2. CHUA GUAN v.

SAMAHANG MAGSASAKA, 62 PHIL 473 (1935)

FACTS: On June 18, 1931, Gonzalo H. Co Toco, a resident of Manila and the owner of 5,894 shares of the
capital stock of Samahang Magsasaka Inc., with its principal office located in Nueva Ecija, 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. 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 register of deeds of Manila on 23 June 1931, and in the office of the said corporation on 30
September 1931. On 28 November 1931, Chua Chiu assigned all his right and interest in said
mortgage to Chua Guan and the assignment duly made 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. 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 (Chua Guan) having been the
highest bidder for the sum of P14,390, the sheriff executed in his favor a certificate of sale of said shares.
The plaintiff tendered the certificates of stock standing in the name of Co Toco to the proper officers of the
corporation (Samahang Magsasaka) 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. 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. 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.

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. 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: 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 mortgaged 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.

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 be recorded both in the province of the
mortgagor's residence and in the province where the property is situated.

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.

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. 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. 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.

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. 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.

4. Fua Cun v. Ricardo Summers in his capacity as Sheriff ex-oficio of the City of Manila, and the
CHINA BANKING CORPORATION

FACTS: On August 26, 1920, one Chua Soco subscribed for 500 shares of stock of the defendant Banking
Corporation at a par value of P100 per share [P 50,000]. However, he only paid the sum of P 25,000 which
is 1/2 of the subscription price, in cash for which a receipt was issued. On May 18, 1921, 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.

The Fua Cun, the plaintiff, thereupon 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. Meanwhile, 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.
Fua Cun thereupon brought the present action maintaining that by virtue of the payment of the one-half
of the subscription price of the 500 shares Chua Soco in effect became the owner 250 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. The
trial court rendered judgment in favor of the Fua Cun declaring that Chua Soco, through the
payment of the P25,000, acquired the right to two hundred and fifty shares fully paid up, upon which
shares the plaintiff holds a lien superior to that of the China Banking Corporation and ordering that the
receipt be returned to said plaintiff. From this judgment the defendants appeal.

ISSUE/S
1) Whether Chua Soco, through the payment of the P25,000, acquired the right to 250 shares
which were fully paid up. (main issue for corporation)
2) Whether the plaintiff holds a lien superior to that of the defendant Banking Corporation and
ordering that the receipt be returned to said plaintiff. (main issue in the case)

HELD:
1) No. The Court stated that the payment of half the subscription price does not make the holder
of stock the owner of half the subscribed shares. Plaintiff's rights consist in equity in 500 shares
and upon payment of the unpaid portion of the subscription price he becomes entitled to the
issuance of certificate for the said 500 shares in his favor. However, shares for which no
certificate of stock has been issued may validly be mortgaged in whole (and not just with respect
to the portion paid-up) and the corporation receiving notice thereof is bound to respect the
security arrangement. Equity in shares of stock may be assigned. The assignment becomes
effective as between the parties and as to third parties with notice. Equity in shares of stock may be
a subject of a chattel mortgage but such will operate as a conditional equitable assignment.

2) Yes, the plaintiff has a superior lien over the bank. The claim of the defendant Banking
Corporation upon which it brought the action in which the writ of attachment was issued, was for
the non-payment of drafts accepted by Chua Soco and had no direct connection with the
shares of stock in question. At common law a corporation has no lien upon the shares of
stockholders for any indebtedness to the corporation and our attention has not been called to any
statute creating such lien here. On the contrary, section 120 of the Corporation Act provides that "no
bank organized under this Act shall make any loan or discount on the security of the shares of its
own capital stock, nor be the purchaser or holder of any such shares, unless such security or
purchase shall be necessary to prevent loss upon a debt previously contracted in good faith, and
stock so purchased or acquired shall, within six months from the time of its purchase, be sold or
disposed of at public or private sale, or, in default thereof, a receiver may be appointed to close up
the business of the bank in accordance with law." The reasons for this doctrine are obvious: if
banking corporations were given a lien on their own stock for the indebtedness of the
stockholders, the prohibition against granting loans or discounts upon the security of the stock
would become largely ineffective.

6. TORIBIA USON, plaintiff-appellee, vs. VICENTE DIOSOMITO, ET AL., defendants.

Facts: Defendant Vicente Diosomito was the original owner of the seventy-five shares of stock, having a
par value of P7,500, and that on February 3, 1931, he sold said shares to Emeterio Barcelon and delivered
to the latter the corresponding certificates. But Barcelon did not present these certificates to the North
Electric Corporation for registration until the 16th of September, 1932, when they were cancelled and a
new certificate was issued in favor of Barcelon, who transferred the same of the defendant H.P.L.
Jollye.

Meanwhile, Toribia Uson had filed a civil action for debt against Vicente Diosomito and that 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 on January 1932. Subsequently, Toribia Uson obtained judgment against the defendant Diosomito
for the sum of P2,300 with interest and costs. To satisfy said judgment, the sheriff sold said shares at public
auction. The plaintiff Toribia Uson was the highest bidder and said shares were adjudicated to her. 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.

It will be seen, therefore, that the transfer of said shares by Vicente Diosomito, the judgment debtor, to
Barcelon was not registered and noted on the books of the corporation until some nine months after the
attachment had been levied on said shares.

Issue: Whether 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.

Ruling: No. The transfer is not valid. The true meaning of the language is, and the obvious intention of
the legislature in using it was, that all transfers of shares should be entered, as here required, on the
books of the corporation. And it is equally clear to us that all transfers of shares not so entered are
invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to
subsequent purchasers in good faith, and indeed, as to all persons interested, except the parties to such
transfers. All transfers not so entered on the books of the corporation are absolutely void; not because they
are without notice or fraudulent in law or fact, but because they are made so void by statute.

This court still adheres to the principle that its function is jus dicere non jus dare. To us 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 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 of the 75 shares in the
North Electric Company, Inc., made by the defendant Diosomito to the defendant Barcelon was not valid as
to the plaintiff-appellee, Toribia Uson on the date on which she obtained her attachment lien (Jan. 18,
1932) on said shares of stock which still stood in the name of Diosomito on the books of the corporation.

7. ANTONIO ESCAÑO, plaintiff-appellee, vs. FILIPINAS MINING CORPORATION, ET Al.,

defendants. STANDARD INVESTMENT OF THE PHILIPPINES, appellant.

Facts: On March 8, 1937, the plaintiff-appellee (Escano) obtained judgment against Silverio Salvosa
whereby the latter was ordered to transfer and deliver to the former 116 active shares and an undetermined
number of shares in escrow of the Filipinas Mining Corporation and to pay the sum of P500 as damages,
with the proviso that the escrow shares shall be transferred and delivered to the plaintiff only after they
shall have been released (issued) by the company. A writ of garnishment was served by the sheriff of
Manila upon the Filipinas Mining Corporation to satisfy the said judgment; and Filipinas Mining
Corporation advised the sheriff of Manila that according to its books the judgment debtor Silverio Salvosa
was the registered owner of 1,000 active shares and about 21,339 unissued shares held in escrow by the
said corporation. The sheriff sold the 1,000 active shares at public auction.
It appears that Silverio Salvosa sold to Jose P. Bengzon all his right, title, and interest in and to 18,580
shares of stock of the Filipinas Mining Corporation held in escrow which the said Salvosa was entitled to
receive, and which Bengzon in turn subsequently sold and transferred to Standard Investment of the
Philippines. Neither Salvosa's sale to Bengzon nor Bengzon's sale to the Standard Investment of the
Philippines was notified to and recorded in the books of the Filipinas Mining Corporation more than
three years after the escrow shares in question were attached by garnishment served on the Filipinas
Mining Corporation as hereinbefore set forth. On January 24, 1941, the defendant Filipinas Mining
Corporation issued in favor of the defendant Standard Investment of the Philippines certificate of stock
for the 18,580 shares formerly held in escrow by Silverio Salvosa and which had been adversely [claimed]
by the present plaintiff-appellee on the one hand and the Standard Investment of the Philippines on the
other, the first by virtue of garnishment proceedings (judgment) and the second by virtue of the sale made
to it by Jose P. Bengzon (Salvosa to Bengzon to Filipinas Mining) as aforesaid.

Issue: Whether or not the issuance by the Filipinas Mining Corporation of the said 18,580 shares of
its stock to the Standard Investment of the Philippines was valid as against the attaching judgment
creditor (Escano) of the original owner.

Ruling: No. The transfer of duly issued shares of stock is not valid as against third parties and the
corporation until it is noted upon the books of the corporation. The reasons for the registration are (1) to
enable the corporation to know at all times who its actual stockholders are, because mutual rights
and obligations exist between the corporation and its stockholders; (2) to afford to the corporation an
opportunity to object or refuse its consent to the transfer in case it has any claim against the stock
sought to be transferred, or for any other valid reason; and (3) to avoid fictitious or fraudulent
transfers.

Moreover, it seems illogical and unreasonable to hold that inactive or unissued shares still held by the
corporation in escrow pending receipt of authorization from the Government to issue them, may be
negotiated or transferred unrestrictedly and more freely than active or issued shares evidenced by
certificates of stock. We are, therefore, of the opinion and so hold that section 35 of the Corporation
Law, which requires the registration of transfers of shares stock upon the books of the corporation as
a condition precedent to their validity against the corporation and third parties, is also applicable to
unissued shares held by the corporation in escrow.

8. Ponce v. Alsons Cement Corp. (2002), G.R. NO. 139802 December 10, 2002

FACTS: Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC), having subscribed to
and fully paid 239,500 shares of said corporation. On February 8, 1968, Vicente C. Ponce and Fausto
Gaid, incorporators, executed a “Deed of Undertaking” and “Indorsement” whereby Gaid acknowledges
that Ponce is the owner of the shares and he was therefore assigning/endorsing it to Ponce. VCC was
renamed Floro Cement Corporation (FCC) and then to Alsons Cement Corporation (ACC). Up to the
present, no certificates of stock corresponding to the 239,500 subscribed and fully paid shares of Gaid were
issued in the name of Fausto G. Gaid and/or the plaintiff. Despite repeated demands, the ACC refused to
issue the certificates of stocks. SEC Hearing Officer Enrique L. Flores, Jr. granted the motion to dismiss.
Upon appeal, the Commission En Banc reversed the decision of the Hearing Officer. Ponce, filed a
complaint with the SEC for mandamus. CA opted for the dismissal of the mandamus for failure to state a
cause of action in view of the absence of any allegation that the transfer of the shares was registered in the
stock and transfer book

ISSUE: W/N the cert. of stocks of Gaid can be transferred to Ponce

HELD: NO. Petition Denied.

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 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 or
certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books
of the corporation. The stock and transfer book is the basis for ascertaining the persons entitled to the rights
and subject to the liabilities of a stockholder. Hence, without such recording, the transferee may not be
regarded by the corporation as one among its stockholders and the corporation may legally refuse
the issuance of stock certificates in the name of the transferee even when there has been compliance
with the requirements of Section 64 of the Corporation Code in relation to Sec. 63 thereof. Where a
transferee is not yet recognized as a stockholder, the corporation is under no specific legal duty to issue
stock certificates in the transferee’s name. In the case at bar, a mandamus should not issue to compel
the secretary of a corporation to make a transfer of the stock on the books of the company, unless it
affirmatively appears that he has failed or refused so to do, upon the demand either of the person in
whose name the stock is registered, or of some person holding a power of attorney for that purpose
from the registered owner of the stock. Mere indorsee of a stock certificate, claiming to be the owner,
will not necessarily be recognized as such by the corporation and its officers, in the absence of express
instructions of the registered owner to make such transfer to the indorsee, or a power of attorney
authorizing such transfer.

Absent an allegation that the transfer of shares is recorded in the stock and transfer book of
respondent ALSONS, there appears no basis for a clear and indisputable duty or clear legal
obligation that can be imposed upon the respondent corporate secretary, so as to justify the issuance
of the writ of mandamus to compel him to perform the transfer of the shares to petitioner. The test of
sufficiency of the facts alleged in a petition is whether or not, admitting the facts alleged, the court could
render a valid judgment thereon in accordance with the prayer of the petition. This test would not be
satisfied if, as in this case, not all the elements of a cause of action are alleged in the complaint. Where the
corporate secretary is under no clear legal duty to issue stock certificates because of the petitioner’s failure
to record earlier the transfer of shares, one of the elements of the cause of action for mandamus is clearly
missing.

10. A.R. Hager vs. Albert J. Bryan, GR L-6230, January 18, 1911

Doctrine: Mandamus is not the proper remedy to compel a secretary of a corporation to record the
transfer of stock in the books of the corporation. The proper remedy, the suit being a private one, is
to sue for damages.

Facts: This is an original action commenced in the SC to secure a writ of mandamus against herein
defendant to compel him, as secretary of Visayan Electric Company, to transfer upon the books of said
company certain shares mentioned in the petition.
Bryan-London & Co. was the registered owner of 100 shares of capital stock of Visayan Electric
Company and among them were:
 Certificate No. 55 (representing 5 shares)
Certificate No. 62 (10 shares)
Certificate No. 63 (10 shares)
Later, it endorsed its certificates of stock to Hager. Petitioner entered into an agreement with a
Martin M. Levering where said shares were bought from. It was said that the reason behind the agreement
was that certain parties in Bryan-London & Co., which respondent was a member, were trying to get
control of Visayan Electric Company and that they decided to prevent them from securing control.
The title to such shares was not questioned by respondent and is transferable only on the books of
the company. Hager then brought his certificates to the Visayan Electric Company to transfer upon the
company’s books the stocks under his name. When respondent refuses to record it, petitioner repeatedly
demanded and requested respondent, as secretary of Visayan Electric Company, to transfer on the books of
company the Certificates of shares mentioned above.

Issue: Whether or not the courts have jurisdiction to issue writ of mandamus for the purpose of
compelling the secretary of a private corporation to transfer stock upon the books of the corporation.

Held: No. The SC held that the remedy of mandamus is unavailable under the facts of the case. The writ in
such case is purely a private one and there is generally an adequate remedy by an action against the
corporation for damages. Mandamus will not lie because the suit is against a private corporation and
in no sense a proceeding to enforce the performance of a public duty. Also, there is another remedy
other than mandamus and that is to sue for damages.
Under the old corporation law, no share of stock against which the corporation holds any
unpaid claim, shall be transferrable on the books of the corporation. To permit the writ of mandamus
to issue for the purpose of compelling the officers to transfer stock might require such officers against
which the corporation holds unpaid claims. If the court should issue the writ, it might require an officer
to transfer stock under conditions where the law expressly prohibited such transfer.
The writ of mandamus will never issue to compel a person to violate an express provision of the
law. The act required to be performed must be one which the law specially enjoin as a duty resulting
from an office, trust, or station or unlawfully excludes the plaintiff from the used and enjoyment of a
right or office to which he is entitled and from which he is unlawfully precluded. No law at that time
which specially requires the performance of the act of transferring the stock, while there is a law expressly
prohibiting its transfer, except under certain conditions.

Mere indorsement in blank of certificate does not clearly indicate the registered owner’s wish to have
the certificate cancelled and a new one issued in the name of the holder. To compel transfer,
indorsement in blank of the certificate must be accompanied by either:
1. Express instructions of the registered owner to make such transfer to the indorsee;
2. Power of attorney authorizing the transfer

12. Wack-Wack Golf and Country Club vs. Won [and Tan] 104 PHIL 466

Facts: Defendants separately claim to be the lawful owners of the same membership fee certificates issued
by the Wack Wack Golf and Country Club. Defendant Lee Won claims its ownership stemming from a
decision rendered in an earlier civil case. Meanwhile, defendant Bienvenido Tan claims the certificates
from assignment made by Swan, Culbertson, and Fritz in his favor. It was to Swan, Culbertson and Fritz
that the original membership fee certificate was issued. In sum therefore, the plaintiff club prays that the
CFI order the defendants to interplead and litigate their conflicting claims. In separate motions, however,
the defendants moved to dismiss the complaint on the grounds of res judicata – stating that to allow an
interpleader would be tantamount to reopening the civil case involving Won and collaterally attack the
same –, failure to state a cause of action, and bar by prescription. Consequently, the trial court ruled against
the club. Hence, this petition.

Issue: Was the remedy of interpleader proper and timely? NO

Held: There is no question that the subject matter of the present controversy, i.e., the membership fee
certificate 201, is proper for an interpleader suit. However, the Corporation may not properly invoke
the remedy of interpleader.

It is the general rule that before a person will be deemed to be in a position to ask for an order of
interpleader, he must be prepared to show, among other prerequisites, that he has not become
independently liable to any of the claimants. Indeed, if a stakeholder defends a suit filed by one of the
adverse claimants and allows said suit to proceed to final judgment against him, he cannot later on have
that part of the litigation repeated in an interpleader suit.

In the case at hand, the Corporation allowed civil case 26044 to proceed to final judgment. It was
aware of the conflicting claims of the appellees with respect to the membership fee certificate 201
long before it filed the present interpleader suit. Yet it did not interplead Tan. It preferred to proceed
with the litigation and to defend itself therein. As a matter of fact, final judgment was rendered against it
and said judgment has already been executed. It is therefore too late for it to invoke the remedy of
interpleader.

To now permit the Corporation to bring Won to court after the latter's successful establishment
of his rights in civil case 26044 to the membership fee certificate 201, is to increase, instead of to
diminish the number of suits, which is one of the purposes of an action of interpleader, with the possibility
that the latter would lose the benefits of the favorable judgment. This cannot be done because having
elected to take its chances of success in said civil case 26044, with full knowledge of all the fact, the
Corporation must submit to the consequences of defeat.

Besides, a successful litigant cannot later be impleaded by his defeated adversary in an interpleader
suit and compelled to prove his claim anew against other adverse claimants, as that would in effect be a
collateral attack upon the judgment.

In fine, the instant interpleader suit cannot prosper because the Corporation had already been
made independently liable in civil case 26044 and, therefore, its present application for interpleader
would in effect be a collateral attack upon the final judgment in the said civil case; the appellee Lee
had already established his rights to membership fee certificate 201 in the aforesaid civil case and,
therefore, this interpleader suit would compel him to establish his rights anew, and thereby increase instead
of diminish litigations, which is one of the purposes of an interpleader suit, with the possibility that the
benefits of the final judgment in the said civil case might eventually be taken away from him; and because
the Corporation allowed itself to be sued to final judgment in the said case, its action of interpleader was
filed inexcusably late, for which reason it is barred by laches or unreasonable delay.

13. Lambert vs. Fox, 26 PHIL 588

FACTS: Early in 1911, John R. Edgar & Co. was engaged in the retail of book and stationery business
when the said business was eventually taken over by its creditors including Lambert and Fox. Lambert and
Fox became the two largest stockholders in the new corporation called John R. Edgar & Co., Incorporated.
Lambert and Fox entered into an agreement wherein they mutually and reciprocally agree not to sell,
transfer, or otherwise dispose of a part of the stock until after 1 year from the agreement date unless
consented in writing. It was also stipulated that in case of infraction in the agreement, an amount of
P1,000 pesos shall be paid as liquidated damages. On October 19, 1911, Fox sold his stock to E. C.
McCullough & Co. of Manila, a strong competitor. The sale was made by the defendant notwithstanding
the protest. Fox offered to sell his shares of stock to Lambert for the same sum that McCullough was
paying them less P1,000, the penalty specified in the contract. Lambert refused. The case was dismissed by
the trial Court.

ISSUE: Whether or not Fox should be penalized

HELD: YES. The judgment is reversed, the case remanded with instructions to enter a judgment in favor
of the plaintiff and against the defendant for P1,000, with interest; without costs in this instance. In the first
place, the parties expressly stipulated that the contract should last for one year regardless of the objective
where it should be applied. The parties who are competent to contract may make such agreements within
the limitations of the law and public policy as they desire, and that the courts will enforce them according
to their terms. The suspension of the power to sell has a beneficial purpose, results in the protection of the
corporation as well as of the individual parties to the contract, and is reasonable as to the length of time of
the suspension. In upholding the agreement, the SC held that the stipulation was not illegal nor in
restraint of trade and offends no public policy. The suspension of the power to sell has a beneficial
purpose, results in the protection of the corporation as well as of the individual parties to the
contract, and is reasonable as to the length of time of the suspension. But in holding so, this case made
it clear that the doctrine did not mean to cover suspension of the right of alienation of stock, limiting
ourselves to the statement that the suspension in this particular case is legal and valid.

14. Henry Fleischer, plaintiff-appellee, vs. Botica Nolasco Co., Inc., defendant-appellant.

FACTS: This action was commenced in the CFI against the board of directors of the Botica Nolasco, Inc., a
corporation duly organized and existing under the laws of the Philippine Islands. 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. 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. Trial Court held
that, in his opinion, 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 in favor of plaintiff. Hence, this appeal.

ISSUE: Whether or not article 12 of the by-laws of the corporation is in conflict with the provisions
of the Corporation Law (Act No. 1459).

Questioned Article 12 creates in favor of the Botica Nolasco, Inc., a preferential right to buy, under
the same conditions, the share or shares of stock of a retiring shareholder. Has said corporation any
power, under the Corporation Law (Act. No. 1459), to adopt such by-law?

HELD:
The particular provisions of the Corporation Law referring to transfer of shares of stock are as follows:

SEC. 13. Every corporation has the power:

 xxx
(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of the
number of its officers and directors within the limits prescribed by law, and for the transferring of its
stock, the administration of its corporate affairs, etc.
xxx

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, that 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. The holder of shares, as owner of personal property, is at liberty, under said
section (Sec. 35), 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. The by-law now in question was adopted under the power conferred upon the
corporation by section 13, paragraph 7, above quoted; 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.

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 validity of the by-law of a corporation is purely a question of law. The power to enact by-laws
restraining the sale and transfer of stock must be found in the governing statute or the charter. Restrictions
upon the traffic in stock must have their source in legislative enactment, as the corporation itself
cannot create such impediments. By-laws are intended merely for the protection of the corporation, and
prescribe regulation and not restriction; they are always subject to the charter of the corporation. The
corporation, in the absence of such a power, cannot ordinarily inquire into or pass upon the legality of the
transaction by which its stock passes from one person to another, nor can it question the consideration upon
which a sale is based. A by-law cannot take away or abridge the substantial rights of
stockholder. Under a statute authorizing by-laws for the transfer of stock, a corporation can do no more
than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable
restriction upon the right of sale.

That a corporation has no power to prevent or to restrain transfers of its shares, unless such power is
expressly conferred in its charter or governing statute. This conclusion follows from the further
consideration that by-laws or other regulations restraining such transfers, unless derived from
authority expressly granted by the legislature, would be regarded as impositions in restraint of trade.

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 xxx 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 (Fleischer). 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.

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. Whenever a
corporation refuses to transfer and register stock in cases like the present, mandamus will lie to compel
the officers of the corporation to transfer said stock upon the books of the corporation. Petition
denied. Decision of trial court affirmed.

16. JOSEFA SANTAMARIA, assisted by her husband, FRANCISCO SANTAMARIA, Jr., plaintiff-
appellee, vs. THE HONGKONG AND SHANGHAI BANKING CORPORATION and R. W.
TAPLIN, defendants-appellant.

FACTS: Mrs. Josefa T. Santamaria bought 10,000 shares of the Batangas Minerals, Inc., through the
offices of Woo, Uy-Tioco & Naftaly, a stock brokerage firm and pay therefore the sum of P8,041.20. Later
on, Mrs. 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 therefor with
the understanding that said certificate would be returned to her upon payment of the 10,000 Crown Mines,
Inc. shares. R. J. Campos & Co., Inc. bought for Mrs. Josefa Santamaria 10,000 shares of the Crown Mines,
Inc. at 0.225 a share, or the total amount of P2,250. At the time of the delivery of a stock Certificate No.
517 to R.J. Campos & Co., Inc., her name was written in lead pencil on the upper right hand corner thereof
as the certificate was in the name of Woo, Uy-Tioco & Naftaly. Mrs. Santamaria went to R.J. Campos &
Co., Inc. to pay for her order of 10,000 Crown Mines shares and to get back Certificate No. 517.

She was informed that her Stock certificate was in the possession of the Hongkong and Shanghai Banking
Corporation. Certificate No. 517 came into possession of the Hongkong and Shanghai Banking Corporation
because R.J. Campos & Co., Inc. had opened an overdraft account with this bank. It had executed a
document of hypothecation, by the term of which R.J. Campos & Co., Inc. 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."

Hongkong & Shanghai Banking Corporation requested that the certificate be cancelled and a new
certificate be issued in the name of R.W. Taplin as trustee and nominee of the banking corporation.
Robert W. Taplin was an officer of this institution in charge of the securities belonging to or claimed by the
bank. The Batangas Minerals, Inc. issued Certificate No. 715 in the name of Robert W. Taplin as trustee
and nominee of the Hongkong & Shanghai Banking Corporation. Mrs. Santamaria made a claim to the
bank for her certificate. She informed Taplin 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 R.J. Campos & Co., Inc., and that he could not do anything until the case of the bank with
Campos shall have been terminated. R.J. Campos & Co., Inc. was declared insolvent, then the Hongkong &
Shanghai Banking Corporation asked permission in the insolvency court to sell the R.J. Campos & Co.,
Inc., securities listed in its motion by virtue of the document of hypothecation, the insolvency court granted
this motion.

10,000 shares of Batangas Minerals, Inc. represented by Certificate No. 715, were sold to the same bank by
the Sheriff for P300 at the foreclosure sale authorized by said order. R.J. Campos, the president of R.J.
Campos & Co., Inc., was prosecuted for estafa and found guilty and was sentenced by the Manila Court of
First Instance to an imprisonment and to indemnify the offended party, Mrs. Josefa Santamaria, in the
amount of P8,041.20 representing the value of the 10,000 shares of Batangas Minerals, Inc. Mrs.
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.

ISSUE: W/N the trial court erred in finding that the plaintiff-appellee was not chargeable with
negligence in the transaction which gave rise to this case.

RULING: YES. Santamaria 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. It further
held that when a stock certificate is endorsed in blank by the owner thereof, it constitutes as street
certificate, so that upon its face, the holder is entitled to demand its transfer into his name from the
issuing corporation. Such certificate is deemed quasi negotiable and as such the transferee thereof is
justified in believing that it belongs to the holder and transferor.

The court held that she could not recover the certificate since she could have asked the corporation
that issued it to cancel and issue another in lieu thereof in her name. Her negligence was the immediate
cause of the damage, since the certificate was endorsed by her to constitute as a street certificate. Upon its
face, the holder (Taplin) was entitled to demand its transfer to his name from the issuing corporation (Hong
Kong Banking). The bank is not obligated to look beyond the certificate to ascertain the ownership of the
stock at the time he received it from Campos, it having been given pursuant to a letter of hypothecation.

18. Gamboa vs. Victoriano, 90 SCRA 40 (1979)

SUMMARY: Gamboa et al. (de la Rama group) filed a civil case against the Lopue group to nullify the
issuance of 823 shares of stock of the Inocentes de la Rama, Inc. in Favor of the Lopue group. In the said
civil case, the Lopue group alleged that upon their acquisition of shares of stock in the corporation, the de
la Rama group, in order to Forestall their takeover of the corporation, surreptitiously met and elected
Gamboa and de la Rama as president and vice president of the corporation, respectively, and thereafter
passed a resolution authorizing the sale of the 823 unissued shares of the corporation to Gamboa, et al., at
par value, after which the rest of the de la Rama group were elected to the board of the corporation, to the
prejudice of the Lopue group. A compromise agreement was entered into by other members of the de la
Rama group and the Lopue group. The de la Rama group sought to dismiss the complaint against them (on
the allegation that the Lopue group has waived its cause of action against them by virtue of the compromise
agreement), but this was denied by the CFI. In its petition, for certiorari before SC, the de la Rama group
contends that the proper remedy of the Lopue group would be to institute a derivative suit against the de la
Rama group in the name of the corporation in order to secure a binding relief after exhausting all the
possible remedies available within the corporation. SC did not agree with them because in the case at bar,
the Lopue group is alleging and vindicating their members’ own individual interests or prejudice, and not
that of the corporation.

FACTS: Gamboa et al were sued by private respondents Lopues. Lopues wanted to nullify the issuance of
823 shares of stock of Inocentes de la Rama Inc. in their favor. Plaintiffs own 1,328 shares of stock of
Inocentes, which has an ACS of 3,000 shares, par value of 100 per share. 2,177 of those were subscribed
and issued, leaving 823 unissued.

Upon plaintiff’s acquisition of the shares held by Ledesma and Sicangco (then Pres and VP), Gamboa, de
la Rama and Borromeo were the remaining members of the Board of Directors. They met and secretly
elected Gamboa and De la Rama as Pres and VP respectively, in order to prevent/forestall the takeover of
the corp. They then passed a resolution authorizing the sale of such 823 shares among themselves, and
elected their board of directors. Complaint was filed in that the sale of the unissued 823 shares of stock
of the corporation was in violation of the plaintiffs' and pre-emptive rights and made without the
approval of the board of directors representing 2/3 of the outstanding capital stock, and is in disregard
of the strictest relation of trust existing between the defendants, as stockholders thereof.

They prayed (Lopue) for injunction, receivership, nullification of sale of the 823 shares and damages. RTC
judge Victoriano ordered the issuance of Writ of Preliminary Injunction. Lopues entered into a compromise
agreement with the board members that Lopues will withdraw their claim; but in return, De La Rama and
Batistuzi will waive and transfer their rights to the shares in favor of plaintiffs (Lopues).

The Compromise Agreement was approved by the trial court, BUT the motion to dismiss was NOT
GRANTED. Gamboa filed for Motion for Reconsideration, claiming the court has no jurisdiction to
interfere with the management of the corporation by the BOD but the same was denied.

ISSUE: Does the court have jurisdiction to interfere with the management of the corporation by the
BOD? YES

The petition is without merit. The questioned order denying the petitioners' motion to dismiss the complaint
is merely interlocutory and cannot be the subject of a petition for certiorari. The proper procedure to be
followed in such a case is to continue with the trial of the case on the merits and, if the decision is adverse,
to reiterate the issue on appeal. It would be a breach of orderly procedure to allow a party to come before
this Court every time an order is issued with which he does not agree.

The claim of the petitioners, in their Addendum to the motion for reconsideration of the order denying the
motion to dismiss the complaint, questioning the trial court's jurisdiction on matters affecting the
management of the corporation, is without merit. The well-known rule is that courts cannot undertake
to control the discretion of the board of directors about administrative matters as to which they have
legitimate power of, action and contracts intra vires entered into by the board of directors are
binding upon the corporation and courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority. In the
instant case, the plaintiffs aver that the defendants have concluded a transaction among themselves as
will result to serious injury to the interests of the plaintiffs, so that the trial court has jurisdiction over
the case.
The petitioners further (Gamboa) contend that the proper remedy of the plaintiffs (Lopues) would be to
institute a derivative suit against the petitioners in the name of the corporation in order to secure a binding
relief after exhausting all the possible remedies available within the corporation.

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation

wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in
interest. In the case at bar, however, the plaintiffs (Lopue) are alleging and vindicating their own
individual interests or prejudice, and not that of the corporation. At any rate, it is yet too early in the
proceedings since the issues have not been joined. Besides, misjoinder of parties is not a ground to dismiss
an action.

19. GOKONGWEI v. SEC

FACTS: Gokongwei, a stockholder of SMC filed a petition with the SEC against the majority of the
members of the BOD of SMC seeking for the nullity of the by-laws which the said majority members of
BOD of SMC have amended. Said resolution contained that stockholders who are as well directors in
another corporation engaging in the same business with SMC are disqualified to be elected as director of
SMC. Gokongwei argues that prior to the questioned amendment, he had all the qualifications to be a
director of SMC. That as a stockholder, he had acquired inherent rights 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, the
majority members of the BOD purposely provided for his disqualification and deprived him of his vested
right hence the said amended by-laws are null and void. At that time, Gokongwei is a stockholder of SMC
and president and controlling shareholder of CFC-Robina, a corporation engaged in business competitive to
that of SMC. He also 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.
Issue: WON the corporations have no inherent power to disqualify a stockholder from being elected
as a director; WON stockholders have vested right to be elected as directors
Held:
1) It is recognized by all authorities that every corporation has the inherent power to adopt by-
laws for its internal government and to regulate the conduct and prescribe the rights and
duties of its members towards itself and among themselves in reference to the management of
its affairs.

At common law, the rule was “that the power to make and adopt by laws was inherent in every corporation
as one of its necessary and inseparable legal incidents. And it is settled throughout the US that in absence
of positive legislative provisions limiting it, every private corporation has the inherent power as one of its
necessary and inseparable legal incidents, independent of any specific enabling provision in its charter or in
general law, such power of self-government being essential to enable the corporation to accomplish the
purposes of its creation.”
In this jurisdiction, a corporation may prescribe in its by-laws, the qualifications, duties and compensation
of directors, officers and employees. This must necessarily refer to a qualification in addition to that
specified under the Corporation Law, that every director must own in his right at least one share of the
capital stock of the stock corporation of which he is a director.
2) Stockholders have no vested right to be elected as directors. 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 the majority.
Pursuant to the Corporation Law, any corporation may amend its articles of incorporation by a vote or
written assent of the stockholders representing at least 2/3 of the subscribed capital stock of the corporation.
If the amendment changes, diminishes or restricts the rights of the existing shareholders then the dissenting
minority has only one right, to object thereto in writing and demand payment for his share. Under also the
Corporation Law, the owners of the majority of the subscribed capital may amend or repeal any 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.
3) An amendment to the corporate by-law which renders a stockholder ineligible to be director,
if he be also director in a corporation whose business is in competition with that of the other
corporation is valid.

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 BOD. An 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. This is based upon the principle that where the
director is so employed in the service of a rival company, he cannot serve both, but must betray one or the
other.
20. Islamic Directorate vs. CA, GR No. 117897 [14 May 1997]

FACTS: In1971, the Islamic Directorate of the Philippines ("IDP") was incorporated with the primary
purpose of establishing a mosque, school, and other religious infrastructures in Quezon City. IDP
purchased a lot in Tandang Sora, QC, which was covered by two transfer certificates of title. When
President Marcos declared martial law in 1972, most of the members of the 1971 Board of Trustees
("Tamano Group") flew to the Middle East to escape political persecution. Thereafter, two contending
groups claiming to be the IDP Board of Trustees sprung: the Carpizo group and Abbas group. In a suit
between the two groups, SEC rendered a decision in 1986 declaring both groups to be null and void.
SEC recommended that new by-laws be approved and a new election be conducted upon the approval of
the by-laws. However, the SEC recommendation was not heeded.
In 1989, the Carpizo group passed a Board Resolution authorizing the sale of the land to Iglesia Ni
Cristo ("INC"), and a Deed of Sale was eventually executed. In 1991, the Tamano Group filed a petition
before the SEC questioning the sale. Meanwhile, INC filed a suit for specific performance against the
Carpizo group. INC also moved to compel certain Leticia Ligon (who is apparently the mortgagee of the
lot) to surrender the title. The Tamano group sought to intervene, but the intervention was denied despite
the Court being informed of the pending SEC case. In 1992, the Court subsequently ruled that the INC as
the rightful owner of the land, and ordered Ligon to surrender the titles for annotation. Ligon appealed to
CA, but her appeals were denied. In 1993, the SEC ruled that the sale was null and void. On appeal, CA
reversed the SEC ruling.

MAIN ISSUE: Whether or not the sale between the Carpizo group and INC is null and void.
RULING: YES. Since the SEC has declared the Carpizo group as a void Board of Trustees, the sale it
entered into with INC is likewise void. Without a valid consent of a contracting party, there can be
no valid contract.
In this case, the IDP never gave its consent, through a legitimate Board of Trustees, to the disputed
Deed of Absolute Sale executed in favor of INC. Therefore, this is a case not only of vitiated consent, but
one where consent on the part of one of the supposed contracting parties is totally wanting. Ineluctably, the
subject sale is void and produces no effect whatsoever.
Further, the Carpizo group failed to comply with Section 40 of the Corporation Code, which
provides that: " ... a corporation may, by a majority vote of its board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets... when
authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock; or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a
stockholders' or members' meeting duly called for the purpose...."
The subject lot constitutes the only property of IDP. Hence, its sale to a third-party is a sale or
disposition of all the corporate property and assets of IDP. For the sale to be valid, the majority vote of the
legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide members of the
corporation should have been obtained. These twin requirements were not met in the case at bar. Hence,
the sale by the Board of Trustees of the only property of the corporation without compliance with the
provisions of Sec. 40 of the Corporation Code requiring the ratification of members requiring at least
2/3 of the membership, would make the sale null and void.

21. RAMIREZ v. ORIENTALIST

FACTS: Orientalists Co. was engaged in the business of manufacturing and conducting a theatre in Manila
for the exhibition of films. On the other hand, J.F. Ramirez who is based in Paris, was engaged in the
production or distribution of cinematographic material. In this enterprise, J.F. Ramirez, was represented in
Manila by his son, Jose Ramirez. Sometime in July 1913, negotiations begun between the 2 parties for the
purpose of placing the exclusive agency of Éclair Films and Milano Films in the hands of Orientalist.
Ramon J. Fernandez, one of the directors of Orientalist and its treasurer, was chiefly active in this matter.
Before the end of the July, Jose Ramirez placed in the hands of Fernandez an offer stating in detail the
terms upon which his father would undertake to supply from Paris the aforesaid films. Accordingly,
Fernandez had an informal conference with all the members of the company’s BOD except one, with the
approval of those with whom he had communicated. Then he addressed 2 subsequent letters accepting the
offer for the exclusive agency of Éclair and Milano films.
In due time the films began to arrive in Manila, a draft for the cost and expenses incident to each shipment
being attached to the proper bill of lading. It appears that Orientalist Company was without funds to meet
these obligations and the first few drafts were dealt with in the following manner: The drafts, upon
presentment thru the bank, were accepted in the name of Orientalist Company by its president B.
Hernandez and were taken by the latter with his own funds. As the drafts has thus been paid by B.
Hernandez, the films which had been procured by payment of said drafts were treated by him as his own
property and they in fact never came into the actual possession of Orientalist, as owner at all, though it is
true that Hernandez rented the films to Orientalist and they were exhibited by in the Oriental theatre under
an arrangement which was made between him and the theatre’s manager.
Later, several other remittances of films from Paris came. Like the same, all of the drafts were drawn on
Orientalist but was accepted by Hernandez except the last which the latter accepted individually. The drafts
when they fell due were not paid. Ramirez instituted an action against Orientalist and Fernandez. TC:
Declared Orientalist as principal debtor and Fernandez is subsidiarily liable as guarantor. From this
judgment, both of the Orientalist and Fernandez appealed.
No sworn answer denying the genuineness and due execution of the contracts in question or questioning the
authority of Fernandez to bind Orientalist was filed in this case, but evidence was admitted without
objection from Ramirez tending to show that Fernandez has no such authority. The evidence consisted of
extracts from the minutes of the proceedings of the company’s stockholders, showing that the making of
this contract had been under consideration in both bodies and that the authority to make the same had been
withheld by the stockholders.
Issue:
1) Whether the admission resulting from the failure of Orientalist to deny the due execution of
the contracts under oath is binding upon it for all purposes of this lawsuit or such failure
should be considered a mere irregularity of procedure which was waived when the evidence
referred to was admitted without objection from Ramirez.
2) Liability of Orientalist and Fernandez upon the letters of acceptance

Held: TC ruling affirmed.

I. Failure of Orientalist to make any issue in its answer with regard to the authority of
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 eliminating
the question of his authority from the case, considered as a matter of mere pleading.
II. SC considered the liability of Orientalist on the merits just as if that liability had been
properly put in issue by a specific answer under oath denying the authority of Fernandez
to bind it. It must be at the outset premised that Fernandez, as treasurer, had no
independent authority to bind the company by signing its name to the letters in question.
It is declared under the Corporation Law that corporate powers shall be exercised and all
corporate business conducted by the BOD. And this principle is recognized in the by-
laws of the corporation in question which contain a provision declaring that the power to
make contracts shall be vested in the BOD. However, the fact that the power to make
corporate contracts is thus vested in the BOD, 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 a formal
expression of its will.

In the case at bar, it appears on evidence that on the date upon which the letter accepting the offer of Éclair
films was dispatched, the BOD of the Orientalist convened in a special session in the office of Fernandez at
the request of the latter. Present there were 4 members, including the president, who under the by-laws is
authorized to enter into contracts. All signified their consent to the making of the contracts. It thus appears
that the BOD, before the financial inability of the corporation to proceed with the project was revealed, had
already recognized the contracts as being in existence and had proceeded to take the necessary steps to
utilize the films.
22. Board of liquidators vs. Kalaw, 20 SCRA 987 (1967)

FACTS: The National Coconut Corporation (NACOCO) was chartered as a non-profit governmental
organization on avowedly for the protection, preservation and development of the coconut industry in the
Philippines. On August 1, 1946, NACOCO's charter was amended [Republic Act 5] to grant that
corporation the express power to buy and sell copra. The charter amendment was enacted to stabilize
copra prices, to serve coconut producers by securing advantageous prices for them, to cut down to a
minimum, if not altogether eliminate, the margin of middlemen, mostly aliens. General Manager and
board chairman was Maximo M. Kalaw; defendants Juan Bocar and Casimiro Garcia were members
of the Board; defendant Leonor Moll became director only on December 22, 1947. NACOCO, after
the passage of Republic Act 5, embarked on copra trading activities. Scores of contracts have been
executed by the General Manager, Kalaw, for the delivery of copra.

An unhappy chain of events conspired to deter NACOCO from fulfilling the contracts it entered into.
Nature supervened. Four devastating typhoons visited the Philippines in 1947. When it became clear that
the contracts would be unprofitable, Kalaw submitted them to the board for approval. It was not until
December 22, 1947 when the membership was completed. Defendant Moll took her oath on that date. A
meeting was then held. Kalaw made a full disclosure of the situation apprised the board of the impending
heavy losses. No action was first taken on the contracts but not long thereafter, that is, on January 30, 1948,
the board met again with Kalaw, Bocar, Garcia and Moll in attendance. They unanimously approved the
contracts hereinbefore enumerated.

As was to be expected, NACOCO but partially performed the contracts. The buyers threatened damage
suits, some of which were settled. But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue
before the Court of First Instance of Manila. The cases culminated in an out-of-court amicable settlement
when the Kalaw management was already out.

With particular reference to the Dreyfus claims, NACOCO put up the defenses that:

(1) The contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to do
business here; and
(2) Failure to deliver was due to force majeure, the typhoons. All the settlements sum up to
P1,343,274.52.
In this suit started in February, 1949, NACOCO 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. By Executive Order 372, dated November 24, 1950, NACOCO, together with other
government-owned corporations, was abolished, and the Board of Liquidators was entrusted with the
function of settling and closing its affairs.

DECISION OF LOWER COURT: The lower court came out with a judgment dismissing the complaint.
Hence, plaintiff appealed direct to this Court. Plaintiff levelled a major attack on the lower court's holding
that Kalaw justifiably entered into the controverted contracts without the prior approval of the corporation's
directorate. Plaintiff leans heavily on NACOCO's corporate by-laws. Article IV (b), Chapter III thereof,
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: Whether or not the acts of the respondent as General Manager without prior approval of the
Board are valid corporate acts. YES

RULING: The movement of the market requires that sales agreements be entered into, even though the
goods are not yet in the hands of the seller. Known in business parlance as forward sales, it is concededly
the practice of the trade. Above all, NACOCO's limited funds necessitated a quick turnover. Copra
contracts then had to be executed on short notice — at times within twenty-four hours. To be appreciated
then is the difficulty of calling a formal meeting of the board. So pleased was NACOCO's board of
directors that, on December 5, 1946, in Kalaw's absence, it voted to grant him a special bonus "in
recognition of the signal achievement rendered by him in putting the Corporation's business on a self-
sufficient basis within a few months after assuming office, despite numerous handicaps and difficulties."

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.
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 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.

These previous contract it should be stressed, were signed by Kalaw without prior authority from the
board. 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. 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.

Under the given circumstances, the Kalaw contracts are valid corporate acts. Bad faith 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 thru some motive or interest or ill will; it partakes of the
nature of fraud. Applying this precept to the given facts herein, we find that there was no "dishonest
purpose," or "some moral obliquity," or "conscious doing of wrong," or "breach of a known duty," or
"Some motive or interest or ill will" that "partakes of the nature of fraud." 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.

3. Should Kalaw be liable for damages? NO. 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.
Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict the coming
of unpredictable typhoons. And even as typhoons supervened Kalaw was not remissed in his duty. He
exerted efforts to stave off losses. That Kalaw cannot be tagged with crassa negligentia or as much as
simple negligence, would seem to be supported by the fact that even as the contracts were being questioned
in Congress and in the NACOCO board itself, President Roxas defended the actuations of Kalaw. It is a
well-known rule of law that questions of policy of management are left solely to the honest decision of
officers and directors of a corporation, and the court is without authority to substitute its 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."

23. ACUNA v. BATAC PRODUCERS

FACTS: Emiliano Acuna and Batac Producers Cooperative Marketing Association, Inc. thru its manager,
Leon Verano entered into a tentative agreement whereby the Acuna would give 20k to Batac Producers to
be utilized by the latter as additional funds for its Virginia tobacco buying operations during the current
redrying season. It also included that for Acuna shall be constituted as Batac’s representative in Manila, in
charged for the handling and facilitating of tobacco and for these services, Acuna shall receive a
remuneration of 50 cents per kilo of tobacco. Said tentative agreement was favorably received by the BOD
of Batac Producers. Later, said BOD unanimously authorized Verano to execute any contract on behalf of
the corporation for the purpose of securing additional funds for the corporation and secure the services of
any person or entity to collect the payments due to the corporation. Acuna alleges that he was made to
believe that the original agreement between him and Verano except for his remuneration is acceptable to
the corporation. Subsequently, the formal agreement was executed, duly authorized by the corporation’s
BOD. According to Acuna, he was assured by the BOD, upon his inquiry, 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 all the members of the board had already agreed to the same. Acuna complied with his
obligations under the contract. But after doing so, the agreement was disapproved by the BOD. Hence,
Acuna filed a case against the corporation but CFI dismissed the complaint on the ground that it states no
cause of action.
Held: A perusal of the complaint reveals that it contains sufficient allegations indicating such approval or at
least subsequent ratification. It must be noted that Acuna met with each and all of the individual BOD
members (who constituted the entire BOD) and discussed with them extensively the tentative agreement
and he was made to understand that it was acceptable to them, except as to Acuna’s remuneration. But that
matter was subsequently settled. More so, 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 that although
the contract required such approval it did not specify just in what manner the same should be given.
There is abundant authority in support of the proposition that ratification may be express or implied and
that implied 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.
24. Harden vs. Benguet Consolidated, 58 PHIL 1140 (1948)
FACTS: Benguet Consolidated Mining was organized in June 1903 as a sociedad anonima in conformity
with the Spanish Code of Commerce. Balatoc Mining Company, on the other hand, was organized in
December 1925 in conformity with the relatively new Corporation Law, with the petitioners, Harden et al.
as its stockholders. When Balatoc Mining first organized, the properties it acquired were largely
undeveloped and the original stockholders were unable to supply the means needed for profitable operation.
In order to solve such problem, the company’s stockholders appointed a committee for the purpose of
interesting outside capital in the mine. By virtue of a resolution adopted by the Board of Directors of
Balatoc, a committee thereof approached A.W. Beam, the President and the General Manager of Benguet
Company, in order to secure capital necessary for the development of the Balatoc property. In exchange,
Balatoc Mining agreed to give Benguet Mining 600,000 shares.
The venture proved to be profitable and Balatoc Mining earned and so did its stockholders, and of
course, Benguet Mining was earning big too because it now owns 600,000 shares, as agreed. As soon as the
success of the company became apparent, Harden (owner of thousands of shares of Balatoc) questioned the
transfer of 600,000 shares to Benguet. Harden seeks to annul the certificate covering the 600,000 shares of
stock transferred to Benguet on the ground that under the Corporation Law a corporation like Benguet
Mining which is engaged in the mining industry is prohibited from being interested in other corporations
which are also engaged in the mining industry like Balatoc Mining.
ISSUES: Whether or not Harden et. al. can maintain an action based upon the violation of law
supposedly committed by Benguet Company under the Corporation Law
 RULING: NO. The Corporation Law of 1925 subjects sociedades anonimas to its provisions “so far
as such provisions may be applicable”. In 1929, the Corporation Law was amended and the prohibition
cited by Harden was so modified as merely to prohibit any such corporation from holding more than fifteen
per centum of the outstanding capital stock of another such corporation.
Benguet Company committed no civil wrong against the plaintiffs, and if a public wrong has been
committed, the directors of the Balatoc Company, and Harden himself were the active inducers of the
commission of that wrong. The contract was 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.
Further and more importantly, the Corporation Law of 1925 provides that if the person who allegedly
violated the provisions of said law is a corporation, the proper action is a quo warranto which should be
initiated by the Attorney-General or its deputized provincial fiscal and not a private action as the one filed
by Harden. The doctrine from this case therefore is that even when the corporate contracts are illegal per
se, when only public or government policy is at stake and no private wrong is committed, the Courts
will leave the parties as they are, in accordance with their original contractual expectations.
25. PRICE v. MARTIN
FACTS: Sulu Development Company held its stockholders meeting on Nov. 1925 where they elected new
officers of the corporation and at which the proposed mortgage of the corporation in favor of another
corporation was approved. One of the stockholders of the corporation was Mr. Dean Worcester, in whose
name the 97 shares of stocks at that time stood upon the books of the corporation. But since he was
already deceased at that time, his 97 shares of stock were voted by his proxy, Mrs. Worcester. Here
now comes Martin with all the pertinent documents, claiming to be the owner of the said shares. According
to him, he delivered in trust the shares of stocks to the late Dean Worcester to be held and used for his
(Martin’s) benefit. Copies of the documents relied upon by Martin were made a part of the record but
apparently no was action taken by the stockholders or by the directors and at the meantime, Mrs.
Worcester’s proxy apparently voted the stock without protest on the part of Martin or any other
stockholder. Martin filed a case before the CFI to question the voting made by the proxy. The Trial
Court held that the voting of Mrs. Worcester legal.
Held: Whether or not the vote made by Mrs. Worcester, in her capacity as proxy, should be given
legal effect. YES
Martin contends that the transference of the books of the company of the 97 shares of stocks in the name of
Mrs. Worcester was fraudulent and illegal. The evidence of record, however, under all the
circumstances of the case, fails to demonstrate the allegation of fraud. Mrs. Worcester acted in Good
Faith and in the honest belief that she had not only a legal right but a duty to participate in the stockholders
meeting.
Until challenged in a proper proceeding, a stockholder according to the books of the company has a right to
participate in that meeting and in the absence of fraud, the action [made on the basis] of the stockholders’
meeting cannot be collaterally attacked on account of such participation. A person who has purchased
stock and who desires to be recognized as a stockholder, for the purpose of voting, must secure a
standing by having the transfer recorded upon the books. If the transfer is not duly made upon request,
he has, as remedy, to compel it to be made.
26. Ramon De La Rama vs. Ma-Ao Sugar Central Co., Inc.

FACTS: Representative or derivative suits were filed against the Ma-Ao Sugar, Amado Araneta and three
other directors of the corporation, by its 4 minority stockholders, spearheaded by De La Rama. The
complaint comprising the period November, 1946 to October, 1952, stated five causes of action, the most
relevant being: the alleged illegal and ultra-vires acts consisting of self-dealing irregular loans, and
unauthorized investments.

In 1950, the Ma-ao Sugar Central Co., Inc., through its President, J. Amado Araneta, subscribed for
P300,000.00 worth of capital stock of the Philippine Fiber Processing Co. Inc. Payments on the
subscription were made on September 20, 1950, for P150,000.00; on April 30, 1951, for P50,000.00; and
on March 6, 1952, for P100,000.00. At the time the first two payments were made there was no board
resolution authorizing the investment; and that it was only on November 26, 1951, that the President of Ma-
ao Sugar Central Co., Inc., was so authorized by the Board of Directors. Additionally, 355,000 shares of
stock of the same Philippine Fiber Processing Co., Inc., owned by Luzon Industrial, corporation were
transferred on May 31, 1952, to Ma-ao Sugar Central Co., Inc., with a valuation of P355,000.00 on the
basis of P1.00 par value per share.
Again the "investment" was made without prior board resolution, the authorizing resolution having
been subsequently approved only on June 4, 1952. De la Rama et. al. contend that even assuming,
arguendo, that the said Board Resolutions are valid, the transaction, is still wanting in legality, because no
resolution has been approved by the affirmative vote of 2/3 of the stockholders holding shares in the
corporation as required in Sec. 17-½ of the Corporation Law.

On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10 of the Corporation Law,
which provides:
SEC. 13. — Every corporation has the power:
(9) To enter into any obligation or contract essential to the proper administration of its corporate affairs
or necessary for the proper transaction of the business or accomplishment of the purpose for which the
corporation was organized;
(10) Except as in this section otherwise provided, and in order to accomplish its purpose as stated in the
articles of incorporation, to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities and
other evidences of indebtedness of any domestic or foreign corporation.
The lower court held that the investments were not in violation of the law and ruled that “the law
should be understood to mean as the authorities state, that it is prohibited to the Corporation to invest in
shares of another corporation unless such an investment is authorized by 2/3 of the voting power of the
stockholders, if the purpose of the corporation in which investment is made is foreign to the purpose
of the investing corporation because surely there is more logic in the stand that if the investment is made
in a corporation whose business is important to the investing corporation and would aid it in its purpose, to
require authority of the stockholders would be to unduly curtail the Power of the Board of Directors; the
only trouble here is that the investment was made without any previous authority of the Board of Directors
but was only ratified afterwards; this of course would have the effect of legalizing the unauthorized act.” A
reading of the two afore-cited provisions shows that there is need for interpretation of the apparent conflict.
ISSUE: Whether the lower court was correct in ruling in that the investments by the defendants were
not in violation of the law (whether or not the 2/3 affirmative vote requirement for said investments may
be dispensed with in the instant case)
HELD: YES. The Court cited a book entitled “The Philippine Corporation Law” by Prof. Sulpicio Guevara
of the UP College of Law.
“A private corporation, in order to accomplish its purpose as stated in its articles of incorporation,
and subject to the limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage,
pledge or dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic or
foreign corporation. 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. In any case, the purchase of such shares or securities must be subject to the
limitations established by the Corporation Law; namely, (a) that no agricultural or mining corporation shall
in anywise be interested in any other agricultural or mining corporation; or (b) that a non-agricultural or
non-mining corporation shall be restricted to own not more than 15% of the voting stock of any agricultural
or mining corporation; and (c) that such holdings shall be solely for investment and not for the purpose of
bringing about a monopoly in any line of commerce or combination in restraint of trade.”
“A private corporation has the power to invest its corporate 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 in a resolution by the affirmative vote of stockholders holding
shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a
proposal at a stockholders' meeting called for that purpose,' and provided further, that no agricultural or
mining corporation shall in anywise be interested in any other agricultural or mining corporation. When
the investment is necessary to accomplish its purpose or purposes as stated in it articles of
incorporation, the approval of the stockholders is not necessary.”
The lower court ordered the management of the Ma-ao Sugar Central Co., Inc. to refrain from
making investments in Acoje Mining, Mabuhay Printing and any other company whose purpose is not
connected with the sugar central business. This portion of the decision was reversed by the Court
because Sec. 17-1/2 of the Corporation Law allows a corporation to invest its funds in any
corporation or business, or for any purpose other than the main purpose for which it was organized
provided that its board of directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting power.
Therefore, the SC agrees with the lower court ruling. The investment by a sugar central in the
equity of a sugar bag manufacturing company falls within the implied powers of the sugar central as part
of its primary purpose and does not need ratification by the stockholders.

27. GOKONGWEI v. CA
In another petition filed by Gokongwei before the SEC, it raised that SMC invested corporate funds in
Hongkong Brewery & Distellery, Ltd., a foreign corporation, without prior authority of the stockholders
thus violating the Corporation Law. SEC however allowed the said investment made to Hongkong Brewery
since the stockholders ratified the same.
ISSUE: Does the investment undertaken by SMC violate the Corporation Law?
Held: NO. 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 BOD has been so authorized by the affirmative vote of stockholders holding shares entitling them
to exercise at least 2/3 of the voting power. If the investment is made in pursuance of the corporate
purpose, it does not need the approval of the stockholders. It is only when the purchase of shares is
done solely for investment and not to accomplish the purpose of its incorporation that the vote of
approval of the stockholders holding shares entitling them to exercise at least 2/3 of the voting power
is necessary.
As stated by SMC, the purchase of beer manufacturing facilities by SMC was an investment in the same
business stated as its main purpose in its AOI, which is to manufacture and market beer. It appears that the
original investment was made by SMC when they purchased a beer brewery in Hongkong for the
manufacture and marketing of San Miguel beer thereat.
And assuming that the BOD of SMC had no authority to make the assailed investment, there is no
question that a corporation, like an individual, may ratify and thereby render binding upon it the
originally unauthorized acts of its officers or other agents. This is true because the questioned
investment is neither contrary to law, morals, public order nor public policy. It is a corporate transaction or
contract which is within the corporate powers, but which is defective from a purported failure to observe
in its execution the requirement of the law that the investment and its ratification by said stockholders
obliterates any defect which it may have had at the outset. Mere ultra vires acts of those which are not
illegal and void ab initio but are not merely within the scope of the AOI, are merely voidable and may
become binding and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is
apparently relevant to the corporate purpose. The mere fact that SMC submitted the assailed investment
to the stockholders for ratification cannot be construed as an admission that SMC had committed an ultra
vires act, considering the common practice of corporations of periodically submitting for ratification of
their stockholders the acts of their directors, officers and managers.

28. Lanuza vs. Court of Appeals (GR No. 131394 [2005])

FACTS: The Philippine Merchant Marine School (PMMI) was incorporated in 1952 with 700 founders’
shares and 76 common shares as its initial stock subscription reflected in the articles of incorporation. It
was only in 1978 when the company’s stock and transfer book was registered at the instance of private
respondents, recording 33 common shares as the only issued and outstanding shares of PMMI. In a dispute
over the basis of a quorum in a stockholders’ meeting, for the supposed purpose of electing new set of
directors, private respondents (Onrubia et. al) contend that the same should be based on the initial
subscribed capital stock as reflected in the 1952 articles of incorporation, and not on the number of issued
and outstanding shares as recorded in 1978 in the company’s stock and transfer book. Petitioners contend
otherwise. Both the SEC en banc and the Court of Appeals ruled in favor of private respondents. Hence,
this petition seeking to nullify the assailed decision.

ISSUE: What should be the basis in determining the quorum in the stockholders’ meeting?

HELD: The initial subscribed capital stock as reflected in the articles of incorporation should be
made the basis in the determination of a quorum. The articles of incorporation define the charter of the
corporation and its contractual relations with the state and the stockholders. The contents thereof are
binding not only on the corporation but also on its shareholders. In the instant case, the articles of
incorporation indicate that the company had 776 issued and outstanding shares. On the other hand, the
stock and transfer book is not in any sense a public record and only constitutes prima facie evidence.
Hence, it may be impeached by other competent evidence. Therefore, the same cannot be used as the
sole basis for determining the quorum as it does not reflect the totality of shares which have been
subscribed, more so when the articles of incorporation show a significantly larger amount of shares
issued and outstanding.

29. LEE v. CA
FACTS: A complaint for a sum of money was filed by International Corporate Bank against Lee and the
other directors of Alfa Integrated Textile Mills. Lee and the other directors in turn filed a 3rd party
complaint against ALFA. In the case, the TC issued an order requiring the issuance of an alias summon to
ALFA thru DBP after Lee informed the court that the summons for ALFA have been erroneously served
considering that the management of ALFA has been transferred to DBP. In a manifestation, DBP informed
the court that it was not authorized to receive the summons for ALFA since DBP has not taken over the
said company which has a separate and distinct personality. In view of this manifestation, the TC ordered
DBP to serve summon to ALFA. DBP again in a manifestation suggested that service of summons can be
had to Lee and his group, being directors of ALFA. Lee and his group filed for MR on the ground that they
were no longer officers of ALFA based on the VTA executed between all the stockholders of ALFA and
DBP hence it could no longer receive summons or any court processes for or on behalf of ALFA. But TC
upheld the validity of the service of summons on ALFA thru Lee and the other directors. Lee and his group
filed another MR. TC reversed itself and held that Lee and his group were no longer corporate officers of
ALFA thus the service of summons on them for ALFA is not proper. CA reversed the decision so Lee and
his group appealed to the SC.
Lee and his group maintain that with the execution of the VTA between them and the other stockholders of
ALFA, as one party and the DBP as the other party, where they assigned and transferred all their shares in
ALFA to DBP as trustee, they can no longer be considered directors of ALFA since under the corporation
law, a director must in his own right hold at least one share.
Issue: Whether or not Lee and the other directors are no longer directors of ALFA due to the
execution of the VTA
Held: No longer directors.
Considering that the VTA between ALFA and the DBP transferred legal ownership of the stock covered by
the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the said
shares of stocks. In the absence of a showing that DBP had caused to be transferred in their names one
share of stock for the purpose of qualifying as directors of ALFA, Lee and his group can no longer be
deemed to have retained their status as officers of ALFA which was the case before the execution of the
VTA.
Not being directors of ALFA, service of summons upon them is not proper. It would have been proper if
made upon DBP since there appears to be no dispute from the records that DBP has indeed taken over the
full management and control of ALFA.
Notes: VTA is an agreement in writing whereby one or more shareholders of a corporation consent to
transfer his or her shares to a trustee in order to vest in the latter voting or other rights pertaining to said
shares for a period of 5 years upon the fulfillment of statutory conditions and such other terms and
conditions specified in the agreement. The 5 year-period may be extended in cases where the voting trust is
executed pursuant to a loan agreement whereby the period is made contingent upon full payment of the
loan.
Criteria to distinguish VTA from proxy and pooling agreements:
a) The voting of rights of the stock are separated from the other attributes of ownership
b) The voting rights granted are intended to be irrevocable for a definite period of time
c) The principal purpose of the grant of voting rights is to acquire voting control of the corporation

30. NIDC vs. Aquino, 163 SCRA 153 (NIDC and PNB are affiliate companies)

Doctrine: A VTA transfers only voting or other rights pertaining to the shares subject of the
agreement, or control over the stock. Stockholders of a corp. that lost all its assets through
foreclosures cannot go after those properties. PNB-NIDC acquired those properties not as trustees
but as creditors.

Facts: Batjak, (Basic Agricultural Traders Jointly Administered Kasamahan) is a Filipino-American

corporation organized under the laws of the Philippines, primarily engaged in the manufacture of coconut
oil and copra cake for export. In 1965, Batjak's financial condition deteriorated to the point of bankruptcy.
As of that year, Batjak's indebtedness to some private banks and to the Philippine National Bank (PNB)
amounted to P11,915,000.00.As security for the payment of its obligations and advances against shipments,
Batjak mortgaged its three (3) coco-processing oil mills to Manila Banking Corporation (Manila
Bank), Republic Bank (RB), and Philippine Commercial and Industrial Bank (PCIB), respectively. In
need for additional operating capital to place the three (3) coco-processing mills at their optimum capacity
and maximum efficiency and to settle, pay or otherwise liquidate pending financial obligations with the
different private banks, Batjak applied to PNB for additional financial assistance. On 5 October 1965, a
Financial Agreement was submitted by PNB to Batjak for acceptance.

The terms and conditions of the Financial Agreement were duly accepted by Batjak. Under said
Agreement, NIDC would, as it actually did, invest P6, 722,500.00 in Batjak in the form of preferred
shares of stock convertible within five (5) years at par into common stock, to pay for Batjak's
obligations to Republic Bank (RB), Manufacturers Bank and Trust Company (MBTC) and Philippine
Commercial & Industrial Bank (PCIB), and the balance of the investment was to be applied to Batjak's past
due account of P 5 million with the PNB. Upon receiving payment, RB, PCIB, and MBTC released in favor
of PNB the first and any mortgages they held on the properties of Batjak.

Next, a Voting Trust Agreement was executed on 26 October 1965 in favor of NIDC by the stockholders
representing 60% of the outstanding paid-up and subscribed shares of Batjak. This agreement was for a
period of five (5) years and, upon its expiration, was to be subject to negotiation between the parties.
In July 1967, forced by the insolvency of Batjak, PNB instituted extrajudicial foreclosure proceedings
against the oil mills of Batjak. The properties were sold to PNB as the highest bidder. One year thereafter,
or in September 1968, final Certificates of Sale were issued. Subsequently, PNB transferred the ownership
of the two (2) oil mills to NIDC which, as aforestated, was a wholly-owned PNB subsidiary.

Three (3) years thereafter, or on 31 August 1970, Batjak represented by majority stockholders, through
Atty. Amado Duran, legal counsel of private respondent Batjak, wrote a letter to NIDC inquiring if the
latter was still interested in negotiating the renewal of the Voting Trust Agreement. On 22 September 1970,
legal counsel of Batjak wrote another letter to NIDC informing the latter that Batjak would now safely
assume that NIDC was no longer interested in the renewal of said Voting Trust Agreement and, in view
thereof, requested for the turn-over and transfer of all Batjak assets, properties, management and
operations.

NIDC replied, confirming the fact that it had no intention whatsoever to comply with the demands of
Batjak. Batjak filed a case to recover such assets, properties, management, and operations. Respondent
judge issued a restraining order "prohibiting petitioners from removing any record, books, commercial
papers or cash, and leasing, renting out, disposing of or otherwise transferring any or all of the properties,
machineries, raw materials and finished products and/or by-products thereof now in the factory sites of the
three (3) modem coco milling plants.

On 24 April 1971, NIDC and PNB filed an opposition to the ex parte application for the issuance of a writ
of preliminary prohibitory and mandatory injunction and a motion to set aside restraining order. Before the
court could act on the said motion, private respondent Batjak filed on 3 May 1971 a petition for
receivership as alternative to writ of preliminary prohibitory and mandatory injunction. This was opposed
by PNB and NIDC. On 8 May 1971, NIDC and PNB filed a motion to dismiss Batjak's complaints. On 16
August 1971, respondent judge issued the now assailed order denying petitioners' motion to dismiss and
appointing a set of three (3) receivers.

Issue/s: Is PNB/NIDC entitled to the properties?

Held: Yes. Batjak premises its right to the possession of the three (3) off mills on the Voting Trust
Agreement, claiming that under said agreement, NIDC was constituted as trustee of the assets, management
and operations of Batjak, that due to the expiration of the Voting Trust Agreement, on 26 October 1970,
NIDC should turn over the assets of the three (3) oil mills to Batjak.
As borne out by the records of the case, PNB acquired ownership of two (2) of the three (3) oil mills by
virtue of mortgage foreclosure sales. NIDC acquired ownership of the third oil mill also under a mortgage
foreclosure sale. Certificates of title were issued to PNB and NIDC after the lapse of the one (1) year
redemption period. Subsequently, PNB transferred the ownership of the two (2) oil mills to NIDC. There
can be no doubt; therefore, that NIDC not only has possession of, but also title to the three (3) oil mills
formerly owned by Batjak. The interest of Batjak over the three (3) oil mills ceased upon the issuance of the
certificates of title to PNB and NIDC confirming their ownership over the said properties. More so, where
Batjak does not impugn the validity of the foreclosure proceedings. Neither Batjak nor its
stockholders have instituted any legal proceedings to annul the mortgage foreclosure
aforementioned.

However, the Batjak argues that the Voting Trust Agreement states that:
“Upon termination of this Agreement as heretofore provided, the certificates delivered to the TRUSTEE by
virtue hereof shall be returned and delivered to the undersigned stockholders as the absolute owners
thereof, upon surrender of their respective voting trust certificates, and the duties of the TRUSTEE shall
cease and terminate.”

Under the aforecited provision, what was to be returned by NIDC as trustee to Batjak's stockholders,
upon the termination of the agreement, are the certificates of shares of stock belonging to Batjak's
stockholders, not the properties or assets of Batjak itself which were never delivered, in the first place
to NIDC, under the terms of said Voting Trust Agreement.

In any event, a voting trust transfers only voting or other rights pertaining to the shares subject of the
agreement or control over the stock. 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.

Dispositive Portion: WHEREFORE, the petitions are GRANTED. The orders of the respondent judge,
dated 16 August 1971 and 30 September 1971, are hereby ANNULLED and SET ASIDE. The respondent
judge and/or his successors are ordered to desist from hearing and/or conducting any further proceedings in
Civil Case No. 14452, except to dismiss the same. With costs against private respondents.

32. ANTONIO PARDO v. THE HERCULES LUMBER and IGNACIO FERRER

FACTS: Pardo is a stockholder of Hercules Lumber and Ferrer is the acting secretary of the said company.
The Company refused to permit Pardo to inspect the records and business transactions of the company.
There was no question regarding the right to inspect as it is guaranteed in the Corp. Law. The main
consideration in this case has reference to the time, or times, within which the right of inspection may
be exercised. The company, through various resolutions, had designated certain times to which the
stockholders can inspect the books. Allegedly, Pardo didn’t get permission to inspect thus was denied
such. Hence, this petition. The main ground upon which the defense of the company appears to be rested
has reference to the time, or times, within which the right of inspection may be exercised.

Article 10 of the By-laws of the company provides:

"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."

A Board Resolution was passed at the directors' meeting held on 16 February 1924. 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 (10 days) of the
same month for examination, in appropriate hours.

ISSUES:
1) WON the board resolution constitutes a lawful restriction on the right conferred by statute? NO
2) WON Pardo lost his right to inspection and examination for the year, since he has not availed
himself of the permission [to inspect the company’s books and transactions within the 10 days
defined in the board resolution? NO
3) WON the shareholder’s motive in exercising this right is material? NO

Held: The basis of right of inspection is Sec. 51 of Act No. 1459 [Corporation Law]. In Philpotts v.
Philippine Manufacturing Co., and Berry, it was 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. 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. 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.

On the issue of motives that prompted Pardo to make inspection, it is alleged that the information which
Pardo seeks is desired for ulterior purposes in connection with a competitive firm with which Pardo is
alleged to be connected. It is also insisted that one of Pardo’s purposes is to obtain evidence preparatory to
the institution of an action, which he means to bring against the company re: a contract of employment
which once existed between the corporation and himself. These suggestions are entirely apart from the
issue — the motive of the shareholder exercising the right is immaterial.

Section 51. 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, how authorized, the notice
given, whether the meeting was regular or special, if special its object, those present and absent,
and every act done or ordered done at the meeting. On the demand of any director, member, or
stockholder, the time when any director, member, or stockholder entered or left the meeting must be
noted on the minutes, and on a similar demand, the yeas and nays must be taken on any motion or
proposition and a record thereof carefully made. The protest of any director, member, or
stockholder on any action or proposed action must be recorded in full on his demand. 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.

Therefore, Pardo is granted the relief to inspect. Right to inspect is open to any director, trustee or
stockholder or member of the corporation at reasonable hours on business days. He may demand in
writing a copy of excerpts at his expense.

34. Gonzales vs PNB 122 SCRA 489

FACTS: Gonzales instituted a suit, as a taxpayer, against Sec. of Public Works and Communications, the
Commissioner of Public Highways, and PNB for alleged anomalies committed regarding the bank’s
extension of credit to import public works equipment intended for the massive development program. The
petitioner’s standing was questioned because he did not own any share in PNB. Consequently, Petitioner
bought 1 share of PNB stocks in order to gain standing as a stockholder.

Petitioner thereafter sought to inquire and ordered PNB to produce its books and records which the Bank
refused, invoking the provisions from its charter created by Congress. The petitioner filed petition for
mandamus to compel PNB to produce its books and records. The RTC dismissed the petition and it ruled
that the right to examine and inspect corporate books is not absolute, but is limited to purposes reasonably
related to the interest of the stockholder, must be asked for in good faith for a specific and honest purpose
and not gratify curiosity or for speculative or vicious purposes; that such examination would violate the
confidentiality of the records of the respondent bank as provided in Section 16 of its charter, Republic Act
No. 1300, as amended; and that the petitioner has not exhausted his administrative remedies.

ISSUE: Whether or not Petitioner may compel PNB to produce its books and records

HELD: No. As may be noted from the Sec 74 BP Blg. 68, among the changes introduced in the new Code
with respect to the right of inspection granted to a stockholder are the following the records must be kept at
the principal office of the corporation; the inspection must be made on business days; the stockholder may
demand a copy of the excerpts of the records or minutes; and the refusal to allow such inspection shall
subject the erring officer or agent of the corporation to civil and criminal liabilities. However, while
seemingly enlarging the right of inspection, the new Code has prescribed limitations to the same. It is now
expressly required as a condition for such examination 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
the respondent bank, he has not set forth the reasons and the purposes for which he desires such inspection,
except to satisfy himself as to the truth of published reports regarding certain transactions entered into by
the respondent bank and to inquire into their validity. The circumstances under which he acquired one share
of stock in the respondent bank purposely to exercise the right of inspection do not argue in favor of his
good faith and proper motivation. Admittedly he sought to be a stockholder in order to pry into transactions
entered into by the respondent bank even before he became a stockholder. His obvious purpose was to arm
himself with materials which he can use against the respondent bank for acts done by the latter when the
petitioner was a total stranger to the same. He could have been impelled by a laudable sense of civic
consciousness, but it could not be said that his purpose is germane to his interest as a stockholder.

The inspection sought to be exercised by the petitioner would be violative of the provisions of its charter of
PNB. The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not
governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides:

SEC. 4. Corporations created by special laws or charters. — Corporations created by special laws or
charters shall be governed primarily by the provisions of the special law or charter creating them or
applicable to them. Supplemented by the provisions of this Code, insofar as they are applicable.

The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to the
right of a stockholder to demand an inspection or examination of the books of the corporation may not be
reconciled with the abovequoted provisions of the charter of the respondent bank. It is not correct to claim,
therefore, that the right of inspection under Section 74 of the new Corporation Code may apply in a
supplementary capacity to the charter of the respondent bank.