79.
Mead v EC McCullough o The authorization made by the three directors to allow the sale
GR NO. 6217
December 26, 1911
Topic: Duties of Directors and Controlling Stockholders
Petitioners: Charles Mead
Respondents: EC McCullough et. al. and the Philippine Engineering and Construction
Company
Ponente: Trent, J.
FACTS:
Note: This case is complicated. The first and second causes of action were dismissed.
The third cause of action was reduced in terms of the amount. What will be discussed
in the facts are those that are relevant to the issue and topic only.
 Mead, McCullough, and three others organized the corporation called the
Philippine Engineering and Construction Company (PECC).
 The four incorporators, except Mead, contributed the majority of the
capital stock while offering the remaining shares to the public.
 Mead contributed personal properties initially and was assigned as the
company manager. However, he eventually resigned when he accepted an
engineering job in China. Despite such resignation, he remained as one of
the five directors of the Company.
 The Company was experiencing losses at this point in time McCullough, the
president, proposed that he will buy the assets of the corporation, assume
all of its obligation, and organize another association under the name of
Manila Salvage Company.
 The reason why McCullough did this is based on the fact that if he
organized such company, PECC’s creditors would give the new company an
extension of time to comply with their old obligations based on the
contracts entered into and would reconsider the question of forfeiture of
the money PECC deposited with a bank, which amounted to $10,000
Mexican currency.
 The three other directors voted in favor of McCullough’s action; hence, the
assets were transferred to McCullough.
 Mead learned of this and so he opposed it by filing a complaint before the
lower court because the personal properties he contributed were also
transferred to McCullough.
 Mead argued the following:
o Under the Articles of Incorporation of PECC, the Board only have
ordinary powers and no powers of disposition;
of company assets to McCullough constitutes an act of agency
which is invalid because no express commission was made;
o The requirement for a commission can be inferred from Art.
1413, which is the concept of agency in general terms.
o Mead also argues that under their Charter, no resolution
affecting the administration of the affairs of PECC should be
binding upon the corporation unless the unanimous consent of
the entire board be obtained.
 This action was first brought by Charles Mead against McCullough and
three others. Mead, however, died since the commencement of this action
but it is still going forward in the name of his administrator.
 The complaint has three causes of action, which are the following:
o For salary;
o For profits; and
o For the value of the personal effects alleged to have been left by
Mead and sold by the defendants.
 A joint and several judgment was rendered by default against each and all
of the defendants for $3,450.61 gold.
 McCullough alone having made the application to have this judgment set
aside, which the court granted, vacating the judgment as to him only.
 At the new trial after the death of Mead, judgment was rendered upon the
merits, dismissing the case as to the first and second causes of action and
for the sum of $1,200 gold on the third cause of action. Both parties
appealed.
ISSUE:
W/N the majority of the stockholders, who were also majority of the directors of this
corporation, have the power to sell or transfer to one of its members the assets of
said corporation? YES
HELD/RATIO:
Several factors were considered by the Court in its ruling:
1. Mead abandoned his managerial post when he resigned and took the job
in China.
2. A close reading of PECC’s articles shows there is no such intention for
unanimity when it comes to votes affecting matters of administration. The
only requirement is that at least three of the said board is present in order
to constitute a legal meeting. This was complied with when the other four
directors were present when the decision to transfer the assets was made.
Only Mead was absent.
 3. PECC is suffering financial losses. The assets of the PECC only contained of it. Especially when directors act in good faith and adequate consideration. In this
the following: Office Furniture (P400), the uncompleted contract for the case, McCullough’s act of assuming PECC’s obligations and organizing Manila Salvage
construction of Government warehouses, and the wrecking contract. Their is considered as an act in good faith.
liabilities already amounted to $19,645 Mexican currency.

The Court explains that a corporation is essentially a partnership, except in form. The
directors are the managing partners and the stockholders have a joint interest in all
the property and effects of the corporation.

McCullough as a director and president can be considered as an agent but not the
agent under Art. 1713, which was Mead’s argument. The Court said that Art. 1713
deals with the broad aspect of agency in ordinary cases but not in a corporation case.

In this case, when the sale to McCullough took place, there were apparently four
directors present. All gave their consent to the sale. Mead’s express consent was not
obtained despite being a director in PECC. Although he resigned as manager, he was
still a director. However, he accepted the engineering position in Canton Company,
knowing that his duties as such would require his whole time and prevent him from
returning to the PH for at least a year or so. Additionally, the position he accepted
was incompatible with his position as director in PECC, which has a sphere of
operation that is limited to the PH. Such facts are sufficient to constitute an
abandoning or vacating of his position as director in PECC.

Consequently, the transfer of corporation assets to one of its members was made
with the unanimous consent of all the PECC directors. Under its articles of
incorporation, the stockholders and directors had general ordinary powers. There is
nothing in the articles that expressly prohibits the sale or transfer of the corporate
property to one of the stockholders.

The more appropriate analogy is that PECC has its directors as the trustees. The
trustees-directors hold the company assets in trust for the beneficiaries, which are
the creditors. As trustees, they decided that it is beneficial to sell the company assets
to McCullough to recover some cash equivalents in the winding up of the corporate
affairs. Besides, there is no prohibition against the selling of company assets to one
of its directors either from law of from PECC’s articles.

A majority of the directors, even if against the protest of the minority, have the
power to transfer or sell corporate properties especially when the business is at a
failure and the best interest of the corporation and the stockholders require it.

Also, there is no reason why a director, by the authority of the majority stockholders
or the board, may not deal with the corporation, loan it money, or buy property from