrary holding would bring the law to the verge of unconstitutionality, a result which should be and can
be easily avoided.
9. The noncompliance of a foreign corporation with the statute may be pleaded as an affirmative defense.
10. Thereafter, it must appear from the evidence, first, that the plaintiff is a foreign corporation, second,
that it is doing business in the Philippines, and third, that it has not obtained the proper license as
provided by the statute.
The order appealed from shall be set aside and the record shall be returned to the court of origin for further
proceedings.
CASE LAW DOCTRINE:
The Corporation Law (Act No. 1459) contains six sections relating particularly to foreign corporations.
(1) Section 68, as amended by Act No. 2900, provides that no foreign corporation
“shall be permitted to transact business in the Philippine Islands until after it shall have
obtained a license for that purpose from the Chief of the Mercantile Register of the Bureau of
Commerce and Industry,” upon order either of the Secretary of Finance or the Secretary of
Commerce and Communications.
No order for a license shall be issued except upon a statement under oath of the managing agent of the
corporation, showing to the satisfaction of the proper Secretary that the corporation is solvent and in sound
financial condition, and setting forth the resources and liabilities of the corporation. Said statement shall contain
the following:
(1) The name of the corporation; (2) the purpose for which it was organized;(3) the location of its
principal or home office; (4) the capital stock of the corporation and the amount thereof actually subscribed and
paid into the treasury; (5) the net assets of the corporation over and above all debts, liabilities, obligations,
and claims outstanding against it; and (6) the name of an agent residing in the Philippine Islands authorized
by the corporation to accept evidence of summons and process in all legal proceedings against the corporation
and of all notices affecting the corporation.

CORPORATION LAW
Case Digest

CORPORATION LAW
Case Digest
225 ATLANTIC MUTUAL VS CEBU STEVEDORING AUTHOR: Karyl Villanueva
G.R. No. L-18961 August 31, 1966
TOPIC: Foreign Corporations: Effects of Failure to secure If a foreign corporation is not doing business here it is not
SEC license barred from seeking redress in our courts in proper cases, as
PONENTE: Justice Makalintal when it sues on an isolated transaction, even if it has not
obtained a license pursuant to Section 69 of the Corporation
Law
FACTS
1. The appellants — Atlantic Mutual Insurance Company and Continental Insurance Company — are both foreign
corporations existing under the laws of the United States. They sued Cebu Stevedoring Co., Inc., a domestic corporation,
for recovery of a sum of money because the defendant, a common carrier, undertook to carry a shipment failed to comply
with its obligation, as carrier, to deliver the copra in good order.
2. DEFENDANTS CONTENTION: moved to dismiss on the ground that plaintiffs had no legal personality to appear
before Philippine courts and with no capacity to sue. It was based upon failure of the complaint to allege compliance with
section 69 of the Corporation Law.
Section 69 of the Corporation Law

SEC. 69. No foreign corporation or corporation formed, organized, or existing under any laws other than those of
the Philippines shall be permitted to transact business in the Philippines or maintain by itself or assigned any suit
for the recovery of any debt, claim, or demand whatever, unless it shall have the license prescribed in the section
immediately preceeding….
Section 68 of the Corporation Law is almost identical with the first part of Section 69 which requires a license
before a foreign corporation may be permitted to transact business in the Philippines, but adds that such license
may be obtained from the Director of Commerce upon order of the Secretary of Commerce and Industry.
3. RTC DECISION: dismissed complaint. The implication of the court's ruling is that without such license a foreign
corporation may not sue in our courts in view of section 69 of the Corporation Law. Hence the appeal.
ISSUE: W/N without such license a foreign corporation may not sue in our courts in view of section 69 of the Corporation
Law?
HELD: No, it may still sue. If a foreign corporation is not doing business here it is not barred from seeking redress in our
courts in proper cases, as when it sues on an isolated transaction, even if it has not obtained a license pursuant to Section
69.
RATIO:
• The law simply means that no foreign corporation shall be permitted to transact business in the Philippines unless
it shall have the license required by law, and, until it complies with this law, shall not be permitted to maintain any
suit in the local courts.
• The statute was not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring
a domicile for the purpose of business without taking the steps necessary to render it amenable to suit in the local
courts.

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Case Digest
• The implication of the law is that it was never the purpose of the Legislature to exclude a foreign corporation
which happens to obtain an isolated order for business from the Philippines, from securing redress in the
Philippine Courts, and thus, in effect, to permit persons to avoid their contracts made with such foreign
corporations.
• The effect of the statute preventing foreign corporations from doing business and from bringing actions in the local
courts, except in compliance with elaborate requirements, must not be unduly extended or improperly applied. It
should not be construed to extend beyond the plain meaning of its terms, considered in connection with its object,
and in connection with the spirit of the entire law."
CASE LAW/ DOCTRINE: If a foreign corporation is not doing business here it is not barred from seeking redress in our
courts in proper cases, as when it sues on an isolated transaction, even if it has not obtained a license pursuant to Section
69 of the Corporation Law

CORPORATION LAW
Case Digest
228 HOME INSURANCE VS EASTERN SHIPPING AUTHOR: Karyl Villanueva
G.R. No. L-34382 July 20, 1983 A foreign corporation actually doing business in the
Philippines without license to do so may be sued in our
G.R. No. L-34383 July 20, 1983 courts.
TOPIC: Foreign Corporations: Effects of Failure to Secure

SEC license
PONENTE: Justice Gutierrez

FACTS
1. These are 2 consolidated petitions wherein plaintiff was a foreign insurance company duly authorized to do business in
the Philippines through its agent.
2. In the 2 cases, the defendants were the owners of the vessels and were thus the carrier of shipment of items to a
consignee. In both cases, the plaintiff, being an insurance company, insured the shipments against all risks. However, the
cargoes delivered to the consignee were either damaged or lost.
3. Plaintiff paid the consignee under its Insurance Cargo Policy, virtue of which plaintiff became subrogated to the rights
and actions of the consignee. Demands were made on defendant carriers and for reimbursement thereof but they failed and
refused to pay the same. Plaintiff then filed for recovery of maritime damages against defendants.
4. RTC DECISION: dismissed complaint on the ground that plaintiff failed to prove its capacity to sue. Hence the petition
for review on certiorari.
**When the complaints in these two cases were filed, the petitioner had already secured the necessary license to conduct
its insurance business in the Philippines. It could already filed suits. However, when the insurance contracts which formed
the basis of these cases were executed, the petitioner had not yet secured the necessary licenses and authority. According to
a number of rulings in previous cases, this made the contracts unenforceable (and not null and void) upon compliance with
the requirements of the law.
ISSUE: w/n the Trial court erred in considering as an issue the legal existence or capacity of plaintiff-appellant?
HELD: Yes because a foreign corporation actually doing business in the Philippines without license to do so may be sued
in our courts. The implication of the law is that it was never the purpose of the Legislature to exclude a foreign corporation
which happens to obtain an isolated order for business from the Philippines, from securing redress in the Philippine courts,
and thus, in effect, to permit persons to avoid their contracts made with such foreign corporations.
RATIO:
• Section 69 of the Corporation Law states:
Sec. 69. No foreign corporation or corporation formed, organized, or existing under any laws other than those of
the Philippine Islands shall be permitted to transact business in the Philippine Islands or maintain by itself or
assignee any suit for the recovery of any debt, claim, or demand whatever, unless it shall have the license
prescribed in the section immediately preceding…
• The object of Sections 68 and 69 of the Corporation Law was to subject the foreign corporation doing business in
the Philippines to the jurisdiction of our courts.
• The object of the statute was not to prevent the foreign corporation from performing single acts, but to prevent it
from acquiring a domicile for the purpose of business without taking the steps necessary to render it amenable to
suit in the local courts. The implication of the law is that it was never the purpose of the Legislature to exclude a
CORPORATION LAW
Case Digest
foreign corporation which happens to obtain an isolated order for business from the Philippines, from securing
redress in the Philippine courts, and thus, in effect, to permit persons to avoid their contracts made with such
foreign corporations.
• The effect of the statute preventing foreign corporations from doing business and from bringing actions in the
local courts, except on compliance with elaborate requirements, must not be unduly extended or improperly
applied. It should not be construed to extend beyond the plain meaning of its terms, considered in connection with
its object, and in connection with the spirit of the entire law.
• Significantly, Batas Pambansa Blg. 68, the Corporation Code of the Philippines has corrected the ambiguity
caused by the wording of Section 69 of the old Corporation Law.
Section 133 of the present Corporation Code provides:
SEC. 133. Doing business without a license.-No foreign corporation transacting business in the Philippines
without a license, or its successors or assigns, shag be permitted to maintain or intervene in any action, suit
or proceeding in any court or administrative agency in the Philippines; but such corporation may be sued
or proceeded against before Philippine courts or administrative tribunals on any valid cause of action
recognized under Philippine laws.
CASE LAW/ DOCTRINE: A foreign corporation actually doing business in the Philippines without license to do so may
be sued in our courts. The implication of the law is that it was never the purpose of the Legislature to exclude a foreign
corporation which happens to obtain an isolated order for business from the Philippines, from securing redress in the
Philippine courts, and thus, in effect, to permit persons to avoid their contracts made with such foreign corporations.

CORPORATION LAW
Case Digest
230 Facilities Management Corp. v. de la Osa Author: KC
89 SCRA 131 (1979)
TOPIC: What Constitutes Transacting
Business
Ponente: MAKASIAR, J:
Facts:
Petition for review on certiorari of the decision of the Court of Industrial Relations, dated February 14, 1972,
ordering petitioners herein to pay private respondent Leonardo de la Osa his overtime compensation, as
well as his swing shift and graveyard shift premiums at the rate of fifty (50%) per cent of his basic salary.
The aforesaid decision was based on a report submitted by the Hearing Examiner, the pertinent portions of which
are quoted herein below:
1. In a petition filed on July 1, 1967, Leonardo dela Osa sought his reinstatement with full back wages, as
well as the recovery of his overtime compensation, swing shift and graveyard shift differentials.
2. Petitioner alleged that he was employed by respondents as follows: (1) painter with an hourly rate of
$1.25, inclusive; (2) houseboy with an hourly rate of $1.26 (3) houseboy with an hourly rate of $1.33
(4) cashier with an hourly rate of $1.40
3. He was not paid both overtime and night shift premiums despite his repeated demands from respondents.
4. Respondents filed an answer without denying the allegations of the basic petition but interposed the
following special defenses, namely:
a) Facilities Management Corporation and J. S. Dreyer are domiciled in Wake Island which is
beyond the territorial jurisdiction of the Philippine Government;
b) J. V. Catuira, though an employee of respondent corporation presently stationed in Manila, is
without power and authority of legal representation;
c) employment contract between petitioner and respondent corporation carries -the approval of
the Department of Labor of the Philippines.
5. Respondents filed a motion to dismiss the subject petition on the ground that this Court has no
Jurisdiction over the instant case but said motion was denied by this Court sustaining jurisdiction in
accordance with the prevailing doctrine of the Supreme Court in similar cases.
6. The contract of employment between the parties litigant was shown to have been originally executed and
subsequently renewed in Manila, any dispute arising therefrom should necessarily be determined in
the place or venue where it was contracted.
ISSUE: WON petitioner has been 'doing business in the Philippines' so that the service of summons upon its
agent in the Philippines vested the Court of First Instance of Manila with jurisdiction.
HELD: Yes, from the facts of record, the petitioner may be considered as doing business in the Philippines
within the scope of Section 14, Rule 14 of the Rules of the Court
RATIO:
1. Section 14, Rule 14 of the Rules of the Court which provides: Service upon private foreign
corporations. If the defendant is a foreign corporation or a non-resident joint stock company or
association: doing business in the Philippines, service may be made on its resident agent
designated in accordance with law for that purpose or, if there be no such agent, on the
government official designated by law to that effect, or on any of its officers or agents within the
Philippines
2. Indeed, the petitioner, in compliance with Act 2486 as implemented by Department of Labor Order No.
IV dated May 20, 1968 had to appoint Jaime V. Catuira, as agent for FMC with authority to
CORPORATION LAW
Case Digest
execute Employment Contracts and receive, in behalf of that corporation, legal services from and
be bound by processes of the Philippine Courts of Justice, for as long as he remains an employee of
FMC.
3. Petitioner in his motion to dismiss, admits that Mr. Catuira represented it in this country 'for the
purpose of making arrangements for the approval by the Department of Labor of the
employment of Filipinos who are recruited by the Company as its own employees for
assignment abroad.' In effect, Mr. Catuira was an officer representing petitioner in the Philippines.
4. If a foreign corporation, not engaged in business in the Philippines, is not banned from seeking redress
from courts in the Philippines, a fortiori, that same corporation cannot claim exemption from being
sued in Philippine courts for acts done against a person or persons in the Philippines.
5. In Mentholatum Co., Inc., et al vs- M Court rules that-
No general rule or governing principle can be laid down as to what constitutes 'doing' or 'engaging in'
or 'transacting' business. The true test, however, seems to be whether the foreign corporation is
continuing the body or substance of the business or enterprise for which it was organized or
whether it has substantially retired from it and turned it over to another.
The term implies a continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions normally incident to,
and in progressive prosecution of, the purpose and object of its organization
CASE LAW DOCTRINE:
Under the rules and regulations promulgated by the Board of Investments which took effect Feb. 3, 1969,
implementing Rep. Act No. 5455, which took effect Sept. 30, 1968, the phrase 'doing business' has been
exemption with illustrations, among them being as follows:
xxx xxx xxx
(f) the performance within the Philippines of any act or combination of acts enumerated in section l(l) of the Act
shall constitute 'doing business' therein. in particular, 'doing business includes:
(1) Soliciting orders, purchases (sales) or service contracts. Concrete and specific solicitations by a foreign
firm, not acting independently of the foreign firm amounting to negotiation or fixing of the terms and conditions
of sales or service contracts, regardless of whether the contracts are actually reduced to writing, shall constitute
doing business even if the enterprise has no office or fixed place of business in the Philippines. xxx
(2) Appointing a representative or distributor who is domiciled in the Philippines, unless said representative
or distributor has an independent status, i.e., it transacts business in its name and for its own account, and not in
the name or for the account of the principal.
(4) Opening offices, whether called 'liaison' offices, agencies or branches, unless proved otherwise.
(10) Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to
that extent the performance of acts or works, or the exercise of some of the functions normally incident to, or in
the progressive prosecution of, commercial gain or of the purpose and objective of the business organization (54
O.G. 53).

CORPORATION LAW
Case Digest
233 Aetna Casualty & Surety Co. v. Pacific Author: KC
Star Line
80 SCRA 635 (1977)
TOPIC: What Constitutes Transacting

Business
Ponente
Facts: This is an appeal from the decision of the CFI Manila, entitled Aetna Casualty & Surety Company vs
Pacific Star Line, The Bradman Co. Inc., Manila Port Service and/or Manila Railroad Company, Inc."
dismissing the complaint on the ground that the plaintiff has no legal capacity to bring this suit and making no
finding as to the liability of the defendants.
1. On February 11, 1963, Smith Bell & Co. (Philippines), Inc. and Aetna Surety Casualty & Surety Co.
Inc., as subrogee, instituted Civil Case to recover the amount of US $2,300.00 representing the value of
the stolen and damaged cargo plus litigation expenses and exemplary damages in the amounts of
P1,000.00 and P2,000.00, respectively, with legal interest thereon from the filing of the suit and costs
against
• Pacific Star Line,
• The Bradman Co. Inc.,
• Manila Port Service and/or Manila Railroad Company, Inc.
2. Pacific Star Line, common carrier, was operating the vessel SS Ampal on a commercial run between
United States and Philippine Ports including Manila;
3. The Bradman Co. Inc., was the ship agent in the Philippines for the SS Ampal and/or Pacific Star
Line;
4. Manila Railroad Co. Inc. and Manila Port Service were the arrastre operators in the port of
Manila and were authorized to delivery cargoes discharged into their custody on presentation of release
papers from the Bureau of Customs and the steamship carrier and/or its agents;
5. On December 2, 1961, the SS Ampal took on board at New York, N.Y., U.S.A., a consignment or cargo
including 33 packages of Linen & Cotton Piece Goods for shipment to Manila for which defendant
Pacific Star Line issued Bill of Lading No. 18 in the name of I. Shalom & Co., Inc., as shipper,
consigned to the order of Judy Philippines, Inc., Manila;
6. Upon SS Ampal’s arrival in Manila and discharging its cargo to the custody of Manila Port Service; the
shipment sustained damages valued at US $2,300.00 representing pilferage and seawater damage due to
the negligence of the defendants.
7. I. Shalom & Co., Inc. immediately filed claim for the undelivered land damaged cargo with defendant
Pacific Star Line in New York, N.Y., but said defendant refused and still refuses to pay the said
claim;
8. The cargo was insured by I. Shalom & Co., Inc. with plaintiff Aetna Casualty & Surety Company for
loss and/or damage; and upon demand, Aetna Casualty & Surety Company indemnified I. Shalom &
Co., Inc. the amount of US $2,300.00;
9. Plaintiffs and/or their predecessor-in-interest sustained losses due to the negligence of Pacific Star Line
prior to delivery of the cargo to Manila or, in the alternative, due to the negligence of Manila Port
Service after delivery of the cargo to it by the SS Ampal; Yet, despite repeated demands, none of the
defendants has been willing to accept liability for the claim of the plaintiffs
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Case Digest
10. The defendants Manila Port Service and Manila Railroad Company, Inc. to allege that the plaintiff,
Aetna casualty & Surety Company, is a foreign corporation not duly licensed to do business in the
Philippines and, therefore, without capacity to sue and be sued.
11. It is a fact that said appellant has no license to transact business in the Philippines as a foreign
corporation.
12. RTC dismissed the case:

“There has been a ruling that foreign corporation may file a suit in the Philippines in isolated cases. But the case of the plaintiff here is not that. The evidence
shows that the plaintiff has been filing actions in the Philippines not just in isolated instances, but in numerous cases and therefore, has been doing business in this
country, contrary to Philippine laws.”
Issue: Whether or not the appellant, Aetna Casualty & Surety Company, has been doing business in the
Philippines
Held: No, since the appellant Aetna Casualty & Surety Company is not engaged in the business of insurance in
the Philippines but is merely collecting a claim assigned to it by the consignee, it is not barred from filing the
instant case although it has not secured a license to transact insurance business in the Philippines
The decision appealed from is hereby set aside and the case is remanded to the trial court for further
proceedings to determine the liability of the defendants-appellees
Ratio:
1. It is settled that if a foreign corporation is not engaged in business in the Philippines, it may not
be denied the right to file an action in Philippine courts for isolated transactions.
2. The object of Sections 68 and 69 of the Corporation Law was not to prevent the foreign
corporation from performing single acts, but to prevent it from acquiring a domicile for the
purpose of business without taking the steps necessary to render it amenable to suit in the local
courts.
3. It was never the purpose of the Legislature to exclude a foreign corporation which happens to obtain
an isolated order for business from the Philippines, from securing redress in the Philippine courts.
4. In Mentholatum Co., Inc. et al. vs. Mangaliman, et al., this Court ruled that, No general rule or
governing principle can be laid down as to what constitutes 'doing' or 'engaging in' or 'transacting'
business. Indeed, each case must be judged in the light of its peculiar environmental circumstances.
The true test, however, seems to be whether the foreign corporation is continuing the body or
substance of the business or enterprise. for which it was organized or whether it has substantially
retired from it and turned it over to another.
5. In Eastboard Navigation, Ltd., et al. vs. Juan Ysmael & Co., Inc., this Court held that: (d) While
plaintiff is a foreign corporation without license to transact business in the Philippines, it does not
follow that it has no to bring the present action. Such license is not necessary because it is not
engaged in business in the Philippines.
6. It cannot be said that the Aetna Casualty & Surety Company is transacting business of
insurance in the Philippines for which it must have a license. The contract of insurance was
entered into in New York, U.S.A., and payment was made to the consignee in its New York branch.
It appears from the list of cases issued by the Clerk of Court of the Court of First Instance of Manila
that all the actions, except two (2) cases filed by Smith, Bell & Co., Inc. against the Aetna Casualty
& Surety Company, are claims against the shipper and the arrastre operators just like the case at bar.
Case Law Doctrine:
1. Section 68 of the Corporation Law provides that "No foreign corporation or corporation formed,
organized, or existing under any laws other than those of the Philippines shall be permitted to
transact business in the Philippines until after it shall have obtained a license for that purpose from
the Securities and Exchange Commissioners . . . ."
2. Section 69 of said Corporation Law "No foreign corporation or corporation formed,
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Case Digest
organized, or existing under any laws other than those of the Philippines shall be
permitted to transact business in the Philippines or maintain by itself or assignee any suit
for the recovery of any debt, claim, or demand whatever, unless it shall have the license
prescribed in the section immediately preceding ...

CORPORATION LAW
Case Digest
235 ANTAM CONSOLIDATED v. CA AUTHOR: Franch Galanza
143 SCRA 289 (1980)
TOPIC: What Constitutes Transacting Business
PONENTE: Gutierrez, J.
FACTS
1. On 9 April 1981, Stokely Van Camp. Inc. filed a complaint against Banahaw Milling Corporation, Antam Consolidated,
Inc., Tambunting Trading Corporation, Aurora Consolidated Securities and Investment Corporation, and United Coconut
Oil Mills, Inc. (Unicom) for collection of sum of money.
2. Stokely alleged the following in its complaint that it is a corporation organized and existing under the laws of the state
of Indiana, U.S.A. and has its principal office at 941 North Meridian Street, Indianapolis, Indiana, U.S.A., and one of its
subdivisions "Capital City Product Company" (Capital City) has its office in Columbus, Ohio, U.S.A.;
3. Stokely and Capital City were not engaged in business in the Philippines prior to the commencement of the suit so that
Stokely is not licensed to do business in this country and is not required to secure such license;
4. On 21 August 1978, Capital City and Coconut Oil Manufacturing (Phil.) Inc. (Comphil) with the latter acting through its
broker Rothschild Brokerage Company, entered into a contract (RBS 3655) wherein Comphil undertook to sell and deliver
and Capital City agreed to buy 500 long tons of crude coconut oil to be delivered in October/November 1978 at the c.i.f
price of US$0.30/lb. but Comphil failed to deliver the coconut oil so that Capital City covered its coconut oil needs in the
open market at a price substantially in excess of the contract and sustained a loss of US$103,600; that to settle Capital
City's loss under the contract, the parties entered into a second contract (RBS 3738) on 3 November 1978 wherein Comphil
undertook to buy and Capital City agreed to sell 500 long tons of coconut crude oil under the same terms and conditions
but at an increased c.i.f. price of US$0.3925/lb.;
5. The second contract states that "it is a wash out against RBS 3655" so that Comphil was supposed to repurchase the
undelivered coconut oil at US $0.3925 from Capital City by paying the latter the sum of US$103,600.00 which is the same
amount of loss that Capital City sustained under the first contract; that Comphil again failed to pay said amount, so to settle
Capital City's loss, it entered into a third contract with Comphil on 24 January 1979 wherein the latter undertook to sell and
deliver and Capital City agreed to buy the same quantity of crude coconut oil to be delivered in April/May 1979 at the c.i.f.
price of US$0.3425/lb.;
6. The latter price was 9.25 cents/lb. or US$103,600 for 500 long tons below the then current market price of 43.2 cents/lb.
and by delivering said quantity of coconut oil to Capital City at the discounted price, Comphil was to have settled its
US$103,600 liability to Capital City;
7. Comphil failed to deliver the coconut oil so Capital City notified the former that it was in default and Capital City
sustained damages in the amount of US$175,000
8. After repeated demands from Comphil to pay the said amount, the latter still refuses to pay the same.
9. Stokely further prayed that a writ of attachment be issued against any and all the properties of Antam, et al. in an amount
sufficient to satisfy any lien of judgment that Stokely may obtain in its action.
10. After demands were made by respondent on Comphil, the Tambuntings ceased to be directors and officers of Comphil
and were replaced by their five employees, who were managers of Tambunting's pawnshops and said employees caused
the name of Comphil to be changed to "Banahaw Milling Corporation" and authorized one of the Tambuntings, Antonio P.
Tambunting, Jr., who was at that time neither a director nor officer of Banahaw to sell its oil mill
11. Unicom has taken over the entire operations and assets of Banahaw because the entire and outstanding capital stock of
the latter was sold to the former;
12. All of the issued and outstanding capital stock of Comphil are owned by the Tambuntings who were the directors and
officers of Comphil and who were the ones who benefited from the sale of Banahaw's assets or shares to Unicom;
13. All of the petitioners evaded their obligation to respondent by the devious scheme of using Tambunting employees to
replace the Tambuntings in the management of Banahaw and disposing of the oil mill of Banahaw or their entire interests
to Unicom
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Case Digest
14. Respondent has reasonable cause to believe and does believe that the coconut oil mill, which is the only substantial
asset of Banahaw is about to be sold or removed so that unless prevented by the Court there will probably be no assets of
Banahaw to satisfy its claim.
15. April 10, 1981, the trial court ordered the issuance of a writ of attachment in favor of Stokely upon the latter's deposit
of a bond in the amount of P1,285,000.00.
16. June 3,1981 - Stokely filed a motion for reconsideration to reduce the attachment bond.
17. On 11 June 1981, Antam, et al. filed a motion to dismiss the complaint on the ground that Stokely, being a foreign
corporation not licensed to do business in the Philippines, has no personality to maintain the suit. Thereafter, the trial court
issued an order, dated 10 August 1981, reducing the attachment bond to P500,000.00 and denying the motion to dismiss by
Antam, et al. on the ground that the reason cited therein does not appear to be indubitable. Antam, et al. filed a petition for
certiorari before the Intermediate Appellate Court. On 14 June 1982, the appellate court dismissed the petition. Antam, et
al. filed a motion for reconsideration but the same was denied.
ISSUE:
Whether Stokely Van Camp, Inc. has the capacity to sue, in light of three transactions it entered into with Comphil, Antam,
etc. without license.
HELD:
YES. Stokely, being a foreign corporation not doing business in the Philippines, does not need to obtain a license to do
business in order to have the capacity to sue. The transactions entered into by Stokely with Comphil, Antam, et al. are not a
series of commercial dealings which signify an intent on the part of Stokely to do business in the Philippines but constitute
an isolated one which does not fall under the category of "doing business.".
RATIO:
1. The only reason why Stokely entered into the second and third transactions with Comphil, Antam, et al. was because it
wanted to recover the loss it sustained from the failure of Comphil, Antam, et al. to deliver the crude coconut oil under the
first transaction and in order to give the latter a chance to make good on their obligation.
2. Instead of making an outright demand on Comphil, Antam, et al., Stokely opted to try to push through with the
transaction to recover the amount of US$103,600.00 it lost. This explains why in the second transaction, Comphil, Antam,
et al. were supposed to buy back the crude coconut oil they should have delivered to the respondent in an amount which
will earn the latter a profit of US$103,600.00. When this failed the third transaction was entered into by the parties
whereby Comphil, Antam, et al. were supposed to sell crude coconut oil to the respondent at a discounted rate, the total
amount of such discount being US$103,600.00.
3. Unfortunately, Comphil, Antam, et al. failed to deliver again, prompting Stokely to file the suit below. From these facts
alone, it can be deduced that in reality, there was only one agreement between Comphil, Antam, et al. and Stokely and that
was the delivery by the former of 500 long tons of crude coconut oil to the latter, who in turn, must pay the corresponding
price for the same.
4. The three seemingly different transactions were entered into by the parties only in an effort to fulfill the basic agreement
and in no way indicate an intent on the part of Stokely to engage in a continuity of transactions with Comphil, Antam, et al.
which will categorize it as a foreign corporation doing business in the Philippines.
CASE LAW/ DOCTRINE:
1. There is no general rule or governing principle laid down as to what constitutes'doing'or'engaging in' or 'transacting
business in the Philippines. Each case must be judged in the Light of its peculiar circumstance
2. The acts of these corporations should be distinguished from a single or isolated business transaction or occasional,
incidental and casual transactions which do not come within the meaning of the law. Where a single act or transaction
, however, is not merely incidental or casual but indicates the foreign corporation's intention to do other business in
the Philippines, said single act or transaction constitutes 'doing' or 'engaging in' or 'transacting' business in the
Philippines.

CORPORATION LAW
Case Digest
236 Cargill, Inc. v. Intra Strata Assurance Corp., AUTHOR: Franch Galanza
615 SCRA 304 (2010)
TOPIC: What Constitutes Transacting Business
PONENTE: Carpio, J.
FACTS
1. Petitioner Cargill, Inc. (petitioner) is a corporation organized and existing under the laws of the State of Delaware,
United States of America. Petitioner and Northern Mindanao Corporation (NMC) executed a contract dated 16 August
1989 whereby NMC agreed to sell to petitioner 20,000 to 24,000 metric tons of molasses, to be delivered from 1 January to
30 June 1990 at the price of $44 per metric ton.
2. The contract provides that petitioner would open a Letter of Credit with the Bank of Philippine Islands. Under the "red
clause" of the Letter of Credit, NMC was permitted to draw up to $500,000 representing the minimum price of the contract
upon presentation of some documents.
3.The contract was amended three times with the third amendment also requiring NMC to put up a performance bond
equivalent to $451,500, which represents the value of 10,500 metric tons of molasses computed at $43 per metric ton. The
performance bond was intended to guarantee NMC’s performance to deliver the molasses during the prescribed shipment
periods according to the terms of the amended contract.
4. In compliance with the terms of the third amendment of the contract, respondent issued on 10 October 1990 a
performance bond in the sum of P11,287,500 to guarantee NMC’s delivery of the 10,500 tons of molasses, and a surety
bond in the sum of P9,978,125 to guarantee the repayment of downpayment as provided in the contract.
5. NMC was only able to deliver 219.551 metric tons of molasses out of the agreed 10,500 metric tons. Thus, petitioner
sent demand letters to respondent claiming payment under the performance and surety bonds. When respondent refused to
pay, petitioner filed on 12 April 1991 a complaint for sum of money against NMC and respondent.
6. Petitioner, NMC, and respondent entered into a compromise agreement, which the trial court approved in its
Decision dated 13 December 1991. The compromise agreement provides that NMC would pay petitionerP3,000,000 upon
signing of the compromise agreement and would deliver to petitioner 6,991 metric tons of molasses from 16-31 December
1991. However, NMC still failed to comply with its obligation under the compromise agreement. Hence, trial proceeded
against respondent.
7. T trial court rendered a decision, in favor of plaintiff [Cargill, Inc.], ordering defendant INTRA STRATA
ASSURANCE CORPORATION to solidarily pay plaintiff the total amount of SIXTEEN MILLION NINE HUNDRED
NINETY-THREE THOUSAND AND TWO HUNDRED PESOS (P16,993,200.00), Philippine Currency, with interest at
the legal rate from October 10, 1990 until fully paid, plus attorney’s fees in the sum of TWO HUNDRED THOUSAND
PESOS (P200,000.00), Philippine Currency and the costs of the suit.
8. On appeal, the Court of Appeals reversed the trial court’s decision and dismissed the complaint. Hence, this petition.
ISSUE:
Whether or not petitioner is doing or transacting business in the Philippines in contemplation of the law and established
jurisprudence/ Whether or not CARGILL, an unlicensed foreign corporation, has legal capacity to sue before Philippine
courts.
HELD:
YES. Cargill is a foreign company merely importing molasses from a Philipine exporter. A foreign company
that merely imports goods from a Philippine exporter, without opening an office or appointing an agent in the
Philippines, is not doing business in the Philippines.
RATIO:
1. According to Article 123 of the Corporation Code, a foreign corporation must first obtain a license and a
certificate from the appropriate government agency before it can transact business in the Philippines. Where a
foreign corporation does business in the Philippines without the proper license, it cannot maintain any action or
proceeding before Philippine courts, according to Article 133 of the Corporation Code
2. “Doing Business”
• ….. and any other act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of
the business organization.”
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Case Digest
3. Since INTRA is relying on Section 133 of the Corporation Code to bar petitioner from maintaining an action
in Philippine courts, INTRA bears the burden of proving that CARGILL was doing business in the PH. In this
case, we find that INTRA failed to prove that CARGILL’s activities in the Philippines constitute doing business
as would prevent it from bringing an action.
4. There is no showing that the transactions between petitioner and NMC signify the intent of petitioner to
establish a continuous business or extend its operations in the Philippines.
5. In this case, the contract between petitioner and NMC involved the purchase of molasses by petitioner from
NMC. It was NMC, the domestic corporation, which derived income from the transaction and not petitioner. To
constitute “doing business,” the activity undertaken in the Philippines should involve profit-making.
6. Other factors which support the finding that petitioner is not doing business in the Philippines are:
(1) petitioner does not have an office in the Philippines;
(2) petitioner imports products from the Philippines through its non-exclusive local broker, whose authority to
act on behalf of petitioner is limited to soliciting purchases of products from suppliers engaged in the sugar trade
in the Philippines; and
(3) the local broker is an independent contractor and not an agent of petitioner.
CASE LAW/ DOCTRINE:
. To be doing or “transacting business in the Philippines” for purposes of Section 133 of the Corporation Code,
the foreign corporation must actually transact business in the Philippines, that is, perform specific business
transactions within the Philippine territory on a continuing basis in its own name and for its own account

CORPORATION LAW
Case Digest
237 General Corp. of the Phils. v. Union Insurance AUTHOR: Franch Galanza
87 Phil 313 (1950)
TOPIC: How Courts Acquire Jurisdiction Over Foreign
Corporations
PONENTE: Montemayor, J.
FACTS
1. General Corporation of the Philippines and the Mayon Investment Co. are domestic corporations duly organized and
existing by virtue of the laws of the Philippines, with principal offices in the City of Manila.
2. The Union Insurance Society of Canton, Ltd. is a foreign insurance corporation, duly authorized to do business in the
Philippines, with head office in the City of Hongkong, China, and a branch office in Manila.
3. The Fireman's Fund Insurance Co. is a foreign insurance corporation duly organized and existing under the laws of the
State of California, U.S.A. It has been duly registered with the Insurance Commissioner of the Bureau of Commerce as
such insurance company since November 7, 1946, and authorized to do business in the Philippines since that date.
4. The Union Insurance Society of Canton, ltd. has been acting as settling agent of and settling insurance claims against the
Fireman's Fund Insurance Co. even before the last world war and continued as such at least up to November 7, 1946.
5.In a civil case of the Court of First Instance of manila, the General Corporation of the Philippines and the Mayon
Investment Co. as plaintiffs sued the union Insurance Society of Canton, Ltd. and the Fireman's Fund Insurance Co. for the
payment of twelve marine insurance policies in the sum of P57,137.60.
6. Said policies were issued by the Fireman's Fund Insurance Co. for the merchandise shipped from the United States to the
Philippines in 1945, in the name of Western Canvas Products Company and/or Rovan Trading Company, doing business in
Seattle, Washington, U.S.A.
7. The original bills of lading and the original insurance policies covering the merchandise, all endorsed in blank, were sent
by the insured to the Hongkong & Shanghai Banking Corporation in manila with instructions that the said documents were
to be surrendered and title to the merchandise covered by them to be transferred upon payment in full of the invoice price.
8. Upon arrival of the merchandise in Manila the consignee or purchaser would appear to have failed to meet the terms of
the sale and following a certain agreement between the shippers and the herein plaintiffs, the shipping papers, including the
twelve marine insurance policies were surrendered to the herein plaintiffs and the merchandise released to them, the latter
claiming that they had paid to the bank the full invoice price.
9. It was later found that some of the merchandise were lost and others damaged while in transit and inasmuch as the
policies were made payable to the order of the assured in Manila acting as settling agent of its co-defendant Fireman's
Fund Insurance Co.
10. The trial court found that regarding the eleven marine insurance policies which have been the subject of interpleader in
the Superior Court in the State of Washington for King County and decided by said court against the herein plaintiffs, said
decision constituted res adjudicata binding upon the plaintiffs herein. The trial court absolved the defendant Union
Insurance Society of Canton, Ltd. from the complaint but condemned the Fireman's Fund Insurance Co. to pay the
plaintiffs the sum of $2,000 or its equivalent in Philippine currency, with legal interest from and including September 12,
1946, on the claim based on the marine insurance policy No. 70448/6, Exhibit E-2.
11. The plaintiffs General Corporation of the Philippines and Mayon Investment Co. appealed from that part of the
decision referring to the eleven marine insurance policies.
12. Fireman's Fund Insurance Co. appealed form the decision in so far as it was sentenced to pay $2,000 to the plaintiffs.
This is the case on appeal now under consideration.
ISSUE:
Whether or not the trial court acquired jurisdiction over appellant Fireman's Fund Insurance Co. and in rendering judgment
against it in the sum of $2,000.
HELD:
YES. A foreign corporation actually doing business in this jurisdiction, with or without license or authority to do so, is
amenable to process and the jurisdiction of local courts. If such foreign corporation has a license to do business, then
summons to it will be served on the agent designated by it for purpose, or otherwise in accordance with the provisions of
the Corporation Law.

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Case Digest
RATIO:
1. Section 14, Rule 7 of the Rules of Court above quoted in employing the phrase "doing business in the Philippines"
makes no distinction as to whether said business was being done or engaged in legally with the corresponding
authority and license of the Government or, perhaps illegally, without the benefit of any such authority or license.
As long as a foreign private corporation does or engages in business in this jurisdiction, it should and will be
amenable to process and the jurisdiction of the local courts, this for the protection of the citizens, and service upon
any agent of said foreign corporation constitutes personal service upon the corporation and accordingly judgment
may be rendered against said foreign corporation.
2. It is a rule generally accepted that one single or isolated business transaction does not constitute "doing business"
within the meaning of the law, and that transactions which are occasional, incidental and casual, not of a character
to indicate a purpose to engage in business do not constitute the doing or engaging in business contemplated by
law. In order that a foreign corporation may be regarded as doing business within a State, there must be continuity
of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one
of a temporary character.
3. The Fireman's Fund Insurance Co., to judge by the twelve marine insurance policies issued as already mentioned,
policies covering different shipments, made payable in Manila, endorsed in blank, and in practice, collectible by
the consignees in Manila or such other persons or entities who meet the terms by paying the amounts of the
invoices, rendering it not only convenient but necessary for said Fireman's Fund Insurance Co. to appoint and keep
a settling agent in this jurisdiction, was certainly doing business in the Philippines. And these were not casual or
isolated business transactions. According to the evidence, since before the war, the Fireman's Fund Insurance Co.
would appear to have engaged in this kind of business and had employed its co-defendant Union Insurance Society
of Canton, Ltd. as its settling agent, although sometime in 1946, between July and August of that year, appellant
had its own employee from its head office in America, one John L. Stewart, acting as its settling agent here. And,
to conclusively prove continuity of the business and the intention of the appellant not only to establish but to
continue such regular business in this jurisdiction, on November 7, 1946, less than two months after service of
summons, it applied for, obtained a license and was authorized to regularly do business in the Philippines.
4. Section 14, Rule 7 of the Rules of the Court makes no distinction as to corporations with or without authority to do
business in the Philippines. The test is whether a foreign corporation was actually doing business here. Otherwise,
a foreign corporation illegally doing business here because of its refusal or neglect to obtain the corresponding
license and authority to do business may successfully though unfairly plead such neglect or illegal act so as to
avoid service and thereby impugn the jurisdiction of the local courts. It would indeed be anomalous and quite
prejudicial, even disastrous, to the citizens in this jurisdiction who in all good faith and in the regular course of
business accept and pay for shipments of good from America, relying for their protection on duly executed foreign
marine insurance policies made payable in Manila and duly endorsed and delivered to them, that when they go to
court to enforce said policies, the insurer who all along has been engaging in this business of issuing similar
marine policies, serenely pleads immunity to local jurisdiction because of its refusal or neglect to obtain the
corresponding license to do business here thereby compelling the consignees or purchasers of the goods insured to
go to America and sue in its courts for redress.
5. Section 68 of the Corporation Law - service of summons on a foreign corporation may be made only upon an
agent of said corporation residing in the Philippines and authorized by the foreign corporation to accept service.
Said section refers to a foreign corporation doing business in the Philippines which has complied with the law and
obtained the corresponding license. It does not refer to a foreign corporation actually doing business here but
without the corresponding license or authority. In the latter case, service of summons is governed by section 14,
Rule 7 of the Rules of Court.
CASE LAW/ DOCTRINE:

1. A foreign corporation actually doing business in this jurisdiction, with or without license or authority to do so, is
amenable to process and the jurisdiction of local courts. If such foreign corporation has a license to do business,
then summons to it will be served on the agent designated by it for purpose, or otherwise in accordance with the
provisions of the Corporation Law.

CORPORATION LAW
Case Digest
DONE! But, as you have noticed, there are some cases missing (211, 213, 215, 216,
226, 227, 229, 231, 232, and 234). If you have the time, kindly make the case digest
and include it here to complete this compilation. Good luck! ☺ -G01, Batch 3, DLSU Law


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CORPORATION LAW

Definition and Attributes of a Corporation

Kinds of Business Organizations and their Differences

Partnerships – Articles 1767 and 1768 of Civil Code

Joint Venture – Kilosbayan v Guingona, 232 SCRA 110 (1994)

Cooperatives – Article 3, RA No. 6938

Jurisdiction of the SEC

Union Glass v. SEC, 126 SCRA 32 (1983)

II. Classification of Private Corporations

Stock v. Non-Stock Corporations

CIR v. Club Filipino, 5 SCRA 321 (1962)

NDC v. Phil. Veterans Bank, 192 SCRA 257 (1990)

III. Formation and Organization of Corporation

Requirements in the Formation of a Corporation

Steps in the Formation of a Corporation

(b) Drafting of Articles of Incorporation

(i) Corporate Name

Lyceum of the Phils. v. CA, 219 SCRA 610 (1993)

G01, Batch 3, DLSU Law

(c) Filing of Articles; Payment of Fees

(d) Examination of Articles; Approval or Rejection by SEC

(e) Issuance of Certificate of Incorporation

De Facto Corporations: Requisites

(a) User of Corporate Powers

(b) Formation under apparently Valid Statute

Municipality of Malabang v. Benito, 27 SCRA 533 (1969)

(c) Colorable Compliance with the Legal Requirements in Good Faith

Bergeron v. Hobbs, 96 Wis 641 (1897)

Empire Mfg. v. Stuart, 9 N.W. 527 (1881)

(4) Internal Organization: By-Laws

Fleischer v. Botica Nolasco, 47 Phil 583 (1925)

IV. The Corporate Entity

The Theory of Corporate Entity

Stockholders of T. Guanzon v. Register of Deeds, 6 SCRA 373 (1962)

(a) Interlocking Directors and Same Shareholders

G01, Batch 3, DLSU Law

(b) Corporate Officers

Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991)

(c) Dealings between Corporation and Stockholder

LBP v. CA, 364 SCRA 375 (2001)

Traders Royal Bank v. CA, 177 SCRA 788 (1989)

Piercing the Corporate Veil

Source: US v. Milwaukee Refrigerator Transit Co., 142 Fed. 247

(a) Contrary to Law / Public Policy; Evasion of Liability to Government

State v. Standard Oil, 142 Fed 247 (1905)

(b) Evasion of Liability to Creditors

Tan Boon Bee v. Jarencio, 163 SCRA 205 (1975)

(c) Evasion of Liability / Obligation to Employees

Claparols v. CIR, 65 SCRA 613 (1975)

(d) Evasion of Liability on Contract

Villa-Rey Transit v. Ferrer, 25 SCRA 845 (1968)

(e) Close Corporations

Cease v. CA, 93 SCRA 483 (1979)

PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001)

G01, Batch 3, DLSU Law

Garrett v. Southern Railway, 173 F.Supp E.d. Tenn (1959)

V. Promoter’s Contracts Prior to Incorporation

Liability of Corporation for Promoter’s Contracts

McArthur v. Times Printing Co., 51 N.W. 216 (1892)

Corporate Rights under Promoter’s Contracts

Builders’ Duntile v. Dunn, 229 K.Y. 569 (1929)

Personal Liability of Promoter on Pre-Incorporation Contracts

Wells v. Fay & Egan, 143 GA 732 (1915)