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Corporation Law Case Digests

Sec. 81. Instances of appraisal right.- Any stockholder of Sec. 83. Effect of demand and termination of right. -
a corporation shall have the right to dissent and demand From the time of demand for payment of the fair value
payment of the fair value of his shares in the following of a stockholder's shares until either the abandonment
instances: of the corporate action involved or the purchase of the
1. In case any amendment to the articles of said shares by the corporation, all rights accruing to such
incorporation has the effect of changing or restricting shares, including voting and dividend rights, shall be
the rights of any stockholder or class of shares, or of suspended in accordance with the provisions of this
authorizing preferences in any respect superior to those Code, except the right of such stockholder to receive
of outstanding shares of any class, or of extending or payment of the fair value thereof: Provided, That if the
shortening the term of corporate existence; dissenting stockholder is not paid the value of his shares
2. In case of sale, lease, exchange, transfer, within 30 days after the award, his voting and dividend
mortgage, pledge or other disposition of all or rights shall immediately be restored. (n)
substantially all of the corporate property and assets as
provided in the Code; and Sec. 84. When right to payment ceases. - No demand for
3. In case of merger or consolidation. (n) payment under this Title may be withdrawn unless the
corporation consents thereto. If, however, such demand
Sec. 82. How right is exercised. - The appraisal right may for payment is withdrawn with the consent of the
be exercised by any stockholder who shall have voted corporation, or if the proposed corporate action is
against the proposed corporate action, by making a abandoned or rescinded by the corporation or
written demand on the corporation within thirty (30) disapproved by the Securities and Exchange Commission
days after the date on which the vote was taken for where such approval is necessary, or if the Securities
payment of the fair value of his shares: Provided, That and Exchange Commission determines that such
failure to make the demand within such period shall be stockholder is not entitled to the appraisal right, then
deemed a waiver of the appraisal right. If the proposed the right of said stockholder to be paid the fair value of
corporate action is implemented or affected, the his shares shall cease, his status as a stockholder shall
corporation shall pay to such stockholder, upon thereupon be restored, and all dividend distributions
surrender of the certificate or certificates of stock which would have accrued on his shares shall be paid to
representing his shares, the fair value thereof as of the him. (n)
day prior to the date on which the vote was taken,
excluding any appreciation or depreciation in Sec. 85. Who bears costs of appraisal. - The costs and
anticipation of such corporate action. expenses of appraisal shall be borne by the corporation,
unless the fair value ascertained by the appraisers is
If within a period of sixty (60) days from the date the approximately the same as the price which the
corporate action was approved by the stockholders, the corporation may have offered to pay the stockholder, in
withdrawing stockholder and the corporation cannot which case they shall be borne by the latter. In the case
agree on the fair value of the shares, it shall be of an action to recover such fair value, all costs and
determined and appraised by three (3) disinterested expenses shall be assessed against the corporation,
persons, one of whom shall be named by the unless the refusal of the stockholder to receive payment
stockholder, another by the corporation, and the third was unjustified. (n)
by the two thus chosen. The findings of the majority of
the appraisers shall be final, and their award shall be Sec. 86. Notation on certificates; rights of transferee. -
paid by the corporation within thirty (30) days after such Within ten (10) days after demanding payment for his
award is made: Provided, That no payment shall be shares, a dissenting stockholder shall submit the
made to any dissenting stockholder unless the certificates of stock representing his shares to the
corporation has unrestricted retained earnings in its corporation for notation thereon that such shares are
books to cover such payment: and Provided, further, dissenting shares. His failure to do so shall, at the option
That upon payment by the corporation of the agreed or of the corporation, terminate his rights under this Title.
awarded price, the stockholder shall forthwith transfer If shares represented by the certificates bearing such
his shares to the corporation. (n) notation are transferred, and the certificates
consequently canceled, the rights of the transferor as a
dissenting stockholder under this Title shall cease and

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Corporation Law Case Digests

the transferee shall have all the rights of a regular stock corporation, by the vote of at least to two-thirds
stockholder; and all dividend distributions which would (2/3) of the members, in a stockholder's or member's
have accrued on such shares shall be paid to the meeting duly called for the purpose. Written notice of
transferee. (n) the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or
Sec. 81. Instances of appraisal right.- Any stockholder of member at his place of residence as shown on the books
a corporation shall have the right to dissent and demand of the corporation and deposited to the addressee in
payment of the fair value of his shares in the following the post office with postage prepaid, or served
instances: personally: Provided, That any dissenting stockholder
1. In case any amendment to the articles of may exercise his appraisal right under the conditions
incorporation has the effect of changing or restricting provided in this Code.
the rights of any stockholder or class of shares, or of A sale or other disposition shall be deemed to
authorizing preferences in any respect superior to those cover substantially all the corporate property and assets
of outstanding shares of any class, or of extending or if thereby the corporation would be rendered incapable
shortening the term of corporate existence; of continuing the business or accomplishing the purpose
2. In case of sale, lease, exchange, transfer, for which it was incorporated.
mortgage, pledge or other disposition of all or After such authorization or approval by the
substantially all of the corporate property and assets as stockholders or members, the board of directors or
provided in the Code; and trustees may, nevertheless, in its discretion, abandon
3. In case of merger or consolidation. such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the rights
Sec. 37. Power to extend or shorten corporate term. - A of third parties under any contract relating thereto,
private corporation may extend or shorten its term as without further action or approval by the stockholders
stated in the articles of incorporation when approved by or members.
a majority vote of the board of directors or trustees and Nothing in this section is intended to restrict the
ratified at a meeting by the stockholders representing at power of any corporation, without the authorization by
least two-thirds (2/3) of the outstanding capital stock or the stockholders or members, to sell, lease, exchange,
by at least two-thirds (2/3) of the members in case of mortgage, pledge or otherwise dispose of any of its
non-stock corporations. Written notice of the proposed property and assets if the same is necessary in the usual
action and of the time and place of the meeting shall be and regular course of business of said corporation or if
addressed to each stockholder or member at his place the proceeds of the sale or other disposition of such
of residence as shown on the books of the corporation property and assets be appropriated for the conduct of
and deposited to the addressee in the post office with its remaining business.
postage prepaid, or served personally: Provided, That in In non-stock corporations where there are no
case of extension of corporate term, any dissenting members with voting rights, the vote of at least a
stockholder may exercise his appraisal right under the majority of the trustees in office will be sufficient
conditions provided in this code. authorization for the corporation to enter into any
transaction authorized by this section. (28 1/2a)
Sec. 40. Sale or other disposition of assets. - Subject to
the provisions of existing laws on illegal combinations Sec. 42. Power to invest corporate funds in another
and monopolies, a corporation may, by a majority vote corporation or business or for any other purpose. -
of its board of directors or trustees, sell, lease, Subject to the provisions of this Code, a private
exchange, mortgage, pledge or otherwise dispose of all corporation may invest its funds in any other
or substantially all of its property and assets, including corporation or business or for any purpose other than
its goodwill, upon such terms and conditions and for the primary purpose for which it was organized when
such consideration, which may be money, stocks, bonds approved by a majority of the board of directors or
or other instruments for the payment of money or other trustees and ratified by the stockholders representing at
property or consideration, as its board of directors or least two-thirds (2/3) of the outstanding capital stock, or
trustees may deem expedient, when authorized by the by at least two thirds (2/3) of the members in the case
vote of the stockholders representing at least two-thirds of non-stock corporations, at a stockholder's or
(2/3) of the outstanding capital stock, or in case of non- member's meeting duly called for the purpose. Written

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Corporation Law Case Digests

notice of the proposed investment and the time and excluding any appreciation or depreciation in
place of the meeting shall be addressed to each anticipation of such corporate action.
stockholder or member at his place of residence as
shown on the books of the corporation and deposited to If within a period of sixty (60) days from the date the
the addressee in the post office with postage prepaid, or corporate action was approved by the stockholders, the
served personally: Provided, That any dissenting withdrawing stockholder and the corporation cannot
stockholder shall have appraisal right as provided in this agree on the fair value of the shares, it shall be
Code: Provided, however, That where the investment by determined and appraised by three (3) disinterested
the corporation is reasonably necessary to accomplish persons, one of whom shall be named by the
its primary purpose as stated in the articles of stockholder, another by the corporation, and the third
incorporation, the approval of the stockholders or by the two thus chosen. The findings of the majority of
members shall not be necessary. (17 1/2a) the appraisers shall be final, and their award shall be
paid by the corporation within thirty (30) days after such
Sec. 76. Plan or merger of consolidation. - Two or more award is made: Provided, That no payment shall be
corporations may merge into a single corporation which made to any dissenting stockholder unless the
shall be one of the constituent corporations or may corporation has unrestricted retained earnings in its
consolidate into a new single corporation which shall be books to cover such payment: and Provided, further,
the consolidated corporation. That upon payment by the corporation of the agreed or
The board of directors or trustees of each awarded price, the stockholder shall forthwith transfer
corporation, party to the merger or consolidation, shall his shares to the corporation. (n)
approve a plan of merger or consolidation setting forth
the following: Sec. 83. Effect of demand and termination of right. -
From the time of demand for payment of the fair value
1. The names of the corporations proposing to merge of a stockholder's shares until either the abandonment
or consolidate, hereinafter referred to as the of the corporate action involved or the purchase of the
constituent corporations; said shares by the corporation, all rights accruing to such
2. The terms of the merger or consolidation and the shares, including voting and dividend rights, shall be
mode of carrying the same into effect; suspended in accordance with the provisions of this
3. A statement of the changes, if any, in the articles of Code, except the right of such stockholder to receive
incorporation of the surviving corporation in case of payment of the fair value thereof: Provided, That if the
merger; and, with respect to the consolidated dissenting stockholder is not paid the value of his shares
corporation in case of consolidation, all the statements within 30 days after the award, his voting and dividend
required to be set forth in the articles of incorporation rights shall immediately be restored. (n)
for corporations organized under this Code; and
4. Such other provisions with respect to the proposed Turner v. Lorenzo Shipping Corporation
merger or consolidation as are deemed necessary or G.R. No. 157479
desirable. (n)
Facts:
Sec. 82. How right is exercised. - The appraisal right may  Petitioners Philip and Elnora Turner were the
be exercised by any stockholder who shall have voted owners of 1,010,000 shares of stocks of
against the proposed corporate action, by making a Respondent Lorenzo Shipping Corporation.
written demand on the corporation within thirty (30)  Petitioners voted against the restriction of pre-
days after the date on which the vote was taken for emptive right to newly issued stocks, to be
payment of the fair value of his shares: Provided, That effected via the amendment of the articles of
failure to make the demand within such period shall be incorporation of the Respondent Corporation.
deemed a waiver of the appraisal right. If the proposed They alleged that it is prejudicial to their
corporate action is implemented or affected, the interests as shareholders.
corporation shall pay to such stockholder, upon  Thus, through the exercise of their appraisal
surrender of the certificate or certificates of stock right, they demanded the payment of their
representing his shares, the fair value thereof as of the shares at P2.276/share (P2,298,760.00).
day prior to the date on which the vote was taken,

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Corporation Law Case Digests

 Respondent Corporation countered that it was  No. The RTC erred in ordering the Respondent
an acceptable amount alleging that, the FMV of Corporation to pay, and that the same exceeded
Petitioners’ shares before the implementation in the exercise of its jurisdiction in rendering
of the corporate action to deny pre-emptive judgment in favor of Petitioners and in the
right was at P0.41/share (P414,100.00). issuance of writ of execution. A stock holder
 Respondent Corporation further alleged that the who dissents certain corporate actions has the
corporation had no unrestricted retained right to demand FMV of his share (appraisal
earnings at the time the demand was made. right), provided that the corporation has URE as
 Disagreement to stock valuation led to the provided for under Sec. 81 of the Corporation
constitution of an appraisal committee which Code. Such right may be exercised when there is
valued the shares in dispute at P2.54/share a change in the AoI prejudicing the interests of
(2,565,000.00). the stockholder. No payment shall be made
 Petitioners then asked for payment at said value unless there are unrestricted retained earnings
plus 2% interest per month from the date of in its books to cover such payment. Payment by
original demand. the corporation to a dissenting stockholder
 Respondent Corporation, through a letter, told exercising his appraisal right without the
Petitioners that they cannot pay due to the existence of URE is in violation of the trust fund
absence of URE, and that the corporation had a doctrine which proscribes the distribution of
deficit of P72,973,114.00. This led petitioner to assets to a stockholder without first paying
file an action for collection of sum of money and corporate debts because the assets of the
damages with RTC Makati. corporation are held in trust by the same for the
 Respondent Corporation alleged that the cause benefit of its creditors. Payment made under
of action of the Petitioners has not yet accrued such circumstance is prejudicial to the corporate
due to the absence of the former’s URE creditors and is null and void. Creditors are
 RTC Makati, in finding that the suit was an always preferred over stockholders.
intracorporate dispute, ordered the re-raffle of  Petitioners’ cause of action is premature,
the case pursuant to the Interim Rules of because there is no URE at the time of demand.
Intracorporate Dispute. The case was raffled in Right to demand has not yet accrued. No valid
RTC Manila, the court which exercise territorial demand, no actionable wrong. The subsequent
jurisdiction in the place where the principal existence of URE does not cure the lack of cause
office of Respondent Corporation is found of action. Petition for Certiorari Denied. Yeah.
 RTC Manila, in ruling in favor of the Petitioners
and ordering the Respondent to pay, stated that Sec. 58. Proxies. - Stockholders and members may vote
the Corporation Code does not require that URE in person or by proxy in all meetings of stockholders or
must exist at the time of demand. Even if there members. Proxies shall in writing, signed by the
is no URE at such time, if there would be URE stockholder or member and filed before the scheduled
later, the FMV of the stocks shall be paid, meeting with the corporate secretary. Unless otherwise
provided that there must be sufficient funds to provided in the proxy, it shall be valid only for the
cover creditors after such payment. meeting for which it is intended. No proxy shall be valid
 Respondents, aggrieved, elevated the case to and effective for a period longer than five (5) years at
the Court of Appeals which reversed the RTC any one time. (n)
Decision and enjoined the payment to the
petitioners. This prompted the Petitioners to Alejandrino v. De Leon
elevate the same to the Supreme Court, thus,
this recourse. TOPIC: Devices affecting control - Proxy

Issue: Whether or not the Court of Appeals erred in FACTS:


reversing the RTC Decision. 1. Quo warranto to annul the election of all or any one
of the respondents as directors of Pampanga Sugar
Ruling: Development Co. or Pasudeco and to declare

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Corporation Law Case Digests

Alejandrino as director. Petitioners and Respondents Also, the organization of Pambul was
are stockholders of Pasudeco. accomplished by a vote of the majority of Pasudeco
2. A meeting was held to elect a new board of directors Stockholder Shares. Stockholders of Pambul are free to
and 9 Respodents were voted, each with more than vote their shares. Petitioner alleged that terms of loans
19,000 votes, with Jose de Leon getting 19,907 votes were way of bribing Stockholder Shares to vote for
(1st place), while Alejandrino got only 14,000 votes. management. But to vote at Stockholders meeting is not
3. However, 6,000 shares held by Alejandrino given to a political franchise and involves no public interest. It
him by 18 Stockholders were not accepted by the can no more be called bribery than the payment by the
chairman and the secretary for registration and purchaser of the price of goods he bought.
election. If he had been so permitted, he would have
obtained 20,389 shares. The reason given for If proxies were given in consideration of pledge,
rejecting the said votes were that the 18 in good faith without fraudulent intent, it cannot be
Stockholders Shares previously executed pledges in deemed immoral just because it offers a temptation to
favor of Pambul Inc., whereby they granted the abuse power and to oppress minority Stockholder
pledgee the right to vote the shares. Shares. No Stockholder is compelled to borrow money
4. Petitioner alleged that: from and pledge his shares to Pambul. The benefits are
- Pambul was an alter ego of Pasudeco and its mutual. So long as management acts honestly, no one
principal Stockholder of de Leon, that Pambul can question their acts, which are purely intra vires.
was organized pursuant to a resolution of
Pasudeco‘s Stockholder Shares as a financing
corporation, 118 G Campbell vs. Loew’s
- the Stockholder Shares of Pasudeco 134 A. 2d 852
automatically became Stockholders Shares of 1957
Pambul, that Pambul offered Pasudeco
Stockholders loans with lenient terms, and Topic: Proxy
- as a result of the irrevocable proxies in the
pledge agreements, only 2 families with only 30% Facts:
of Pasudeco outstanding capital stock have Vogel was president of Loew’s (defendant). Director
monopolized the directorship. Tomlinson and his supporters were attempting to take
- the irrevocable proxies are contrary to good control of Loew’s from Vogel and his supporters. Vogel
morals and public policy and thus void or sent notice setting a stockholders’ meeting to fill
revocable. director vacancies, increase the number of directors,
and remove Tomlinson and another director. Vogel sent
ISSUE: WON the irrevocable proxies were contrary to out a letter claiming the directors were to be removed
good morals or public policy? for cause because they had been uncooperative,
attempted to take control of Loew’s, and harassed the
HELD: president and corporate officers. Vogel refused to
Petitioner did not adduce evidence to prove provide a stockholders’ list to the two directors.
that irrevocable proxies were contrary to good morals or Campbell (plaintiff) filed suit in the Court of Chancery
public policy. The right of a Stockholder to vote is seeking an injunction to stop the shareholders’ meeting,
inherent in ownership, and if the owner can dispose of bar consideration of part of the agenda, and stop
the property itself, it is apparent that he can dispose the particular proxy votes. As regards proxy votes, it sought
right to manage it. No allegation that the proxies were to be nullified by Tomlinson group because Vogel group
procured thru error, deceit, fraud or intimidation. The was given a stockholders’ list so easily. This would
circumstances of the case are not sufficient in law to enable them to solicit more proxies. Unlike the
vitiate or invalidate the proxies. The desire and design of Tomlinson group who were not given a shareholders’
a majority of stockholders of a private corporation to list. The Tomlinson group alleged that the Vogel group,
control management and operation is legitimate per se. by using it’s corporate powers in giving it’s alliance a
The monopoly of corporations is not actionable per se. stockholders’ list, deprived them of due process.

Issue:

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Corporation Law Case Digests

Whether the solicitation of proxy votes may proceed. new management that is open to
the takeover.
Ruling:  The insurgents prevailed, resulting in the change
NO. Delaware chancery court declined to enjoin the of management.
stockholders' meeting but did preclude the corporation  At the annual meeting, the prevailing group
from counting proxy votes and from using corporate sought the reimbursement of their own
personnel and facilities to solicit proxy votes. In so campaign expenses, which was ratified by a 16
ruling, the court reasoned that (a) the president of the to 1 majority vote of the stockholders.
board of directors was authorized by the bylaws to call a  In the course of the proxy contest, a total
stockholders' meeting for any reason; (b) stockholders amount of $261k was paid out of corporate
were not restricted in when they could vote on funds, of which:
directorships, and thus they could replace a director at o $106,000 spent by the old BOD while
any time; (c) directors could be removed for good cause, still in office, in defense of their position
and allegations made by defendants supported the in said contest
proposed removal of plaintiffs; but (d) plaintiffs had not o $28,000 paid to the old BOD by the new
been afforded sufficient opportunity to respond to the BOD to compensate the former
allegations in the proxy solicitations, and thus the directors for such of the remaining
votes tendered by the proxies could not be counted expenses of their unsuccessful defense
unless and until plaintiffs were given such an o $127,000 representing reimbursement
opportunity. of expenses to members of the
prevailing group
The injunction was denied as to the meeting itself, as  Rosenfeld filed, for himself and other
the president of the board of directors was authorized stockholders, a stockholder's derivative action
by the bylaws to call a stockholders' meeting and the seeking to compel the return of $261k paid out
bylaws permit the stockholders to replace the directors of the corporate treasury.
for good cause; the injunction was granted as to proxy  Appellate Division: Unanimously affirmed a
voting owing to the failure to afford plaintiffs specifics judgment of an Official Referee DISMISSING
about the allegations and an opportunity to be heard. Rosendfeld’s complaint on the merits. Court
Agrees
WILLIAM ROSENFELD v. FAIRCHILD ENGINE &  Rosenfeld: that it was ILLEGAL for the directors,
AIRPLANE CORPORATION (Angsiy) unless by UNANIMOUS consent of stockholders,
309 N.Y. 168 to expend corporate funds in the proxy contest
Court of Appeals of the State of New York. beyond the amounts necessary to give to
July 8, 1955 stockholders bare notice of the meeting and of
the matters to be voted on.
FACTS:
 William Rosenfeld is a lawyer owning 25 out of ISSUE: W/N it is lawful for a corporation, by affirmative
the corporation’s 2.3 million shares. vote of the stockholders, to pay out of its funds the
 The instant case involved a proxy contest, which expenses of a "proxy contest", incurred by competing
stemmed from a difference in policy between candidates for election.
Fairchild Engine and Airplane Corp’s group on
one hand (insurgent faction) –yes, Fairchild is RULING: YES. Rosenfeld lost. Where a majority of the
NOT the corp itself, and the old BOD on the stockholders chose — in this case by a vote of 16 to 1 —
other, at the very bottom of which was the to reimburse the successful contestants for achieving
Ward employment contract. I googled it and the very end sought and voted for by them as owners of
sabi: the corporation, there is no reason to deny the effect of
o Proxy contest is a strategy that may their ratification nor to hold the corporate body
accompany a hostile takeover. It occurs powerless to determine how its own moneys shall be
when the acquiring company attempts spent.
to convince shareholders to use
their proxy votes to install

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Corporation Law Case Digests

 TEST: When the directors act IN GOOD FAITH in public relations counsel and proxy
a contest over POLICY, they have the right to solicitors.
incur reasonable and proper expenses for  However legitimate such measures may be on
solicitation of proxies and in defense of their behalf of stockholders themselves in such a
corporate policies, and are not obliged to sit controversy, most of them do not pertain to a
idly by. The courts are entirely competent to corporate function but are part of the familiar
pass upon their bona fides in any given case, as apparatus of aggressive factions in corporate
well as the nature of their expenditures when contests.
duly challenged.  What expenses of the incumbent group must
 In a contest over POLICY, as compared to a be allowed and what must be disallowed
purely personal power contest, corporate should be remitted to the trial court to
directors have the right to make reasonable ascertain, after taking evidence, in accordance
and proper expenditures, subject to the with the rule that the incumbent directors
scrutiny of the courts when duly challenged, were required to assume the burden of going
from the corporate treasury for the purpose of forward in the first instance with evidence
persuading the stockholders of the correctness explaining and justifying their expenditures.
of their position and soliciting their support for Only such as were reasonably related to
policies which the directors believe, in all good informing the stockholders fully and fairly
faith, are in the best interests of the concerning the corporate affairs should be
corporation. allowed.
 The stockholders, moreover, have the right to
reimburse successful contestants for the Sec. 59. Voting trusts. - One or more stockholders of a
reasonable and bona fide expenses incurred by stock corporation may create a voting trust for the
them in any such policy contest, subject to like purpose of conferring upon a trustee or trustees the
court scrutiny. However, the corporate right to vote and other rights pertaining to the shares
directors CANNOT, under any circumstances, for a period not exceeding five (5) years at any time:
disport themselves in a proxy contest with the Provided, That in the case of a voting trust specifically
corporation's funds to an unlimited extent. required as a condition in a loan agreement, said voting
Where it is established that such funds have trust may be for a period exceeding five (5) years but
been spent for personal power, individual gain shall automatically expire upon full payment of the loan.
or private advantage, and NOT in the belief A voting trust agreement must be in writing and
that such expenditures are in the best interests notarized, and shall specify the terms and conditions
of the stockholders and the corporation, or thereof. A certified copy of such agreement shall be filed
where the fairness and reasonableness of the with the corporation and with the Securities and
amounts allegedly expended are duly and Exchange Commission; otherwise, said agreement is
successfully challenged, the courts will not ineffective and unenforceable. The certificate or
hesitate to disallow them. certificates of stock covered by the voting trust
agreement shall be canceled and new ones shall be
Dissenting opinion: VAN VOORHIS, J. (putting this here issued in the name of the trustee or trustees stating that
in case Atty. Migallos asks) they are issued pursuant to said agreement. In the
 No resolution was passed by the stockholders books of the corporation, it shall be noted that the
approving payment to the management group. transfer in the name of the trustee or trustees is made
Not all of the $133,966 in obligations paid or pursuant to said voting trust agreement.
incurred by the prevailing group was designed The trustee or trustees shall execute and deliver
merely for information of stockholders. It to the transferors voting trust certificates, which shall be
included payment for all of the activities of a transferable in the same manner and with the same
strenuous campaign to persuade and cajole in a effect as certificates of stock.
hard-fought contest for control of this The voting trust agreement filed with the
corporation. corporation shall be subject to examination by any
o It included expenses for entertainment, stockholder of the corporation in the same manner as
chartered airplanes and limousines, any other corporate book or record: Provided, That both

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Corporation Law Case Digests

the transferor and the trustee or trustees may exercise  Financial agreement was made by PNB BOD for
the right of inspection of all corporate books and BATJAK’S acceptance:
records in accordance with the provisions of this Code. - NIDC (PNB’s subsidiary) will invest 6,722,500
Any other stockholder may transfer his shares to of preferred shares of stock at 9%
the same trustee or trustees upon the terms and cumulative, participating and convertible
conditions stated in the voting trust agreement, and within 5 years at par into common stocks to
thereupon shall be bound by all the provisions of said pay off debts to Repubic Bank,
agreement. Manufacturer’s Bank and PCIB. NIDC to
No voting trust agreement shall be entered into match subscription of 10million by
for the purpose of circumventing the law against additional investment of 3,277,500 at it
monopolies and illegal combinations in restraint of trade option within 1-2 years.
or used for purposes of fraud. - NIDC-guarantor of accounts for 5 years with
Unless expressly renewed, all rights granted in a Manila Banking Corp.
voting trust agreement shall automatically expire at the - Mentioned banks shall release the
end of the agreed period, and the voting trust mortgaged properties of BATJAK in favor of
certificates as well as the certificates of stock in the PNB.
name of the trustee or trustees shall thereby be deemed - BATJAK shall mortgage all mills in favor of
canceled and new certificates of stock shall be reissued PNB.
in the name of the transferors. - A voting trust agreement for 5 years of 60%
The voting trustee or trustees may vote by proxy of outstanding paid up and subscribed
unless the agreement provides otherwise. (36a) shares be executed byy stockholders in
favor of NIDC.
National Investment And Development Corporation, - This accomodation shall be secured by the
Eusebio Villatuya, Mario Y. Consing And Roberto S. signatures of BATJAK’s officers and
Benedicto Vs. Hon. Benjamin Aquino, In His Official directors.
Capacity As Presiding Judge Of Branch Viii Of The Court - BOD-increased to seven, 4 from BATJAK and
Of First Instance Of Rizal, Batjak, Inc., Graciano A. 3 from PNB-NIDC.
Garcia And Marcelino Calinawan, Jr. - A comptroller (person in charge of the
PHILIPPINE NATIONAL BANK Vs. HON. BENJAMIN H. financial accounts of a company) at
AQUINO, In His Capacity As Presiding Judge Of The BATJAK’s expense be assigned by NIDC to
Court Of First Instance Of Rizal, Branch VIII And supervise financial management of the
BATJAK, INCORPORATED BATJAK.
G.R. No. L-34192 & L-34213 , [June 30, 1988] - Past due account of 5M with PNB shall be
treated as a demand loan
- Any excess of NIDC investment after
Topic: Voting Trusts payment to the banks shall be applied to
Facts: reduce demand loan.
 Basic Agricultural Traders Jointly Administered - Export advance of 3M approved and line
Kasamahan (BATJAK-) is a FIL-AM domestic shall expire on Sept. 30, 1966.
corporation engaged in the manufacture of  BATJAK accepted the agreement and PNB
coconut oil and cobra cake for export. In 1965- complied with it and total amount extended by
financial status: almost bankupt. Indebtedness PNB went up to 14,207,859.81.
amounted to 11,915,000:  First mortgage was executed in favor of PNB of
 BATJAK mortgaged its three coco-processing oil all mills and foreclosure proeeding instituted by
mills in Sasa Davao, Jimenez Misamis Oriental Manila Bank did not push through upon
and Tanauan Leyte to Manila Banking Corp., payment of NIDC.
Republic Bank and PH Commercial and  A Voting Trust Agreement was made on Oct.
Industrial Bank (PCIB). 26, 1965 in favor of NIDC by the stockholders
 In order to fully operate the coco mills to settle representing 60% of the outstanding paid up
its obligation, it sought the financial assistance and subscribed shares of BATJAK-period of 5
of PNB.

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years subject to negotiation of parties after  BATJAK filed a petition for receivership while
expiration-mutual agreement of the parties. motion was pending-opposed by PNB and NIDC-
 Some of the important parts in the agreement filed a motion to dismiss. –denied
states:  3 receivers were appointed. MFR of NIDC-
-60,000 shares shall be transferred to the capital denied.
stock of BATJAK to NIDC (Trustee)  Hence, these two petitions for certiorari and
- Voting power is given to the trustee to vote prohibition seeking to annul the orders of
the shares in all meetings of BATJAK respondent judge of CFI Rizal which granted
- Trustee shall not receive any compensation for appointment of receivers and to prohibit
its service except those that may be granted by respondent judge from conducting any
BATJAK. proceeding on the action.
- Trustee as a juridical person shall enjoy the Issue:
exercise of powers or rights established by 1. W/N trial court has jurisdiction over the subject
authorized representatives. of the action? No
- Agreement shall be binding during the 5 year 2. W/N venue is improperly laid? Yes
period or any extension and inure to the benefit 3. W/N plaintiff has no legal capacity to sue?
of stockholders. Irrevocable during said terms or (corpo related) Yes
extension. 4. W/N the CFI erred in issuing the writ? (corpo
- Upon termination, certificates shall be related) Yes
delivered by the Trustee to the undersigned 5. W/N the CFI erred in appointing receivers?
stockholders and duties of TRUSTEE shall cease (corpo related- relevant to the topic)Yes
and terminate.
 July 1967- PNB instituted extrajudicial
foreclosure proceedings against the oil mills of Held: Petitions are granted. Orders of respondent judge
BATJAK and properties were sold to PNB as the are annulled and set aside.
highest bidder. A year after, a cert. Of sale was
issued in the name of NIDC as BATJAK failed to 1.
exercise its right to redeem the properties.  Rule is that the jurisdiction of CFI to issue writ is
 1970- BATJAK represented by majority where the land in controversy is situated. Her,
stockholders through Atty. Duran via a letter properties are in Davao, Misamis and Leyte
inquired to NIDC if it is still interested in the which was outside the jurisdiction of CFI Rizal.
renewal of the Voting Trust Agreement. 2nd
letter was made stating that BATJAk would 2.
assume that NIDC will no longer renew the  BATJAK’s complaint should have been filed
voting trust agreement and requested for the where the properties are located-Davao,
turn-over of all BATJAk assets, prop., Misamis or Leyte and not in CFI Rizal. Acc. to
management and operations. ROC, actions shall be commenced in the
 3rd letter was sent asking for complete province where the property or any part of it
accounting of the assets for the turn-over. lies.
 NIDC replied that it had no intention to comply 3.
with BATJAK’s demands.  BATJAK’S complaint for mandamus is its claim of
 BATJAK filed with CFI a special civil action for right to recovery of possession. HOWEVER, the
mandamus and an urgent ex parte motion after parties in the Voting Trust Agreement were
for issuance of writ of preliminary prohibitory NIDC and certain stockholders of BATJAK. The
injunction- judge issued restraining order stockholders who transferred their share to
prohibiting NIDC to remove any records and NIDC:
products in the mills. It was amended which JAMES A. KEISTER — 21,500
inclued office of PNB Manila and NIDC office in shares
Makati. Opposition was filed by PNB and NIDC. JOHNNY LIEUSON — 20,300
shares

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CBM FINANCE & INVESTMENT  Nowhere in the provision doest it state of any
CORP. (C.B. Mendoza, Pres.) — transfer or assignment to NIDC of BATJAK’s
5,000 shares assets. NIDC was a TRUSTEE only of the voting
ALEJANDRO G. BELTRAN — 4,000 rights of 60% of the paid up and outstanding
shares shares of stock in BATJAK. Under no. 9 of the
ESPERANZA A. ZAMORA — 3,000 Voting Trust Agreement, what shall only be
shares returned and delivered to BATJAK are the voting
CIRIACO B. MENDOZA — 2,000 trust certificates.
shares  Under Sec. 59 of the Corp. Code:
FIDELA DE GUZMAN — 2,000 "Sec. 59. Voting Trusts — One or more
shares stockholders of a stock corporation may create a
LLOYD D. COMBS — 2,000 shares voting trust for the purpose of conferring upon
RENATO B. BEJAR — 200 shares a trustee or trustees the right to vote and other
TOTAL 60,000 shares rights pertaining to the shares for a period not
 It is clear that BATJAK as a corporation is not a exceeding five (5) years at any one time: . . ."
signatory and not a real party in interest in this  In this case, NIDC acquired the properties as a
case. The stockholders who have executed the foreclosing creditor and not under the capacity
Voting Trust agreement should have filed the of a trustee.
action.
4. Sec. 100. Agreements by stockholders. -
 Mandamus is issued when there is a right clearly 1. Agreements by and among stockholders
granted by law. Here, there is no clear right that executed before the formation and organization of a
BATJAK should be entitled to. close corporation, signed by all stockholders, shall
 The prayer of BATJAK was for NIDC to survive the incorporation of such corporation and shall
surrender 3 mills and submit a complete continue to be valid and binding between and among
accounting but evidence shows that the such stockholders, if such be their intent, to the extent
property already belongs to NIDC acquired by that such agreements are not inconsistent with the
PNB as the highest bidder and after failure of articles of incorporation, irrespective of where the
BATJAK to redeem the properties. It is clear provisions of such agreements are contained, except
that BATJAK has no right to these properties. those required by this Title to be embodied in said
5. articles of incorporation.
 A receiver of real or personal property may be 2. An agreement between two or more
appointed by the court when it appears that the stockholders, if in writing and signed by the parties
applicant has an interest in said property. The thereto, may provide that in exercising any voting rights,
interest or claim must be exisitng. the shares held by them shall be voted as therein
 NIDC’s title to the properties were acquired provided, or as they may agree, or as determined in
when the mills were foreclosed and PNB and accordance with a procedure agreed upon by them.
NIDC became the highest bidder in which a cert 3. No provision in any written agreement signed by
of sale was issued and were named under NIDC the stockholders, relating to any phase of the corporate
after failure of BATJAK to redeem such. affairs, shall be invalidated as between the parties on
 BATJAK said that under the Voting Trust the ground that its effect is to make them partners
Agreement, NIDC was only a trustee and due to among themselves.
its expiration on Oct. 1970, NIDC should turn 4. A written agreement among some or all of the
over the assets to BATJAK. Under the provisions stockholders in a close corporation shall not be
of 1 and 3 of the Voting Trust Agreement, it invalidated on the ground that it so relates to the
states that the agreement shall be for five years conduct of the business and affairs of the corporation as
and the assigned rights to NIDC: to restrict or interfere with the discretion or powers of
-power to vote the shares of stock of the board of directors: Provided, That such agreement
stockholders of BATJAK shall impose on the stockholders who are parties
-authority to execute any agreement or docs to thereto the liabilities for managerial acts imposed by
express or assent to any matter this Code on directors.

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5. To the extent that the stockholders are actively not proper. Lee/Lacdao not proper parties in the third
engaged in the management or operation of the party complaint.
business and affairs of a close corporation, the
stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders 1. Voting Trust
shall be personally liable for corporate torts unless the • Ballentine's Law Dictionary: "trust created by an
corporation has obtained reasonably adequate liability agreement between a group of stockholders and the
insurance. trustee... whereby it is provided that for a term of
years, or for a period contingent upon a certain
Ramon Lee, Antonio Lacdao v. CA, Sacoba event, or until the agreement is terminated, control
Manufacturing Corp, et al over the stock owned by such stockholders... is to be
GR 93695 lodged in the trustee"
02/04/1992 • Sec 59, Corp Code: "One or more stockholders of a
(Pineda; Concepcion) stock corporation may create a voting trust for the
purpose of conferring upon a trustee the right to
Topic: Voting Trust vote and other rights pertaining to the share for a
period not exceeding 5 years at any one time..."
• By its very nature, a VTA results in the separation of
FACTS voting rights of a stockholder from his other rights
• Lee: ALFA President; Lacdao: ALFA EVP (i.e. right to receive dividends, right to inspect books)
• Voting Trust Agreement ("VTA") between Lee/Lacdao • Party rights
(trustors) and DBP (trustee) • Beneficial owner: Lee/Lacdao
• "The TRUSTORS hereby assign and deliver to the • Legal title / equitable owner: DBP
TRUSTEE the certificate of the shares of stocks
owned by them respectively... TRUSTEE shall
possess the same powers as owners of the 2. Criteria to distinguish VTA from proxy agreements
equitable as well as the legal title to the stock."
• Voting rights are separated from other attributes of
• Duration of VTA contingent upon fulfillment of ownership
certain of obligations of ALFA with DBP (DBP is a
creditor of ALFA; hence while debt exists, VTA
• Voting rights granted are intended to be irrevocable
for a definite period of time
exists)
• Principal purpose of the grant of voting rights is to
• International Corporate Bank filed a complaint for
acquire voting control of the corporation
sum of money against Sacoba Manufacturing Corp
("SMB"), which in turn filed a third-party complaint
against ALFA and Lee/Lacdao
3. Status of Lee/Lacdao in ALFA
• Lee/Lacdao: motion to dismiss, as they are no
• By virtue of the VTA, Lee/Lacdao became beneficial
longer officers... Summons were erroneously
owners, as the stocks were placed under the name of
served to them, since they are no longer directors
DBP (equitable owner). Consequently, they ceased to
of ALFA, since they do not own shares of stock
be directors, as they no longer owned shares of stock.
(requirement to be director) by virtue of the VTA
In fact, they were no longer included in the list of
• SMB: The voting trust agreement did not deny officers of ALFA.
Lee/Lacdao of their positions in ALFA, hence • The Corp Code no longer requires that a director
service of summons upon them was valid hold title "in his own right", so long as it is in his
own name. In order to be a director, what is
material is legal title to, not beneficial ownership
ISSUE: W/N Lee/Lacdao are directors of ALFA which
warrant the service of summons upon them.
4. VTA Validity
RULING: No, they are no longer directors by virtue of
the VTA. Service of summons made to Lee/Lacdao was

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• Despite lapse of 5 years, VTA continues to be in managers to be elected or to cumulate said shares and
existence, given it was intended to exist so long as give one candidate as many votes as the number of
ALFA's obligations remains directors multiplied by the number of his shares shall
equal, or to distribute them upon the same principle
among as many candidates as he shall think fit, and such
5. Summons on Corporation directors or managers shall not be elected in any other
• Rules of Court recognize that service of summons to manner;”
corporation can be made through: president, Two decrees (judgments) were rendered after trial on
manager, secretary, cashier, agent, or any of its the issues presented
directors o 1ST DECREE: The Stockholders Control Agreement was
• Service of summons upon Lee/Lacdao, they not being valid, and Harkert is restrained from violating the
officers/directors of ALFA, was erroneous agreement
o 2ND DECREE: Same as 1st decree, the agreement was
E.K. Buck Retail Stores v Harkert valid and Harkert is ordered to pay $33,612
157 Neb. 867 (Neb. 1954) Harkert is now appealing before the Court
TOPIC: Pooling and voting agreements
PONENTE: Carter, J. ISSUE(S):
Is the Stockholders Control Agreement valid?
FACTS:
Walter Harkert was the sole owner of chain of HELD:
restaurants of hamburger stands, his finances were low YES. The Court held that the Stockholders Agreement
and so he engaged in the selling of fixtures and entering is valid.
into agreements to buy the fixtures and equipment back
at the end of 5 years for a higher price, payment to be RATIO:
made in monthly installments for a period of 5 years Although the constitutional provision provides that
Harkert then became acquainted with Earl Buck who directors may not be elected in any other manner, the
he entered into 4 purchase and resale agreements with Court held that the Stockholders Control Agreement did
Harkert Houses was incorporated with the expectation not ipso fact change the manner of election prescribed
that Buck would be interested in advancing more money by the Constitution
for his interests and the new corporation’s It was held that the purpose of Article XII, section 5, of
Sometime in 1937, Harkert and Buck entered into a the Constitution is to secure to minority stockholders a
Stockholders Control Agreement, this contract provided voice in the management of the affairs of the
that Buck would cancel Harkert’s debt ($55, 650) in corporation in proportion to the number of their share
exchange for 40% of stocks in Harkert Houses, and It was also held that the Constitutional provision’s
although Buck only holds 40% of the stocks – he may purpose was to provide for cumulative voting in the
nominate 2 out of the 4 Board of Directors of the accomplishment of which it was necessary to fix the
Corporation voting power of the shares of stocks
Because of Buck’s financial support, Harkert Houses The Court finds nothing in the section which changes
survived the then existing rights of a stockholder to contract with
Harkert now does not want to honor the contract another stockholder with reference to how he should
because he contends that voting for the Board of vote his stock
Directors should be based on the shares owned in the Quoted from the decision:
corporation and not based on the Stockholders Control o “We conclude that stockholders control agreements
Agreement are not invalid per se. If they are based on a sufficient
Harkert contends that the agreement is in violation of consideration between the contracting stockholders they
Art. XII, Sec. 5 of the Constitution which provides: are valid and binding if they do not contravene any
o “The Legislature shall provide by law that in all express constitutional or statutory provision or
elections for directors or managers of incorporated contemplate any fraud, oppression, or wrong against
companies every stockholder shall have the right to vote creditors or other stockholders, or other illegal object.
in person or proxy for the number of shares owned by Where such a situation appears it is not illegal or against
him, for as many persons as there are directors or public policy for two or more stockholders owning the

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majority of the shares of stock to unite upon a course of not to be broken so long as such officer is loyal
corporate policy, or upon the officers, including to the interests of the corporation and that he
directors, whom they will elect.” has been found loyal to the corporation, the
agreement of Stoneham and other
McQuade vs Stoneham stockholders is enforceable.
263 NY 323 ISSUE: W/N the shareholder agreement between
January 18, 1934 McQuade and Stoneham to use their best efforts to
Dadivas keep each of the parties in their respective positions is
valid.
FACTS: RULING: NO
o Stoneham a majority stockholder of National o An agreement among stockholders whereby it
Exhibition Company and McQuade (stockholder is attempted to deprive the directors of their
and a city magistrate), together with McGraw power to discharge an unfaithful employee of
(another stockholder) entered into an the corporation is illegal as against public
agreement that made Stoneham as president, policy. Majority stockholders, united in voting
McGraw as Vice-President and and McQuade as trusts, effectively manage the business of a
treasurer stating that “they will use their best corporation by choosing trustworthy directors
endeavors for the purpose of continuing as to reflect their policies in the corporate
directors of said Company and as officers management.
thereof”. o A contract is illegal and void so far as it
o A four out of seven board of directors were precludes the board of directors, at the risk of
selected by Stoneham and he had complete incurring legal liability, from changing officers,
control over them. salaries or policies or retaining individuals in
o Stoneham did not to keep their agreement office, except by consent of the contracting
with McQuade to use their best efforts to parties.
continue him as treasurer. On the contrary, o Although the evidence indicated that Stoneham
McQuade was dropped with their entire may have exercised bad faith in that McQuade
acquiescence and at the next stockholders' was competent in his position and was ousted
meeting, he (McQuade) was dropped as a over personal disagreements, the director’s
director although they might have elected him. intentions are irrelevant because the court does
o TRIAL COURT: found that McQuade was not want to put directors in a position wherein
removed because he had antagonized the they would have to defend future decisions
dominant Stoneham by persisting in and McQuade was also ineligible for
challenging his power over the corporate employment with NEC because he was a City
treasury and for no misconduct on his part. Magistrate. Thus, he cannot be reinstated.
Stoneham said that it is for the protection of “No city magistrate shall engage in any
the corporation and the minority stockholders. other business or profession or act as referee, or
(Refused to order the reinstatement of receiver, but each of said justices and
McQuade, but have given him damages for magistrates shall devote his whole time and
wrongful discharge, with a right to sue for future capacity, so far as the public interest demands,
damages) to the duties of his office”.
o STONEHAM: The contract in suit was void “The treasurer shall perform such other
because the directors held their office charged duties, as shall be, from time to time assigned to
with the duty to act for the corporation him by the board of directors or the president, or
according to their best judgment and that any as may be required by these by-laws."
contract which compels a director to vote to o The statute provides in clear that a magistrate
keep any particular person in office and at a must in the performance of his public duties be
stated salary is illegal. free from the rival claims of a business or
o MCQUADE: Filed a suit for reinstatement as profession upon his time and capacity. He
treasurer. An agreement among directors to cannot serve both masters for hire.
continue a man as an officer of a corporation is HELD: Reversed and revised

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Concurring: Justice Lehman (b) should continue as its general manager so long
Reinstatement should be denied, but only as he should be "faithful, efficient and
because McQuade was a City Magistrate. The contract, competent;"
however, was valid because Stoneham as a majority (c) should during his life receive 1/4 of the net
owner could elect the directors who elect the treasurer income of the corporations either by way of
and was not therefore taking away any powers from the salary or dividends; and
directors that he already really had. (d) that no unreasonable or incommensurate
salaries should be paid to other officers or
CLARK v DODGE agents which would so reduce the net income
as materially to affect Clark's profits.
Facts:
The action is for the specific performance of a contract Clark on his part agreed to disclose the specified formula
between the plaintiff Clark and the defendant Dodge, to the son and to instruct him in the details and
relating to the affairs of the two corporations. methods of manufacture; and further, at the end of his
The two corporate are New Jersey corporations life to bequeath his stock — if no issue survived him —
manufacturing medicinal preparations by secret to the wife and children of Dodge.
formulae. The main office, factory and assets of both The complaint alleges due performance of the contract
corporations are located in the State of New York. In by Clark and breach thereof by Dodge in that he has
1921, and at all times since, Clark owned 25% and failed to use his stock control to continue Clark as a
Dodge seventy-five 25% of the stock of each director and as a general manager, and has prevented
corporation. Clark from receiving his proportion of the income, while
 Dodge (defendant) took no active part in the taking his own, by causing the employment of
business, although he was a director and, incompetent persons at excessive salaries, and
through ownership of their qualifying shares, otherwise.
controlled the other directors of both
corporations. He was the president of Bell & Issue: W/N the contract is illegal as against the public
Company, Inc., and nominally general manager within the decision in McQuade v. Stoneham, upon the
of Hollings-Smith Company, Inc. authority of which the Appellate Division dismissed the
 Clark (plaintiff) was a director and held the complaint
offices of treasurer and general manager of Bell
& Company, Inc., and also had charge of the Ruling: the Clark (plaintiff) WON. The agreement is
major portion of the business of Hollings-Smith valid. The case of McQuade v. Stoneham should not be
Company, Inc. The formulæ and methods of applied in this case.
manufacture of the medicinal preparations were
known to him alone. "The business of a corporation shall be managed by
its board of directors." (General Corporation Law,
In 1921, Dodge and Clark entered into a written Section 27) That is the statutory norm.
agreement under seal, where the desire of Dodge that
Clark should continue in the efficient management and Public policy, the intention of the Legislature, detriment
control of the business of Bell & Company, Inc., so long to the corporation, is phrases, which in this connection
as he should "remain faithful, efficient and competent mean little. Possible harm to bona fide purchasers of
to so manage and control the said business;" and his stock or to creditors or to stockholding minorities has
further desire that Clark should not be the sole more substance; but such harms are absent in many
custodian of a specified formula but should share his instances. If the enforcement of a particular contract
knowledge thereof and of the method of manufacture damages nobody — not even, in any perceptible degree,
with a son of Dodge, provided, in substance, as follows: the public — one sees no reason for holding it illegal,
That Dodge during his lifetime and, after his death, a even though it impinges slightly upon the broad
trustee to be appointed by his will, would so vote his provision of Section 27. Damage suffered or threatened
stock and so vote as a director that the plaintiff: is a logical and practical test, and has come to be the
(a) should continue to be a director of Bell & one generally adopted by the courts. Where the
Company, Inc. and directors are the sole stockholders, there seems to be

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no objection to enforcing an agreement among them to


vote for certain people as officers. There is no direct Sec. 24. Election of directors or trustees. - At all
decision to that effect in this court, yet there are strong elections of directors or trustees, there must be present,
indications that such a rule has long been recognized: either in person or by representative authorized to act
The opinion in Manson v. Curtis closed its discussion by by written proxy, the owners of a majority of the
saying: "The rule that all the stockholders by their outstanding capital stock, or if there be no capital stock,
universal consent may do as they choose with the a majority of the members entitled to vote. The election
corporate concerns and assets, provided the interests of must be by ballot if requested by any voting stockholder
creditors are not affected, because they are the or member. In stock corporations, every stockholder
complete owners of the corporation, cannot be invoked entitled to vote shall have the right to vote in person or
here." That was because all the stockholders were not by proxy the number of shares of stock standing, at the
parties to the agreement there in question. So, where time fixed in the by-laws, in his own name on the stock
the public was not affected, "the parties in interest, books of the corporation, or where the by-laws are
might, by their original agreement of incorporation, limit silent, at the time of the election; and said stockholder
their respective rights and powers," even where there may vote such number of shares for as many persons as
was a conflicting statutory standard. there are directors to be elected or he may cumulate
In Kassel v. Empire Tinware Co.: "As the parties to the said shares and give one candidate as many votes as the
action are the complete owners of the corporation, there number of directors to be elected multiplied by the
is no reason why the exercise of the power and number of his shares shall equal, or he may distribute
discretion of the directors cannot be controlled by valid them on the same principle among as many candidates
agreement between themselves, provided that the as he shall see fit: Provided, That the total number of
interests of creditors are not affected." votes cast by him shall not exceed the number of shares
Thus, the Court think that there can be no doubt that owned by him as shown in the books of the corporation
the agreement here in question was legal and that the multiplied by the whole number of directors to be
complaint states a cause of action. There was no elected: Provided, however, That no delinquent stock
attempt to sterilize the board of directors, as in shall be voted. Unless otherwise provided in the articles
the Manson and McQuade cases. The only restrictions of incorporation or in the by-laws, members of
on Dodge were: corporations which have no capital stock may cast as
 that as a stockholder he should vote for Clark as many votes as there are trustees to be elected but may
a director — a perfectly legal contract; not cast more than one vote for one candidate.
 that as director he should continue Clark as Candidates receiving the highest number of votes shall
general manager, so long as he proved faithful, be declared elected. Any meeting of the stockholders or
efficient and competent — an agreement which members called for an election may adjourn from day to
could harm nobody; day or from time to time but not sine die or indefinitely
 that Clark should always receive as salary or if, for any reason, no election is held, or if there not
dividends one-fourth of the "net income." For present or represented by proxy, at the meeting, the
the purposes of this motion, it is only just to owners of a majority of the outstanding capital stock, or
construe that phrase as meaning whatever was if there be no capital stock, a majority of the member
left for distribution after the directors had in entitled to vote.
good faith set aside whatever they deemed wise;
 that no salaries to other officers should be paid, Sec. 6. Classification of shares. - The shares of stock of
unreasonable in amount or incommensurate stock corporations may be divided into classes or series
with services rendered — a beneficial and not a of shares, or both, any of which classes or series of
harmful agreement. shares may have such rights, privileges or restrictions as
may be stated in the articles of incorporation: Provided,
If there was any invasion of the powers of the That no share may be deprived of voting rights except
directorate under that agreement, it is so slight as to be those classified and issued as "preferred" or
negligible; and certainly there is no damage suffered by "redeemable" shares, unless otherwise provided in this
or threatened to anybody. Code: Provided, further, That there shall always be a
The judgment of the Appellate Division should be class or series of shares which have complete voting
reversed. rights. Any or all of the shares or series of shares may

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have a par value or have no par value as may be 7. Investment of corporate funds in another
provided for in the articles of incorporation: Provided, corporation or business in accordance with this Code;
however, That banks, trust companies, insurance and
companies, public utilities, and building and loan 8. Dissolution of the corporation.
associations shall not be permitted to issue no-par value
shares of stock. Except as provided in the immediately preceding
Preferred shares of stock issued by any paragraph, the vote necessary to approve a particular
corporation may be given preference in the distribution corporate act as provided in this Code shall be deemed
of the assets of the corporation in case of liquidation to refer only to stocks with voting rights.
and in the distribution of dividends, or such other
preferences as may be stated in the articles of Sec. 7. Founders' shares. - Founders' shares classified as
incorporation which are not violative of the provisions such in the articles of incorporation may be given
of this Code: Provided, That preferred shares of stock certain rights and privileges not enjoyed by the owners
may be issued only with a stated par value. The board of of other stocks, provided that where the exclusive right
directors, where authorized in the articles of to vote and be voted for in the election of directors is
incorporation, may fix the terms and conditions of granted, it must be for a limited period not to exceed
preferred shares of stock or any series thereof: five (5) years subject to the approval of the Securities
Provided, That such terms and conditions shall be and Exchange Commission. The five-year period shall
effective upon the filing of a certificate thereof with the commence from the date of the aforesaid approval by
Securities and Exchange Commission. the Securities and Exchange Commission.
Shares of capital stock issued without par value
shall be deemed fully paid and non-assessable and the Sec. 44. Power to enter into management contract. -
holder of such shares shall not be liable to the No corporation shall conclude a management contract
corporation or to its creditors in respect thereto: with another corporation unless such contract shall have
Provided; That shares without par value may not be been approved by the board of directors and by
issued for a consideration less than the value of five stockholders owning at least the majority of the
(P5.00) pesos per share: Provided, further, That the outstanding capital stock, or by at least a majority of the
entire consideration received by the corporation for its members in the case of a non-stock corporation, of both
no-par value shares shall be treated as capital and shall the managing and the managed corporation, at a
not be available for distribution as dividends. meeting duly called for the purpose: Provided, That (1)
A corporation may, furthermore, classify its where a stockholder or stockholders representing the
shares for the purpose of insuring compliance with same interest of both the managing and the managed
constitutional or legal requirements. corporations own or control more than one-third (1/3)
Except as otherwise provided in the articles of of the total outstanding capital stock entitled to vote of
incorporation and stated in the certificate of stock, each the managing corporation; or (2) where a majority of
share shall be equal in all respects to every other share. the members of the board of directors of the managing
Where the articles of incorporation provide for corporation also constitute a majority of the members
non-voting shares in the cases allowed by this Code, the of the board of directors of the managed corporation,
holders of such shares shall nevertheless be entitled to then the management contract must be approved by
vote on the following matters: the stockholders of the managed corporation owning at
1. Amendment of the articles of incorporation; least two-thirds (2/3) of the total outstanding capital
2. Adoption and amendment of by-laws; stock entitled to vote, or by at least two-thirds (2/3) of
3. Sale, lease, exchange, mortgage, pledge or other the members in the case of a non-stock corporation. No
disposition of all or substantially all of the corporate management contract shall be entered into for a period
property; longer than five years for any one term.
4. Incurring, creating or increasing bonded The provisions of the next preceding paragraph
indebtedness; shall apply to any contract whereby a corporation
5. Increase or decrease of capital stock; undertakes to manage or operate all or substantially all
6. Merger or consolidation of the corporation with of the business of another corporation, whether such
another corporation or other corporations; contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such

16 | P a g e
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service contracts or operating agreements which relate - The bond market became so favorable to
to the exploration, development, exploitation or refinancing so Mr Clement directed Mr. Pabst to consult
utilization of natural resources may be entered into for with Kuhn, Loeb and Co. whether it would be possible to
such periods as may be provided by the pertinent laws sell at price not less than par, a NEW issue of P.O.&D
or regulations. bonds guaranteed by PRR in the same amount as the
first issuance but bearing a lower interest
- The negotiations with Kuhn, Loeb and Co until
Sec. 31. Liability of directors, trustees or officers. - they reached an understanding and thereafter the board
Directors or trustees who willfully and knowingly vote of directors of P.O. & D approved a resolution issuing
for or assent to patently unlawful acts of the new Series D bonds which PRR approved and
corporation or who are guilty of gross negligence or bad guaranteed.
faith in directing the affairs of the corporation or acquire - On the same day, the said bonds were sold to
any personal or pecuniary interest in conflict with their Kuhn and Loeb Co. subject to the approval by the
duty as such directors or trustees shall be liable jointly Interstate Commerce Commission
and severally for all damages resulting therefrom - The transaction was approved and bonds were
suffered by the corporation, its stockholders or sold to the public by Kuhn
members and other persons. - Directors of Hasley, Stuart and Co and Otis & Co
When a director, trustee or officer attempts to now contends that there has been an underground
acquire or acquires, in violation of his duty, any interest transaction as they were not allowed to bid for the
adverse to the corporation in respect of any matter purchase of the bond (stockholder sila ng PRR) and that
which has been reposed in him in confidence, as to PRR and P.O. & D would have greatly benefited from the
which equity imposes a disability upon him to deal in his bidding had the directors allowed it.
own behalf, he shall be liable as a trustee for the - They now fault the management for dealing
corporation and must account for the profits which with only one investment house and neglecting to “shop
otherwise would have accrued to the corporation. around” for the best possible price which resulted to a
loss. (loss kasi malaki ung spread ng bond tapos lower
Otis v Pennsylvania Railroad interest, so high risk, low return, hindi mabenta)

DOCTRINE: ISSUE: WON individual defendants failed and refused to


Although the directors chose the wrong course of exercise ordinary care and judgment in the sale of the
action, they acted in good faith and therefore were not Series D bonds?
liable to the shareholders. The court reasoned that
"mistakes or errors in the exercise of honest business HELD: No.
judgment do not subject the officers and directors to What constitutes negligence depends upon the
liability for Negligence in the discharge of their circumstances of the case and the court will NOT
appointed duties.” interfere with the internal management of the
corporation and therefore will not substitute its
FACTS: judgment for that of the officers or directors. Mistakes
- This is a secondary/derivative action brought by or errors in exercise of honest business judgment do not
Otis and Co (Otis) as a stockholder of Pennsylvania subject the officers and directors to liability for
Railroad Co (PRR) negligence in the discharge of their appointed duties.
- PRR owns all of the capital stock of the
Pennsylvania, Ohio and Detroit Railroad Co (P.O. & D). Note: No bad faith because for the longest time, railroad
The latter company has maturing bonds in which the companies regard Kuhn and Loeb Co. as “the bank” to
principal and interest were guaranteed by PRR. (When PRR and so it was established that nothing unusual
the bonds mature, P.O. & D should pay bond holders when PRR solely consulted Kuhn and Loeb.
and failure to do so, PRR will have to pay as surety)
- The possibility of refinancing the bond series Insight: Una, since favorable yung bond market, nainis
had been under consideration by Mr. Clement sina Otis na hindi sila pinayagan to bid. Eh tapos matters
(president of PRR) and Mr. Pabst (finance of PRR and went wrong so para pamukha pa sa directors na mali
president of P.O. & D) sila, ayan they had this suit instituted.

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from the books of the corporation that it had accounts


Steinberg v. Velasco receivable of the face value of P19,126.02, therefore it
G.R. No. L-30460, March 12, 1929 had a surplus over and above its debts and liabilities.
However, there is no stipulation as to the actual cash
Nature: Petition for review of lower court decision to value of those accounts, and it does appear from the
dismiss P’s complaint since it held that the Board of stipulation that, P12,512.47 of those accounts had but
Directors could legally declare dividend of P3000 little value. The corporation did not then have an actual
bona fide surplus from which the dividends could be
Facts: paid, and that the payment of them in full at the time
Steinberg (P) is the receiver of Sibuguey Trading Corp. P would affect the financial condition of the corporation.
alleges that [Velasco, as president, Del Castillo, as vice- Because of this, the directors did not act in good faith or
president, Navallo, as secretary-treasurer, and Manuel, that they were grossly ignorant of their duties. Creditors
as director of the trading Company][R], at a meeting of of a corporation have the right to assume that so long as
the board of directors held on July 24, 1922, approved there are outstanding debts and liabilities, the board of
and authorized various lawful purchases already made directors will not use the assets of the corporation to
of a large portion of the capital stock of the company purchase its own stock, and that it will not declare
from its various stockholders, thereby diverting its funds dividends to stockholders when the corporation is
to the injury of the creditors of the corp. At the time of insolvent.
such purchase, the corporation had debts amounting to
P13,807.50, most of which were unpaid at the time Montelibano vs Bacolod-Murcia Milling (1962)
petition for the dissolution of the corporation was
financial condition, in contemplation of an insolvency Facts: Plaintiffs-appellants, Alfredo Montelibano,
and dissolution. P also alleges that R approved a Alejandro Montelibano, and the Limited co-partnership
resolution for the payment of P3,000 as dividends to its Gonzaga and Company, had been and are sugar planters
stockholders, which was done in bad faith, and to the adhered to the defendant-appellee’s sugar central mill
injury and fraud of its creditors since it had accounts less under identical milling contracts. Originally executed in
in amount than the accounts receivable. R argues that 1919, said contracts were stipulated to be in force for 30
the distribution of dividends was authorized by the years starting with the 1920-21 crop, and provided that
board of directors and they constitute surplus profit of the resulting product should be divided in the ratio of
the corp. The lower court found out that R authorized 45% for the mill and 55% for the planters. Sometime in
the purchase of, purchased and paid for, 330 shares of 1936, it was proposed to execute amended milling
the capital stock of the corporation at the agreed price contracts, increasing the planters’ share to 60% of the
of P3,300, and that at the time the purchase was made, manufactured sugar and resulting molasses, besides
the corporation was indebted in the sum of P13,807.50, other concessions, but extending the operation of the
and that according to its books, it had accounts milling contract from the original 30 years to 45 years.
receivable in the sum of P19,126.02. The Board of Directors of the appellee Bacolod-Murcia
Milling Co., Inc., adopted a resolution granting further
Issue: Whether R can declare dividends. concessions to the planters over and above those
contained in the printed Amended Milling Contract. The
Ruling: No. The action of the board in purchasing the appellants initiated the present action, contending that
stock from the corporation and in declaring the three Negros sugar centrals with a total annual
dividends on the stock was all done at the same meeting production exceeding one-third of the production of all
of the board of directors. The directors were permitted the sugar central mills in the province, had already
to resign so that they could sell their stock to the granted increased participation (of 62.5%) to their
corporation. The authorized capital stock was P20,000 planters, and that under the resolution the appellee had
divided into 2,000 shares of the par value of P10 each, become obligated to grant similar concessions to the
which only P10,030 was subscribed and paid. Deducting plaintiffs. The appellee Bacolod-Murcia Milling Co., inc.,
the P3,300 paid for the purchase of the stock, there resisted the claim, and defended by urging that the
would be left P7,000 of paid up stock, from which stipulations contained in the resolution were made
deduct P3,000 paid in dividends, there would be left without consideration; that the resolution in question
P4,000 only. R acted on assumption that it appeared was, therefore, null and void ab initio, being in effect a

18 | P a g e
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donation that was ultra vires and beyond the powers of subsidiary, Guaranty Company (Defendant), and J.P.
the corporate directors to adopt. Morgan & Co. (Defendant) for a loss resulting from a
bond transaction.
Issue: WON the board resolution is an ultra vires act and
in effect a donation from the board of directors? Synopsis of Rule of Law: A director is not liable for loss
or damage other than what was proximately caused by
Held: No. There can be no doubt that the directors of his own acts or omissions in breach of his duty. s
the appellee company had authority to modify the resulting from a bond transaction.
proposed terms of the Amended Milling Contract for the
purpose of making its terms more acceptable to the Facts: On October 16, 1930, Trust Company (Defendant)
other contracting parties. As the resolution in question and its subsidiary, Guaranty Company (Defendant),
was passed in good faith by the board of directors, it is agreed to participate in the purchase of $3,000,000 in
valid and binding, and whether or not it will cause losses Missouri Pacific Convertible Debentures, through the
or decrease the profits of the central, the court has no firm of J.P. Morgan & Co. (Defendant), at par, with an
authority to review them. Whether the business of a option to the seller, Alleghany Corporation, to
corporation should be operated at a loss during repurchase them at the same price at any time within
depression, or close down at a smaller loss, is a purely six months. The purpose of the purchase was to enable
business and economic problem to be determined by Alleghany to raise money to pay for particular properties
the directors of the corporation and not by the court. without going over its borrowing limit. The only
The appellee Bacolod-Murcia Milling Company is, under purpose served by the option therefore, was to make
the terms of its Resolution of August 20, 1936, duty the transaction conform as closely as possible to a loan
bound to grant similar increases to plaintiffs-appellants without the usual incidents of a loan transaction. The
herein. decision to purchase was made after the October 1929
stock market crash when the market was in a slight
Additional digest (Ruling): As the resolution in question upswing that started in April 1930. After October 1930,
was passed in good faith by the board of directors, it is there was another sharp and unexpected drop in the
valid and binding, and whether or not it will cause losses market. Guaranty (Defendant) and Trust (Defendant)
or decrease the profits of the central, the court has no could not sell any of the bonds until October 8, 1931,
authority to review them. and the last were not sold until December 28, 1937,
Xx It is a well-known rule of law that questions which resulted in a loss of $2,250,000. Stockholders
of policy or of management are left solely to the honest (Plaintiff) brought a derivative action to hold the
decision of officers and directors of a corporation, and directors liable for the loss.
the court is without authority to substitute its judgment
of the board of directors; the board is the business Issue: Is a director liable for loss or damage other than
manager of the corporation, and so long as it acts in what was proximately caused by his own acts or
good faith its orders are not reviewable by the courts. omissions in breach of his duty?
It must be remembered that the controverted
resolution was adopted by appellee corporation as a Held: (Shientag, J.) No. Directors stand in a fiduciary
supplement to, or further amendment of, the proposed relationship to their company. They are bound by rules
milling contract, and that it was approved on August 20, of conscientious fairness, morality, and honesty, which
1936, twenty-one days prior to the signing by appellants are imposed by the law as guidelines for those who are
on September 10, of the Amended Milling Contract under fiduciary obligations. A director owes a loyalty to
itself; so that when the Milling Contract was executed, his corporation that is undivided and an allegiance
the concessions granted by the disputed resolution had uninfluenced by no consideration other than the welfare
been already incorporated into its terms. of the corporation. He must conduct the corporation’s
business with the same degree of care and fidelity, as an
Litwin v. Allen ordinary prudent man would exercise when managing
Supreme Court of New York 25 N.Y.S.2d 667 (1940) his own affairs of similar size and importance. A director
of a bank is held to stricter accountability. He must use
Brief Fact Summary: Stockholders (Plaintiff) brought a that degree of care ordinarily exercised by prudent
derivative action against Trust Company (Defendant), its bankers, and, if he does so, he will be absolved from

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liability even though his opinion may turn out to be unable to borrow the money, and instead, on November
mistaken and his judgment faulty. The facts in existence 18, 1930, sold $10,000,000 in its Missouri Pacific bonds
at the time of their occurrence must be considered to banking firm J.P. Morgan & Co. for cash at par value,
when determining liability. In this case, the first with an option for Alleghany to buy back the bonds
question was whether the bond purchase was ultra within six months for the price at which they were sold
vires. “It would seem that if it is against public policy for to J.P. Morgan. Guaranty Trust Company (Trust
a bank, anxious to dispose of some of its securities, to Company) made a written commitment to J.P. Morgan
agree to buy them back at the same price, it is even to participate in the purchase, and Guaranty Company
more so where a bank purchases securities and gives of New York (Guaranty Company), a subsidiary of Trust
the seller the option to buy them back at the same Company, agreed to take over the bonds upon
price, thereby incurring the entire risk of loss with no expiration of the six month repurchase option, if
possibility of gain other than the interest derived from Alleghany failed to exercise the option. The bonds had
the securities during the period the bank holds them.” already been steadily declining in value in 1930. On
Therefore, regarding the price of securities, the bank November 5, 1930, when the board of directors of Trust
inevitably assumed any risk of heavy loss, and any sharp Company approved the transaction, the bonds were
rise was assured to benefit the seller. Trust (Defendant) selling at 102 7/8. On November 18, 1930, when the
could not avoid liability by having an agreement with its board of directors of Guaranty Company approved their
subsidiary, Guaranty (Defendant), for Guaranty commitment, the bonds were valued at 98 5/8. On April
(Defendant) to take any loss, should it occur. In this 16, 1931, when the six month repurchase option
case, “the entire arrangement was so improvident, so expired, the bonds were selling at 86 high and 81 low.
risky, so unusual and unnecessary as to be contrary to Guaranty Company took them over from Trust Company
fundamental conceptions of prudent banking practice.” at par and carried them on its books as an investment.
Therefore, the directors must be held personally liable. Shareholders owning 36 out of 900,000 shares of stock
The second question, in this case, was whether they in Trust Company (plaintiffs) have brought a derivative
were liable for the entire 81 percent loss or whether suit against the directors of Trust Company and
their liability was limited to the percentage lost during Guaranty Company, and members of J.P. Morgan
the six-month option period. A director is not liable for (defendants), seeking to impose liability for losses
loss or damage other than what was proximately caused resulting from the transaction.
by his own acts or omissions in breach of his duty. Only
the option was tainted with improvidence. When the HELD V2: The court held trust company had no interest
option expired, any loss that followed was the result of in third-party corporation; thus, defendant officers had
the director’s independent business judgment for which not breached their duty.
they should not be held. Plaintiffs also charged defendant officers' bond
acquisition on trust company's behalf constituted an
Discussion: In general, hesitation exists to hold directors improper loan to third-party corporation.
liable for questionable conduct. The main fear is that The court held that the bonds were purchased
the directors’ financial liabilities may be devastating. negligently but that the applicable statute of limitations
Though the chance of such liabilities being imposed may prevented recovery against three defendant officers.
be small, it is feared that qualified persons will be
discouraged from serving as directors. In addition, Plaintiffs also claimed defendant officers negligently
directors may be overly cautious and pass up a desirable extended a loan to a third-party company and then
business risk out of fear of being held for any loss that improperly auctioned the loan's collateral due to
might result. The fear of directors’ personal liability is improper influence from defendant banking firm.
often cited to justify broad indemnification and The court followed the rule that allowed
insurance provisions and for the adoption of state deference to business decisions, and held defendant
statutes defining the scope of directors’ duties. directors properly extended the loan using information
they possessed and that their auction of the loan's
FACTS V2: Alleghany Corporation held $23,500,000 in collateral was equitable.
unsecured bonds in Missouri Pacific. Alleghany
purchased several properties, and in 1930 still owed CONCLUSION: The court entered partial judgment in
over $10,000,000 on the purchase price. Alleghany was favor of plaintiffs as to their claim involving the

20 | P a g e
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improper purchase of bonds, due to defendant officers' "2. To compel them to pay to the
negligence in approving the bond purchase. The court corporation, or to its creditors, any
entered judgment in favor of defendants as to plaintiffs' money and the value of any property,
other claims. which they have acquired to
themselves, or transferred to others, or
ALBERT G. WALKER, AS TRUSTEE IN lost, or wasted, by or through any
BANKRUPTCY OF FREDERICK SOUTHACK ALWYN neglect of or failure to perform or other
BALL, JR., INC., Plaintiff, V. violation of their duties."
ALRICH H. MAN AND OTHERS, DEFENDANTS 5. Causes of Action:
142 Misc. 288, 293
SUPREME COURT, NEW YORK COUNTY (1) 1st COA: The board of directors authorized the
FEBRUARY 5, 1931 sale of stock of the corporation to the public
Topic: VIII. Duties of directors and controlling generally by employing Alwyn Ball, under an
shareholders; Duty of diligence, the Business Judgment agreement whereby Wheeler was to receive
Rule 18% of the gross amount of any moneys
received by him or the corporation on account
Facts: of the sale of the corporation's shares of stock.
Alrich Man moves for judgment dismissing the This was not authorized by any resolution of the
amended complaint on the ground generally board of directors. The corporation paid to
that it does not state facts sufficient to Wheeler $232,000 as commission and for his
constitute a cause of action against him services in selling $875,210 of the stock. The
1. Frederick Southack Alwyn Ball, Jr., Inc. is a board knew that substantial payments were
domestic corporation engaged in the business of being made to Wheeler "and knew or ought to
managing real properties, as agents for owners. have known the approximate amount thereof."
It has an authorized capital stock consisted of It was in excess of any moneys to which
10,000 shares of preferred stock of a par value Wheeler was entitled" under his agreement
of $100 each, and 15,000 shares of common with Ball.
stock of no par value. - Defendant’s Answer: "approved, acquiesced
2. The corporation was adjudicated a bankrupt in in, confirmed and ratified the said acts of
this Federal district in January, 1928 the other defendant directors so performed
3. Albert Walker, trustee in the bankruptcy of as aforesaid," is a conclusion of law, and
Frederick Southack Alwyn Ball, Jr., Inc., seeks to consequently insufficient as a matter of law
recover $1,677,411.19 from Man and others, as
former directors of the bankrupt corporation,
for dereliction of duty and mismanagement in (2) 2nd COA: The bankrupt advanced to one M.H.
the conduct of the bankrupt's affairs. Avram or M.H. Avram Co. $20,000, taking as
4. The amended complaint asserts eleven causes security therefor the note of such indorsed by
of action under section 60 of the General one J.D. Lacey; which was a loan that was not
Corporation Law, which, in part, provides: "An authorized by any meeting of the board of
action may be brought against one or more of directors and "was not for the benefit of the
the directors or officers of a corporation to corporation or in aid of any business or business
procure judgment for the following relief or any affairs of the corporation." This remained on the
part thereof: bankrupt's books until the bankruptcy as unpaid
"1. To compel the defendants to and appeared as an asset "in various statements
account for their official conduct, issued by corporation from time to time."
including any neglect of or failure to - Defendant’s Answer: no allegation that he
perform their duties, in the was a director at the time of the loan, and
management and disposition of the that it does not appear that at the time he
funds and property, committed to their was a director Lacey could have been held
charge. by a suit upon the note

21 | P a g e
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(3) 3rd to 5th COA: On the declaration and payment and controlled the meeting excludes the
of dividends, in violation of section 58 of the moving defendant from liability.
Stock Corporation Law. Defendants Comstock, (6) 8th COA: As a result of the inattention to the
et al "were present and/or voted; that the other conduct of the affairs of the corporation upon
defendants herein did approve, ratify and the part of the defendants or some of them, and
acquiesce in the said declaration of said their gross neglect of their duties as directors of
dividend and did approve of, participate in the corporation, substantial losses were
and/or receive payment of dividend pursuant to incurred
said declaration, and that the said defendants - Defendant’s Answer: did not cause or
thereafter failed, neglected and refused to take participate in the acts complained of in this
any steps or proceedings or to make any efforts eighth cause.
to recover back said sums on behalf of said (7) 9th COA: Mismanagement in connection with the
corporation, or to protect the rights of the affairs of the Thayer West Point Hotel
corporation and to preserve the assets thereof Corporation (in which the bankrupt was
in that connection." interested), the bankrupt having guaranteed
- Defendant’s Answer: There is an absence of payment of the bills of the builder and other
allegation that at the time of the declaration contractors. It is charged that the construction
of the unlawful dividends there were any costs exceeded what they should have, and as a
judgment creditors of the corporation. consequence of this mismanagement regarding
(4) 6th COA: At the time of the incorporation of the hotel the bankrupt sustained damage in the
Southack Ball, Inc., there were approximately sum of $585,279.09.
5,200 units, consisting of one share of common - Defendant’s Answer: Directors cannot be
stock and one share of preferred stock of the held personally liable because a building
corporation, held in the treasury; it venture exceeds in cost the preliminary
subsequently received subscriptions for estimate and that, in effect, a mere error of
approximately 6,000 units. But at a meeting of judgment is alleged.
the stockholders of Southack Ball, Inc., the
capital stock was authorized to be increased, (8) 10th COA: Defendants are called upon to account
making available for sale an additional 10,000 (9) 11th COA: Unlawful conduct in speculating with
shares of preferred and 5,000 shares of the bankrupt's money in Florida real estate, it
common stock = oversubscription of units of its being charged that an investment was made in a
stock corporation owned and controlled by certain of
- Defendant’s Answer: sufficient unissued the defendants, as a consequence of which the
units of stock were available to meet any bankrupt was damaged in the sum of $75,000.
paid subscription and that the purchase of
the 800 additional units was unnecessary Issue:
(5) 7th COA: $80,000 was diverted from the treasury Whether or not the directors should be held liable. YES.
of the corporation to the defendants Ball, and The motion of the defendant Man is in all respects
should have been received by the corporation. denied.
The defendants not present at the meeting were
elected and became directors at the time of the Held:
increase, or shortly thereafter, and that they  Section 61 of the General Corporation Law
were advised and knew, or ought to have authorizes the bringing of an action for the relief
known, of the wrongful conduct prescribed in section 60 by a trustee in
- Defendant’s Answer: This affirmatively bankruptcy of the corporation. These directors
shows that he was not present at the are charged not only with misfeasance, but with
meeting of February 16, 1925, and that the nonfeasance, for acquiescing in and confirming
allegation that certain named directors the wrongdoing of others, and with doing
other than the moving defendant then nothing to retrieve the waste. Passivity and
owned all of the stock of the corporation disavowal of knowledge alone do not constitute
a pass to freedom from responsibility. A director

22 | P a g e
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may not shut off liability by shutting off his he could have saved the C. Neither of these has he made
hearing and sight. It is his duty to know what is any effort to do so.
transpiring. The company's stockholders and
creditors, as well as the public, have a right to RATIO: The defendant is not subject to the burden of
rely upon the performance by him of the duties proving that the loss would have happened, whether he
of a director. ( Kavanaugh v. Kavanaugh had done his duty or not. If he were, it would come to
Knitting Co., 226 N.Y. 185, 193.) this: That, if a D were once shown slack in his duties, he
 Kavanaugh v. Gould ( 147 A.D. 281, 289): "The would stand charged prima facie w/ the difference
law has no place for dummy directors." between the corporate treasury as it was, and as it
 "They [directors] are liable only for the losses of would be judged by a hypothetical standard of success.
its funds attributable to their negligence." .. No men of sense would take an office, if the law
Negligence, however, may ensue from inaction, imposed upon them a guaranty of the general success of
as well as action. their companies as a penalty for negligence.
 "Ratification is a conclusion of fact and not a Ds are not specialists, like lawyers or doctors.
conclusion of law." (Pollitz v. Wabash). They must have a good sense, perhaps they must have
Ratification may be implied through acquaintance w/ affairs; but they need not- perhaps
acquiescence instead of expressed by positive they should not-have any technical talent. They are the
and distinct action or language. ( Arnot v. Union general advisers of the business, and if they faithfully
Salt Co.) give such liability as they have to their charge, it would
 Charges are more than mere error of judgment, not be lawful to hold them LB.
sufficient to compel all of them to account for
their conduct in connection therewith. Bates v. Dresser
 Where a fiduciary is personally interested in a
transaction concerning the trust, "there is in FACTS: Dresser was the president of a small bank in
equity a presumption against the transaction, Cambridge. The bank had only a few employees, and
which he is required to explain." defendant supervised all the work that was done. One
( Sage v. Culver) In such a case only a prima of the employees, Coleman, was promoted from
facie case would be established. ( Coplay messenger to bookkeeper in 1904. From 1904 until
Cement Mfg. Co. v. Loeb) 1907, there were several small shortages in the bank
and indications that an employee was stealing. There
Barnes v. Andrews (NY, 1924) was no indication, however, that Coleman was
dishonest. In 1907, Coleman began using his access to
1) Receiver of LIBERTY STARTERS CORP. sued a the books to cover up the thefts he was making. He did
director (Andrews) of the C for “misprision of office” this by altering the records in such a way that the only
alleging that: way he could be caught was to examine the deposit
The defendant failed to give adequate attention record of all the deposits. During this time, defendant
to the affairs of the C. w/c had been conducted had several indications that someone at the bank was a
incompetently and w/o regard to the waste in salaries thief. He never attempted to ascertain who the thief
during the period before production was possible. was or to examine the books, even though he had the
(during his incumbency, there were only 2 BOD meeting opportunity to do so.
o w/c he never attended)
ISSUE: Did the failure to take affirmative action to
2) C produced starters for Ford Motors. But delays discover the thief amount to a breach of duty to the
were experienced in the production of starters. corporation?

HELD 2: There is no evidence that the defendant’s RULING:


neglect caused any losses to the C and that, if there Yes, as far as the president is concerned, but not
were, the loss cannot be ascertained. regarding the directors. The directors acted reasonably
The plaintiff must show that, had Andrews done by relying on the information given to them. They had
his full duty he could have made the C prosper or at no reason to believe that there were any irregularities in
least could have broken its fall. He must show what sum the bank records.

23 | P a g e
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Dresser’s position was different. He was in the Gorkom also agreed not to solicit other bids and agreed
bank daily. He had access to the books at all times. He not to provide proprietary information to other bidders.
knew of shortages and apparent unexplained declines in Van Gorkom only included a couple people in the
deposits, yet he failed to make any attempt to discover negotiations with Pritzker, and most of the senior
the reasons behind these peculiar events. management and the Board of Directors found out
The continued losses were his fault because the about the deal on the day they had to vote to approve
warnings that he had should have led him to investigate. the deal. Van Gorkom did not distribute any information
Had he investigated, the losses may have been at the voting, so the Board had only the word of Van
eliminated because he may have discovered the reason Gorkom, the word of the President of Trans Union (who
behind them. was privy to the earlier discussions with Pritzker), advice
Dresser, as president, was much closer to the from an attorney who suggested that the Board might
operation of the bank than the directors. He was there be sued if they voted against the merger, and vague
every day, and he supervised the actual operation of the advice from Romans who told them that the $55 was in
bank. the beginning end of the range he calculated. Van
This the directors didn’t do; therefore, Dresser’s Gorkom did not disclose how he came to the $55
position exposed him to the warning signs, while the amount. On this advice, the Board approved the merger,
directors were not exposed and, therefore, he was and it was also later approved by shareholders.
personally liable while the directors were not.
Issue. The issue is whether the business judgment by the
Smith v. Van Gorkom Board to approve the merger was an informed decision.

Brief Fact Summary. Plaintiffs, Alden Smith and John Held. The Delaware Supreme Court held the business
Gosselin, brought a class action suit against Defendant judgment to be gross negligence, which is the standard
corporation, Trans Union, and its directors, after the for determining whether the judgment was informed.
Board approved a merger proposal submitted by the The Board has a duty to give an informed decision on an
CEO of Trans Union, fellow Defendant Jerome Van important decision such as a merger and can not escape
Gorkom. the responsibility by claiming that the shareholders also
approved the merger. The directors are protected if
Synopsis of Rule of Law. Under the business judgment they relied in good faith on reports submitted by
rule, a business judgment is presumed to be an officers, but there was no report that would qualify as a
informed judgment, but the judgment will not be report under the statute. The directors can not rely
shielded under the rule if the decision was unadvised. upon the share price as it contrasted with the market
value. And because the Board did not disclose a lack of
Facts. Trans Union had large investment tax credits valuation information to the shareholders, the Board
(ITCs) coupled with accelerated depreciation deductions breached their fiduciary duty to disclose all germane
with no offsetting taxable income. Their short term facts.
solution was to acquire companies that would offset the
ITCs, but the Chief Financial Officer, Donald Romans, Dissent. The dissent believed that the majority
suggested that Trans Union should undergo a leveraged mischaracterized the ability of the directors to act
buyout to an entity that could offset the ITCs. The soundly on the information provided at the meeting
suggestion came without any substantial research, but wherein the merger vote took place. The credentials of
Romans thought that a $50-60 share price (on stock the directors demonstrated that they gave an intelligent
currently valued at a high of $39 ½) would be business judgment that should be shielded by the
acceptable. Van Gorkom did not demonstrate any business judgment rule.
interest in the suggestion, but shortly thereafter
pursued the idea with a takeover specialist, Jay Pritzker. Discussion. The court noted that a director’s duty to
With only Romans’ unresearched numbers at his exercise an informed business judgment is a duty of care
disposal, Van Gorkom set up an agreement with Pritzker rather than a duty of loyalty. Therefore, the motive of
to sell Pritzker Trans Union shares at $55 per share. Van the director can be irrelevant, so there is no need to
Gorkom also agreed to sell Pritzker one million shares of prove fraud, conflict of interests or dishonesty.
Trans Union at $39 per share if Pritzker was outbid. Van

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Gokongwei vs. Securities and Exchange Commission of directors; and that in amending the by-laws, Soriano,
[GR L-45911, 11 April 1979] et. al. purposely provided for Gokongwei's
disqualification and deprived him of his vested right as
Facts: [SEC Case 1375] On 22 October 1976, John afore-mentioned, hence the amended by-laws are null
Gokongwei Jr., as stockholder of San Miguel and void. As additional causes of action, it was alleged
Corporation, filed with the Securities and Exchange that corporations have no inherent power to disqualify a
Commission (SEC) a petition for "declaration of nullity of stockholder from being elected as a director and,
amended by-laws, cancellation of certificate of filing of therefore, the questioned act is ultra vires and void; that
amended by-laws, injunction and damages with prayer Andres M. Soriano, Jr. and/or Jose M. Soriano, while
for a preliminary injunction" against the majority of the representing other corporations, entered into contracts
members of the Board of Directors and San Miguel (specifically a management contract) with the
Corporation as an unwilling petitioner. As a first cause of corporation, which was avowed because the questioned
action, Gokongwei alleged that on 18 September 1976, amendment gave the Board itself the prerogative of
Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, determining whether they or other persons are engaged
Antonio Roxas, Emeterio Buñao, Walthrode B. Conde, in competitive or antagonistic business; that the portion
Miguel Ortigas, and Antonio Prieto amended by bylaws of the amended by-laws which states that in
of the corporation, basing their authority to do so on a determining whether or not a person is engaged in
resolution of the stockholders adopted on 13 March competitive business, the Board may consider such
1961, when the outstanding capital stock of the factors as business and family relationship, is
corporation was only P70,139.740.00, divided into unreasonable and oppressive and, therefore, void; and
5,513,974 common shares at P10.00 per share and that the portion of the amended by-laws which requires
150,000 preferred shares at P100.00 per share. At the that "all nominations for election of directors shall be
time of the amendment, the outstanding and paid up submitted in writing to the Board of Directors at least
shares totalled 30,127,043, with a total par value of five (5) working days before the date of the Annual
P301,270,430.00. Meeting" is likewise unreasonable and oppressive. It
was, therefore, prayed that the amended by-laws be
It was contended that according to section 22 of the declared null and void and the certificate of filing
Corporation Law and Article VIII of the by-laws of the thereof be cancelled, and that Soriano, et. al. be made
corporation, the power to amend, modify, repeal or to pay damages, in specified amounts, to Gokongwei.
adopt new by-laws may be delegated to the Board of On 28 October 1976, in connection with the same case,
Directors only by the affirmative vote of stockholders Gokongwei filed with the Securities and Exchange
representing not less than 2/3 of the subscribed and Commission an "Urgent Motion for Production and
paid up capital stock of the corporation, which 2/3 Inspection of Documents", alleging that the Secretary of
should have been computed on the basis of the the corporation refused to allow him to inspect its
capitalization at the time of the amendment. Since the records despite request made by Gokongwei for
amendment was based on the 1961 authorization, production of certain documents enumerated in the
Gokongwei contended that the Board acted without request, and that the corporation had been attempting
authority and in usurpation of the power of the to suppress information from its stockholders despite a
stockholders. As a second cause of action, it was alleged negative reply by the SEC to its query regarding their
that the authority granted in 1961 had already been authority to do so.
exercised in 1962 and 1963, after which the authority of
the Board ceased to exist. As a third cause of action, The motion was opposed by Soriano, et. al. The
Gokongwei averred that the membership of the Board Corporation, Soriano, et. al. filed their answer, and their
of Directors had changed since the authority was given opposition to the petition, respectively. Meanwhile, on
in 1961, there being 6 new directors. As a fourth cause 10 December 1976, while the petition was yet to be
of action, it was claimed that prior to the questioned heard, the corporation issued a notice of special
amendment, Gokogwei had all the qualifications to be a stockholders' meeting for the purpose of "ratification
director of the corporation, being a substantial and confirmation of the amendment to the By-laws",
stockholder thereof; that as a stockholder, Gokongwei setting such meeting for 10 February 1977. This
had acquired rights inherent in stock ownership, such as prompted Gokongwei to ask the SEC for a summary
the rights to vote and to be voted upon in the election judgment insofar as the first cause of action is

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concerned, for the alleged reason that by calling a main purpose for which the Corporation has been
special stockholders' meeting for the aforesaid purpose, organized, and ratification of the investments thereafter
Soriano, et. al. admitted the invalidity of the made pursuant thereto." By reason of the foregoing, on
amendments of 18 September 1976. The motion for 28 April 1977, Gokongwei filed with the SEC an urgent
summary judgment was opposed by Soriano, et. al. motion for the issuance of a writ of preliminary
Pending action on the motion, Gokongwei filed an injunction to restrain Soriano, et. al. from taking up Item
"Urgent Motion for the Issuance of a Temporary 6 of the Agenda at the annual stockholders' meeting,
Restraining Order", praying that pending the requesting that the same be set for hearing on 3 May
determination of Gokongwei's application for the 1977, the date set for the second hearing of the case on
issuance of a preliminary injunction and or Gokongwei's the merits. The SEC, however, cancelled the dates of
motion for summary judgment, a temporary restraining hearing originally scheduled and reset the same to May
order be issued, restraining Soriano, et. al. from holding 16 and 17, 1977, or after the scheduled annual
the special stockholders' meeting as scheduled. This stockholders' meeting. For the purpose of urging the
motion was duly opposed by Soriano, et. al. On 10 Commission to act, Gokongwei filed an urgent
February 1977, Cremation issued an order denying the manifestation on 3 May 1977, but this notwithstanding,
motion for issuance of temporary restraining order. no action has been taken up to the date of the filing of
After receipt of the order of denial, Soriano, et. al. the instant petition.
conducted the special stockholders' meeting wherein
the amendments to the by-laws were ratified. On 14 Gokongwei filed a petition for petition for certiorari,
February 1977, Gokongwei filed a consolidated motion mandamus and injunction, with prayer for issuance of
for contempt and for nullification of the special writ of preliminary injunction, with the Supreme Court,
stockholders' meeting. A motion for reconsideration of alleging that there appears a deliberate and concerted
the order denying Gokongwei's motion for summary inability on the part of the SEC to act.
judgment was filed by Gokongwei before the SEC on 10
March 1977. Issue:
1. Whether the corporation has the power to provide
[SEC Case 1423] Gokongwei alleged that, having for the (additional) qualifications of its directors.
discovered that the corporation has been investing 2. Whether the disqualification of a competitor from
corporate funds in other corporations and businesses being elected to the Board of Directors is a
outside of the primary purpose clause of the reasonable exercise of corporate authority.
corporation, in violation of section 17-1/2 of the 3. Whether the SEC gravely abused its discretion in
Corporation Law, he filed with SEC, on 20 January 1977, denying Gokongwei's request for an examination of
a petition seeking to have Andres M. Soriano, Jr. and the records of San Miguel International, Inc., a fully
Jose M. Soriano, as well as the corporation declared owned subsidiary of San Miguel Corporation.
guilty of such violation, and ordered to account for such 4. Whether the SEC gravely abused its discretion in
investments and to answer for damages. On 4 February allowing the stockholders of San Miguel Corporation
1977, motions to dismiss were filed by Soriano, et. al., to to ratify the investment of corporate funds in a
which a consolidated motion to strike and to declare foreign corporation.
Soriano, et. al. in default and an opposition ad
abundantiorem cautelam were filed by Gokongwei. Held: 1. It is recognized by all authorities that "every
Despite the fact that said motions were filed as early as corporation has the inherent power to adopt by-laws
4 February 1977, the Commission acted thereon only on 'for its internal government, and to regulate the conduct
25 April 1977, when it denied Soriano, et. al.'s motions and prescribe the rights and duties of its members
to dismiss and gave them two (2) days within which to towards itself and among themselves in reference to the
file their answer, and set the case for hearing on April 29 management of its affairs.'" In this jurisdiction under
and May 3, 1977. Soriano, et. al. issued notices of the section 21 of the Corporation Law, a corporation may
annual stockholders' meeting, including in the Agenda prescribe in its by-laws "the qualifications, duties and
thereof, the "reaffirmation of the authorization to the compensation of directors, officers and employees."
Board of Directors by the stockholders at the meeting This must necessarily refer to a qualification in addition
on 20 March 1972 to invest corporate funds in other to that specified by section 30 of the Corporation Law,
companies or businesses or for purposes other than the which provides that "every director must own in his

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right at least one share of the capital stock of the stock fiduciary. Their powers are powers in trust. He who is in
corporation of which he is a director." Any person "who such fiduciary position cannot serve himself first and his
buys stock in a corporation does so with the knowledge cestuis second. He cannot manipulate the affairs of his
that its affairs are dominated by a majority of the corporation to their detriment and in disregard of the
stockholders and that he impliedly contracts that the standards of common decency. He cannot by the
will of the majority shall govern in all matters within the intervention of a corporate entity violate the ancient
limits of the act of incorporation and lawfully enacted precept against serving two masters. He cannot utilize
by-laws and not forbidden by law." To this extent, his inside information and strategic position for his own
therefore, the stockholder may be considered to have preferment. He cannot violate rules of fair play by doing
"parted with his personal right or privilege to regulate indirectly through the corporation what he could not do
the disposition of his property which he has invested in so directly. He cannot violate rules of fair play by doing
the capital stock of the corporation, and surrendered it indirectly through the corporation what he could not do
to the will of the majority of his fellow incorporators. It so directly. He cannot use his power for his personal
can not therefore be justly said that the contract, advantage and to the detriment of the stockholders and
express or implied, between the corporation and the creditors no matter how absolute in terms that power
stockholders is infringed by any act of the former which may be and no matter how meticulous he is to satisfy
is authorized by a majority." Pursuant to section 18 of technical requirements. For that power is at all times
the Corporation Law, any corporation may amend its subject to the equitable limitation that it may not be
articles of incorporation by a vote or written assent of exercised for the aggrandizement, preference, or
the stockholders representing at least two-thirds of the advantage of the fiduciary to the exclusion or detriment
subscribed capital stock of the corporation. If the of the cestuis. The doctrine of "corporate opportunity"
amendment changes, diminishes or restricts the rights is precisely a recognition by the courts that the fiduciary
of the existing shareholders, then the dissenting standards could not be upheld where the fiduciary was
minority has only one right, viz.: "to object thereto in acting for two entities with competing interests. This
writing and demand payment for his share." Under doctrine rests fundamentally on the unfairness, in
section 22 of the same law, the owners of the majority particular circumstances, of an officer or director taking
of the subscribed capital stock may amend or repeal any advantage of an opportunity for his own personal profit
by-law or adopt new by-laws. It cannot be said, when the interest of the corporation justly calls for
therefore, that Gokongwei has a vested right to be protection. It is not denied that a member of the Board
elected director, in the face of the fact that the law at of Directors of the San Miguel Corporation has access to
the time such right as stockholder was acquired sensitive and highly confidential information, such as:
contained the prescription that the corporate charter (a) marketing strategies and pricing structure; (b) budget
and the by-law shall be subject to amendment, for expansion and diversification; (c) research and
alteration and modification. development; and (d) sources of funding, availability of
personnel, proposals of mergers or tie-ups with other
2. Although in the strict and technical sense, directors of firms. It is obviously to prevent the creation of an
a private corporation are not regarded as trustees, there opportunity for an officer or director of San Miguel
cannot be any doubt that their character is that of a Corporation, who is also the officer or owner of a
fiduciary insofar as the corporation and the stockholders competing corporation, from taking advantage of the
as a body are concerned. As agents entrusted with the information which he acquires as director to promote
management of the corporation for the collective his individual or corporate interests to the prejudice of
benefit of the stockholders, "they occupy a fiduciary San Miguel Corporation and its stockholders, that the
relation, and in this sense the relation is one of trust." questioned amendment of the by-laws was made.
"The ordinary trust relationship of directors of a Certainly, where two corporations are competitive in a
corporation and stockholders is not a matter of substantial sense, it would seem improbable, if not
statutory or technical law. It springs from the fact that impossible, for the director, if he were to discharge
directors have the control and guidance of corporate effectively his duty, to satisfy his loyalty to both
affairs and property and hence of the property interests corporations and place the performance of his
of the stockholders. Equity recognizes that stockholders corporation duties above his personal concerns. The
are the proprietors of the corporate interests and are offer and assurance of Gokongwei that to avoid any
ultimately the only beneficiaries thereof." A director is a possibility of his taking unfair advantage of his position

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as director of San Miguel Corporation, he would absent management, determine the financial condition of the
himself from meetings at which confidential matters corporation, and generally take an account of the
would be discussed, would not detract from the validity stewardship of the officers and directors. herein,
and reasonableness of the by-laws involved. Apart from considering that the foreign subsidiary is wholly owned
the impractical results that would ensue from such by San Miguel Corporation and, therefore, under Its
arrangement, it would be inconsistent with Gokongwei's control, it would be more in accord with equity, good
primary motive in running for board membership — faith and fair dealing to construe the statutory right of
which is to protect his investments in San Miguel petitioner as stockholder to inspect the books and
Corporation. More important, such a proposed norm of records of the corporation as extending to books and
conduct would be against all accepted principles records of such wholly owned subsidiary which are in
underlying a director's duty of fidelity to the the corporation's possession and control.
corporation, for the policy of the law is to encourage
and enforce responsible corporate management. 4. Section 17-1/2 of the Corporation Law allows a
corporation to "invest its funds in any other corporation
3. Pursuant to the second paragraph of section 51 of the or business or for any purpose other than the main
Corporation Law, "(t)he record of all business purpose for which it was organized" provided that its
transactions of the corporation and minutes of any Board of Directors has been so authorized by the
meeting shall be open to the inspection of any director, affirmative vote of stockholders holding shares entitling
member or stockholder of the corporation at reasonable them to exercise at least two-thirds of the voting power.
hours." The stockholder's right of inspection of the If the investment is made in pursuance of the corporate
corporation's books and records is based upon their purpose, it does not need the approval of the
ownership of the assets and property of the stockholders. It is only when the purchase of shares is
corporation. It is, therefore, an incident of ownership of done solely for investment and not to accomplish the
the corporate property, whether this ownership or purpose of its incorporation that the vote of approval of
interest be termed an equitable ownership, a beneficial the stockholders holding shares entitling them to
ownership, or a quasi-ownership. This right is predicated exercise at least two-thirds of the voting power is
upon the necessity of self-protection. It is generally held necessary. As stated by the corporation, the purchase of
by majority of the courts that where the right is granted beer manufacturing facilities by SMC was an investment
by statute to the stockholder, it is given to him as such in the same business stated as its main purpose in its
and must be exercised by him with respect to his Articles of Incorporation, which is to manufacture and
interest as a stockholder and for some purpose germane market beer. It appears that the original investment was
thereto or in the interest of the corporation. In other made in 1947-1948, when SMC, then San Miguel
words, the inspection has to be germane to the Brewery, Inc., purchased a beer brewery in Hongkong
petitioner's interest as a stockholder, and has to be (Hongkong Brewery & Distillery, Ltd.) for the
proper and lawful in character and not inimical to the manufacture and marketing of San Miguel beer thereat.
interest of the corporation. The "general rule that Restructuring of the investment was made in 1970-1971
stockholders are entitled to full information as to the thru the organization of SMI in Bermuda as a tax free
management of the corporation and the manner of reorganization. Assuming arguendo that the Board of
expenditure of its funds, and to inspection to obtain Directors of SMC had no authority to make the assailed
such information, especially where it appears that the investment, there is no question that a corporation, like
company is being mismanaged or that it is being an individual, may ratify and thereby render binding
managed for the personal benefit of officers or directors upon it the originally unauthorized acts of its officers or
or certain of the stockholders to the exclusion of other agents. This is true because the questioned
others." While the right of a stockholder to examine the investment is neither contrary to law, morals, public
books and records of a corporation for a lawful purpose order or public policy. It is a corporate transaction or
is a matter of law, the right of such stockholder to contract which is within the corporate powers, but
examine the books and records of a wholly-owned which is defective from a purported failure to observe in
subsidiary of the corporation in which he is a its execution the requirement of the law that the
stockholder is a different thing. Stockholders are investment must be authorized by the affirmative vote
entitled to inspect the books and records of a of the stockholders holding two-thirds of the voting
corporation in order to investigate the conduct of the power. This requirement is for the benefit of the

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stockholders. The stockholders for whose benefit the owned by him personally cannot fairly and adequately
requirement was enacted may, therefore, ratify the represent the interest of the minority.
investment and its ratification by said stockholders
obliterates any defect which it may have had at the ISSUE: WON de los Angeles have the legal standing to
outset. Besides, the investment was for the purchase of sue. (Derivative suit)
beer manufacturing and marketing facilities which is
apparently relevant to the corporate purpose. The mere HELD: YES. The bona fide ownership by a stockholder
fact that the corporation submitted the assailed in his own right suffices to invest him with the standing
investment to the stockholders for ratification at the to bring a derivative suit for the benefit of the
annual meeting of 10 May 1977 cannot be construed as corporation. The number of his shares is immaterial
an admission that the corporation had committed an since he is not suing in his own behalf, or for the
ultra vires act, considering the common practice of protection or vindication of his own particular right, or
corporations of periodically submitting for the the redress of a wrong committed against him
ratification of their stockholders the acts of their individually but in behalf and for the benefit of the
directors, officers and managers. corporation.
The requisites of a derivative suit are: (1) the
San Miguel Corporation vs. Khan party bringing the suit should be a stockholder as of the
G.R. No. 85339; August 11, 1989 time of the act or transactions complained of, the
number of shares not being material; (2) exhaustion of
FACTS: intra-corporate remedies (has made a demand on the
Fourteen corporations initially acquired shares board of directors for the appropriate relief but the
of outstanding capital stock of SMC and constituted a latter has failed or refused to heed his plea); and (3) the
Voting Trust thereon in favor of Andres Soriano, Jr. cause of action actually devolves on the corporation and
When the latter died Eduardo Cojuanco was elected as not to the particular stockholder bringing the suit.
the substitute trustee. However, after the EDSA
revolution, Cojuanco fled out of the country, and Strong and Strong vs. Repide
subsequently an agreement was entered into between 41 Phil. 947
the 14 corporations and Andres Soriano III (as an agent 3 May 1909
of several persons) for the purchase of the shares held
by the former. FACTS: Among the lands comprising the friar lands are
Actually the buyer of the shares was Neptunia the Dominican lands, the only valuable asset owned by
Corporation, a foreign corporation and wholly-owned the corporation Philippine Sugar Estates Development
subsidiary of another subsidiary wholly owned by SMC. Company Limited (Philippine Sugar Estates). Francisco
Neptunia paid the downpayment from the proceeds of Gutierrez Repide (Repide), defendant, was the majority
certain loans. PCGG then sequestered the shares subject stockholder and one of the five directors of Philippine
of the sale so SMC suspended all the other installments Sugar Estates. He was likewise elected by the board as
of the price to the sellers. The 14 corporations then sued the agent and administrator general of such company.
for rescission and damages. The factual backdrop being during US
Meanwhile, PCGG directed SMC to issue occupation, the US Government wanted to secure title
qualifying shares to seven (7) individuals including over the friar lands. To accomplish this objective,
Eduardo de los Angeles from the sequestered shares for Governor for the Philippines entered into negotiations
them to hold in trust. Then, the SMC’s board of directors for the purchase of the Dominican lands, during which
passed a resolution assuming the loans incurred by Repide represented Philippine Sugar Estates. The first
Neptunia for the downpayment. De los Angeles assailed offer of the Governor was to purchase the subject lands
the resolution alleging that it was not passed by the in the amount of $6,043,219.47. As the majority
board aside from its deleterious effects on the stockholder of Philippine Sugar Estates and without
corporation’s interest. When his efforts to obtain relief prior consultation with the other stockholders, Repide
within the corporation proved futile, he filed this action rejected the offer. For the second offer, the purchase
with the SEC. Respondent directors alleged that de los price was increased to $7,535,000.
Angeles has no legal standing having been merely While negotiations for the second offer were
“imposed” by the PCGG and that the twenty (20) shares ongoing and while still holding out for a higher price of

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the Dominican lands, Repide took steps to purchase the employed an agent to purchase the stock of Strong,
800 shares of stock of Philippine Sugar Estates. These concealed his own identity and his knowledge of the
shares were owned by Mrs. Eleanor Strong (Strong) state of negotiations and their probable result. The
which were then in the possession of her agent, F. concealment of his identity while procuring the
Stuart Jones (Jones). Repide, instead of seeing Jones, purchase of the stock, by his agent, was in itself strong
employed Kauffman who later on employed Sloan, a evidence of fraud on the part of Repide. By such means,
broker, to purchase the shares of Strong. Jones sold the more easily was he able to avoid questions relative
the 800 shares of Strong for 16,000 Mexican currency. to the negotiations for the sale of Dominican lands and
For this sale transaction a check of one Rueda Ramos actual misrepresentations regarding that subject. He
was issued. kept up the concealment as long as he could by giving
Later on, the negotiations for the purchase of the check of a third person Rueda Ramos, for the
the Dominican lands were concluded and a contract of purchase money. This move of Repide was a studied and
sale was subsequently executed. This sale transaction intentional omission to be characterized as part of the
increased the value of the shares of stocks originally deceitful machinations to obtain the purchase without
owned by Strong from 16,000 Mexican currency to giving any information whatever as to the state and
76,256 US currency. During the negotiations regarding probable result of the negotiations and to obtain a
the purchase of the shares of stock of Strong, not one lower price for the shares of Strong. After the purchase
word of the facts affecting the value of this stock was of stock, he continued negotiations for the sale of the
made known to her nor her agent, Jones. After the sale Dominican lands as the administrator general and
of Dominican lands and after the purchase of the 800 eventually entered into a contract of sale. The whole
shares of Strong, Repide became the owner of 30,400 transaction gives conclusive evidence of the
out of the 42,030 shares of Philippine Sugar Estates. overwhelming influence Repide had in the negotiations
Strong filed a complaint for the recovery of her and it is clear that the final consummation was in his
800 shares. She argued that her agent Jones had no hands at all times.
authority to sell her shares and that Repide fraudulently
concealed the facts affecting their value. OBITER DICTUM: The directors are declared to be
mandatories of the society and that they are prohibited
ISSUE: Was there fraud in effecting the purchase of from acquiring by purchase, even at public or judicial
Strong’s shares? auction, the property the administration or sale of
which, may have been entrusted to them, and that this
RULING: Yes. With the factual circumstances of this is the extent of the prohibition.
case, it became the duty of Repide, acting in good faith,
to state the facts before making the purchase of Sec. 32. Dealings of directors, trustees or officers with
Strong’s shares. That Repide was one of the directors of the corporation. - A contract of the corporation with
Philippine Sugar Estates was but one of the facts upon one or more of its directors or trustees or officers is
which liability is asserted. He was not only a director, voidable, at the option of such corporation, unless all
but he owned three-fourths of the shares of its stock, the following conditions are present:
and was, at the time of the purchase of the stock, 1. That the presence of such director or trustee in
administrator general of the company with large powers the board meeting in which the contract was approved
and engaged in the negotiations which finally led to the was not necessary to constitute a quorum for such
sale of the company’s lands at a price which greatly meeting;
enhanced the value of the stock. He was the negotiator 2. That the vote of such director or trustee was nor
for the sale of the Dominican lands and was acting necessary for the approval of the contract;
substantially as the agent of the shareholders of 3. That the contract is fair and reasonable under the
Philippine Sugar Estates by reason of his ownership of circumstances; and
the shares in the company. Because of such ownership 4. That in case of an officer, the contract has been
and agency, no one knew as well as he does about the previously authorized by the board of directors.
exact condition of the negotiations. He was the only one
who knew of the probability of the sale of the Where any of the first two conditions set forth in the
Dominican lands to the government and of the probable preceding paragraph is absent, in the case of a contract
purchase price. Under these circumstances, Repide with a director or trustee, such contract may be ratified

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by the vote of the stockholders representing at least and at least 60% of the capital stock of which is owned
two-thirds (2/3) of the outstanding capital stock or of at or controlled by citizens of the United States.
least two-thirds (2/3) of the members in a meeting Although it was claimed that the corporation
called for the purpose: Provided, That full disclosure of has stockholders residing in United States, there was no
the adverse interest of the directors or trustees involved indication if they are all citizens of America, how much
is made at such meeting: Provided, however, That the percentage do they occupy as stockholders, and if they
contract is fair and reasonable under the circumstances. have the same rules that apply to the conditions
mentioned. In the circumstances, the court ruled that
Pedro R. Palting vs Sanjose Petroleum Inc. the respondent SAN JOSE PETROLEUM, as presently
Ponente: Barrera constituted, is not a business enterprise that is
authorized to exercise the parity privileges under the
Facts: San Jose Petroleum a corporation organized and Parity Ordinance, the Laurel-Langley Agreement and the
existing in the Republic of Panama, PETROLEUM filed Petroleum Law. Its tie-up with SAN JOSE OIL is,
with the Philippine Securities and Exchange Commission consequently, illegal.
a sworn registration statement, for the registration and The parity rights agreement is not applicable to
licensing for sale in the Philippines Voting Trust SJP. The parity rights are only granted to American
Certificates. business enterprises or enterprises directly or indirectly
It was alleged that the entire proceeds of the controlled by US citizens. SJP is a Panamanian corporate
sale of said securities will be devoted or used exclusively citizen. The other owners of SJO are Venezuelan
to finance the operations of San Jose Oil Company, Inc. corporations, not Americans. SJP was not able to show
which is a domestic mining corporation. Pedro R. Palting contrary evidence. Further, the Supreme Court
and others, allegedly prospective investors in the shares emphasized that the stocks of these corporations are
of SAN JOSE PETROLEUM, filed with the Securities and being traded in stocks exchanges abroad which renders
Exchange Commission an opposition to registration and their foreign ownership subject to change from time to
licensing of the securities on the grounds that the tie-up time. This fact renders a practical impossibility to meet
between SAN JOSE PETROLEUM, and SAN JOSE OIL, the requirements under the parity rights. Hence, the tie
violates the Constitution of the Philippines, the up between SJP and SJO is illegal, SJP not being a
Corporation Law and the Petroleum Act of 1949. domestic corporation or an American business
enterprise contemplated under the Laurel-Langley
Issue: Whether or not the "tie-up" between the Agreement.
respondent SAN JOSE PETROLEUM, and SAN JOSE OIL
COMPANY, INC., is violative of the Constitution, the Prime White Cement Corporation vs Intermediate
Laurel-Langley Agreement, the Petroleum Act of 1949 Appellate Court

Held: Yes. In the 1946 Ordinance Appended to the In July 1969, Zosimo Falcon and Justo Trazo entered into
Constitution, this right was extended to citizens of the an agreement with Alejandro Te whereby it was agreed
United States; states that to all forms of business that from 1970 to 1976, Te shall be the sole dealer of
enterprises owned or controlled, directly or indirectly, 20,000 bags Prime White cement in Mindanao. Falcon
by citizens of the United States in the same manner as was the president of Prime White Cement Corporation
to, and under the same conditions imposed upon, (PWCC) and Trazo was a board member thereof. Te was
citizens of the Philippines or corporations or likewise a board member of PWCC. It was agreed that
associations owned or controlled by citizens of the the selling price for a bag of cement shall be P9.70.
Philippines, would have the privilege of disposition, Before the bags of cement can be delivered, Te
exploitation, development, and utilization of all already made known to the public that he is the sole
Philippine natural resources. However, respondent is dealer of cements in Mindanao. Various hardwares then
owned, controlled, directly and indirectly by approached him to be his sub-dealers, hence, Te
Panamanian Corporation. entered into various contracts with them.
The Laurel-Langley Agreement also states that But then apparently, Falcon and Trazo were not
with respect to natural resources in the public domain in authorized by the Board of PWCC to enter into such
the Philippines, only through the medium of a contract. Nevertheless, the Board wished to retain the
corporation organized under the laws of the Philippines contract but they wanted some amendment which

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includes the increase of the selling price per bag to prejudiced due to the filing of this case. However, there
P13.30 and the decrease of the total amount of cement can be no award for moral damages under Article 2217
bags from 20k to 8k only plus the contract shall only be of the Civil Code in favor of a corporation.
effective for a period of three months and not 6 years.
Te refused the counter-offer. PWCC then NOTE: In a later case, Coastal Pacific Trading, Inc. vs
awarded the contract to someone else. Te then sued Southern Rolling Mills Co., Inc. (July 28, 2006), it was
PWCC for damages. PWCC filed a counterclaim and in ruled that a corporation may be entitled to moral
said counterclaim, it is claiming for moral damages the damages provided that its good reputation was debased
basis of which is the claim that Te’s filing of a civil case resulting in its humiliation in the business realm.
against PWCC destroyed the company’s goodwill. The
lower court ruled in favor Te. Charles Mead vs E. C. McCullough

ISSUE: Whether or not the ruling of the lower court is Charles Mead, Edwin McCullough and three others
correct. organized the corporation called The Philippine
Engineering and Construction Company (PECC). The 4
HELD: No. Te is what can be called as a self-dealing organizers, except Mead, contributed to the majority of
director – he deals business with the same corporation the capital stock of PECC, the remaining shares were
in which he is a director. There is nothing wrong per se offered to the public. Mead contributed some personal
with that. However, Sec. 32 provides that: properties. Mead was assigned as a manager but he
SEC. 32. Dealings of directors, trustees or resigned as such when he accepted an engineering job
officers with the corporation. —- A contract of the in China. But even so, he remained as one of the five
corporation with one or more of its directors or trustees directors (the organizers).
or officers is voidable, at the option of such corporation, At that time, PECC was already incurring losses.
unless all the following conditions are present: McCullough, the president, proposed that he shall buy
1. That the presence of such director or trustee the assets of the corporation. The three other directors
in the board meeting in which the contract was then voted in favor of this proposal hence the assets
approved was not necessary to constitute a quorum for were transferred to McCullough. Mead learned of this
such meeting; and so he opposed it because the personal properties he
2. That the vote of such director or trustee was contributed were also transferred to McCullough.
not necessary for the approval of the contract; Mead also argued that under the articles of
3. That the contract is fair and reasonable incorporation of PECC, the board of directors only have
under the circumstances; and ordinary powers; that the authorization made by the
4. That in the case of an officer, the contract three directors to allow the sale of company assets to
with the officer has been previously authorized by the McCullough constitutes an act of agency which is invalid
Board of Directors. at that because no express commission was made, i.e.,
no power of attorney was made in favor of the
In this particular case, the Supreme Court directors. The requirement for a commission can be
focused on the fact that the contract between PWCC inferred from Article 1713 of the Civil Code which
and Te through Falcon and Trazo was not reasonable. provides:
Hence, PWCC has all the rights to void the contract and
look for someone else, which it did. The contract is An agency stated in general terms only includes acts of
unreasonable because of the very low selling price. The administration.
Price at that time was at least P13.00 per bag and the In order to compromise, alienate, mortgage, or
original contract only stipulates P9.70. Also, the original execute any other act of strict ownership an express
contract was for 6 years and there’s no clause in the commission is required. (Emphasis supplied).
contract which protects PWCC from inflation. As a Mead also insists that under their charter, no
director, Te in this transaction should protect the resolution affecting the administration of the affairs of
corporation’s interest more than his personal interest. PECC should be binding upon the corporation unless the
His failure to do so is disloyalty to the corporation. unanimous consent of the entire board was first
Anent the issue of moral damages, there is no obtained
question that PWCC’s goodwill and reputation had been

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ISSUE: Whether or not the three directors had the Stockholdings exceeding twenty (20%) percent
authority to allow the sale/transfer of the company of the outstanding capital stock shall be considered
assets to McCullough. substantial for purposes of interlocking directors.

HELD: Yes. Several factors have to be considered. First is Sec. 34. Disloyalty of a director. - Where a director, by
the fact that Mead abandoned his post when he took virtue of his office, acquires for himself a business
the job offer to work in China. He knew for a fact that opportunity which should belong to the corporation,
the nature of the job offered is permanent. Second, a thereby obtaining profits to the prejudice of such
close reading of the articles of incorporation of PECC corporation, he must account to the latter for all such
shows that there is no such intention for unanimity profits by refunding the same, unless his act has been
when it comes to votes affecting matters of ratified by a vote of the stockholders owning or
administration. The only requirement is that “At least representing at least two-thirds (2/3) of the outstanding
three of said board must be present in order to capital stock. This provision shall be applicable,
constitute a legal meeting.” Which was complied with notwithstanding the fact that the director risked his own
when the other four directors were present when the funds in the venture.
decision to transfer the company assets was made.
Third is the fact that PECC was in a downhill (SRC) Section 27. Insider’s Duty to Disclose When
situation. A corporation is essentially a partnership, Trading. – 27.1. It shall be unlawful for an insider to sell
except in form. “The directors are the trustees or or buy a security of the issuer, while in possession of
managing partners, and the stockholders are the cestui material information with respect to the issuer or the
que trust and have a joint interest in all the property security that is not generally available to the public,
and effects of the corporation.” McCullough as a unless: (a) The insider proves that the information was
director himself and the president can be considered an not gained from such relationship; or (b) If the other
agent but not the “agent” contemplated in Article 1713 party selling to or buying from the insider (or his agent)
of the Civil Code. Article 1713 deals with the broad is identified, the insider proves: (I) that he disclosed the
aspect of agency and in ordinary cases but not in the information to the other party, or (ii) that he had reason
case of a corporation and its directors. In the case at to believe that the other party otherwise is also in
bar, the more appropriate analogy is that PECC, being a possession of the information. A purchase or sale of a
losing corporation, has its directors as the trustees. The security of the issuer made by an insider defined in
trustees-directors hold the company assets in trust for Subsection 3.8, or such insider’s spouse or relatives by
the beneficiaries, which are the creditors. As trustees, affinity or consanguinity within the second degree,
they decided that it is beneficial to sell the company legitimate or common-law, shall be presumed to have
assets to McCullough to at least recover some cash been effected while in possession of material nonpublic
equivalents in the winding up of the corporate affairs. information if transacted after such information came
Besides, there is no prohibition against the selling of into existence but prior to dissemination of such
company assets to one of its directors either from law or information to the public and the lapse of a reasonable
from PECC’s articles of incorporation. time for market to absorb such information: Provided,
however, That this presumption shall be rebutted upon
Sec. 33. Contracts between corporations with a showing by the purchaser or seller that he was aware
interlocking directors. - Except in cases of fraud, and of the material nonpublic information at the time of the
provided the contract is fair and reasonable under the purchase or sale.
circumstances, a contract between two or more
corporations having interlocking directors shall not be 27.2. For purposes of this Section, information is
invalidated on that ground alone: Provided, That if the "material nonpublic" if: (a) It has not been generally
interest of the interlocking director in one corporation is disclosed to the public and would likely affect the
substantial and his interest in the other corporation or market price of the security after being disseminated to
corporations is merely nominal, he shall be subject to the public and the lapse of a reasonable time for the
the provisions of the preceding section insofar as the market to absorb the information; or (b) would be
latter corporation or corporations are concerned. considered by a reasonable person important under the
circumstances in determining his course of action
whether to buy, sell or hold a security.

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27.3. It shall be unlawful for any insider to 23.2. For the purpose of preventing the unfair
communicate material nonpublic information about the use of information which may have been obtained by
issuer or the security to any person who, by virtue of the such beneficial owner, director or officer by reason of
communication, becomes an insider as defined in his relationship to the issuer, any profit realized by him
Subsection 3.8, where the insider communicating the from any purchase or sale, or any sale or purchase, of
information knows or has reason to believe that such any equity security of such issuer within any period of
person will likely buy or sell a security of the issuer less than (6) months unless such security was acquired
whole in possession of such information. in good faith in connection with a debt previously
27.4. (a) It shall be unlawful where a tender contracted, shall inure to and be recoverable by the
offer has commenced or is about to commence for: issuer, irrespective of any intention of holding the
(i) Any person (other than the tender offeror) security purchased or of not repurchasing the security
who is in possession of material nonpublic information sold for a period exceeding six (6) months. Suit to
relating to such tender offer, to buy or sell the securities recover such profit may be instituted before the
of the issuer that are sought or to be sought by such Regional Trial Court by the issuer, or by the owner of
tender offer if such person knows or has reason to any security of the issuer in the name and in behalf of
believe that the information is nonpublic and has been the issuer if the issuer shall fail or refuse to bring such
acquired directly or indirectly from the tender offeror, suit within sixty (60) days after request or shall fail
those acting on its behalf, the issuer of the securities diligently to prosecute the same thereafter, but not such
sought or to be sought by such tender offer, or any shall be brought more than two years after the date
insider of such issuer; and such profit was realized. This Subsection shall not be
(ii) Any tender offeror, those acting on its construed to cover any transaction were such beneficial
behalf, the issuer of the securities sought or to be owner was not such both time of the owner or the sale,
sought by such tender offer, and any insider of such or the sale of purchase, of the security involved, or any
issuer to communicate material nonpublic information transaction or transactions which the Commission by
relating to the tender offer to any other person where rules and regulations may exempt as not comprehended
such communication is likely to result in a violation of within the purpose of this subsection.
Subsection 27.4 (a)(I). 23.3. It shall be unlawful for any such beneficial
(b) For purposes of this subsection the term owner, director or officer, directly or indirectly, to sell
"securities of the issuer sought or to be sought by such any equity security of such issuer if the person selling
tender offer" shall include any securities convertible or the principal: (a) Does not own the security sold: or (b) If
exchangeable into such securities or any options or owning the security, does not deliver not deliver it
rights in any of the foregoing securities. against such sale within 20 days thereafter, or does not
within five days after such sale deposit in the mails or
(SRC) Section 23. Transactions of Directors officers and the unusual channels of transportation; but no person
Principal Stockholders. – 23.1. Every person who is shall be deemed to have violated this subsection if he
directly or indirectly the beneficial owner of more than proves not withstanding the exercise of good faith he
ten per centum (10%) of any class of any equity security was unable to make such delivery in such time, or that
which satisfies the requirements of subsection 17.2, or to do so would cause undue inconvenience or expense.
who is a director or an officer of the issuer of such 23.4. The provisions of subsection 23.2 shall not
security, shall file, at the time either such requirement is apply to any purchase and sale, or sale and purchase,
first satisfied or after ten days after he becomes such a and the provisions of Subsection 23.3 shall not apply to
beneficial owner, director, or officer, a statement form any sale, of an equity security not then or thereafter
the Commission and, if such security is listed for trading held by him and an investment account, by a dealer in
on an exchange, also with the exchange of the amount the ordinary course of his business and incident to the
of all the equity security of such issuer of which he is the establishment or maintenance by him of a primary or
beneficial owner, and within ten days after the close of secondary market, otherwise than on an Exchange, for
each calendar month thereafter, if there has been a such security. The Commission may, by such rules and
change in such ownership at the close of the calendar regulations as it deems necessary or appropriate in the
month and such changes in his ownership as have public interest, define and prescribe terms and
occurred during such calendar month. conditions with respect to securities held in an
investment account and transactions made in the

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ordinary course of business and incident to the Stock corporations must also keep a book to be
establishment or maintenance of a primary or known as the "stock and transfer book", in which must
secondary market. be kept a record of all stocks in the names of the
stockholders alphabetically arranged; the installments
Insuranshares Corp. v Northern Fiscal Corp – see book paid and unpaid on all stock for which subscription has
been made, and the date of payment of any installment;
Sec. 74. Books to be kept; stock transfer agent. - Every a statement of every alienation, sale or transfer of stock
corporation shall keep and carefully preserve at its made, the date thereof, and by and to whom made; and
principal office a record of all business transactions and such other entries as the by-laws may prescribe. The
minutes of all meetings of stockholders or members, or stock and transfer book shall be kept in the principal
of the board of directors or trustees, in which shall be office of the corporation or in the office of its stock
set forth in detail the time and place of holding the transfer agent and shall be open for inspection by any
meeting, how authorized, the notice given, whether the director or stockholder of the corporation at reasonable
meeting was regular or special, if special its object, hours on business days.
those present and absent, and every act done or No stock transfer agent or one engaged
ordered done at the meeting. Upon the demand of any principally in the business of registering transfers of
director, trustee, stockholder or member, the time stocks in behalf of a stock corporation shall be allowed
when any director, trustee, stockholder or member to operate in the Philippines unless he secures a license
entered or left the meeting must be noted in the from the Securities and Exchange Commission and pays
minutes; and on a similar demand, the yeas and nays a fee as may be fixed by the Commission, which shall be
must be taken on any motion or proposition, and a renewable annually: Provided, That a stock corporation
record thereof carefully made. The protest of any is not precluded from performing or making transfer of
director, trustee, stockholder or member on any action its own stocks, in which case all the rules and
or proposed action must be recorded in full on his regulations imposed on stock transfer agents, except the
demand. payment of a license fee herein provided, shall be
The records of all business transactions of the applicable. (51a and 32a; B. P. No. 268.)
corporation and the minutes of any meetings shall be
open to inspection by any director, trustee, stockholder Sec. 75. Right to financial statements. - Within ten (10)
or member of the corporation at reasonable hours on days from receipt of a written request of any
business days and he may demand, writing, for a copy of stockholder or member, the corporation shall furnish to
excerpts from said records or minutes, at his expense. him its most recent financial statement, which shall
Any officer or agent of the corporation who shall include a balance sheet as of the end of the last taxable
refuse to allow any director, trustees, stockholder or year and a profit or loss statement for said taxable year,
member of the corporation to examine and copy showing in reasonable detail its assets and liabilities and
excerpts from its records or minutes, in accordance with the result of its operations.
the provisions of this Code, shall be liable to such At the regular meeting of stockholders or
director, trustee, stockholder or member for damages, members, the board of directors or trustees shall
and in addition, shall be guilty of an offense which shall present to such stockholders or members a financial
be punishable under Section 144 of this Code: Provided, report of the operations of the corporation for the
That if such refusal is made pursuant to a resolution or preceding year, which shall include financial statements,
order of the board of directors or trustees, the liability duly signed and certified by an independent certified
under this section for such action shall be imposed upon public accountant.
the directors or trustees who voted for such refusal: and However, if the paid-up capital of the corporation is less
Provided, further, That it shall be a defense to any than P50,000.00, the financial statements may be
action under this section that the person demanding to certified under oath by the treasurer or any responsible
examine and copy excerpts from the corporation's officer of the corporation.
records and minutes has improperly used any
information secured through any prior examination of LANUZA vs. CA
the records or minutes of such corporation or of any
other corporation, or was not acting in good faith or for FACTS: The Philippine Merchant Marine School (PMMI)
a legitimate purpose in making his demand. was incorporated in 1952 with 700 founders’ shares and

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76 common shares as its initial stock subscription which the stockholders can inspect the books. Allegedly,
reflected in the articles of incorporation. it was only in Pardo didn’t get permission to inspect thus was denied
1978 when the company’s stock and transfer book was such. Hence this petition.
registered, recording 33 common shares as the only The main ground upon which the defense of the
issued and outstanding shares of PMMI. In a dispute company appears to be rested has reference to the
over the basis of a quorum in a stockholders’ meeting, time, or times, within which the right of inspection may
private respondents contend that the same should be be exercised. Article 10 of the By-laws of the company
based on the initial subscribed capital stock as reflected "Every shareholder may examine the books of
in the 1052 articles of incorporation, and not on the the company and other documents pertaining to
number of issued and outstanding shares as recorded in thesame upon the days which the board of directors
1978 in the compnany’s stock and transfer book. shall annually fix."
Petitioners contend otherwise. Both the SEC en banc Board Resolution passed at the directors'
and the Court of Appeals ruled in favor of private meeting held on 16 February 1924
respondents. Hence, this petition seeking to nullify the The board also resolved to call the usual general
assailed decision. (meeting of shareholders) for March 30 of thepresent
year, with notice to the shareholders that the books of
ISSUE: What should be the basis in determining the the company are at their dispositionfrom the 15th to
quorum in the stockholders’ meeting? 25th of the same month for examination, in appropriate
hours.
HELD: The initial subscribed capital stock as reflected in
the articles of incorporation should be made the basis in ISSUES:
the determination of a quorum. The articles of 1) WON the board resolution constitutes a lawful
incorporation defines the charter of the corporation and restriction on the right conferred by statute? NO
its contractual relations with the state and the 2) WON Pardo lost his right to inspection and
stockholders. The contents thereof are binding not only examination for the year, since he has not availed
on the corporation but also on its shareholders. In the himself of the permission [to inspect the company’s
instant case, the articles of incorporation indicate that books and transactions within the 10 days defined in the
the company had 776 issued and outstanding shares. On board resolution? NO
the other hand, the stock and transfer book is not in any 3) WON the shareholder’s motive in exercising this right
sense a public record and only constitutes prima facie is material? NO
evidence. Hence, it may be impeached by other
competent evidence. Therefore, the same cannot be Held: The basis of right of inspection is Sec. 51 of Act No.
used as the sole basis for determining the quorum as it 1459 [Corporation Law]. In Philpotts v.
does not reflect the totality of shares which have been PhilippineManufacturing Co., and Berry, it was held that
subscribed, more so when the articles of incorporation the right of examination there conceded to the
show a significantly larger amount of shares issued and stockholder may be exercised either by a stockholder in
outstanding. person or by any duly authorized agent or
representative.
ANTONIO PARDO v. THE HERCULES LUMBER and It may be admitted that the officials in charge of
IGNACIO FERRER a corporation may deny inspection when sought at
unusual hours or under other improper conditions; but
Pardo is a stockholder of Hercules Lumber and neither the executive officers nor the board of directors
Ferrer is the acting secretary of the said company. The have the power to deprive a stockholder of the right
Company refused to permit the Pardo to inspect the altogether.
records and business transactions of the company. A by-law unduly restricting the right of
There was no question regarding the right to inspect as inspection is undoubtedly invalid. Under a statute
it is guaranteed in the Corp. Law. similar to our own it has been held that the statutory
The main consideration in this case has right of inspection is not affected by the adoption by the
reference to the time, or times, within which the right of board of directors of a resolution providing for the
inspection may be exercised. The company, through closing of transfer books thirty days before an election.
various resolutions, had designated certain times to

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Our statute declares that the right of inspection • It will be noted that such right can be exercised
can be exercised "at reasonable hours." This means at “at reasonable hours”, meaning reasonable hours on
reasonable hours on business days throughout the year, business days throughout the year; not merely during
and not merely during some arbitrary period of a few some arbitrary period chosen by the officers.
days chosen by the directors. • Also, generally speaking, the motive of the
shareholder exercising the right is immaterial.
Additional issue: The motives that prompted Pardo to Therefore, Pardo is granted the relief to inspect.
make inspection
Right to inspect- open to any director, trustee or
It is alleged that the information which Pardo stockholder or member of the corporation at reasonable
seeks is desired for ulterior purposes in connection with hours on business days. He may demand in writing a
a competitive firm with which Pardo is alleged to be copy of excerpts at his expense.
connected. It is also insisted that one of Pardo’s
purposes is to obtain evidence preparatory to the Philpotts vs. Philippine Manufacturing Co. and Berry
institution of an action, which he means to bring against
the company re: a contract of employment which once W.G. Philpotts (Petitioner) , a stockholder in
existed between the corporation and himself. These Philippine Manufacturing Company sought to compel
suggestions are entirely apart from the issue — the respondents to permit plaintiff, a person or by some
motive of the shareholder exercising the right is authorized agent or attorney to inspect and examine the
immaterial. records of the business transacted by said company
since January 1, 1918.
Writ of mandamus will issue Respondent corporation or any of its officials
Section 51. All business corporations shall keep has refused to allow the petitioner himself to examine
and carefully preserve a record of all business anything relating to the affairs of the company, and the
transactions, and a minute of all meetings of directors, petitioner prays for an order commanding respondents
members, or stockholders, in which shall be set forth in to place records of all business transactions of the
detail the time and place of holding the meeting, how company, during a specific period, at the disposal of the
authorized, the notice given, whether the meeting was plaintiff or his duly authorized agent or attorney.
regular or special, if special its object, those present and Petitioner desires to exercise said right through agent or
absent, and every act done or ordered done at the attorney.
meeting. On the demand of any director, member, or Petition is filed originally in the Supreme Court
stockholder, the time when any director, member, or under authority of Section 515 of Code of Civil
stockholder entered or left the meeting must be noted Procedure, which gives SC concurrent jurisdiction with
on the minutes, and on a similar demand, the yeas and then Court of First Instance in cases where any
nays must be taken on any motion or proposition and a corporation or person unlawfully excludes the plaintiff
record thereof carefully made. The protest of any from use and enjoyment and some right he is entitled.
director, member, or stockholder on any action or
proposed action must be recorded in full on his demand. ISSUE: Whether the right which the law concedes to a
The record of all business transactions of the stockholder to inspect the records can be exercised by a
corporation and the minutes of any meeting shall be proper agent or attorney of the stockholder as well as
open to the inspection of any director, member, or by stockholder in person
stockholder of the corporation at reasonable hours.
HELD: Yes. Right of inspection of records can be
• No. Such restriction made by the company is exercised by proper agent or attorney of the stockholder
invalid. as well as by stockholder in person.
• Inspection at unusual hours or under improper The right of inspection / examination into
conditions may be denied, otherwise it cannot be corporate affairs given to a stockholder in section 51 of
denied. the Corporation Law which states: “The records of all
• Neither the executive officers nor board of business transactions of the corporation and the
directors have the power to deny a stockholder of the minutes of any meeting shall be open to the inspection
right all together. of any director, member, or stockholder of the

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corporation at reasonable hour” can be exercised either meeting of the BOD at which the compensation of the
by himself or by any duly authorized representative or attorneys of the company was fixed, or whether
attorney in fact, and either with or without the Director Veraguth, in a spirit of antogonism, has made
attendance of the stockholder. This is in conformity with this merely a pretext to cause trouble, we are unable
the general rule that what a man may do in person he definitely to say. This much, however, can appropriately
may do through another. be stated and is decisive, and this is that the meeting in
question is in the past and, therefore, now merely
EUGENIO VERAGUTH, Director and Stockholder of the presents an academic question; that no damage was
Isabela Sugar Company, Inc., petitioner, caused to Veraguth by the action taken at the special
vs. meeting which he did not attend, since his interests
ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting were fully protected by the Philippine National Bank;
President, and AGUSTIN B. MONTILLA, Secretary of the and that as to meetings in the future it is to be
same corporation, respondents. presumed that the secretary of the company will fulfill
the requirements of the resolutions of the company
FACTS: pertaining to regular and special meetings. It will, of
The parties to this action are Eugenio Veraguth (director course, be incumbent upon Veraguth to give formal
and stockholder of Isabela Sugar Company, Inc.), and notice to the secretary of his post-office address if he
the Isabela Sugar Company, Inc., Gil Montilla (acting desires notice sent to a particular residence.
president) and Agustin B. Montilla (secretary). Petitioner
prays: 2) On the second question pertaining to the right
- That the respondents be required within five of inspection of the books of the company, the
days from receipt of notice of this petition to show Corporation Law, Section 51, provides that:
cause why they refuse to notify the petitioner, as “All business corporations shall keep and
director, of the regular and special meetings of the BOD; carefully preserve a record of all business transactions,
- That a final and absolute writ of mandamus be and a minute of all meetings of directors, members, or
issued to each and all of the respondents to notify stockholders, in which shall be set forth in detail the
immediately the petitioner within the reglamentary time and place of holding the meeting was regular or
period, of all regular and special meetings of the board special, if special its object, those present and absent,
of directors of the Isabela Sugar Central Company; and and every act done or ordered done at the meeting. . . .
- To place at his disposal at reasonable hours the The record of all business transactions of the
minutes, documents, and books of said corporation for corporation and the minutes of any meeting shall be
his inspection as director and stockholder, and to issue open to the inspection of any director, member, or
immediately, upon payment of the fees, certified copies stockholder of the corporation at reasonable hours.”
of any documentation in connection with said minutes,
documents, and the books of the aforesaid corporation. Directors of a corporation have the unqualified right to
inspect the books and records of the corporation at all
ISSUE/S: reasonable times.
1) Whether there was a malicious attempt to keep We rule that the petitioner has not made out a case for
Director Veraguth from attending a special meeting of relief by mandamus. Petition denied with costs.
the BOD at which the compensation of the attorneys of
the company was fixed, or whether Director Veraguth, NOTES (In the event Atty. Dakanay gets finicky):
in a spirit of antagonism, has made this merely a pretext Pretexts may not be put forward by officers of
to cause trouble. corporations to keep a director or shareholder from
2) Whether a director has the unqualified right to inspecting the books and minutes of the corporation,
inspect the books and records of the corporation. and the right of inspection is not to be denied on the
ground that the director or shareholder is on unfriendly
RULING: terms with the officers of the corporation whose
1) Speaking to the first point relating to the alleged records are sought to be inspected.
failure of the secretary to notify the petitioner of a A director or stockholder can of course make
special meeting, whether there was a malicious attempt copies, abstracts, and memoranda of documents, books,
to keep Director Veraguth from attending a special and papers as an incident to the right of inspection, but

38 | P a g e
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cannot, without an order of a court, be permitted to Continental Ore Phil., Inc., Continental Ore, Huber
take books from the office of the corporation. Corporation, Allis Chalmers and General Motors
We do not conceive, however, that a director or Corporation. In the course of the hearing of said case on
stockholder has any absolute right to secure certified 3 August 1967, the personality of Gonzales to sue the
copies of the minutes of the corporation until these bank and question the letters of credit it has extended
minutes have been written up and approved by the for the importation by the Republic of the Philippines of
directors. (See Fisher's Philippine Law of Stock public works equipment intended for the massive
Corporations, sec. 153, and Fletcher Cyclopedia development program of the President was raised. In
Corporations, vol. 4, Chap. 45.) view thereof, he expressed and made known his
When Veraguth telegraphed the secretary, intention to acquire one share of stock from
asking the latter to forward a certified copy of the Congressman Justiniano Montano which, on the
resolution of the BOD concerning the payment of following day, 30 August 1967, was transferred in his
attorney's fees in a certain case against Isabela Sugar name in the books of the Bank. Subsequent to his
Company and others, the secretary answered stating aforementioned acquisition of one share of stock of the
that, since the minutes of the meeting in question had Bank, Gonzales, in his dual capacity as a taxpayer and
not been signed by the directors present, a certified stockholder, filed the following cases involving the bank
copy could not be furnished and that as to other or the members of its Board of Directors to wit: (1) On
proceedings of the stockholders, a request should be 18 October 1967, Civil Case 71044 versus the Board of
made to the president of Isabela Sugar Company. It Directors of the Bank; the National Investment and
appears that the board of directors adopted a resolution Development Corp., Marubeni Iida Co., Ltd., and Agro-
providing for inspection of the books and the taking of Inc. Dev. Co. or Saravia; (2) On 11 May 1968, Civil Case
copies "by authority of the President of the corporation 72936 versus Roberto Benedicto and other Directors of
previously obtained in each case." We do not think that the Bank, Passi (Iloilo) Sugar Central, Inc., Calinog-
anything improper occurred when the secretary Lambunao Sugar Mill Integrated Farming, Inc., Talog
declined to furnish certified copies of minutes which had sugar Milling Co., Inc., Safary Central, Inc., and Batangas
not been approved by the BOD, and that while so much Sugar Central Inc.; and (3) On 8 May 1969, Civil Case
of the last resolution of the BOD as provides for prior 76427 versus Alfredo Montelibano and the Directors of
approval of the president of the corporation before the both the PNB and DBP.
books of the corporation can be inspected puts an illegal
obstacle in the way of a stockholder or director, that On 11 January 1969, however, Gonzales addressed a
resolution, so far as we are aware, has not been letter to the President of the Bank, requesting
enforced to the detriment of anyone. In addition, it submission to look into the records of its transactions
should be said that this is a family dispute, the petitioner covering the purchase of a sugar central by the Southern
and the individual respondents belonging to the same Negros Development Corp. to be financed by Japanese
family; that a test case between the petitioner and the suppliers and financiers; its financing of the Cebu-
respondents has not been begun in the Court of First Mactan Bridge to be constructed by V.C. Ponce, Inc. and
Instance of Occidental Negros involving hundreds of the construction of the Passi Sugar Mills in Iloilo. On
thousands of pesos, and that the appellate court should January 23, 1969, the Asst. Vice President and Legal
not intrude its views to give an advantage to either Counsel of the Bank answered petitioner's letter
party. denying his request for being not germane to his
interest as a one share stockholder and for the cloud of
Gonzales vs. Philippine National Bank doubt as to his real intention and purpose in acquiring
[GR L-33320, 30 May 1983] said share. In view of the Bank's refusal, Gonzales
instituted the petition for mandamus. The Court of First
Facts: Ramon A. Gonzales initially instituted several Instance of Manila denied the prayer of Gonzales that
cases in the Supreme Court questioning different he be allowed to examine and inspect the books and
transactions entered into by the Bank with other records of PNB regarding the transactions mentioned on
parties. First among them is Civil Case 69345 filed on 27 the grounds that the right of a stockholder to inspect
April 1967, by Gonzales as a taxpayer versus Sec. the record of the business transactions of a corporation
Antonio Raquiza of Public Works and Communications, granted under Section 51 of the former Corporation Law
the Commissioner of Public Highways, the Bank, (Act No. 1459, as amended) is not absolute, but is

39 | P a g e
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limited to purposes reasonably related to the interest of which he can use against the PNB for acts done by the
the stockholder, must be asked for in good faith for a latter when Gonzales was a total stranger to the same.
specific and honest purpose and not gratify curiosity or He could have been impelled by a laudable sense of civic
for speculative or vicious purposes; that such consciousness, but it could not be said that his purpose
examination would violate the confidentiality of the is germane to his interest as a stockholder.
records of the bank as provided in Section 16 of its
charter, RA 1300, as amended; and that Gonzales has 2. Section 15 of the PNB's Charter (RA 1300, as
not exhausted his administrative remedies. Gonzales amended) provides that "Inspection by Department of
filed the petition for review. Supervision and Examination of the Central Bank. — The
National Bank shall be subject to inspection by the
Issue: Department of Supervision and Examination of the
Central Bank." Section 16 thereof providest that
Whether Gonzales' can ask for an examination of the "Confidential information. — The Superintendent of
books and records of PNB, in light of his ownership of Banks and the Auditor General, or other officers
one share in the bank. designated by law to inspect or investigate the condition
Whether the inspection sought to be exercised by of the National Bank, shall not reveal to any person
Gonzales would be violative of the provisions of PNB's other than the President of the Philippines, the
charter. Secretary of Finance, and the Board of Directors the
details of the inspection or investigation, nor shall they
Held: give any information relative to the funds in its custody,
its current accounts or deposits belonging to private
1. The unqualified provision on the right of inspection individuals, corporations, or any other entity, except by
previously contained in Section 51, Act No. 1459, as order of a Court of competent jurisdiction." On the
amended, no longer holds true under the provisions of other hand, Section 30 of the same provides that
the present law. The argument of Gonzales that the "Penalties for violation of the provisions of this Act. —
right granted to him under Section 51 of the former Any director, officer, employee, or agent of the Bank,
Corporation Law should not be dependent on the who violates or permits the violation of any of the
propriety of his motive or purpose in asking for the provisions of this Act, or any person aiding or abetting
inspection of the books of PNB loses whatever validity it the violations of any of the provisions of this Act, shall
might have had before the amendment of the law. If be punished by a fine not to exceed ten thousand pesos
there is any doubt in the correctness of the ruling of the or by imprisonment of not more than five years, or both
trial court that the right of inspection granted under such fine and imprisonment." The Philippine National
Section 51 of the old Corporation Law must be Bank is not an ordinary corporation. Having a charter of
dependent on a showing of proper motive on the part of its own, it is not governed, as a rule, by the Corporation
the stockholder demanding the same, it is now Code of the Philippines. The provision of Section 74 of
dissipated by the clear language of the pertinent Batas Pambansa Blg. 68 of the new Corporation Code
provision contained in Section 74 of Batas Pambansa with respect to the right of a stockholder to demand an
Bilang 68. Although Gonzales has claimed that he has inspection or examination of the books of the
justifiable motives in seeking the inspection of the books corporation may not be reconciled with the above
of the PNB, he has not set forth the reasons and the quoted provisions of the charter of the PNB. It is not
purposes for which he desires such inspection, except to correct to claim, therefore, that the right of inspection
satisfy himself as to the truth of published reports under Section 74 of the new Corporation Code may
regarding certain transactions entered into by the apply in a supplementary capacity to the charter of the
respondent bank and to inquire into their validity. The PNB.
circumstances under which he acquired one share of
stock in the PNB purposely to exercise the right of Gokongwei v SEC (supra)
inspection do not argue in favor of his good faith and
proper motivation. Admittedly he sought to be a REPUBLIC OF THE PHILIPPINES (PCGG) vs.
stockholder in order to pry into transactions entered SANDIGANBAYAN
into by the PNB even before he became a stockholder. G.R. No. 88858/ G.R. No. 88809 July 10, 1991
His obvious purpose was to arm himself with materials

40 | P a g e
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FACTS: Private respondent Eduardo Conjuangco, Jr., as a the stockholder is not in friendly terms with the
stockholder of record, sought authority to inspect and corporation's officers.
examine the corporate records of United Coconut While it may be true that the right of inspection
Planters Bank and San Miguel Corporation. Since the granted by Sec. 74 of the Corporation Code is not
shares of private respondent in the UCPB and SMC have absolute, as when the stockholder is not acting in good
been sequestered by the PCGG, private respondent was faith and for a legitimate purpose or when the demand
advised to course his request through the PCGG. is purely speculative or merely to satisfy curiosity, the
Thereafter, private respondent filed a petition for same may not be said in the case of private respondent.
prohibition and mandamus before the Sandiganbayan In the case at bar, petitioner failed to discharge the
seeking to enforce his stockholder's right to inspect the burden of proof to show that private respondent's
corporate records of UCPB and SMC. The Sandiganbayan action in seeking examination of the corporate records
on its resolution dated May 9, 1989 and May 18, 1989, was moved by unlawful or ill-motivated designs which
allowed respondent Cojuangco to inspect the corporate could appropriately call for a judicial protection against
records of UCPB and SMC respectively. Hence, the the exercise of such right. Save for its unsubstantiated
instant petition for certiorari with prayer for the allegations, petitioner could offer no proof, nay, not
issuance of TRO. On June 13, 1989 and July 20, 1989, even a scintilla of evidence that respondent Cojuangco,
Court issued a TRO. Jr., was motivated by bad faith; that the demand was for
an illegitimate purpose or that the demand was
ISSUE: Whether or not sequestration of the shares of impelled by speculation or idle curiosity. Surely,
private respondent in the UCPB and SMC automatically respondent's substantial shareholdings in the SMC and
deprives him of his right of inspection. UCPB cannot be an object of mere curiosity.

RULING: The right of a stockholder to inspect and/or CANDIDO PASCUAL, plaintiff-appellant, vs.
examine the records of a corporation is explicitly EUGENIO DEL SAZ OROZCO, ET AL, defendants-
provided in Section 74 of the Corporation Code. The appellees.
PCGG does not become, ipso facto, the owner of the
shares just because the same have been sequestered, FACTS: This action was brought by the plaintiff Pascual,
nor does it become the stockholder of record by virtue in his own right as a stockholder of the bank, for the
of such sequestration. Records indicate that private benefit of the bank, and all the other stockholders
respondent is the ostensible owner of a substantial thereof. The Banco Español-Filipino is a banking
number of shares and is a stockholder of record in SMC corporation, constituted as such by royal decree of the
and UCPB. * Being a stockholder beyond doubt, there is Crown of Spain in the year 1854, the original grant
therefore no reason why private respondent may not having been subsequently extended and modified by
exercise his statutory right of inspection in accordance royal decree of July 14, 1897, and by Act No. 1790 of the
with Sec. 74 of the Corporation Code, the only express Philippine Commission.
limitation being that the right of inspection should be It is alleged in the amended complaint that the
exercised at reasonable hours on business days; 2) the only compensation contemplated or provided for the
person demanding to examine and copy excerpts from managing officers of the bank was a certain per cent of
the corporation's records and minutes has not the net profits resulting from the bank's operations, as
improperly used any information secured through any set forth in article 30 of its reformed charter or statutes.
previous examination of the records of such The gist of the first and second causes of action is as
corporation; and 3) the demand is made in good faith or follows: The defendants constitute a majority of the
for a legitimate purpose. The latter two limitations, present board of directors of the bank, who alone can
however, must be set up as a defense by the authorize an action against them in the name of the
corporation if it is to merit judicial cognizance. As such, corporation. It appears that during the years 1903, 1904,
and in the absence of evidence, the PCGG cannot 1905, and 1907 the defendants and appellees, without
unilaterally deny a stockholder from exercising his the knowledge, consent, or acquiescence of the
statutory right of inspection based on an unsupported stockholders, deducted their respective compensation
and naked assertion that private respondent's motive is from the gross income instead of from the net profits of
improper or merely for curiosity or on the ground that the bank, thereby defrauding the bank and its
stockholders of approximately P20,000 per annum.

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The second cause of action sets forth that G.R. No. L-25241; November 3, 1926
defendants' and appellees' immediate predecessors in
office in the bank during the years 1899, 1900, 1901, FACTS:
and 1902, committed the same illegality as to their Teal & Company is indebted to HW Peabody &
compensation as is charged against the defendants Co. for P300K for tractors, plows, and parts delivered, of
themselves. In the four years immediately following the which it has paid P150K. Asia Banking Corp held drafts
year 1902, the defendants and appellees were the only accepted by Teal under the HW Peabody’s guarantee.
officials or representatives of the bank who could and Tractors were returned to HW Peabody due to its being
should investigate and take action in regard to the sums unsellable due to financial and agricultural depression in
of money thus fraudulently appropriated by their the RP. Teal ordered another lot of tractors from Smith
predecessors. They were the only persons interested in Kirkpatrick, but shipment was delayed until the
the bank who knew of the fraudulent appropriation by rescission of the credit of Teal with Asia Bank. Yet Smith
their predecessors. still delivered the order, and Teal at the request and
The court below sustained the demurrer as to advice of the Bank accepted the drafts and stored the
the first and second causes of action on the ground that same. Asia Banking persuaded Teal, Peabody, and Smith
in actions of this character the plaintiff must aver in his Kirkpatrick to enter into a “creditor’s agreement”
complaint that he was the owner of stock in the wherein it was mutually agreed that neither of the
corporation at the time of the occurrences complained parties should take action to collect its debts from Teal
of, or else that the stock has since devolved upon him by for 2 years. Teal soon became indebted to Asia Bank for
operation of law. P750,000, secured by mortgage. The Bank then
suggested that, for the mutual protection of Teal and
ISSUE: Whether or not the petitioner has a cause of itself, it was advisable that the Bank should temporarily
action to file a derivative suit. obtain control of the management and affairs of the
company.
RULING: Yes. To this end, it was necessary for the
As to the first cause of action: In suits of this stockholders to place their shares in a voting trust to be
character the corporation itself and not the plaintiff held by the Bank, and then the Bank would finance Teal
stockholder is the real party in interest. The rights of the under its own supervision. The Teal stockholders were
individual stockholder are merged into that of the thus induced to enter into the Voting Trust Agreement,
corporation. It is a universally recognized doctrine that a with the purpose that the agreement will be intended
stockholder in a corporation has no title legal or for the protection of all parties from outside creditors.
equitable to the corporate property; that both of these Shortly after the execution and delivery of the voting
are in the corporation itself for the benefit of all the trust and the MOA, Mullen as GM of the Bank, caused
stockholders. So it is clear that the plaintiff, by reason of the displacement and removal stockholder
the fact that he is a stockholder in the bank representatives in the Board and the substitution in
(corporation) has a right to maintain a suit for and on their place of the Bank’s employees or representatives.
behalf of the bank, but the extent of such a right must The new Board, who have not purchased any share of
depend upon when, how, and for what purpose he stock of Teal, proceeded to remove the Corporate
acquired the shares which he now owns. Secretary, discharge all the old managers and displace
As to the Second cause of action: It affirmatively them with creatures of their own choosing whose
appears from the complaint that the plaintiff was not a interest consisted wholly in pleasing themselves and the
stockholder during any of the time in question in this Bank, and who were wholly foreign to the stockholders.
second cause of action. Upon the question whether or
not a stockholder can maintain a suit of this character ISSUE:
upon a cause of action pertaining to the corporation WON the action should have been brought by
when it appears that he was not a stockholder at the Teal and Co., and not the majority stockholders thereof.
time of the occurrence of the acts complained of and
upon which the action is based, the authorities do not HELD:
agree. NO. Teal and Co., including its Board, was
already under the control of Asia Banking. Thus, it would
Everett vs. Asia Banking have been useless to ask the Board to institute the

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Corporation Law Case Digests

present suit, and the law does not require litigants to Sec 63 of the Corporation Code envisions a formal
perform useless acts. The court held that the certificate of stock which can be issued only upon
stockholders could bring the said action (in the nature of compliance with certain requisites. First, the certificates
a derivative suit) on behalf of Teal and Co. must be signed by the president or vice-president,
When the Board of Directors in a Corporation is countersigned by the secretary or assistant secretary,
under the complete control of the principal defendants and sealed with the seal of the corporation. A mere
in the case and it is obvious that a demand upon the typewritten statement advising a stockholder of the
board of directors to institute an action and prosecute extent of his ownership in a corporation without
the same effectively would be useless, the action may qualification and/or authentication cannot be
be brought by one or more of the stockholders without considered as a formal certificate of stock. Second,
such demand. The Court however, did not rule on the delivery of the certificate is an essential element of its
propriety or impropriety of the Voting Trust Agreement issuance. Hence, there is no issuance of a stock
between the Bank and the Company. certificate where it is never detached from the stock
books although blanks therein are properly filled up if
NOTE: However, it may be inferred that the the person whose name is inserted therein has no
stockholders may bring suit against the trustees if the control over the books of the company. Third, the par
voting trust agreement is being used by the said value, as to par value shares, or the full subscription as
Trustees to perpetuate fraud against the corporation, as to no par value shares, must first be fully paid. Fourth,
is present in this case. The stockholders would still have the original certificate must be surrendered where the
legal standing to institute the suit in behalf of the person requesting the issuance of a certificate is a
corporation for acts done by the trustees to defraud the transferee from a stockholder.
corporation, when the said trustees already have The certificate of stock itself once issued is a continuing
control of the Board of the said corporation. A derivative affirmation or representation that the stock described
suit is still proper. therein is valid and genuine and is at least prima
facie evidence that it was legally issued in the absence
BITONG V. CA (G.R. NO. 123553) of evidence to the contrary. However, this presumption
may be rebutted. Aside from petitioner’s own
admissions, several corporate documents disclose that
Facts: the true party-in-interest is not petitioner but JAKA. It
Petitioner Bitong allegedly acting for the benefit of Mr. should be emphasized that JAKA executed, a deed of
& Ms. Co. filed a derivative suit before the SEC against sale over 1,000 Mr. & Ms. shares in favor of respondent
respondent spouses Apostol, who were officers in said Eugenio D. Apostol. On the same day, respondent
corporation, to hold them liable for fraud and Apostol signed a declaration of trust stating that she
mismanagement in directing its affairs. Respondent was the registered owner of 1,000 Mr. & Ms. shares
spouses moved to dismiss on the ground that petitioner covered by a Certificate of Stock. And, there is nothing
had no legal standing to bring the suit as she was merely in the records which shows that JAKA had revoked the
a holder-in-trust of shares of JAKA Investments which trust it reposed on respondent Eugenia D. Apostol.
continued to be the true stockholder of Mr. & Ms. Neither was there any evidence that the principal had
Petitioner contends that she was a holder of proper requested her to assign and transfer the shares of stock
stock certificates and that the transfer was recorded. to petitioner. In fine, the records are unclear on how
She further contends that even in the absence of the petitioner allegedly acquired the shares of stock of JAKA.
actual certificate, mere recording will suffice for her to Thus, for a valid transfer of stocks, the requirements are
exercise all stockholder rights, including the right to file as follows: (a) There must be delivery of the stock
a derivative suit in the name of the corporation. The SEC certificate; (b) The certificate must be endorsed by the
Hearing Panel dismissed the suit. On appeal, the SEC En owner or his attorney-in-fact or other persons legally
Banc found for petitioner. CA reversed the SEC En Banc authorized to make the transfer; and, (c) to be valid
decision. against third parties, the transfer must be recorded in
Issue: the books of the corporation. At most, in the instant
Whether or not petitioner is the true holder of stock case, petitioner has satisfied only the third requirement.
certificates to be able institute a derivative suit. Compliance with the first two requisites has not been
Ruling: NO. clearly and sufficiently shown.

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*The basis of a stockholder’s suit is always one in corporate planning; and likewise ordering Fortunato
equity. However, it cannot prosper without first
V. de Castro and Arsenio Lopez Chua under the
complying with the legal requisites for its institution.
The most important of these is the bona fide ownership fourth cause of action to restore to the corporation
by a stockholder of a stock in his own right at the time the salaries they each received as special assistants
of the transaction complained of which invests him respectively to the president and board chairman. In
with standing to institute a derivative action for the case of insolvency of any or all of them, the
benefit of the corporation.
members of the board who created their positions
are subsidiarily liable.
Filipinas Port V. Go (2007)  Appealed: creation of the positions merely for
accommodation purposes - GRANTED
G.R. No. 161886 March 16, 2007
ISSUES:
Lessons Applicable: Rationale for "Centralized
Management" Doctrine 1. W/N there was mismanagement - NO
2. W/N there is a proper derivative suit - YES
FACTS:

 Sept 4 1992: Eliodoro C. Cruz, Filport’s president HELD: CA Affirmed


from 1968-1991, wrote a letter to the corporation’s
1. NO
BOD questioning the creation and election of the
following positions with a monthly remuneration of
P13,050.00 each. Cruz requested the board to take  Section 35 of the Corporation Code, the creation of
necessary action/actions to recover from those an executive committee (as powerful as the BOD)
elected to the aforementioned positions the salaries must be provided for in the bylaws of the
they have received. corporation
 Jun 4 1993: Cruz, purportedly in representation of  Notwithstanding the silence of Filport’s bylaws on
Filport and its stockholders, among which is herein the matter, we cannot rule that the creation of the
co-petitioner Mindanao Terminal and Brokerage executive committee by the board of directors is
Services, Inc. (Minterbro), filed with the SEC a illegal or unlawful. One reason is the absence of a
derivative suit against Filport's BOD for acts of showing as to the true nature and functions of
mismanagement detrimental to the interest of the executive committee
corporation and its shareholders at large.  But even assuming there was mismanagement
 Cruz prayed that the BOD be made to pay Filport, resulting to corporate damages and/or business
jointly and severally, the sums of money variedly losses, respondents may not be held liable in the
representing the damages incurred as a result of the absence of a showing of bad faith in doing the acts
creation of the offices/positions complained of and complained of. ("dishonest purpose","some moral
the aggregate amount of the questioned increased obliquity","conscious doing of a wrong", "partakes
salaries. of the nature of fraud")
 RTC: BOD have the power to create positions not in  determination of the necessity for additional offices
the by-laws and can increase salaries. But Edgar C. and/or positions in a corporation is a management
Trinidad under the third and fourth causes of action prerogative which courts are not wont to review in
to restore to the corporation the total amount of the absence of any proof that such prerogative was
salaries he received as assistant vice president for exercised in bad faith or with malice

44 | P a g e
Corporation Law Case Digests

2. YES The Trial Court sided with the respondent and ruled that
the creation of the executive committee and the
 Besides, the requisites before a derivative suit can additional position was legitimate given that it was
be filed by a stockholder: - present provided by the corporation’s by-law. However, the
a) the party bringing suit should be a shareholder as prayer for the return of salaries received was granted,
of the time of the act or transaction complained of, even if the positions and the committee were valid, for
the number of his shares not being material; - a the court ruled that Filipinas Port Services is not a big
corporation requiring multiple executive positions.
stockholder of Filport
The respondents appealed the decision and they
b) he has tried to exhaust intra-corporate remedies,
received a favourable decision as the Court of
i.e., has made a demand on the board of directors Appeals granted the respondents’ appeal, reversed and
for the appropriate relief but the latter has failed or set aside the appealed decision of the trial court and
refused to heed his plea; and accordingly dismissed the so-called derivative suit filed
by Cruz, et al.,
- he wrote a letter
Cruz did not take the decision sitting down, hence the
c) the cause of action actually devolves on the petition.
corporation, the wrongdoing or harm having been,
or being caused to the corporation and not to the To counter the appeal filed by Cruz, respondents also
claim that what Cruz filed is not a derivative suit.
particular stockholder bringing the suit. - wrong
against the stockholders of the corporation The petition was denied and the challenged decision
generally of the CA was affirmed. Only, the Supreme Court
clarified the issue involving the legitimacy of the
derivative suit.
FILIPINAS PORT SERVICES INC v. GO, ET AL.
FACTS:
ISSUE:
The case involves a petition for review on
certiorari. Was the case filed by Cruz, on behalf of Filipinas Port
Services Inc., a derivative suit?

We have here Eliodoro C. Cruz suing on behalf of


the stockholders of Filipinas Port Services alleging that HELD:
there has been numerous cases of mismanagement by
the board of directors: YES.

1. creation of an executive committee not


provided for in the by-laws of the corporation
Under the Corporation Code, where a corporation is an
2. disproportionate increase in the salary
injured party, its power to sue is lodged with its board of
of officials
directors or trustees. But an individual stockholder or an
3. re-creation of already existing positions
individual trustee may be permitted to institute a
4. creation of additional positions with
derivative suit in behalf of the corporation in order to
holders not doing any work to deserve any
protect or vindicate corporate rights whenever the
monthly remuneration.
officials of the corporation refuse to sue, or when a
He prayed for the return of the salary received by all the
demand upon them to file the necessary action would
unnecessarily appointed members.
45 | P a g e
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be futile because they are the ones to be sued, or necessary action in his complaint; and (3) the alleged
because they hold control of the corporation. In such wrong was in truth a wrong against the stockholders of
actions, the corporation is the real party-in-interest the corporation generally, and not against Cruz or
while the suing stockholder, in behalf of the Minterbro, in particular. And while it is true that the
corporation, is only a nominal part. complaining stockholder must show to the satisfaction
of the court that he has exhausted all the means within
Here, the action below is principally for damages his reach to attain within the corporation itself the
resulting from alleged mismanagement of the affairs of redress for his grievances, or actions in conformity to his
Filport by its directors/officers, it being alleged that the wishes, nonetheless, where the corporation is under the
acts of mismanagement are detrimental to the interests complete control of the principal defendants or other
of Filport. Thus, the injury complained of primarily trustees, as here, there is no necessity of making a
pertains to the corporation so that the suit for relief demand upon the directors. The reason is obvious: a
should be by the corporation. However, since the ones demand upon the board to institute an action and
to be sued are the directors/officers of the corporation prosecute the same effectively would have been useless
itself, a stockholder, like petitioner Cruz, may validly and an exercise in futility.
institute a “derivative suit” to vindicate the alleged
corporate injury, in which case Cruz is only a nominal
party while Filport is the real party-in-interest.
Bottom line, when it comes to cases involving two or
Besides, the requisites before a derivative suit can be more trustees, an individual trustee can file a derivative
filed by a stockholder or individual trustee are present in suit duly following the requisites without the need to
this case, to wit: exhaust internal remedies where the trusteeship is
under the complete control of the other trustees for it
will be a waste of time.
a) the party bringing suit should be a shareholder as
of the time of the act or transaction complained of, the
number of his shares not being material; LIKEN v. SHAFFER [Ramos]

(US District Court, N.D. Iowa, 64 F. Supp. 432; 1946)

b) he has tried to exhaust intra-corporate remedies, PLAINTIFFS: Liken (no full names given)
i.e., has made a demand on the board of directors for [stockholders of Shores-Mueller
the appropriate relief but the latter has failed or refused Company]
to heed his plea; and
DEFENDANTS: Shaffer (no full names given) [officers &
directors of Shores-Mueller Company]

c) the cause of action actually devolves on the PONENTE: Graven (District Judge, District court of
corporation, the wrongdoing or harm having been, or Iowa)
being caused to the corporation and not to the
particular stockholder bringing the suit. FACTS:

 Shores-Mueller Company is engaged in


pharmaceuticals (Iowa; existed in Jan 1, ’31)
Indisputably, petitioner Cruz (1) is a stockholder of o Arthur Barlow appointed as receiver for the
Filport; (2) he sought without success to have its board company
of directors remedy what he perceived as wrong when  Plaintiffs claim wrong doing on the part of
he wrote a letter requesting the board to do the defendants in the affairs of the Shores-Mueller
Company
46 | P a g e
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o Defendants despoiled the company of its  bailor’s duty NOT act with the intent
assets by means of collusion and fraudulent of depreciating the pledge’s value
receivership and receiver’s sale o Wrongdoing on the part of those in control
 This case is a trial on the merits on the question of of a corp does NOT work an injury to the
res judicata (separate from the main case) corp but DOES work an injury to minority
o Not much info given in the book about the stockholders
case’s background; it mainly discussed  E.g. when the majority stockholders
doctrines reorganize the corp to the corp’s
ISSUES: WON the case is barred by judgments in earlier benefit buy practically freezes out
derivative suites brought by other stakeholders and eliminates minority
stockholders in the process
HELD: YES, the suit is barred. Suit has become a  Minority stockholders don’t
derivative suit by amendment and is thus barred complain of a wrong done
by judgments in earlier derivative suits brought to the corp, but one done
directly on them
by other stakeholders. DISMISSED.
o Where those despoiling a corp have as part
of the wrongdoing destroyed the corp entity
 Property of a corporation is NOT the property of the
of the wronged corp
individual stockholders
 E.g. stockholder’s derivative suit
o Property of corp is distinct from the
where recovery is allowed
property in the shares of stock issued by it
o Stockholders are not the owners of its
property as individuals
DERIVATIVE SUIT
o Corporation is a person and is a non-
conductor that makes it impossible to  GEN RULE: No proportionate judgment can be
attribute an interest in its property to its allowed a stockholder in a derivative stockholder’s
members suit
 GEN RULE: Where loss has been caused to a corp by o Recovery is an asset of the corp; creditors
the wrongful acts of those managing it, the right of have the first claim upon it
action belongs to the CORPORATION o Allowing recovery directly would leave
o A stockholder CANNOT have an action in his creditors unpaid (fraudulent)
own behalf against one who has injured the o Substantial recovery by the corp often
corp, no matter how much the wrongful requires changes in tax reports and results
acts have depreciated the value of his in additional tac liability
shares  For certain purposes, stockholders instituting
 EXCEPTIONS: stockholder may bring a direct action stockholder’s suit are technically regarded as parties
in connection with corp matters in some situations o Their status is that of those who set the
o Stockholder claims that the corp officers judicial motion in behalf of the corp
conspired to depreciate the value of his o Stockholder is NOT the real plaintiff, but
stock that they could acquire it by sale merely the instigator of the action
under pledge and he was thus deprived of it  Stockholder’s derivative suit is an invention of the
 exception applies when the courts of equity and is recognizable ONLY in equity
wrongful acts aren’t only against the and CANNOT be maintained at law
corp, but also violations of a o Even if the claim is sued directly by the corp
contractual duty owed directly by and would be an action at law, if it is
him to the stockholders enforced via stockholder’s derivative suit, it
 bailee owes a direct duty to the is prosecuted by an action in equity
pledger to be reasonably careful o Stockholder’s institution of a derivative suit
that no harm shall come through his has the same legal effect as if a corp has
custody to the subject matter of the sued
pledge

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o Corporation’s rights in connection with a favor of such defendant/s on the same claim or
claim asserted in its behalf in a stockholder’s cause of action in a subsequent stockholder’s
derivative suit are the same as if it sued derivative suit by other stakeholders
directly o Matters in bar may refer to the claim of the
 Any defense that would be food corporation itself
against the corp if it sued is good  Corporation is guilty of laches
against a claim asserted in its behalf  Conduct of an individual suing in his
in a stockholder’s derivative suit own behalf for wrongs done in
 If the corporation does NOT have a cause of action, connection with corp affairs may be a
then there can be NO RECOVERY on a stockholder’s bar to his claim
derivative suit  Statute of Limitations is a matter of
 STOCKHOLDER’s DERIVATIVE SUIT vs. ORDINARY positive bar
ACTIONS  Knowledge or lack thereof of a
Stockholder’s Ordinary Actions stockholder is NOT MATERIAL to the
Derivative suit claim of the corporation
Stockholder must come Conduct of a particular  Knowledge or lack thereof of a
with clean hands stockholder is stockholder is MATERIAL to the
 He shouldn’t have IMMATERIAL claim of the individual stockholder
acquiesced to or  Stockholders CAN’T  Where those whose knowledge is
ratified, BIND the corp ordinarily imputed to a corp are the
participated in, or (except at a wrongdoers and they are in control
had knowledge of corporate meeting) of the corp, then the statute of
the wrong limitations may be suspended until
complained of the situation is changed
(otherwise  guilty o Matters in abatement may relate to both
of laches) the claim of the corporation and the
Courts of equity Courts of law particular stockholder instituting the action
Claim asserted in behalf  Stockholder’s derivative suit may be
of corp must relate to abated so far as the corp itself is
the corporation itself concerned because of the lack of
 Re: Laches jurisdiction OR because the claim was
o A stockholder must come before the court NOT due
of equity with clean hands  Stockholder’s derivative suit may be
o Otherwise, the court of equity may abate abated because of the conduct of a
the action without reference to the merits particular stockholder/s instituting the
of the claim sought to be asserted in behalf action
of the corp  Knowledge or lack thereof of an
 The fact that one stockholder is guilty of individual stockholder who initiates a
laches does NOT prevent another who stockholder’s derivative suit is material
is NOT GUILTY of laches from instituting on the matter of abatement of such suit
a stockholder’s derivative suit because equity will not grant relief at
o Laches, TO BE A BAR, must be the laches of the behest of suitors whose conduct has
the corp itself offended equitable principles – BUT that
 Acquiescence of a stockholder in the is a matter of abatement, NOT bar
wrong complained  prevents him
from maintaining a stockholder’s
derivative suit Evangelista et. Al v Santos,
 Acquiescence of the corporation  bar GR L-1721, 19 May 1950
to the claim
 GEN RULE: Judgment of a defendant/s in a
stockholder’s derivative suit operates as a bar in
48 | P a g e
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Facts: The petitioners Evangelista et. Al (E) were corporation, then in that case any one of the
minority stockholders of Vitali Lumber Corp. doing stockholders is allowed to bring suit. But in that case it is
lumber exploitation in Zamboanga while Santos was the corporation itself and not the plaintiff stockholder
always the President, treasurer and manager. In such that is the real property in interest, so that such
triple capacity, through fault, neglect, and abandonment damages as may be recovered shall pertain to the
allowed its lumber concession to lapse and its properties corporation. It is a derivative suit brought by a
and assets, among them machineries, buildings, stockholder as the nominal party plaintiff for the benefit
warehouses, trucks, etc., to disappear, thus causing the of the corporation, which is the real property in interest.
complete ruin of the corporation and total depreciation
of its stocks. Because of this, Evangelista filed a In the present case, Evangelista et. al have
complaint against Santos. They ask the court to render brought the action not for the benefit of the corporation
an account of his administration of the corporate but for their own benefit, since they ask that Santos
affairs and assets, to pay plaintiffs the value of their make good the losses occasioned by his
respective participation in said assets on the basis of mismanagement and pay to them the value of their
the value of the stocks held by each of them, among respective participation in the corporate assets on the
others. basis of their respective holdings. Clearly, this cannot be
done until all corporate debts, if there be any, are paid
On the other hand, Santos filed a motion for the and the existence of the corporation terminated by the
dismissal of the complaint on the ground of improper limitation of its charter or by lawful dissolution in view
venue and the complaint did not state a cause of action. of the provisions of section 16 of the Corporation Law.

The lower court ruled in favor of Santos and Petition dismissed. The lower court’s ruling is affirmed.
dismissed the complaint. Aggrieved, petitioners Evangelista et. al lost.
appealed to the SC.
Republic Bank represented by Damaso Perez vs Miguel
Issue: WON Evangelista et. al can file a complaint Cuaderno et. al. (Valcos)
against Santos. GR No. L-22399
March 30, 1967
Ruling: No. The injury complained of is primarily to the
corporation, so that the suit for the damages claimed Facts:
should be by the corporation rather than by the Damaso Perez, a stockholder of the Republic Bank, a
stockholders. The stockholders may not directly claim Philippine banking corporation, instituted a derivative
those damages for themselves for that would result in suit for and in behalf of said Bank against Miguel
the appropriation by, and the distribution among them Cuaderno and Bienvenido Dizon who are Board of
of part of the corporate assets before the dissolution of Directors of the Bank and the Monetary Board of the
the corporation and the liquidation of its debts and Central Bank of the Philippines.
liabilities, something which cannot be legally done
under section 16 of the Corporation Law. Damaso Perez complained to the Monetary Board of the
But while it is to the corporation that the action Central Bank against certain frauds allegedly committed
should pertain in cases of this nature, however, if the by defendant Pablo Roman, in that being chairman of
officers of the corporation, who are the ones called the Board of Directors of the Republic Bank,
upon to protect their rights, refuse to sue, or where a fraudulently granted or caused to be granted loans
demand upon them to file the necessary suit would be (worth 4M pesos) to fictitious and non-existing persons
futile because they are the very ones to be sued or and to their close friends, relatives and/or employees,
because they hold the controlling interest in the who were in reality their dummies, on the basis of
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fictitious and inflated appraised values of real estate


properties. Decision:
Yes, an individual stockholder is permitted to institute
Miguel Cuaderno (then Governor of the Central Bank) a derivative or representative suit on behalf of the
and the Monetary Board ordered an investigation, corporation wherein he holds stock in order to protect
which was carried out by Bank Examiners and found out or vindicate corporate rights, whenever the officials of
that certain mortgage loans amounting to P2,303,400.00 the corporation refuse to sue, or are the ones to be
were granted in violation of sections 77, 78 and 88 of sued or hold the control of the corporation.
the General Banking Act.
In such actions, the suing stockholder is regarded as a
The Central Bank through its Governor, Miguel nominal party, with the corporation as the real party in
Cuaderno, referred to special prosecutors of the interest. The frauds charged by plaintiff are frauds
Department of Justice, the banking frauds and violations against the Bank that redounded to its prejudice.
of the Banking Act for investigation and prosecution, but
no information was filed up to the time of the The facts pleaded constitute a cause of action for the
retirement of Cuaderno in 1961. bank: if the questioned appointments were made solely
to protect Roman from criminal prosecution, by a Board
Other similar frauds were subsequently discovered and composed by Roman's creatures and nominees, then
in order to neutralize the impending action, Pablo the moneys disbursed in favor of Cuaderno and Dizon
Roman engaged Miguel Cuaderno as technical would be an unlawful wastage or diversion of corporate
consultant at a compensation of P12,500 per month, funds. The Bank, therefore, could sue to nullify the
and selected Bienvenido Dizon as chairman of the Board appointments, enjoin disbursement of its funds to pay
of Directors of the Republic Bank. them, and recover those paid out for the purpose.

The Board of Directors composed of individuals Any such authority could not be expected as the suit is
personally selected by Roman, connived and aimed to nullify the action taken by the manager and
confederated in approving the appointment and the board of directors of the Republic Bank. These
selection of Cuaderno and Dizon which was motivated circumstances permit a stockholder to bring a
by bad faith and prompted to protect Pablo Roman derivative suit.
from criminal prosecution; that the appointment of
Cuaderno and his acceptance of the position of technical The order dismissing the complaint is reversed and set
consultant are immoral, anomalous and illegal, and his aside. The case is remanded to the court of origin with
compensation highly unconscionable. instructions to overrule the motions to dismiss and
require the defendants to answer the complaint.
The complaint prayed for a writ of preliminary
injunction against the Monetary Board to prevent its
confirmation of the appointments of Dizon and Catalina Reyes vs Judge Tan and Francisca Justiniani
Cuaderno, against the Board of Directors of the Republic GR No. L-16982 September 30, 1961
Bank from recognizing Cuaderno as technical consultant
and Dizon as Chairman of the Board and against Pablo Derivative suits/Requirements
Roman from appointing or selecting officers or directors
of the Republic Bank. Facts: Francesca Justiniani (FJ) was the corporate
treasurer of Roxas-Kalaw Textile Mills Inc. (RK) while
Issue: Catalina Reyes (CR) and Wadumal Dalamal were the
WON the derivative suit was proper members of BOD. This case started when the company
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purchased some raw materials for its textile business in


U.S. but instead of purchasing raw materials, RK’s office Where corporate directors are guilty of a
in New York purchased finished product. breach of trust not of mere error of judgment or abuse
of discretion and intra-corporate remedy is futile or
The supplier of the finished products was UCC of useless, a stockholder may institute a suit in behalf of
NY which Dalamal had interest. It is important to note himself and other stockholders and for the benefit of
that during that time, the Central Bank of the Philippines the corporation, to bring about a redress of the wrong
had a regulation that it will only lend dollars to inflicted directly upon the corporation and indirectly
companies which would import raw materials. But upon the stockholders.
instead of importing raw materials, RK imported finished
products with the help of Dalamal’s UCC. The CB then Petition is dismissed. The appointment of a receiver is
stopped all dollar allocations for raw materials for the valid.
company (RK). Because of this, RK’s business operation
was paralyzed. FJ urged the board of directors, including
the petitioner to punish Dalamal because of Dalamal’s Elton Chase vs Court of First Instance of Manila
conflict of interest and fraud against the company. But GR L-20457
the BOD did not do anything to punish Dalamal. Instead, October 29, 1966
(Louisse)
it continued to do business with UCC.
Facts:
Because of this, FJ ask the lower court for  Elton Chase, a minority shareholder of AMPARTS,
appointment of a receiver of RK. She alleged that filed a derivative suit in the CFI of Manila against Dr.
because of the BOD’s refusal to go after Dalamal, the Victor Buencamino Sr and several others (the
company suffered damages and prejudice. On the other majority shareholders) charging them with
hand, Catalina Reyes and Dalamal filed a motion to a) Breach of trust
b) Praying for removal as directors
dismiss the case on the ground that FJ has no cause of
c) And if possible the dissolution and
action. The lower court ruled in favor of FJ and ordered liquidation of AMPARTS
the company to be under the receivership. Aggrieved,  In response, Dr. Buencamino opposed Chase’s
Catalina appealed to SC arguing that, among others, the application for receivership
alleged fraudulent transaction took place more than two  Accordingly, after a hearing, Hon. Gatmaitan issued
years before the application of receivership. an order denying Chase’s petition for appointment
of a receiver but requiring Buencamino to file a
bond to answer for whatever damages Chase might
Issue: WON a breach of trust was committed to warrant
suffer by reason of the denial
FJ to prosecute the complaint
CFI RULING: Ruled in favor of Chase and found Dr.
Buencamino guilty of mismanagement and ordering him
Ruling: Yes. A breach of trust was committed and this to pay Ampart 1.9M; he was likewise prohibited from
justified the derivative suit by a minority stock holder on collecting any interest on the 300,000 paid by him on his
behalf of the corporation. initial subscription.
 Subsequently, a supplementary decision
was issued on Aug. 27, 1962 denying the
The importation of textiles instead of raw materials, as
appointment of a receiver and stating that
well as the failure of the Board of Directors to take
considering that the Buencaminos own 2/3
action against those directly responsible for the misuse of the stock of the corporation, it would be
of dollar allocations constitute fraud, or consent thereto equitable that they be allowed to continue
on the part of the directors. Therefore, a breach of trust operation subject to the condition that once
was committed which justified the derivative suit by a a decision of management is made known
minority stockholder on behalf of the corporation. to Chase, he must make known his objection
51 | P a g e
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to the Court within 5 days from receipt of the denial. Again, perhaps by reason of the judgment
decision rendered against Dr. Buencamino finding him guilty of
mismanagement etc., the respondent court, through the
ISSUE: WON CFI erred in refusing the appointment of a Hon. Jesus de Veyra, issued the order of August 27, 1962
receiver whose pertinent portion is quoted above.

RULING: CFI Decision affirmed. Upon the facts of the case, and considering the
precautionary measures adopted by the respondent
 It is well settled that where corporate directors are court for the protection of petitioner's rights and
guilty of a breach of trust and intercorporate interest in AMPARTS, We can not find our way clear to
remedies are futile, minority stockholder affected ruling that said court had committed a grave abuse of
may resort to the courts for relief and ask for the discretion in issuing the orders complained of.
appointment of a receiver.
 But is it also settled that the appointment of a
receiver is a matter addressed to the sound Gamboa et. al. v. Vicotriano et. al
discretion of the court and that such discretion to G.R. No. L-40620
appoint a receiver who would take over the May 5, 1979
administration of the corporate business should be
exercised with great caution and should be granted Topic: When shall Derivative Suits be instituted
when the necessity for it is clear.
 In the present case, it must be noted that although Facts:
petition for appointment was denied, the CFI
nevertheless required Buencamino to answer for  What transpired in the civil case: Gamboa et al.
whatever damages Chase would suffer by reason of (petitioners in this case) and Ramon dela Rama,
such denial. Paz Dela Rama-Battistuzzi and Enzo Battistuzi
 In line with this, and considering the precautionary (private respondents in this case) were sued by
measures adopted by the CFI to protect the rights of Benjamin Lopue et al. to nullify the issuance of
Chase in AMPARTS, the SC found that there are no 823 shares of stock of the Inocentes de la Rama
grounds to rule that the CFI committed grave abuse Inc. in favor of Gamboa et al.
of discretion.  In April 4, 1972, Lopue et al. (except Anastacio
Dacles), are the owners of 1,328 shares of stock
of the Inocentes de la Rama Inc, a domestic
It is well settled in this jurisdiction that where corporate corp. with a capital stock of 3000 shares having
directors are guilty of a breach of trust and a par value of PHP100 per share, 2,177 were
intracorporate remedy is futile, the minority subscribed and issued and 823 shares unissued
stockholders may resort to the courts for appropriate  When Lopue et al. acquired the shares of stock
relief and, incidentally, ask for the appointment of a held by Rafael Ledesma (President at that time)
receiver for the protection of their rights. In such case, and Jose Sicangco (Vice President at that time),
however, the appointment of a receiver is a matter the remaining members of the BOD Mercedes
addressed to the sound discretion of the court, and it Borromeo, Honororio dela Rama and Ricardo
has been frequently held that such discretion to appoint Gamboa surreptitously met and elected
a receiver who would take over the administration of Ricardo Gamboa as President and Honororio as
the corporate business should be exercised with great VP for the purpose of forestalling the take over
caution and only when the necessity therefor is clear. of Lopue et al.
 A resolution was subsequently passed after
The facts of the present case show that, in connection election of BOD authorizing the sale of 823
with the order of June 10, 1961, which denied unissued stocks at par value to Gamboa et al.
petitioner's application for the appointment of a  Lopue et al. contends that the resolution
receiver, the court required respondents herein to file a violated pre-emptive rights and was made
bond in the amount of P100,000.00 to answer for without the approval of at least 2/3 votes of
whatever damages petitioner might suffer by reason of the holders of outstanding capital stock; that

52 | P a g e
Corporation Law Case Digests

the strictest relation of trust was violated  On the issue of Lopue’s waiver of the cause of
between Gamboa et al. and Lopue et al. and action
that the election has unlawfully usurped and  Can estoppel be applied on the fact that
intruded said office to the prejudice of Lopue et Ramon Dela Rama et al. acknowledged the
al. Lopue et al. prayed for a writ of preliminary disputed 823 stocks?
injunction restraining the disposition of the 823  Whether the court has jurisdiction on matters
unissued stocks and a receiver be appointed affecting the management of the corporation
with Lydia Dacles to be voted as the BOD. (related to the topic)
 Respondent judge ordered the issuance of the Held: Petition is dismissed for lack of merit.
writ and ordered Gamboa et al. to surrender the
bonds upon Lopue’s posting a bond of
PHP50,000. Pursuant to the writ, Gamboa et al.
deposited stock nos. 80 to 86 representing the  W/N the subsequent filing of petition for
823 unissued stocks. certioari proper?
 1972- Lopue et al. entered into a compromise - the denial of MTD is merely interlocutory
agreement with Ramon dela Rama, Paz Dela and instead of filing this petition, Gamboa
Rama-Battistuzzi and Enzo Battistuzi where the should have continued the trial of the case
parties will waive, cede or transfer 823 shares on the merits and if decision is adverse, to
of stock to Lopue et al and was approved by file an appeal. Moreover, the denial was not
the trial court in Dec. 1972. arbitrarily or whimsically issued, neither did
 Gamboa et al. filed a motion to dismiss as a the court lacked jurisdiction to issue such.
consequence of the compromise based on the  On the issue of Lopue’s waiver of the cause of
following grounds: action
- Cause of action has been waived or - This cannot hold water since the provision in
abandoned the compromise agreement entered into
- Lopue et al. were estopped from further clearly states that: it shall not in any way
proceeding from the case since they have, constitute or be considered a waiver or
as the effect of the compromise have abandonment of any claim or cause of
acknowledged the disputed 823 stocks. - action against any defendants.
DENIED.  Can estoppel be applied allegedly on the fact
 Gamboa et al. also filed a motion to declare that Ramon Dela Rama et al. acknowledged the
Ramon dela Rama, Paz Dela Rama-Battistuzzi disputed 823 stocks?
and Enzo Battistuzi in contempt of court for - No, there is nothing in the agreement that
violating the writ of injunction in entering a could be construed to mean as an
compromise agreement with Lopue et al. – affirmative admission by Ramon Dela Rama
denied for lack of merit. et al. of the resolution as this resolution is
 MFR was filed regarding the denial of MTD and even sought in the case to be judicially
an addendum claiming that the court has no declared as null and void.
jurisdiction to interfere with the decision of - The fact that no consideration was
BOD, the resolution being a purely management mentioned in the transfer of rights of the
concern that the court could not interfere with. shares means that the admission was
– denied merely an admission by Ramon dela Rama,
 Hence, this petition for certiorari was filed to Paz Dela Rama-Battistuzzi and Enzo
review the order of Hon. Victoriano denying the Battistuzi, the parties who entered into the
motion to dismiss (MTD) of Gamboa et al. filed compromise agreement.
in CFI Negros Occidental and denying the  Whether the court has jurisdiction on matters
motion for reconsideration (MFR) of that order. affecting the management of the corporation
Issue: (dissected the issue into several parts) - Well-known rule: the courts cannot control
the discretion of BOD involving
 W/N the subsequent filing of petition for administrative matters to which BOD have a
certioari proper? legitimate power of action and contracts

53 | P a g e
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entered intra vires are binding UNLESS such III, Sec. 6 of the Amended By-Laws of WIT on
contracts are so unconscionable to amount compensation of all officers of the corporation."
to a wanton destruction of the rights of the 4. In the meeting, a Resolution was passed granting a
minority. Here, Lopue asserts that the total of P19,500 monthly compensation to
transaction will result a serious injury to respondents as corporate officers retroactive June
their interests so the trial court has 1, 1985.
jurisdiction over the case. a. Chairman - P9,000.00/month
- Contention of Gamboa: proper remedy of b. Vice-Chairman - P3,500.00/month
Lopue is a derivative suit in the name of c. Corporate Treasurer - P3,500.00/month
corp., purpose of which is to secure a d. Corporate Secretary - P3,500.00/month
binding relief after exhausting all the e. 10% of the net profits shall be distributed
available remedies available within the equally among the ten members of the
corporation. Board of Trustees.
- A derivative suit may be instituted by the f. There were no other business
stockholder on behalf of the corp. to g. The Chairman declared the meeting
protect or vindicate corporate rights adjourned at 5:11 P.M
whenever the officials of the corp. refuse h. The certification of corp sec Antonio Sales
to sue, or are the ones to be sued or hold stated that it was a regular meeting of the
control of the corp. Suing stockholder here Board of Trustees held on MARCH 30, 1986
is regarded as a nominal party. (not June 1, 1985)
- HOWEVER, what Gamboa et al. were
alleging are their OWN INDIVIDUAL
interests and NOT that of the corp.- 5. A few years later, on March 13, 1991, petitioners
Derivative suit is not applicable here. At filed an affidavit-complaint against respondents
any rate, it is too early in the proceedings as resulting in 2 separate criminal informations filed
the issues have not been joined. Misjoinder before the RTC:
of parties- not a ground to dismiss an action. a. Falsification of a public document under
Article 171 of the RPC
 anchored on the submission of WITs
WESTERN INSTITUTE OF TECHNOLOGY, INC., v. SALAS income statement for the fiscal year
G.R. No. 113032. August 21, 1997 1985-1986 with the SEC reflecting the
disbursement of funds for the
compensation of respondents based on
FACTS: the Resolution passed on March 30,
1986, when in truth, the same was
1. Respondents Salas et al. belonging to one family, are actually passed on June 1, 1986, a date
the majority and controlling members of the Board NOT covered by the corporation s FY
of Trustees of Western Institute of Technology (WIT) b. Estafa under Article 315, par. 1(b)
 engaged in the operation of an educational 6. RTC: acquitted respondents on both counts without
institution any civil liability. MR denied
 Fiscal year from May 1, 1985 ending April 7. Hence, the instant petition for review on certiorari
30, 1986 seeking to hold respondents civilly liable despite
2. Accdg to petitioners, the minority stockholders of their acquittal.
WIT, on June 1, 1986 in the principal office of WIT at 8. Petitioners maintain that this grant of compensation
La Paz, Iloilo City, a Special Board meeting was held to respondents is proscribed under Sec. 30 of the
attended by members of the Board including Corp Code. Thus, respondents are obliged to return
petitioner Villasis. these amounts to the corporation with interest.
3. Prior to said meeting, copies of notice thereof were
distributed to all Board Members, BUT the notice
allegedly indicated that the meeting is on June 1, ISSUES/RULING:
1986 and included "Possible implementation of Art.

54 | P a g e
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1. W/N such grant of compensation is proscribed


under the CC. NO.
Among the basic requirements for a derivative suit to
prosper is that the minority shareholder who is suing
Directors or trustees, as the case may be, are NOT for and on behalf of the corporation MUST ALLEGE his
entitled to salary or other compensation when they complaint before the proper forum that he is suing on
perform nothing more than the usual and ordinary a derivative cause of action on behalf of the
duties of their office. This is founded upon a corporation and all other shareholders similarly
presumption that directors /trustees render service situated who wish to join. This is necessary TO VEST
gratuitously and that the return upon their shares JURISDICTION upon the tribunal in line with the rule
adequately furnishes the motives for service, without that it is the allegations in the complaint that vests
compensation. jurisdiction upon the court or quasi-judicial body
concerned over the subject matter and nature of the
action.
This proscription, however, against granting
 This was NOT complied with by the petitioners
compensation to directors/trustees of a corporation is
either in their complaint before the RTC nor in
not a sweeping rule. The unambiguous implication of the instant petition which merely states that
the phrase “as such directors” under Sec. 30 is that this is a petition for review on certiorari on
members of the board may receive compensation, in pure questions of law to set aside a portion of
addition to reasonable per diems, when they render the RTC decision.
services to the corporation in a capacity other than as  By no amount of equity considerations, if at all
directors/trustees. deserved, can a mere appeal on the civil aspect
of a criminal case be treated as a derivative suit.
 In the case at bench, the Resolution granted
monthly compensation to respondents NOT in
their capacity as members of the board, but A derivative suit should be filed with the SEC which
rather AS OFFICERS of the corporation. exercises original and exclusive jurisdiction over
derivative suits, they being intra-corporate disputes,
per Section 5(b) of P.D. No. 902-A.
2. W/N the instant case is a derivative suit. NO. The
instant case is NOT a derivative suit but is merely an  Granting, for purposes of discussion, that this is
appeal on the civil aspect of Criminal Cases. a derivative suit, the same is outrightly
dismissible for having been WRONGFULLY
FILED in the regular court devoid of any
Petitioners assert that the instant case is a derivative jurisdiction to entertain the complaint.
suit brought by them as minority shareholders of WIT
for and on behalf of the corporation to annul Resolution
No. 48, s. 1986 which is prejudicial to the corporation. Once the case is decided by the SEC, the losing party
may file a petition for review before the Court of
Appeals raising questions of fact, of law, or mixed
questions of fact and law.[17] It is ONLY AFTER the case
A derivative suit is an action brought by minority
has ran this course, and not earlier, can it be brought
shareholders in the name of the corporation to redress
to the SC Rule 45 raising only pure questions of law.
wrongs committed against it, for which the directors
refuse to sue. It is a remedy designed by equity and has  Petitioners, in pleading that the instant
been the principal defense of the minority petition be treated as a derivative suit, are
shareholders against abuses by the majority. trying to short-circuit the entire process which
we cannot here sanction.
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to the mind of the court cannot prevail over the


Minutes and cannot ripen into proof beyond
3. W/N respondents should be held civilly liable. NO. reasonable doubt which is demanded in all
There is simply no basis to hold the accused, criminal prosecutions.
respondents herein, civilly liable.

Chua vs. CA and Hao G.R. No. 150793 November 19,


Section 2(b) of Rule 111: “Extinction of the penal action 2004
does not carry with it extinction of the civil, unless the
extinction proceeds from a declaration in a final Facts: PR Lydia Hao, treasurer of Siena Realty
judgment that the fact from which the civil might arise Corporation, filed a complaint-affidavit against
did not exist.” petitioner for committing acts of falsification by
falsifying the Minutes of the Annual Stockholders
Last paragraph of Section 2, Rule 120: “In case of meeting of the Board of Directors by causing it to
acquittal, unless there is a clear showing that the act appear in said Minutes that LYDIA HAO CHUA was
from which the civil liability might arise did NOT exist, present and has participated in said proceedings, when
in truth and in fact, as the said accused fully well knew
the judgment shall make a finding on the civil liability of
that said Lydia Hao was never present during the
the accused in favor of the offended party.” meeting.

Petitioner alleges that respondent Lydia Hao has no the


 The acquittal in the criminal cases is NOT authority to bring a suit in behalf of the Corporation
merely based on reasonable doubt but rather since there was no Board Resolution authorizing her to
on a finding that the accused- respondents did file the suit. For her part, respondent Hao claimed that
NOT commit the criminal acts complained of. the suit was brought under the concept of a derivative
Thus, pursuant to the above rule and settled suit.
jurisprudence, any civil action ex delicto
cannot prosper. Acquittal in a criminal action Issue: (1) Is the criminal complaint in the nature of a
bars the civil action arising therefrom where derivative suit? (2) Is Siena Realty Corporation a proper
the judgment of acquittal holds that the petitioner in SCA No. 99-94846?
accused did not commit the criminal acts
imputed to them.
Held: Under Section 36 of the Corporation Code, read in
 The prosecution omitted to submit the
relation to Section 23, where a corporation is an injured
COMPLETE minutes of the March 30, 1986
party, its power to sue is lodged with its board of
regular meeting. It only presented in evidence
directors or trustees. An individual stockholder is
page 5 or the last page of the said minutes. Had
permitted to institute a derivative suit on behalf of the
the complete minutes consisting of 5 pages,
corporation wherein he holds stocks in order to protect
been submitted, it can readily be seen and
or vindicate corporate rights, whenever the officials of
understood that the disputed Resolution giving
the corporation refuse to sue, or are the ones to be
compensation to corporate officers, was indeed
sued, or hold the control of the corporation. In such
included in Other Business of the Agenda, and
actions, the suing stockholder is regarded as a nominal
was taken up and passed on March 30, 1986.
party, with the corporation as the real party in interest.
 The imputation that said Resolution was
neither taken up nor passed on March 30, 1986
A derivative action is a suit by a shareholder to enforce a
because the matter regarding compensation
corporate cause of action. The corporation is a
was not specifically stated or written in the
necessary party to the suit. And the relief which is
Agenda and that the words possible
granted is a judgment against a third person in favor of
implementation of said Resolution No. 48, was
the corporation. Similarly, if a corporation has a defense
expressly written in the Agenda for the Special
to an action against it and is not asserting it, a
Meeting of the Board on June 1, 1986, is simply
stockholder may intervene and defend on behalf of the
an IMPLICATION. This evidence by implication
corporation.
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Corporation Law Case Digests

In the Criminal Case, the complaint was instituted by Manila, Philippines, the said accused, being then a
respondent against petitioner for falsifying corporate private individual, did then and there willfully,
documents whose subject concerns corporate projects unlawfully and feloniously commit acts of falsification
of Siena Realty Corporation. Clearly, SRC is an offended upon a public document, to wit: the said accused
party. Hence, SRC has a cause of action. And the civil prepared, certified, and falsified the Minutes of the
case for the corporate cause of action is deemed Annual Stockholders meeting of the Board of Directors
instituted in the criminal action. of the Siena Realty Corporation, duly notarized before a
Notary Public, Atty. Juanito G. Garcia and entered in his
However, the board of directors of the corporation in Notarial Registry as Doc No. 109, Page 22, Book No. IV
this case did not institute the action against petitioner. and Series of 1994, and therefore, a public document,
Private respondent was the one who instituted the by making or causing it to appear in said Minutes of the
action. Private respondent asserts that she filed a Annual Stockholders Meeting that one LYDIA HAO CHUA
derivative suit in behalf of the corporation. This was present and has participated in said proceedings,
assertion is inaccurate. Not every suit filed in behalf of when in truth and in fact, as the said accused fully well
the corporation is a derivative suit. For a derivative suit knew that said Lydia C. Hao was never present during
to prosper, it is required that the minority stockholder the Annual Stockholders Meeting held on April 30, 1994
suing for and on behalf of the corporation must allege in and neither has participated in the proceedings thereof
his complaint that he is suing on a derivative cause of to the prejudice of public interest and in violation of
action on behalf of the corporation and all other public faith and destruction of truth as therein
stockholders similarly situated who may wish to join him proclaimed. Contrary to Law."
in the suit. It is a condition sine qua non that the
corporation be impleaded as a party because not only is Thereafter, the City Prosecutor filed the Information
the corporation an indispensable party, but it is also the (Criminal Case 285721) for falsification of public
present rule that it must be served with process. The document, before the Metropolitan Trial Court (MeTC)
judgment must be made binding upon the corporation of Manila, Branch 22, against Francis Chua but dismissed
in order that the corporation may get the benefit of the the accusation against Elsa Chua. Francis Chua, was
suit and may not bring subsequent suit against the same arraigned and trial ensued thereafter. During the trial in
defendants for the same cause of action. In other words, the MeTC, Atty. Evelyn Sua-Kho and Atty. Ariel Bruno
the corporation must be joined as party because it is its Rivera appeared as private prosecutors and presented
cause of action that is being litigated and because Hao as their first witness. After Hao’s testimony, Chua
judgment must be a res adjudicata against it. moved to exclude Hao’s counsels as private prosecutors
in the case on the ground that Hao failed to allege and
In the criminal complaint filed by herein prove any civil liability in the case. In an Order, dated 26
respondent, nowhere is it stated that she is filing the April 1999, the MeTC granted Chua’s motion and
same in behalf and for the benefit of the corporation. ordered the complainant’s counsels to be excluded from
actively prosecuting Criminal Case 285721. Hao moved
Thus, the criminal complaint including the civil aspect
for reconsideration but it was denied. Hao filed a
thereof could not be deemed in the nature of a petition for certiorari (SCA 99-94846), before the
derivative suit. Regional Trial Court (RTC) of Manila, Branch 19. The RTC
gave due course to the petition and on 5 October 1999,
the RTC in an order reversed the MeTC Order. Chua
Chua vs. Court of Appeals moved for reconsideration which was denied.
[GR 150793, 19 November 2004] Dissatisfied, Chua filed before the Court of Appeals a
petition for certiorari. On 14 June 2001, the appellate
Facts: On 28 February 1996, Lydia Hao, treasurer of court promulgated its Decision denying the petition. The
Siena Realty Corporation, filed a complaint-affidavit with Court of Appeals held that the action was indeed a
the City Prosecutor of Manila charging Francis Chua and derivative suit, for it alleged that petitioner falsified
his wife, Elsa Chua, of four counts of falsification of documents pertaining to projects of the corporation and
public documents pursuant to Article 172[3] in relation made it appear that Chua was a stockholder and a
to Article 171[4] of the Revised Penal Code. The charge director of the corporation. According to the appellate
reads: "That on or about May 13, 1994, in the City of court, the corporation was a necessary party to the

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Corporation Law Case Digests

petition filed with the RTC and even if Hao filed the corporation must be joined as party because it is its
criminal case, her act should not divest the Corporation cause of action that is being litigated and because
of its right to be a party and present its own claim for judgment must be a res adjudicata against it. Herein, the
damages. Chua moved for reconsideration but it was complaint was instituted by Hao against Chua for
denied in a Resolution dated 20 November 2001. Hence, falsifying corporate documents whose subject concerns
the petition by Chua. corporate projects of Siena Realty Corporation. Clearly,
Siena Realty Corporation is an offended party. Hence,
Issue: Whether the criminal complaint was in the nature Siena Realty Corporation has a cause of action. And the
of a derivative suit. civil case for the corporate cause of action is deemed
instituted in the criminal action. However, the board of
Held: Under Section 36 of the Corporation Code, read in directors of the corporation in this case did not institute
relation to Section 23, where a corporation is an injured the action against Chua. Hao was the one who instituted
party, its power to sue is lodged with its board of the action. Nowhere is it stated that she is filing the
directors or trustees. An individual stockholder is same in behalf and for the benefit of the corporation.
permitted to institute a derivative suit on behalf of the Thus, the criminal complaint including the civil aspect
corporation wherein he holds stocks in order to protect thereof could not be deemed in the nature of a
or vindicate corporate rights, whenever the officials of derivative suit.
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.
A derivative action is a suit by a shareholder to enforce a
corporate cause of action. The corporation is a
necessary party to the suit. And the relief which is
granted is a judgment against a third person in favor of
the corporation. Similarly, if a corporation has a defense
to an action against it and is not asserting it, a
stockholder may intervene and defend on behalf of the
corporation. Under the Revised Penal Code, every
person criminally liable for a felony is also civilly liable.
When a criminal action is instituted, the civil action for
the recovery of civil liability arising from the offense
charged shall be deemed instituted with the criminal
action, unless the offended party waives the civil action,
reserves the right to institute it separately or institutes
the civil action prior to the criminal action. Not every
suit filed in behalf of the corporation is a derivative suit.
For a derivative suit to prosper, it is required that the
minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing
on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated
who may wish to join him in the suit. It is a condition
sine qua non that the corporation be impleaded as a
party because not only is the corporation an
indispensable party, but it is also the present rule that it
must be served with process. The judgment must be
made binding upon the corporation in order that the
corporation may get the benefit of the suit and may not
bring subsequent suit against the same defendants for
the same cause of action. In other words, the

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