G.R. No.

76801 August 11, 1995

LOPEZ REALTY, INC., AND ASUNCION LOPEZ GONZALES, petitioners,

vs. Asuncion Lopez Gonzales

FLORENTINA FONTECHA, ET AL., AND THE NATIONAL LABOR

RELATIONS COMMISSION, respondents.
7831

shares
PUNO, J.:

2
The controversy at bench arose from a complaint filed by private
respondents,1 namely, Florentina Fontecha, Mila Refuerzo, Marcial
Mamaril, Perfecto Bautista, Edward Mamaril, Marissa Pascual and Teresita Lopez Marquez
Allan Pimentel, against their employer Lopez Realty Incorporated
(petitioner) and its majority stockholder, Asuncion Lopez Gonzales,
for alleged non-payment of their gratuity pay and other benefits.2
7830
The case was docketed as NLRC-NCR Case No. 2-2176-82.

shares
Lopez Realty, Inc., is a corporation engaged in real estate business,
while petitioner Asuncion Lopez Gonzales is one of its majority
shareholders. Her interest in the company vis-a-vis the other
shareholders is as follows: 3
Arturo F. Lopez 1

7830 share

shares 6

4 Leo Rivera

Rosendo de Leon 1

4 share

shares Except for Arturo F. Lopez, the rest of the shareholders also sit as
members of the Board of Directors.

5
As found by the Labor arbiter.3 sometime in 1978, Arturo Lopez
submitted a proposal relative to the distribution of certain assets of
Benjamin Bernardino petitioner corporation among its three (3) main shareholders. The
proposal had three (3) aspects, viz: (1) the sale of assets of the
company to pay for its obligations; (2) the transfer of certain assets
of the company to its three (3) main shareholders, while some other
assets shall remain with the company; and (3) the reduction of
employees with provision for their gratuity pay. The proposal was
deliberated upon and approved in a special meeting of the board of
directors held on April 17, 1978.
It appears that petitioner corporation approved two (2) resolutions
providing for the gratuity pay of its employees, viz: (a) Resolution
No. 6, Series of 1980, passed by the stockholders in a special
meeting held on September 8, 1980, resolving to set aside, twice a
year, a certain sum of money for the gratuity pay of its retiring
employees and to create a Gratuity Fund for the said contingency;
and (b) Resolution No. 10, Series of 1980, setting aside the amount
of P157,750.00 as Gratuity Fund covering the period from 1950 up
to 1980.
Meanwhile, on July 28, 1981, board member and majority
stockholder Teresita Lopez Marquez died.
On August 17, 1981, except for Asuncion Lopez Gonzales who was
then abroad, the remaining members of the Board of Directors,
namely: Rosendo de Leon, Benjamin Bernardino, and Leo Rivera,
convened a special meeting and passed a resolution which reads:
Resolved, as it is hereby resolved that the gratuity (pay) of the
employees be given as follows:
(a) Those who will be laid off be given the full amount of
gratuity;
(b) Those who will be retained will receive 25% of their gratuity
(pay) due on September 1, 1981, and another 25% on January 1,
1982, and 50% to be retained by the office in the meantime.
(emphasis supplied)
Private respondents were the retained employees of petitioner
corporation. In a letter, dated August 31, 1981, private respondents
requested for the full payment of their gratuity pay. Their request
was granted in a special meeting held on September 1, 1981. The
relevant, portion of the minutes of the said board meeting reads:
In view of the request of the employees contained in the letter
dated August 31, 1981, it was also decided that, all those remaining
employees will receive another 25% (of their gratuity) on or before
October 15, 1981 and another 25% on or before the end of
November, 1981 of their respective gratuity.
At that, time, however, petitioner Asuncion Lopez Gonzales was still
abroad. Allegedly, while she was still out of the country, she sent a
cablegram to the corporation, objecting to certain matters taken up
by the board in her absence, such as the sale of some of the assets
of the corporation. Upon her return, she flied a derivative suit with
the Securities and Exchange Commission (SEC) against majority
shareholder Arturo F. Lopez.
Notwithstanding the "corporate squabble" between petitioner
Asuncion Lopez Gonzales and Arturo Lopez, the first two (2)
installments of the gratuity pay of private respondents Florentina
Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista
were paid by petitioner corporation.
Also, petitioner corporation had prepared the cash vouchers and
checks for the third installments of gratuity pay of said private
respondents (Florentina Fontecha, Mila Refuerzo, Marcial Mamaril
and Perfecto Bautista). For some reason, said vouchers were
cancelled by petitioner Asuncion Lopez Gonzales.
Likewise, the first, second and third installments of gratuity pay of
the rest of private respondents, particularly, Edward Mamaril,
Marissa Pascual and Allan Pimentel, were prepared but cancelled by
petitioner Asuncion Lopez Gonzales. Despite private respondents'
repeated demands for their gratuity pay, corporation refused to pay
the same.4
On July 23, 1984, Labor Arbiter Raymundo R. Valenzuela rendered
judgment in favor of private respondents.5
Petitioners appealed the adverse ruling of the Labor arbiter to
public respondent National Labor Relations Commission. The appeal
focused on the alleged non-ratification and non-approval of the
assailed August 17, 1981 and September 1, 1981 Board Resolutions
during the Annual Stockholders' Meeting held on March 1, 1982.
Petitioners further insisted that the payment of the gratuity to some
of the private respondents was a mere "mistake" on the part of
petitioner corporation since, pursuant to Resolution No. 6, dated
September 8, 1980, and Resolution No. 10, dated October 6, 1980,
said gratuity pay should be given only upon the employees'
retirement.
On November 20, 1985, public respondent, through its Second
Division, dismissed the appeal for lack of merit, the pertinent
portion of which states:6
We cannot agree with the contention of respondents (petitioners')
that the Labor Arbiter a quo committed abuse of discretion in his
decision.
Respondents' (petitioners') contention that, the two (2) resolutions
dated 17 August 1981 and 1 September 1981 . . . which were not
approved in the annual stockholders meeting had no force and
effect, deserves scant consideration. The records show that the
stockholders did not revoke nor nullify these resolutions granting
gratuities to complainants.
On record, it appears that the said resolutions arose from the
legitimate creation of the Board of Directors who steered the
corporate affairs of the corporation. . . .
was evident between Arturo Lopez and Asuncion Gonzales.
The respondents' (petitioners') contention of a mistake to have
been committed in granting the first two (2) installments of
gratuities to complainants Perfecto Bautista, Florentina Fontecha,
Marcial Mamaril and Mila Refuerzo, (has) no legal leg to stand on.
The record is bereft of any evidence that the Board of Directors had
passed a resolution nor is there any minutes of whatever nature
proving mistakes in the award of damages (sic).

Respondents' (petitioners') allegation that the three (3) With regard to the award of service incentive leave and others, the
complainants, Mila E. Refuerzo, Marissa S. Pascual and Edward Commission finds no cogent reason to disturb the appealed
Mamaril, who had resigned after filing the complaint on February 8, decision.
1982, were precluded to (sic) receive gratuity because the said
resolutions referred to only retiring employee could not be given
credence. A reading of Resolutions dated 17 August 1981 and 1 We affirm.
September 1981 disclosed that there were periods mentioned for
the payment of complainants' gratuities. This disproves
respondents' argument allowing gratuities upon retirement of
WHEREFORE, let the appealed decision be, as it is hereby,
employees. Additionally, the proposed distribution of assets (Exh. C-
AFFIRMED and let the instant appeal (be) dismissed for lack of
1) filed by Mr. Arturo F. Lopez also made mention of gratuity pay, " .
merit.
. . (wherein) an employee who desires to resign from the LRI will be
given the gratuity pay he or she earned." (Emphasis supplied) Let us
be reminded, too, that the complainants' resignation was not
voluntary but it was pressurized (sic) due to "power struggle" which SO ORDERED.
Petitioners reconsidered.7 In their motion for reconsideration,
petitioners assailed the validity of the board resolutions passed on
August 17, 1981 and September 1, 1981, respectively, and claimed,
for the first time, that petitioner Asuncion Lopez Gonzales was not
notified of the special board meetings held on said dates. The
motion for reconsideration was denied by the Second Division on
July 24, 1986.
On September 4, 1986, petitioners filed another motion for
reconsideration. Again, the motion was denied by public
respondent in a Minute Resolution dated November 19, 1986.8
Hence, the petition. As prayed for, we issued a Temporary
Restraining Order,9 enjoining public respondent from enforcing or
executing the Resolution, dated November 20, 1986 (sic), in NLRC-
NCR-2-2176-82. 10
The sole issue is whether or not public respondent acted with grave
abuse of discretion in holding that private respondents are entitled
to receive their gratuity pay under the assailed board resolutions
dated August 17, 1951 and September 1, 1981.
Petitioners contend that the board resolutions passed on August 17,
1981 and September 1, 1981, granting gratuity pay to their retained
employees, are ultra vires on the ground that petitioner Asuncion
Lopez Gonzales was not duly notified of the said special meetings.
They aver, further, that said board resolutions were not ratified by
the stockholders of the corporation pursuant to Section 28 1/2 of
the Corporation Law (Section 40 of the Corporation Code). They also
insist that the gratuity pay must be given only to the retiring
employees, to the exclusion of the retained employees or those
who voluntarily resigned from their posts.
At the outset, we note that petitioners allegation on lack of notice
to petitioner Asuncion Lopez Gonzales was raised for the first time
in the in their motion for reconsideration filed before public
respondent National Labor Relations Commission, or after said
public respondent had affirmed the decision of the labor arbiter. To
stress, in their appeal before the NLRC, petitioners never raised the
issue of lack of notice to Asuncion Lopez Gonzales. The appeal dealt
with (a) the failure of the stockholders to ratify the assailed
resolutions and (b) the alleged "mistake" committed by petitioner
corporation in giving the gratuity pay to some of its employees who
are yet to retire from employment.
In their comment, 11 private respondents maintain that the new
ground of lack of notice was not raised before the labor arbiter,
hence, petitioners are barred from raising the same on appeal.
Private respondents claim, further, that such failure on the part of
petitioners, had deprived them the opportunity to present evidence
that, in a subsequent special board meeting held on September 29,
1981, the subject resolution dated September 1, 1981, was
unanimously approved by the board of directors of petitioner
corporation, including petitioner Asuncion Lopez Gonzales. 12
Indeed, it would be offensive to the basic rules of fair play and
justice to allow petitioners to raise questions which have not been
passed upon by the labor arbiter and the public respondent NLRC. It
is well settled that questions not raised in the lower courts cannot,
be raised for the first time on appeal.13 Hence, petitioners may not
invoke any other ground, other than those it specified at the labor
arbiter level, to impugn the validity of the subject resolutions.
We now come to petitioners' argument that the resolutions passed
by the board of directors during the special meetings on August 1,
1981, and September 1, 1981, were ultra vires for lack of notice.
The general rule is that a corporation, through its board of directors,
should act in the manner and within the formalities, if any,
prescribed by its charter or by the general law. 14 Thus, directors
must act as a body in a meeting called pursuant to the law or the
corporation's by-laws, otherwise, any action taken therein may be
questioned by any objecting director or shareholder. 15
Be that as it may, jurisprudence 16 tells us that an action of the
board of directors during a meeting, which was illegal for lack of
notice, may be ratified either expressly, by the action of the
directors in subsequent legal meeting, or impliedly, by the
corporation's subsequent course of conduct. Thus, in one case, 17 it
was held:
. . . In 2 Fletcher, Cyclopedia of the Law of Private Corporations
(Perm. Ed.) sec. 429, at page 290, it is stated:
Thus, acts of directors at a meeting which was illegal because of
want of notice may be ratified by the directors at a subsequent legal
meeting, or by the corporations course of conduct
...
Fletcher, supra, further states in sec. 762, at page 1073-1074:
Ratification by directors may be by an express resolution or vote to
that effect, or it may be implied from adoption of the act,
acceptance or acquiescence. Ratification may be effected by a
resolution or vote of the board of directors expressly ratifying
previous acts either of corporate officers or agents; but it is not
necessary, ordinarily, to show a meeting and formal action by the
board of directors in order to establish a ratification.
In American Casualty Co., v. Dakota Tractor and Equipment Co., 234
F. Supp. 606, 611 (D.N.D. 1964), the court stated:
Moreover, the unauthorized acts of an officer of a corporation may
be ratified by the corporation by conduct implying approval and
adoption of the act in question. Such ratification may be express or
may be inferred from silence and inaction.
In the case at bench, it was established that petitioner corporation
did not issue any resolution revoking nor nullifying the board
resolutions granting gratuity pay to private respondents. Instead,
they paid the gratuity pay, particularly, the first two (2) installments
thereof, of private respondents Florentina Fontecha, Mila Refuerzo,
Marcial Mamaril and Perfecto Bautista.
Despite the alleged lack of notice to petitioner Asuncion Lopez
Gonzales at that time the assailed resolutions were passed, we can
glean from the records that she was aware of the corporation's
obligation under the said resolutions. More importantly, she
acquiesced thereto. As pointed out by private respondents,
petitioner Asuncion Lopez Gonzales affixed her signature on Cash
Voucher Nos. 81-10-510 and 81-10-506, both dated October 15,
1981, evidencing the 2nd installment of the gratuity pay of private
respondents Mila Refuerzo and Florentina Fontecha. 18
We hold, therefore, that the conduct of petitioners after the
passage of resolutions dated August, 17, 1951 and September 1,
1981, had estopped them from assailing the validity of said board
resolutions.
Assuming, arguendo, that there was no notice given to Asuncion
Lopez Gonzalez during the special meetings held on August 17, 1981
and September 1, 1981, it is erroneous to state that the resolutions
passed by the board during the said meetings were ultra vires. In
legal parlance, "ultra vires" act refers to one which is not within the
corporate powers conferred by the Corporation Code or articles of
incorporation or not necessary or incidental in the exercise of the
powers so conferred. 19
The assailed resolutions before us cover a subject which concerns
the benefit and welfare of the company's employees. To stress,
providing gratuity pay for its employees is one of the express
powers of the corporation under the Corporation Code, hence,
petitioners cannot invoke the doctrine of ultra vires to avoid any
liability arising from the issuance the subject resolutions. 20
We reject petitioners' allegation that private respondents, namely,
Mila Refuerzo, Marissa Pascual and Edward Mamaril who resigned
from petitioner corporation after the filing of the case, are
precluded from receiving their gratuity pay. Pursuant to board
resolutions dated August 17, 1981 and September 1, 1981,
respectively, petitioner corporation obliged itself to give the G.R. No. L-4935 May 28, 1954
gratuity pay of its retained employees in four (4) installments: on
September 1, 1981; October 15, 1981; November, 1981; and
January 1, 1982. Hence, at the time the aforenamed private J. M. TUASON & CO., INC., represented by it Managing PARTNER,
respondents tendered their resignation, the aforementioned private GREGORIA ARANETA, INC., plaintiff-appellee,
respondents were already entitled to receive their gratuity pay.
vs.

QUIRINO BOLAÑOS, defendant-appellant.

Petitioners try to convince us that the subject resolutions had no
force and effect in view of the non-approval thereof during the
Annual Stockholders' Meeting held on March 1, 1982. To strengthen
Araneta and Araneta for appellee.
their position, petitioners cite section 28 1/2 of the Corporation Law
(Section 40 of the Corporation Code). We are not persuaded. Jose A. Buendia for appellant.

The cited provision is not applicable to the case at bench as it refers REYES, J.:
to the sale, lease, exchange or disposition of all or substantially all
of the corporation's assets, including its goodwill. In such a case, the
action taken by the board of directors requires the authorization of
This is an action originally brought in the Court of First Instance of
the stockholders on record.
Rizal, Quezon City Branch, to recover possesion of registered land
situated in barrio Tatalon, Quezon City.

It will be observed that, except far Arturo Lopez, the stockholders of

petitioner corporation also sit as members of the board of directors.
Plaintiff's complaint was amended three times with respect to the
Under the circumstances in field, it will be illogical and superfluous
extent and description of the land sought to be recovered. The
to require the stockholders' approval of the subject resolutions.
original complaint described the land as a portion of a lot registered
Thus, even without the stockholders' approval of the subject
in plaintiff's name under Transfer Certificate of Title No. 37686 of
resolutions, petitioners are still liable to pay private respondents'
the land record of Rizal Province and as containing an area of 13
gratuity pay.
hectares more or less. But the complaint was amended by reducing
the area of 6 hectares, more or less, after the defendant had the latter a monthly rent of P132.62 from January, 1940, until he
indicated the plaintiff's surveyors the portion of land claimed and vacates the land, and also to pay the costs.
occupied by him. The second amendment became necessary and
was allowed following the testimony of plaintiff's surveyors that a
portion of the area was embraced in another certificate of title, Appealing directly to this court because of the value of the property
which was plaintiff's Transfer Certificate of Title No. 37677. And still involved, defendant makes the following assignment or errors:
later, in the course of trial, after defendant's surveyor and witness,
Quirino Feria, had testified that the area occupied and claimed by
defendant was about 13 hectares, as shown in his Exhibit 1, plaintiff
I. The trial court erred in not dismissing the case on the ground that
again, with the leave of court, amended its complaint to make its
the case was not brought by the real property in interest.
allegations conform to the evidence.

II. The trial court erred in admitting the third amended complaint.
Defendant, in his answer, sets up prescription and title in himself
thru "open, continuous, exclusive and public and notorious
possession (of land in dispute) under claim of ownership, adverse to
the entire world by defendant and his predecessor in interest" from III. The trial court erred in denying defendant's motion to strike.
"time in-memorial". The answer further alleges that registration of
the land in dispute was obtained by plaintiff or its predecessors in
interest thru "fraud or error and without knowledge (of) or interest IV. The trial court erred in including in its decision land not involved
either personal or thru publication to defendant and/or in the litigation.
predecessors in interest." The answer therefore prays that the
complaint be dismissed with costs and plaintiff required to reconvey
the land to defendant or pay its value.
V. The trial court erred in holding that the land in dispute is covered
by transfer certificates of Title Nos. 37686 and 37677.

After trial, the lower court rendered judgment for plaintiff, declaring
defendant to be without any right to the land in question and
Vl. The trial court erred in not finding that the defendant is the true
ordering him to restore possession thereof to plaintiff and to pay
and lawful owner of the land.

VII. The trial court erred in finding that the defendant is liable to pay
the plaintiff the amount of P132.62 monthly from January, 1940,
until he vacates the premises.
VIII. The trial court erred in not ordering the plaintiff to reconvey
the land in litigation to the defendant.
As to the first assigned error, there is nothing to the contention that
the present action is not brought by the real party in interest, that
is, by J. M. Tuason and Co., Inc. What the Rules of Court require is
that an action be brought in the name of, but not necessarily by, the
real party in interest. (Section 2, Rule 2.) In fact the practice is for an
attorney-at-law to bring the action, that is to file the complaint, in
the name of the plaintiff. That practice appears to have been
followed in this case, since the complaint is signed by the law firm of
Araneta and Araneta, "counsel for plaintiff" and commences with
the statement "comes now plaintiff, through its undersigned
counsel." It is true that the complaint also states that the plaintiff is
"represented herein by its Managing Partner Gregorio Araneta,
Inc.", another corporation, but there is nothing against one
corporation being represented by another person, natural or
juridical, in a suit in court. The contention that Gregorio Araneta,
Inc. can not act as managing partner for plaintiff on the theory that
it is illegal for two corporations to enter into a partnership is
without merit, for the true rule is that "though a corporation has no
power to enter into a partnership, it may nevertheless enter into a
joint venture with another where the nature of that venture is in
line with the business authorized by its charter." (Wyoming-Indiana
Oil Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of
Corp., 1082.) There is nothing in the record to indicate that the
venture in which plaintiff is represented by Gregorio Araneta, Inc. as
"its managing partner" is not in line with the corporate business of
either of them.
Errors II, III, and IV, referring to the admission of the third amended
complaint, may be answered by mere reference to section 4 of Rule
17, Rules of Court, which sanctions such amendment. It reads:
Sec. 4. Amendment to conform to evidence. — When issues not
raised by the pleadings are tried by express or implied consent of
the parties, they shall be treated in all respects, as if they had been
raised in the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to raise
these issues may be made upon motion of any party at my time,
even of the trial of these issues. If evidence is objected to at the trial
on the ground that it is not within the issues made by the pleadings,
the court may allow the pleadings to be amended and shall be so
freely when the presentation of the merits of the action will be
subserved thereby and the objecting party fails to satisfy the court
that the admission of such evidence would prejudice him in
maintaining his action or defense upon the merits. The court may
grant a continuance to enable the objecting party to meet such
evidence.

Under this provision amendment is not even necessary for the
purpose of rendering judgment on issues proved though not
alleged. Thus, commenting on the provision, Chief Justice Moran
says in this Rules of Court:
Under this section, American courts have, under the New Federal
Rules of Civil Procedure, ruled that where the facts shown entitled
plaintiff to relief other than that asked for, no amendment to the
complaint is necessary, especially where defendant has himself
raised the point on which recovery is based, and that the appellate
court treat the pleadings as amended to conform to the evidence,
although the pleadings were not actually amended. (I Moran, Rules
of Court, 1952 ed., 389-390.)
Our conclusion therefore is that specification of error II, III, and IV
are without merit..
Let us now pass on the errors V and VI. Admitting, though his
attorney, at the early stage of the trial, that the land in dispute "is
that described or represented in Exhibit A and in Exhibit B enclosed
in red pencil with the name Quirino Bolaños," defendant later
changed his lawyer and also his theory and tried to prove that the
land in dispute was not covered by plaintiff's certificate of title. The
evidence, however, is against defendant, for it clearly establishes
that plaintiff is the registered owner of lot No. 4-B-3-C, situate in
barrio Tatalon, Quezon City, with an area of 5,297,429.3 square
meters, more or less, covered by transfer certificate of title No.
37686 of the land records of Rizal province, and of lot No. 4-B-4,
situated in the same barrio, having an area of 74,789 square meters,
more or less, covered by transfer certificate of title No. 37677 of the
land records of the same province, both lots having been originally
registered on July 8, 1914 under original certificate of title No. 735.
The identity of the lots was established by the testimony of Antonio
Manahan and Magno Faustino, witnesses for plaintiff, and the
identity of the portion thereof claimed by defendant was
established by the testimony of his own witness, Quirico Feria. The
combined testimony of these three witnesses clearly shows that the
portion claimed by defendant is made up of a part of lot 4-B-3-C and
major on portion of lot 4-B-4, and is well within the area covered by
the two transfer certificates of title already mentioned. This fact
also appears admitted in defendant's answer to the third amended
complaint.
As the land in dispute is covered by plaintiff's Torrens certificate of
title and was registered in 1914, the decree of registration can no
longer be impugned on the ground of fraud, error or lack of notice
to defendant, as more than one year has already elapsed from the
issuance and entry of the decree. Neither court the decree be
collaterally attacked by any person claiming title to, or interest in,
the land prior to the registration proceedings. (Soroñgon vs.
Makalintal,1 45 Off. Gaz., 3819.) Nor could title to that land in
derogation of that of plaintiff, the registered owner, be acquired by
prescription or adverse possession. (Section 46, Act No. 496.)
Adverse, notorious and continuous possession under claim of
ownership for the period fixed by law is ineffective against a Torrens
title. (Valiente vs. Judge of CFI of Tarlac,2 etc., 45 Off. Gaz., Supp. 9,
p. 43.) And it is likewise settled that the right to secure possession
under a decree of registration does not prescribed. (Francisco vs.
Cruz, 43 Off. Gaz., 5105, 5109-5110.) A recent decision of this Court
on this point is that rendered in the case of Jose Alcantara et al., vs.
Mariano et al., 92 Phil., 796. This disposes of the alleged errors V
and VI.
As to error VII, it is claimed that `there was no evidence to sustain
the finding that defendant should be sentenced to pay plaintiff
P132.62 monthly from January, 1940, until he vacates the premises.'
But it appears from the record that that reasonable compensation
for the use and occupation of the premises, as stipulated at the
hearing was P10 a month for each hectare and that the area
occupied by defendant was 13.2619 hectares. The total rent to be
paid for the area occupied should therefore be P132.62 a month. It
is appears from the testimony of J. A. Araneta and witness Emigdio
Tanjuatco that as early as 1939 an action of ejectment had already
been filed against defendant. And it cannot be supposed that
defendant has been paying rents, for he has been asserting all along
that the premises in question 'have always been since time
immemorial in open, continuous, exclusive and public and notorious
possession and under claim of ownership adverse to the entire
world by defendant and his predecessors in interest.' This
assignment of error is thus clearly without merit.
Error No. VIII is but a consequence of the other errors alleged and
needs for further consideration.
During the pendency of this case in this Court appellant, thru other
counsel, has filed a motion to dismiss alleging that there is pending
before the Court of First Instance of Rizal another action between
the same parties and for the same cause and seeking to sustain that
allegation with a copy of the complaint filed in said action. But an
examination of that complaint reveals that appellant's allegation is
not correct, for the pretended identity of parties and cause of action
in the two suits does not appear. That other case is one for recovery
of ownership, while the present one is for recovery of possession.
And while appellant claims that he is also involved in that order
action because it is a class suit, the complaint does not show that
such is really the case. On the contrary, it appears that the action
seeks relief for each individual plaintiff and not relief for and on
behalf of others. The motion for dismissal is clearly without merit.
G.R. No. L-15092 May 18, 1962
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
Tañada, Teehankee and Carreon for plaintiffs-appellants.
Hilado and Hilado for defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First
Instance of Occidental Negros, in its Civil Case No. 2603, dismissing
plaintiff's complaint that sought to compel the defendant Milling
Company to increase plaintiff's share in the sugar produced from
their cane, from 60% to 62.33%, starting from the 1951-1952 crop
year.1äwphï1.ñët
It is undisputed that plaintiffs-appellants, Alfredo Montelibano,
Alejandro Montelibano, and the Limited co-partnership Gonzaga
and Company, had been and are sugar planters adhered to the
defendant-appellee's sugar central mill under identical milling
contracts. Originally executed in 1919, said contracts were
stipulated to be in force for 30 years starting with the 1920-21 crop,
and provided that the resulting product should be divided in the
ratio of 45% for the mill and 55% for the planters. Sometime in
1936, it was proposed to execute amended milling contracts,
increasing the planters' share to 60% of the manufactured sugar
and resulting molasses, besides other concessions, but extending
the operation of the milling contract from the original 30 years to 45
years. To this effect, a printed Amended Milling Contract form was
drawn up. On August 20, 1936, the Board of Directors of the
appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts
No. 11, Acuerdo No. 1) granting further concessions to the planters
over and above those contained in the printed Amended Milling
Contract. The bone of contention is paragraph 9 of this resolution,
that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx xxx xxx
Acuerdo No. 1. — Previa mocion debidamente secundada, la Junta
en consideracion a una peticion de los plantadores hecha por un
comite nombrado por los mismos, acuerda enmendar el contrato de
molienda enmendado medientelas siguentes:
xxx xxx xxx
9.a Que si durante la vigencia de este contrato de Molienda
Enmendado, lascentrales azucareras, de Negros Occidental, cuya
produccion anual de azucar centrifugado sea mas de una tercera
parte de la produccion total de todas lascentrales azucareras de
Negros Occidental, concedieren a sus plantadores mejores
condiciones que la estipuladas en el presente contrato, entonces
esas mejores condiciones se concederan y por el presente se
entenderan concedidas a los platadores que hayan otorgado este
Contrato de Molienda Enmendado.
Appellants signed and executed the printed Amended Milling
Contract on September 10, 1936, but a copy of the resolution of
August 10, 1936, signed by the Central's General Manager, was not
attached to the printed contract until April 17, 1937; with the
notation —
Las enmiendas arriba transcritas forman parte del contrato de
molienda enmendado, otorgado por — y la Bacolod-Murcia Milling
Co., Inc.
In 1953, the appellants initiated the present action, contending that
three Negros sugar centrals (La Carlota, Binalbagan-Isabela and San
Carlos), with a total annual production exceeding one-third of the
production of all the sugar central mills in the province, had already
granted increased participation (of 62.5%) to their planters, and
that under paragraph 9 of the resolution of August 20, 1936,
heretofore quoted, the appellee had become obligated to grant
similar concessions to the plaintiffs (appellants herein). The
appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and
defended by urging that the stipulations contained in the resolution
were made without consideration; that the resolution in question
was, therefore, null and void ab initio, being in effect a donation
that was ultra vires and beyond the powers of the corporate
directors to adopt.
After trial, the court below rendered judgment upholding the stand
of the defendant Milling company, and dismissed the complaint.
Thereupon, plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not stand.
It must be remembered that the controverted resolution was
adopted by appellee corporation as a supplement to, or further
amendment of, the proposed milling contract, and that it was
approved on August 20, 1936, twenty-one days prior to the signing
by appellants on September 10, of the Amended Milling Contract
itself; so that when the Milling Contract was executed, the
concessions granted by the disputed resolution had been already
incorporated into its terms. No reason appears of record why, in the
face of such concessions, the appellants should reject them or
consider them as separate and apart from the main amended
milling contract, specially taking into account that appellant Alfredo
Montelibano was, at the time, the President of the Planters
Association (Exhibit 4, p. 11) that had agitated for the concessions
embodied in the resolution of August 20, 1936. That the resolution
formed an integral part of the amended milling contract, signed on
September 10, and not a separate bargain, is further shown by the
fact that a copy of the resolution was simply attached to the printed
contract without special negotiations or agreement between the
parties.
It follows from the foregoing that the terms embodied in the
resolution of August 20, 1936 were supported by the same causa or
consideration underlying the main amended milling contract; i.e.,
the promises and obligations undertaken thereunder by the
planters, and, particularly, the extension of its operative period for
an additional 15 years over and beyond the 30 years stipulated in
the original contract. Hence, the conclusion of the court below that
the resolution constituted gratuitous concessions not supported by
any consideration is legally untenable.
All disquisition concerning donations and the lack of power of the
directors of the respondent sugar milling company to make a gift to
the planters would be relevant if the resolution in question had
embodied a separate agreement after the appellants had already
bound themselves to the terms of the printed milling contract. But
this was not the case. When the resolution was adopted and the
additional concessions were made by the company, the appellants
were not yet obligated by the terms of the printed contract, since
they admittedly did not sign it until twenty-one days later, on
September 10, 1936. Before that date, the printed form was no
more than a proposal that either party could modify at its pleasure,
and the appellee actually modified it by adopting the resolution in
question. So that by September 10, 1936 defendant corporation
already understood that the printed terms were not controlling,
save as modified by its resolution of August 20, 1936; and we are
satisfied that such was also the understanding of appellants herein,
and that the minds of the parties met upon that basis. Otherwise
there would have been no consent or "meeting of the minds", and
no binding contract at all. But the conduct of the parties indicates
that they assumed, and they do not now deny, that the signing of
the contract on September 10, 1936, did give rise to a binding
agreement. That agreement had to exist on the basis of the printed
terms as modified by the resolution of August 20, 1936, or not at all.
Since there is no rational explanation for the company's assenting to
the further concessions asked by the planters before the contracts
were signed, except as further inducement for the planters to agree
to the extension of the contract period, to allow the company now
to retract such concessions would be to sanction a fraud upon the
planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of
appellees. There can be no novation unless two distinct and
successive binding contracts take place, with the later designed to
replace the preceding convention. Modifications introduced before
a bargain becomes obligatory can in no sense constitute novation in
law.
Stress is placed on the fact that the text of the Resolution of August
20, 1936 was not attached to the printed contract until April 17,
1937. But, except in the case of statutory forms or solemn
agreements (and it is not claimed that this is one), it is the assent
and concurrence (the "meeting of the minds") of the parties, and
not the setting down of its terms, that constitutes a binding
contract. And the fact that the addendum is only signed by the
General Manager of the milling company emphasizes that the
addition was made solely in order that the memorial of the terms of
the agreement should be full and complete.
Much is made of the circumstance that the report submitted by the
Board of Directors of the appellee company in November 19, 1936
(Exhibit 4) only made mention of 90%, the planters having agreed to
the 60-40 sharing of the sugar set forth in the printed "amended
milling contracts", and did not make any reference at all to the
terms of the resolution of August 20, 1936. But a reading of this
report shows that it was not intended to inventory all the details of
the amended contract; numerous provisions of the printed terms
are alao glossed over. The Directors of the appellee Milling
Company had no reason at the time to call attention to the
provisions of the resolution in question, since it contained mostly
modifications in detail of the printed terms, and the only major
change was paragraph 9 heretofore quoted; but when the report
was made, that paragraph was not yet in effect, since it was
conditioned on other centrals granting better concessions to their
planters, and that did not happen until after 1950. There was no
reason in 1936 to emphasize a concession that was not yet, and
might never be, in effective operation.
There can be no doubt that the directors of the appellee company
had authority to modify the proposed terms of the Amended Milling
Contract for the purpose of making its terms more acceptable to the
other contracting parties. The rule is that —
It is a question, therefore, in each case of the logical relation of the
act to the corporate purpose expressed in the charter. If that act is
one which is lawful in itself, and not otherwise prohibited, is done
for the purpose of serving corporate ends, and is reasonably
tributary to the promotion of those ends, in a substantial, and not in
a remote and fanciful sense, it may fairly be considered within
charter powers. The test to be applied is whether the act in
question is in direct and immediate furtherance of the corporation's
business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has the power to
do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp.
266-268)
As the resolution in question was passed in good faith by the board
of directors, it is valid and binding, and whether or not it will cause
losses or decrease the profits of the central, the court has no
authority to review them.
They hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing they
cannot be controlled in the reasonable exercise and performance of
such duty. Whether the business of a corporation should be
operated at a loss during depression, or close down at a smaller
loss, is a purely business and economic problem to be determined
by the directors of the corporation and not by the court. It is a well-
known rule of law that questions of policy or of management are
left solely to the honest decision of officers and directors of a
corporation, and the court is without authority to substitute its
judgment of the board of directors; the board is the business
manager of the corporation, and so long as it acts in good faith its
orders are not reviewable by the courts. (Fletcher on Corporations,
Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La
Carlota, Hawaiian Philippines, San Carlos and Binalbagan (which
produce over one-third of the entire annual sugar production in
Occidental Negros) have granted progressively increasing
participations to their adhered planter at an average rate of
62.333% for the 1951-52 crop year;
64.2% for 1952-53;
64.3% for 1953-54;
64.5% for 1954-55; and
63.5% for 1955-56,
the appellee Bacolod-Murcia Milling Company is, under the terms of
its Resolution of August 20, 1936, duty bound to grant similar
increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside;
and judgment is decreed sentencing the defendant-appellee to pay
plaintiffs-appellants the differential or increase of participation in
the milled sugar in accordance with paragraph 9 of the appellee
Resolution of August 20, 1936, over and in addition to the 60%
expressed in the printed Amended Milling Contract, or the value
thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said
appellants having received an additional 2% corresponding to said
year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year;
and to all appellants thereafter —
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential
during the time they were withheld; and the right is reserved to
plaintiffs-appellants to sue for such additional increases as they may
be entitled to for the crop years subsequent to those herein
adjudged.
G.R. No. L-5377 December 29, 1954
MARIA CLARA PIROVANA ET AL., plaintiffs-appellees,
vs.
THE DE LA RAMA STEAMSHIP CO., defendant-appellant.
Del Rosario and Garcia for appellant.
Vicente J. Francisco for appellees.
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of
Rizal declaring the donation made by the defendant in favor of the
minor children of the late Enrico Pirovano of the proceeds of the
insurance policies taken on his life valid and binding, and ordering
said defendant to pay to said minor children the sum of
P583,813.59, with interest thereon at the rate of per cent from the
date of filing of the complaint, plus an additional amount equivalent
to 20 per cent of said sum of P538,813.59 as damages by way of
attorney's fees and the costs of action.
Plaintiffs herein are the minor children of the late Enrico Pirovano
represented by their mother and judicial guardian Estefania R.
Pirovano. They seek to enforce certain resolutions adopted by the
Board of Directors and stockholders of the defendant company
giving to said minor children of the proceeds of the insurance
policies taken on the life of their deceased father Enrico Pirovano
with the company as beneficiary. Defendant's main defense is: that
said resolutions and the contract executed pursuant thereto are
ultra vires, and, if valid, the obligation to pay the amount given is
not yet due and demandable.
The trial court resolved all the issues raised by the parties in favor of
the plaintiffs and, after considering the evidence, both oral and
documentary, arrived at the following conclusions:
First. — That the contract executed between the plaintiffs and the
defendant is a renumerative donation.
Second. — That said contract or donation is not ultra vires, but an
act executed within the powers of the defendant corporation in
accordance with its articles of incorporation and by laws, sanctioned
and approved by its Board of Directors and stockholders; and
subsequently ratified by other subsequent acts of the defendant
company.
Third. — That the said donation is in accordance with the trend of
modern and more enlightened legislation in its treatment of
questions between labor and capital.
Fourth. — That the condition mentioned in the donation is null and
void because it depends on the provisions of Article 1115 of the old
Civil Code.
Fifth. — That if the condition is valid, its non-fulfillment is due to the
desistance of the defendant company from obeying and doing the
wishes and mandates of the majority of the stockholders.
Sixth. — That the non-payment of the debt in favor of the National
Development Company is not due to the lack of funds, nor to lack of
authority, but the desire of the President of the corporation to
preserve and continue the Government participation in the
company.
Seventh. — That due demands were made by the plaintiffs and their
attorneys and these demands were rejected for no justifiable or
legal grounds.
The important facts which need to be considered for purposes of
this appeal may be briefly stated as follows: Defendant is a
corporation duly organized in accordance with law with an
authorized capital of P500,000, divided into 5,000 shares, with a par
value of P100 each share. The stockholders were: Esteban de la
Rama, 1,800 shares, Leonor de la Rama, 100 shares, Estefania de la
Rama, 100 shares, and Eliseo Hervas, Tomas Concepcion, Antonio G.
Juanco, and Gaudencio Volasote with 5 shares each. Leonor and
Estefania are daughters of Don Esteban, while the rest his
employees. Estefania de la Rama was married to the late Enrico
Pirovano and to them four children were born who are the plaintiffs
in this case.
Enrico Pirovano became the president of the defendant company
and under his management the company grew and progressed until
it became a multi-million corporation by the time Pirovano was
executed by the Japanese during the occupation. On May 13, 1941,
the capital stock of the corporation was increased to P2,000,000,
after which a 100 per cent stock dividend was declared.
Subsequently, or before the outbreak of the war , new stock
dividends of 200 per cent and 33 1/3 per cent were again declared.
On December 4, 1941, the capital stock was once more increased to
P5,000,000. Under Pirovano's management, the assets of the
company grew and increased from an original paid up capital of
around P240,000 to P15,538,024.37 by September 30, 1941 (Exhibit
HH).
In the meantime, Don Esteban de la Rama, who practically owned
and controlled the stock of the defendant corporation, distributed
his shareholding among his five daughters, namely, Leonor,
Estefania, Lourdes, Lolita and Conchita and his wife Natividad
Aguilar so that, at that time, or on July 10, 1946, the stockholding of
the corporation stood as follows: Esteban de la Rama, 869 shares,
Leonor de la Rama, 3,375 shares, Estefania de la Rama, 3,368
shares, Lourdes de la Rama, 3,368 shares, Lolita de la Rama, 3,368
shares, Conchita de la Rama, 3,376 shares, and Natividad Aguilar,
2,136 shares. The other stockholders , namely, Eliseo Hervas, Tomas
Concepcion, Antonio Juanco, and Jose Aguilar, who were merely
employees of Don Esteban, were given 40 shares each, while Pio
Pedrosa, Marcial P. Lichauco and Rafael Roces, one share each,
because they merely represented the National Development
Company. This Company was given representation in the Board Of
Directors of the corporation because at that time the latter had an
outstanding bonded indebtedness to the National Development
Company.
This bonded indebtedness was incurred on February 26, 1940 and
was in the amount of P7,500.00. The bond held by the National
Development Company was redeemable within a period of 20 years
from March 1, 1940,. bearing interest at the rate of 5 per cent per
annum. To secure said bonded indebtedness, all the assets of the
De la Rama Steamship Co., Inc., and properties of Don Esteban de la
Rama, as well as those of the Hijos de I. de la Rama and Co., Inc., a
sister corporation owned by Don Esteban and his family, were
mortgaged to the National Development Company (Annexes A, B, C,
D of Exhibit 3, Deed of Trust). Payments made by the corporation
under the management of Pirovano reduced this bonded
indebtedness to P3,260,855.77.
Upon arrangement made with the National Development Company,
the outstanding bonded indebtedness was converted into non-
voting preferred shares of stock of the De la Rama company under
the express condition that they would bear affixed cumulative
dividend of 6 per cent per annum and would be redeemable within
15 years (Exhibits 5 and 7). This conversion was carried out on
September 23, 1949, when the National Development Company
executed a "Deed of Termination of Trust and Release of Mortgage"
in favor of the De la Rama company (Exhibit 6.) The immediate
effect of this conversion was the released from incumbrance of all
the properties Of Don Esteban and of the Hijos de I. de la Rama and
Co., Inc., which was apparently favorable to the interests of the De
la Rama company, but, on the other hand, it resulted in the
inconvenience that, as holder of the preferred stock, the National
Development Company, was given to the right to 40 per cent of the
membership of the Board of Directors of the De la Rama company,
which meant an increase in the representation of the National
Development Company from 2 to 4 of the 9 members of said Board
of Directors.

The first resolution granting to the Pirovano children the proceeds
of the insurance policies taken on his life by the defendant company
was adopted by the Board of Directors at a meeting held on July 10,
1946, (Exhibit B). This grant was called in the resolution as "Special
Payment to Minor Heirs of the late Enrico Pirovano". Because of its
direct hearing on the issues involved in this case, said resolution is
hereunder reproduced in toto:
SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO
PIROVANO
The President stated that the principal purpose for which the
meeting had been called was to discuss the advisability of making
some form of compensation to the minor heirs of the late Enrico
Pirovano, former President and General Manager of the Company.
As every member of the Board knows, said the President, the late
Enrico Pirovano who was largely responsible for the very successful
development of the activities of the Company prior to war was
killed by the Japanese in Manila sometime in 1944 leaving as his
only heirs four minor children, Maria Carla, Esteban, Enrico and
John Albert. Early in 1941, explained the President, the Company
had insured the life of Mr. Pirovano for a million pesos. Following
the occupation of the Philippines by Japanese forces the Company
was unable to pay the premiums on those policies issued by Filipino
companies and these policies had lapsed. But with regards to the
York Office of the De la Rama Steamship Co., Inc. had kept up
payment of the premiums from year to year. The payments made
on account of these premiums, however, are very small compared
to the amount which the Company will now receive as a result of
Mr. Pirovano's death. The President proposed therefore that out of
the proceeds of these policies the sum of P400,000 be set aside for
the minor children of the deceased, said sum of money to be
convertible into 4,000 shares of the stock of the Company, at par, or
1,000 shares for each child. This proposal, explained the President
as being made by him upon suggestion of President Roxas, but, he
added, that he himself was very much in favor of it also. On motion
of Miss Leonor de la Rama duly seconded by Mrs. Lourdes de la
Rama de Osmeña, the following resolution was, thereupon,
unanimously approved:
Whereas, the late Enrico Pirovano, President and General Manager
of the De la Rama Steamship Company, died in Manila sometime in
November, 1944:
Whereas, the said Enrico Pirovano was largely responsible for the
rapid and very successful development of the activities of thus
company;
Whereas, early in 1941 this company insured the life of said Enrico
Pirovano in various Philippine and American Life Insurance
companies for the total sum of P1,000,000;

Whereas, the said Enrico Pirovano is survived by his widow,
Estefania Pirovano and four minor children, to wit: Esteban, Maria
Carla, Enrico and John Albert, all surnamed Pirovano;lawphil.net
Whereas, said Enrico Pirovano left practically nothing to his heirs
and it is but fit proper that this company which owes so much to the
deceased should make some provision for his children;
Whereas, this company paid premium on Mr. Pirovano's life
insurance policies for a period of only 4 years so that it will receive
from the insurance companies sums of money greatly in excess of
the premiums paid by this company.
Be it resolved, That out of the proceeds to be collected from the life
insurance policies on the life of the late Enrico Pirovano, the sum of
P400,000 be set aside for equal division among the 4 minor children
of the deceased, to wit: Esteban, Maria Carla, Enrico and John
Albert, all surnamed Pirovano, which sum of money shall be
convertible into shares of stock of the De la Rama Steamship
Company, at par and, for that purpose, that the present registered
stockholders of the corporation be requested to waive their
preemptive right to 4,000 shares of the unissued stock of the
company in order to enable each of the 4 minor heirs of the
deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, all
surnamed Pirovano, to obtain 1,000 shares at par;
Resolved, further, that in view of the fact that under the provisions
of the indenture with the National Development Company, it is
necessary that action herein proposed to be confirmed by the Board
of Directors of that company, the Secretary is hereby instructed to
send a copy of this resolution to the proper officers of the National
Development Company for appropriate action. (Exhibit B)
The above resolution, which was adopted on July 10, 1946, was
submitted to the stockholders of the De la Rama company at a
meeting properly convened, and on that same date, July 10, 1946,
the same was duly approved.
It appears that, although Don Esteban and the Members of his
family were agreeable to giving to the Pirovano children the amount
of P400,000 out of the proceeds of the insurance policies taken on
the life of Enrico Pirovano, they did not realize that when they
provided in the above referred two resolutions that said Amount
should be paid in the form of shares of stock, they would be actually
giving to the Pirovano children more than what they intended to
give. This came about when Lourdes de la Rama, wife of Sergio
Osmeña, Jr., showed to the latter copies of said resolutions and
asked him to explain their import and meaning, and it was value
then that Osmeña explained that because the value then of the
shares of stock was actually 3.6 times their par value, the donation
their value, the donation, although purporting to be only P400,00,
would actually amount to a total of P1,440,000. He further
explained that if the Pirovano children would given shares of stock
in lieu of the amount to be donated, the voting strength of the five
daughters of Don Esteban in the company would be adversely
affected in the sense that Mrs. Pirovano would be adversely
affected in the sense that Mrs. Pirovano would have a voting power
twice as much as that of her sisters. This caused Lourdes de la Rama
to write to the secretary of the corporation, Atty. Marcial Lichauco,
asking him to cancel the waiver she supposedly gave of her pre-
emptive rights. Osmeña elaborated on this matter at the annual
meeting of the stockholders held on December 12, 1946 but at said
meeting it was decided to leave the matter in abeyance pending
further action on the part of the members of the De la Rama family.
Osmeña, in the meantime, took up the matter with Don Esteban
and, as consequence, the latter, on December 30, 1946, addressed
to Marcial Lichauco a letter stating, among other things, that "in
view of the total lack of understanding by me and my daughters of
the two Resolutions abovementioned, namely, Directors' and
Stockholders' dated July 10, 1946, as finally resolved by the majority
of the Stockholders and Directors present yesterday, that you
consider the abovementioned resolutions nullified." (Exhibit CC).
On January 6, 1947, the Board of Directors of the De la Rama
company, as a consequence of the change of attitude of Don
Esteban, adopted a resolution changing the form of the donation to
the Pirovano children from a donation of 4,000 shares of stock as
originally planned into a renunciation in favor of the children of all
the company's "right, title, and interest as beneficiary in and to the
proceeds of the abovementioned life insurance policies", subject to
the express condition that said proceeds should be retained by the
company as a loan drawing interest at the rate of 5 per cent per
annum and payable to the Pirovano children after the company
"shall have first settled in full the balance of its present remaining
bonded indebtedness in the sum of approximately P5,000,000"
(Exhibit C). This resolution was concurred in by the representatives
of the National Development Company. The pertinent portion of the
resolution reads as follows:
Be resolved, that out of gratitude to the late Enrico Pirovano this
Company renounce as it hereby renounces, all of his right, title, and
interest as beneficiary in and to the proceeds of the
abovementioned life insurance policies in favor of Esteban, Maria
Carla, Enrico and John Albert, all surnamed Pirovano, subject to the
terms and conditions herein after provided;
That the proceeds of said insurance policies shall be retained by the
Company in the nature of a loan drawing interest at the rate of 5
per cent annum from the date of receipt of payment by the
Company from the various insurance companies above-mentioned
until the time the time the same amounts are paid to the minor
heirs of Enrico Pirovano previously mentioned;

That all amounts received from the above-mentioned policies shall
be divided equally among the minors heirs of said Enrico Pirovano;
That the company shall proceed to pay the proceeds of said
insurance policies plus interests that may have accrued to each of
the heirs of the said Enrico Pirovano or their duly appointed
representatives after the Company shall have first settled in full the
balance of its present remaining bonded indebtedness in the sum of
the approximately P5,000,000.
The above resolution was carried out by the company and Mrs.
Estefania R. Pirovano, the latter acting as guardian of her children,
by executing a Memorandum Agreement on January 10, 1947 and
June 17, 1947, respectively, stating therein that the De la Rama
Steamship Co., Inc., shall enter in its books as a loan the proceeds of
the life insurance policies taken on the life of Pirovano totalling
S321,500, which loan would earn interest at the rate of 5 per cent
per annum. Mrs. Pirovano, in executing the agreement, acted with
the express authority granted to her by the court in an order dated
March 26, 1947.
On June 24, 1947, the Board of Directors approved a resolution
providing therein that instead of the interest on the loan being
payable, together with the principal, only after the company shall
have first settled in full its bonded indebtedness, said interest may
be paid to the Pirovano children "whenever the company is in a
position to met said obligation" (Exhibit D), and on February 26,
1948, Mrs. Pirovano executed a public document in which she
formally accepted the donation (Exhibit H). The Dela Rama company
took "official notice" of this formal acceptance at a meeting held by
its Board of Directors on February 26, 1948.
In connection with the above negotiations, the Board of Directors
took up at its meeting on July 25, 1949, the proposition of Mrs.
Pirovano to buy the house at New Rochelle, New York, owned by
the Demwood Realty, a subsidiary of the De la Rama company at its
original costs of $75,000, which would be paid from the funds held
in trust belonging to her minor children. After a brief discussion
relative to the matter, the proposition was approved in a resolution
adopted on the same date.
The formal transfer was made in an agreement signed on
September 5, 1949 by Mrs. Pirovano, as guardian of her children,
and by the De la Rama company, represented by its new General
Manager, Sergio Osmeña, Jr. The transfer of this property was
approved by the court in its order of September 20,
1949.lawphil.net
On September 13, 1949, or two years and 3 months after the
donation had been approved in the various resolutions herein
above mentioned, the stockholders of the De la Rama company
formally ratified the donation (Exhibit E), with certain clarifying
modifications, including the resolution approving the transfer of the
Demwood property to the Pirovano children. The clarifying
modifications are quoted hereunder:
1. That the payment of the above-mentioned donation shall
not be affected until such time as the Company shall have first duly
liquidated its present bonded indebtedness in the amount of
P3,260,855.77 with The National Development Company, or fully
redeemed the preferred shares of stock in the amount which shall
be issued to the National Development Company in lieu thereof;
2. That any and all taxes, legal fees, and expenses in any way
connected with the above transaction shall be chargeable and
deducted from the proceeds of the life insurance policies
mentioned in the resolutions of the Board of Directors. (Exhibit E)
Sometime in March 1950, the President of the corporation, Sergio
Osmeña, Jr., addressed an inquiry to the Securities and Exchange
Commission asking for opinion regarding the validity of the
donation of the proceeds of the insurance policies to the Pirovano
children. On June 20, 1950 that office rendered its opinion that the
donation was void because the corporation could not dispose of its
assets by gift and therefore the corporation acted beyond the scope
of its corporate powers. This opinion was submitted to the Board of
Directors at its meting on July 12, 1950, on which occasion the
president recommend that other legal ways be studied whereby the
donation could be carried out. On September 14, 1950, another
meeting was held to discuss the propriety of the donation. At this
meeting the president expressed the view that, since the
corporation was not authorized by its charter to make the donation
to the Pirovano children and the majority of the stockholders was in
favor of making provision for said children, the manner he believed
this could be done would be to declare a cash dividend in favor of
the stockholders in the exact amount of the insurance proceeds and
thereafter have the stockholders make the donation to the children
in their individual capacity. Notwithstanding this proposal of the
president, the board took no action on the matter, and on March 8,
1951, at a stockholders' meeting convened on that date the
majority of the stockholders' voted to revoke the resolution
approving the donation to the Pirovano children. The pertinent
portion of the resolution reads as follows:
Be it resolved, as it is hereby resolved, that in view of the failure of
compliance with the above conditions to which the above donation
was made subject, and in view of the opinion of the Securities and
Exchange Commissioner, the stockholders revoke, rescind and
annul, as they do thereby revoke, rescind and annul, its ratification
and approval on September 13, 1949 of the aforementioned
resolution of the Board of Directors of January 6, 1947, as amended
on June 24, 1947. (Exhibit T)
In view of the resolution declaring that the corporation failed to
comply with the condition set for the effectivity of the donation and
revoking at the same time the approval given to it by the
corporation, and considering that the corporation can no longer set
aside said donation because it had no longer set aside said donation
because it had long been perfected and consummated, the minor
children of the late Enrico Pirovano, represented by their mother
and guardian, Estefania R. de Pirovano, demanded the payment of
the credit due them as of December 31, 1951, amounting to
P564,980.89, and this payment having been refused, they instituted
the present action in the Court of First Instance of Rizal wherein
they prayed that the be granted an alternative relief of the
following tenor: (1) sentencing defendant to pay to the plaintiff the
sum of P564,980.89 as of December 31, 1951, with the
corresponding interest thereon; (2) as an alternative relief,
sentencing defendant to pay to the plaintiffs the interests on said
sum of P564,980.89 at the rate of 5 per cent per annum, and the
sum of P564,980.89 after the redemption of the preferred shares of
the corporation held by the National Development Company; and
(3) in any event, sentencing defendant to pay the plaintiffs damages
in the amount of not less than 20 per cent of the sum that may be
adjudged to the plaintiffs, and the costs of action.
The only issues which in the opinion of the court need to be
determined in order to reach a decision in this appeal are: (1) Is the
grant of the proceeds of the insurance policies taken on the life of
the late Enrico Pirovano as embodied in the resolution of the Board
of Directors of defendant corporation adopted on January 6, 1947
and June 24, 1947 a remunerative donation as found by the lower
court?; (2) IN the affirmative case, has that donation been perfected
before its rescission or nullification by the stockholders of the
corporation on March 8, 1951?; (3) Can defendant corporation give
by way of donation the proceeds of said insurance policies to the
minor children of the late Enrico Pirovano under the law or its
articles of corporation, or is that donation an ultra vires act?; and
(4) has the defendant corporation, by the acts it performed
subsequent to the granting of the donation, deliberately prevented
the fulfillment of the condition precedent to the payment of said
donation such that it can be said it has forfeited its right to demand
its fulfillment and has made the donation entirely due and
demandable?
We will discuss these issues separately.
1. To determine the nature of the grant made by the
defendant corporation to the minor children of the late Enrico
Pirovano, we do not need to go far nor dig into the voluminous
record that lies at the bottom of this case. We do not even need to
inquire into the interest which has allegedly been shown by
President Roxas in the welfare of the children of his good friend
Enrico Pirovano. Whether President Roxas has taken the initiative in
the move to give something to said children which later culminated
in the donation now in dispute, is of no moment for the fact is that,
from the mass of evidence on hand, such a donation has been given
the full indorsement and encouraging support by Don Esteban de la
Rama who was practically the owner of the corporation. We only
need to fall back to accomplish this purpose on the several Whereas, the said Enrico Pirovano was largely responsible for the
resolutions of the Board of Directors of the corporations containing rapid and very successful development of the activities of this
said grant for they clearly state the reasons and purposes why the company;
donation has been given.

Whereas, early in 1941 this company insured the life of said Enrico
Before we proceed further, it is convenient to state here in passing Pirovano in various Philippine and American Life Insurance
that, before the Board of Directors had approved its resolution of companies for the total sum of P1,000,000;
January 6, 1947, as later amended by another resolution adopted
on June 24, 1947, the corporation had already decided to give to
the minor children of the late Enrico Pirovano the sum of P400,000 Whereas, the said Enrico Pirovano is survived by his widow,
out of the proceeds of the insurance policies taken on his life in the Estefania Pirovano and 4 minor children, to wit: Esteban, Maria
form of shares, and that when this form was considered Carla, Enrico and John Albert, all surnamed Pirovano;
objectionable because its result and effect would be to give to said
children a much greater amount considering the value then of the
stock of the corporation, the Board of Directors decided to amend
Whereas, the said Enrico Pirovano left practically nothing to his
the donation in the form and under the terms stated in the
heirs and it is but fit and proper that this company which owes so
aforesaid resolutions. Thus, in the original resolution approved by
much to the deceased should make some provisions for his children;
the Board of Directors on July 10, 1946, wherein the reasons for
granting the donation to the minor children of the late Enrico
Pirovano were clearly, we find out the following revealing
statements: Whereas, this company paid premiums on Mr. Pirovano's life
insurance policies for a period of only 4 years so that it will receive
from the insurance companies sums of money greatly in excess of
the premiums paid by the company,
Whereas, the late Enrico Pirovano President and General Manager
of the De la Rama Steamship Company, died in Manila sometime in
November, 1944;
Again, in the resolution approved by the Board of Directors on
January 6, 1947, we also find the following expressive statements
which are but a reiteration of those already expressed in the
original resolution:
Whereas, the late Enrico Pirovano, President and General Manager
of the De la Rama Steamship Co., Inc., died in Manila sometime
during the latter part of the year 1944;
Whereas, the said Enrico Pirovano was to a large extent responsible
for the rapid and very successful development and expansion of the
activities of this company;
Whereas, early in 1941, the life of the said Enrico Pirovano was
insured in various life companies, to wit:
Whereas, the said Enrico Pirovano is survived by 4 minor children,
to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed
Pirovano; and
Whereas, the said Enrico Pirovano left practically nothing to his
heirs and it is but fit and proper that this Company which owes so
much to the deceased should make some provision for his children;
Be it resolved, that out of gratitude to the late Enrico Pirovano this
Company renounce as it hereby renounces, . . . .
From the above it clearly appears that the corporation thought of
giving the donation to the children of the late Enrico Pirovano
because he "was to a large extent responsible for the rapid and very
successful development and expansion of the activities of this
company"; and also because he "left practically nothing to his heirs
and it is but fit and proper that this company which owes so much
to the deceased should make some provision to his children", and
so, the donation was given "out of gratitude to the late Enrico
Pirovano." We do not need to stretch our imagination to see that a
grant or donation given under these circumstances is remunerative
in nature in contemplation of law.
That which is made to a person in consideration of his merits or for
services rendered to the donor, provided they do not constitute
recoverable debts, or that in which a burden less than the value of
the thing given is imposed upon the donee, is also a donation." (Art.
619, old Civil Code.)
In donations made to a person for services rendered to the donor,
the donor's will is moved by acts which directly benefit him. The
motivating cause is gratitude, acknowledgment of a favor, a desire
to compensate. A donation made to one who saved the donor's life,
or a lawyer who renounced his fees for services rendered to the
donor, would fall under this class of donations. These donations are
called remunerative donations . (Sinco and Capistrano, The Civil
Code, Vol. 1, p. 676; Manresa, 5th ed., pp. 72-73.)
2. The next question to be determined is whether the
donation has been perfected such that the corporation can no
longer rescind it even if it wanted to. The answer to this question
cannot but be in the affirmative considering that the same has not
only been granted in several resolutions duly adopted by the Board
of Directors of the defendant corporation, and in all these corporate
acts the concurrence of the representatives of the National
Development Company, the only creditor whose interest may be
affected by the donation, has been expressly given. The corporation
has even gone further. It actually transferred the ownership of the
credit subject of donation to the Pirovano children with the express
understanding that the money would be retained by the
corporation subject to the condition that the latter would pay
interest thereon at the rate of 5 per cent per annum payable
whenever said corporation may be in a financial position to do so.
Thus, the following acts of the corporation as reflected from the
evidence bear this out:
(a) The donation was embodied in a resolution duly approved
by the Board of Directors on January 6, 19437. In this resolution, the
representatives of the National Development Company, have given
their concurrence. This is the only creditor which can be considered
as being adversely affected by the donation. The resolution of June
24, 1947 did not modify the substance of the former resolution for
it merely provided that instead of the interest on the loan being
payable, together with the principal, only after the corporation had
first settled in full its bonded indebtedness, said interest would be
paid "whenever the company is in a position to meet said
obligation."
(b) The resolution of January 6, 1947 was actually carried out
when the company and Mrs. Estefania R. Pirovano, executed a
memorandum agreement stating therein hat the proceeds of the
insurance policies would be entered in the books of the corporation
as a loan which would bear an interest at the rate of 5 per cent per
annum, and said agreement was signed by Mrs. Pirovano as judicial
guardian of her children after she had been expressly authorized by
the court to accept the donation in behalf of her children.
(c) While the donation can be considered as duly executed by
the execution of the document stated in the preceding paragraph,
and by the entry in the books of the corporation of the donation as
a loan, a further record of said execution was made when Mrs.
Pirovano executed a public document on February 26, 1948 making
similar acceptance of the donation. And this acceptance was
officially recorded by the corporation when on the same date its
Board of Directors approved a resolution taking "official notice" of
said acceptance.
(d) On July 25, 1949, the Board of Directors approved the
proposal of Mrs. Pirovano to buy the house at New Rochelle, New
York, owned by a subsidiary of the corporation at the costs of
S75,000 which would be paid from the sum held in trust belonging
to her minor children. And this agreement was actually carried out
in a document signed by the general manager of the corporation
and by Mrs. Pirovano, who acted on the matter with the express
authority of the court.
(e) And on September 30, 1949, or two years and 3 months
after the donation had been executed, the stockholders of the
defendant corporation formally ratified and gave approval to the
donation as embodied in the resolutions above referred to, subject
to certain modifications which did not materially affect the nature
of the donation.
There can be no doubt from the foregoing relation of facts the
donation was a corporate act carried out by the corporation not
only with the sanction of its Board of Directors but also of its
stockholders. It is evident that the donation has reached the stage
of perfection which is valid and binding upon the corporation and as
such cannot be rescinded unless there is exists legal grounds for
doing so. In this case, we see none. The two reasons given for the
rescission of said donation in the resolution of the corporation
adopted on March 8, 1951, to wit: that the corporation failed to
comply with the conditions to which the above donation was made
subject, and that in the opinion of the Securities and Exchange
Commission said donation is ultra vires, are not, in our opinion, valid
and legal as to justify the rescission of a perfected donation. These
reasons, as we will discuss in the latter part of this decision, cannot
be invoked by the corporation to rescind or set at naught the
donation, and the only way by which this can be done is to show
that the donee has been in default, or that the donation has not
been validly executed, or is illegal or ultra vires, and such is not the
case as we will see hereafter. We therefore declare that the
resolution approved by the stockholders of the defendant
corporation on March 8, 1951 did not and cannot have the effect of
nullifying the donation in question.
3. The third question to be determined is: Can defendant
corporation give by way of donation the proceeds of said insurance
policies to the minor children of the late Enrico Pirovano under the
law or its articles of corporation, or is that donation an ultra vires
act? To answer this question it is important for us to examine the
articles of incorporation of the De la Rama company to see this
question it is important for us to examine the articles of
incorporation of the De la Rama company to see if the act or
donation is outside of their scope. Paragraph second of said articles
provides:
Second.— The purposes for which said corporation is formed are:
(a) To purchase, charter, hire, build, or otherwise acquire
steam or other ships or vessels, together with equipments and
furniture therefor, and to employ the same in conveyance and
carriage of goods, wares and merchandise of every description, and
of passengers upon the high seas.
(b) To sell, let, charter, or otherwise dispose of the said vessels
or other property of the company.
(c) To carry on the business of carriers by water.
(d) To carry on the business of shipowners in all of its branches.
(e) To purchase or take on lease, lands, wharves, stores,
lighters, barges and other things which the company may deem
necessary or advisable to be purchased or leased for the necessary
and proper purposes of the business of the company, and from time
to time to sell the dispose of the same.
(f) To promote any company or companies for the purposes of
acquiring all or any of the property or liabilities of this company, or
both, or for any other purpose which may seem directly or indirectly
calculated to benefit the company.
(g) To invest and deal with the moneys of the company and
immediately required, in such manner as from time to time may be
determined.
(h) To borrow, or raise, or secure the payment of money in
such manner as the company shall think fit.
(i) Generally, to do all such other thing and to transact all
business as may be directly or indirectly incidental or conducive to
the attainment of the above object, or any of them respectively.
(j) Without in any particular limiting or restricting any of the
objects and powers of the corporation, it is hereby expressly
declared and provided that the corporation shall have power to
issue bonds and provided that the corporation shall have power to
issue bonds and other obligations, to mortgage or pledge any
stocks, bonds or other obligations or any property which may be
required by said corporations; to secure any bonds, guarantees or
other obligations by it issued or incurred; to lend money or credit to
and to aid in any other manner any person, association, or
corporation of which any obligation or in which any interest is held
by this corporation or in the affairs or prosperity of which this
corporation or in the affairs or prosperity of which this corporation
has a lawful interest, and to do such acts and things as may be
necessary to protect, preserve, improve, or enhance the value of
any such obligation or interest; and, in general, to do such other
acts in connection with the purposes for which this corporation has
been formed which is calculated to promote the interest of the
corporation or to enhance the value of its property and to exercise
all the rights, powers and privileges which are now or may hereafter
be conferred by the laws of the Philippines upon corporations
formed under the Philippine Corporation Act; to execute from time
to time general or special powers of attorney to persons, firms,
associations or corporations either in the Philippines, in the United
States, or in any other country and to revoke the same as and when
the Directors may determine and to do any and or all of the things
hereinafter set forth and to the same extent as natural persons
might or could do.
After a careful perusal of the provisions above quoted we find that
the corporation was given broad and almost unlimited powers to
carry out the purposes for which it was organized among them, (1)
"To invest and deal with the moneys of the company not
immediately required, in such manner as from time to time may be
determined" and, (2) "to aid in any other manner any person,
association, or corporation of which any obligation or in which any
interest is held by this corporation or in the affairs or prosperity of
which this corporation has a lawful interest." The world deal is
broad enough to include any manner of disposition, and refers to
moneys not immediately required by the corporation, and such
disposition may be made in such manner as from time to time may
be determined by the corporations. The donation in question
undoubtedly comes within the scope of this broad power for it is a
fact appearing in the evidence that the insurance proceeds were not
immediately required when they were given away. In fact, the
evidence shows that the corporation declared a 100 per cent cash
dividend, or P2,000,000, and later on another 30 per cent cash
dividend. This is clear proof of the solvency of the corporation. It
may be that, as insinuated, Don Esteban wanted to make use of the
insurance money to rehabilitate the central owned by a sister
corporation, known as Hijos de I. de la Rama and Co., Inc., situated
in Bago, Negros Occidental, but this, far from reflecting against the
solvency of the De la Rama company, only shows that the funds
were not needed by the corporation.
Under the second broad power we have the above stated, that is, to
aid in any other manner any person in the affairs and prosperity of
whom the corporation has a lawful interest, the record of this case
is replete with instances which clearly show that the corporation
knew well its scope and meaning so much so that, with the
exception of the instant case, no one has lifted a finger to dispute
their validity. Thus, under this broad grant of power, this
corporation paid to the heirs of one Florentino Nonato, an engineer
of one of the ships of the company who died in Japan, a gratuity of
P7,000, equivalent to one month salary for each year of service. It
also gave to Ramon Pons, a captain of one of its ships , a retirement
gratuity equivalent to one month salary for every year of service,
the same to be based upon his highest salary. And it contributed
P2,000 to the fund raised by the Associated Steamship Lines for the
widow of the late Francis Gispert, secretary of said Association, of
which the De la Rama Steamship Co., Inc., was a member along with
about 30 other steamship companies. In this instance, Gispert was
not even an employee of the corporation. And invoking this vast
power, the corporation even went to the extent of contributing
P100,000 to the Liberal Party campaign funds, apparently in the
hope that by conserving its cordial relations with that party it might
continue to retain the patronage of the administration. All these
acts executed before and after the donation in question have never
been questioned and were willingly and actually carried out.
We don't see much distinction between these acts of generosity or
benevolence extended to some employees of the corporation, and
even to some in whom the corporation was merely interested
because of certain moral or political considerations, and the
donation which the corporation has seen fit to give to the children
of the late Enrico Pirovano from the point of view of the power of
the corporation as expressed in its articles of incorporation. And if
the former had been sanctioned and had been considered valid and
intra vires, we see no plausible reasons why the latter should now
be deemed ultra vires. It may perhaps be argued that the donation
given to the children of the late Enrico Pirovano is so large and
disproportionate that it can hardly be considered a pension of
gratuity that can be placed on a par with the instances above
mentioned, but this argument overlooks one consideration: the
gratuity here given was not merely motivated by pure liberality or
act of generosity, but by a deep sense of recognition of the valuable
services rendered by the late Enrico Pirovano which had immensely
contributed to the growth of the corporation to the extent that
from its humble capitalization it blossomed into a multi-million
corporation that it is today. In other words of the very resolutions
granting the donation or gratuity, said donation was given not only
because the company was so indebted to him that it saw fit and
proper to make provisions for his children, but it did so out of a
sense of gratitude. Another factor that we should bear in mind is
that Enrico Pirovano was not only a high official of the company but
was at the same time a member of the De la Rama family, and the
recipient of the donation are the grandchildren of Don Esteban de la
Rama. This we, may say, is the motivating root cause behind the
grant of this bounty.
It may be contended that a donation is different from a gratuity.
While technically this may be so in substance they are the same.
They are even similar to a pension. Thus, it was granted for services
previously rendered, and which at the time they were rendered
gave rise to no legal obligation. " (Words and Phrases, Permanent
Edition, p. 675; O'Dea vs. Cook,, 169 Pac., 306, 176 Cal., 659.) Or
stated in another way, a "Gratuity is mere bounty given by the
Government in consideration or recognition or meritorious services
and springs from the appreciation an d graciousness of the
Government", (Ilagan vs. Ilaya, G.R. No. 33507, Dec. 20 1930) or "A
gratuity is something given freely, or without recompense, a gift,
something voluntarily given in return for a favor or services; a
bounty; a tip." Wood Mercantile Co. vs. Cole, 209 S.W. 2d. 290;
Mendoza vs. Dizon, 77 Phil., 533, 43 Off. Gaz. p. 4633. We do not
see much difference between this definition of gratuity and a
remunerative donation contemplated in the Civil Code. In essence
they are the same. Such being the case, it may be said that this
donation is gratuity in a large sense for it was given for valuable
services rendered an ultra vires act in the light of the following
authorities:
Indeed, some cases seem to hold that the giving of a pure gratuity
to directors is ultra vires of corporation, so that it could not be
legalized even if the approval of the shareholders; but this position
has no sound reason to support it, and is opposed to the weight of
authority (Suffaker vs. Kierger's Assignee, 53 S.W. Rep. 288; !07 Ky.
200; 46 L.R.A. 384).
But although business corporations cannot contribute to charity or
benevolence, yet they are not required always to insist on the full
extent of their legal rights. They are not forbidden for the
recognizing moral obligation of which strict law takes no
cognizance. They are not prohibited from establishing a reputation
for board, liberal, equitable dealing which may stand them in good
stead in competition with less fair rivals. Thus, an incorporated fire
insurance company which policies except losses from explosions
may nevertheless pay a loss from that cause when other companies
are accustomed to do so, such liberal dealing being deemed
conducive to the prosperity of the corporation." (Modern Law of
Corporations, Machen, Vol. 1, p. 81).
So, a bank may grant a five years pension to the family at one of its
officers. In all cases in this sorts, the amount of the gratuity rests
entirely within the discretion of the company, unless indeed it be all
together out of the reason and fitness. But where the company has
ceased to be going concerned, this power to make gifts or present it
at the end. (Modern Law of Corporations, Machen, Vol. 1, p. 82.).
Payment of Gratitude out of Capital.— There seems on principle no
reason to doubt that gifts or gratuities wherever they are lawful
may be paid out of capital as well as out of profits. (Modern Law of
corporations, Machen, Vol. 1 p. 83.).
Whether desirable to supplement implied powers of this kind by
express provisions.— Enough has been said to show that the
implied powers of a corporation to give gratuities to its servants and
officers, as well as to strangers, are ample, so that there is therefore
no need to supplement them by express provisions." (modern Law
of Corporations, Machen, Vol. 1, p. 83.) 1
Granting arguendo that the donation given by Pirovano children is
outside the scope of the powers of the defendant corporation, or
the scope of the powers that it may exercise under the law, or it is
an ultra vires act, still it may said that the same can not be
invalidated, or declared legally ineffective for the reason alone, it
appearing that the donation represents not only the act of the
Board of Directors but of the stockholders themselves as shown by
the fact that the same has been expressly ratified in a resolution
duly approved by the latter. By this ratification, the infirmity of the
corporate act, it may has been obliterated thereby making the cat
perfectly valid and enforceable. This is specially so if the donation is
not merely executory but executed and consummated and no
creditors are prejudice, or if there are creditors affected, the latter
has expressly given their confirmity.

In making this pronouncement, advertence should made of the
nature of the ultra vires act that is in question. A little digression
needs be made on this matter to show the different legal effect that
may result consequent upon the performance of a particular ultra
vires act on the part of the corporation. may authorities may be
cited interpreting or defining, extent, and scope of an ultra vires act,
but all of them are uniform and unanimous that the same may be
either an act performed merely outside the scope of the powers
granted to it by it articles of incorporation, or one which is contrary
to law or violative of any principle which will void any contract
whether done individually or collectively. In other words, a
distinction should be made between corporate acts or contracts
which are illegal and those which are merely ultra vires. The former
contemplates the doing of an act which is contrary to law, morals,
or public policy or public duty, and are, like similar transactions
between the individuals void. They cannot serve as basis of a court
action, nor require validity ultra vires acts on the other hand, or
those which are not illegal and void ab initio, but are merely within
are not illegal and void ab initio, but are not merely within the scope
of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders.
Strictly speaking, an ultra vires act is one outside the scope of the
power conferred by the legislature, and although the term has been
used indiscriminately, it is properly distinguishable from acts which
are illegal, in excess or abuse of power, or executed in an
unauthorized manner, or acts within corporate powers but outside
the authority of particular officers or agents (19 C. J. S. 419).
Corporate transactions which are illegal because prohibited by
statute or against public policy are ordinarily void and
unenforceable regardless of the part performance, ratification, or
estoppel; but general prohibitions against exceeding corporate
powers and prohibitions intended to protect a particular class or
specifying the consequences of violation may not preclude
enforcement of the transaction and an action may be had for the
part unaffected by the illegality or for equitable restitution. (19
C.J.S. 421.)
Generally, a transaction within corporate powers but executed in an
irregular or unauthorized manner is voidable only, and may become
enforceable by reason of ratification or express or implied assent by
the stockholders or by reason of estoppel of the corporation or the
other party to the transaction to raise the objection, particularly
where the benefits are retained
As appears in paragraphs 960-964 supra, the general rule is that a
corporation must act in the manner and with the formalities, if any,
prescribed by its character or by the general law. However, a
corporation transaction or contract which is within the corporation
powers, which is neither wrong in itself nor against public policy,
but which is defective from a failure to observe in its execution a
requirement of law enacted for the benefit or protection of a
certain class, is voidable and is valid until avoided, not void until
validated; the parties for whose benefit the requirement was
enacted may ratify it or be estoppel to assert its invalidity, and third
persons acting in good faith are not usually affected by an
irregularity on the part of the corporation in the exercise of its
granted powers. (19 C.J.S., 423-24.)
It is true that there are authorities which told that ultra vires acts, or
those performed beyond the powers conferred upon the
corporation either by law or by its articles of incorporation, are not
only voidable, but wholly void and of no legal effect, and that such
acts cannot be validated by ratification or be the basis of any action
in court; but such ruling does not constitute the weight of authority,
the reason being that they fail to make the important distinction we
have above adverted to. Because rule has been rejected by most of
the state courts and even by the modern treaties or corporations (7
Flethcer, Cyc. Corps., 563-564). And now it can be said that the
majority of the cases hold that acts which are merely ultra vires, or
acts which are not illegal, may be ratified by the stockholders of a
corporation (Brooklyn Heights R. Co. vs. Brooklyn City R. Co., 135
N.Y. Supp. 1001).
Strictly speaking, an act of a corporation outside of its character
powers is just as such ultra vires where all the stockholders consent
thereto as in a case where none of the stockholders expressly or
cannot be ratified so as to make it valid, even though all the
stockholders consent thereto; but inasmuch as the stockholders in
reality constitute the corporation, it should , it would seem, be
estopped to allege ultra vires, and it is generally so held where
there are no creditors, or the creditors are not injured thereby, and
where the rights of the state or the public are not involved, unless
the act is not only ultra vires but in addition illegal and void. of
course, such consent of all the stockholders cannot adversely affect
creditors of the corporation nor preclude a proper attack by the
state because of such ultra vires act. (7 Fletcher Corp., Sec. 3432, p.
585)
Since it is not contended that the donation under consideration is
illegal, or contrary to any of the express provision of the articles of
incorporation, nor prejudicial to the creditors of the defendant
corporation, we cannot but logically conclude, on the strength of
the authorities we have quoted above, that said donation, even if
ultra vires in the supposition we have adverted to, is not void, and if
voidable its infirmity has been cured by ratification and subsequent
acts of the defendant corporation. The defendant corporation,
therefore, is now prevented or estopped from contesting the
validity of the donation. This is specially so in this case when the
very directors who conceived the idea of granting said donation are
practically the stockholders themselves, with few nominal
exception. This applies to the new stockholder Jose Cojuangco who
acquired his interest after the donation has been made because of
the rule that a "purchaser of shares of stock cannot avoid ultra vires
acts of the corporation authorized by its vendor, except those done
after the purchase" (7 Fletcher, Cyc. Corps. section 3456, p. 603;
Pascual vs. Del Saz Orozco, 19 Phil., 82.) Indeed, how can the
stockholders now pretend to revoke the donation which has been
partly consummated? How can the corporation now set at naught
the transfer made to Mrs. Pirovano of the property in New York,
U.S.A., the price of which was paid by her but of the proceeds of the
insurance policies given as donation. To allow the corporation to
undo what it has done would only be most unfair but would
contravene the well-settled doctrine that the defense of ultra vires
cannot be set up or availed of in completed transactions (7 Fletcher,
Cyc. Corps. Section 3497, p. 652; 19 C.J.S., 431).
4. We now come to the fourth and last question that the
defendant corporation, by the acts it has performed subsequent to
the granting of the donation, deliberately prevented the fulfillment
of the condition precedent to the payment of said donation such
that it can be said it has forfeited entirely due and demandable.
It should be recalled that the original resolution of the Board of
Directors adopted on July 10, 1946 which provided for the donation
of P400,000 out of the proceeds which the De la Rama company
would collect on the insurance policies taken on the life of the late
Enrico Pirovano was, as already stated above, amended on January
6, 1947 to include, among the conditions therein provided, that the
corporation shall proceed to pay said amount, as well as the interest
due thereon, after it shall have settled in full balance of its bonded
indebtedness in the sum of P5,000,000. It should be recalled that on
September 13, 1949, or more than 2 years after the last
amendment referred too above, the stockholders adopted another
resolution whereby they formally ratified said donation but subject
to the following clarifications: (1) that the amount of the donation
shall not be effected until such time as the company shall have first
duly liquidated its present bonded indebtedness in the amount of
P3,260,855.77 to the National Development Company, or shall have
first fully redeemed the preferred shares of stock in the amount to
be issued to said company in lieu thereof, and (2) that any and all
taxes, legal fees, and expenses connected with the transaction shall
be chargeable from the proceeds of said insurance policies.
The trial court, in considering these conditions in the light of the
acts subsequently performed by the corporation in connection with
the proceeds of the insurance policies, considered said conditions
null and void, or at most not written because in its pinion their non-
fulfillment was due to a deliberate desistance of the corporation
and not to lack of funds to redeem the preferred shares of the
National Development Company. The conclusions arrived at by the
trial court on this point are as follows:
Fourth. — that the condition mentioned in the donation is null and
void because it depends on the exclusive will of the donor, in
accordance with the provisions of Article 1115 of the Old Civil Code.
Fifth. — That if the condition is valid, its non-fulfillment is due to the
desistance of the defendant company from obeying and doing the
wishes and mandate of the majority of the stockholders.

Sixth. — That the non-payment of the debt in favor of the National
Development Company is due to the lack of funds, nor to lack of
authority, but to the desire of the President of the corporation to
preserve and continue the Government participation in the
company.
To this views of the trial court, we fail to agree. There are many
factors we can consider why the failure to immediately redeem the
preferred shares issued to the National Development Company as
desired by the minor children of the late Enrico Pirovano cannot or
should not be attributed to a mere desire on the part of the
corporation to delay the redemption, or to prejudice the interest of
the minors, but rather to protect the interest of the corporation
itself. One of them is the text of the very resolution approved by the
National Development Company on February 18, 1949 which
prescribed the terms and conditions under which it expressed its
conformity to the conversion of the bonded indebtedness into
preferred shares of stock. The text of the resolution above
mentioned reads:
Resolved: That the outstanding bonded indebtedness of the Dela
Rama Steamship Co., Inc., in the approximate amount of
P3,260,855.77 be converted into non-voting preferred shares of
stock of said company, said shares to bear a fixed dividend of 6
percent per annum which shall be cumulative and redeemable
within 15 years. Said shares shall be preferred as to assets in the
event of liquidation or dissolution of said company but shall be non-
participating.
It is plain from the text of the above resolution that the defendant
corporation had 15 years from February 18, 1949, or until 1964,
within which to effect the redemption of the preferred shares
issued to the National Development Company. This condition
cannot but be binding and obligatory upon the donees, if they
desire to maintain the validity of the donation, for it is not only the
basis upon which the stockholders of the defendant corporation
expressed their willingness to ratify the donation, but it is also by
way which its creditor, the National Development Company, would
want it to be. If the defendant corporation is given 15 years within
which to redeem the preferred shares, and that period would expire
in 1964, one cannot blame the corporation for availing itself of this
period if in its opinion it would redound to its best interest. It
cannot therefore be said that the fulfillment of the condition for the
payment of the donation is one that wholly depends on the
exclusive will of the donor, as the lower court has concluded, simply
because it failed to meet the redemption of said shares in her
manner desired by the donees. While it may be admitted that
because of the disposition of the assets of the corporation upon the
suggestion of its general manager more than enough funds had
been raised to effect the immediate redemption of the above
shares, it is not correct to say that the management has completely
failed in its duty to pay its obligations for, according to the evidence,
a substantial portion of the indebtedness has been paid and only a
balance of about P1,805,169.98 was outstanding when the
stockholders of the corporation decided to revoke or cancel the
donation. (Exhibit P.)
But there are other good reasons why all the available funds have
not been actually applied to the redemption of the preferred
shares, one of them being the "desire of the president of the
corporation to preserve and continue the government participation
in the company" which even the lower court found it to be
meritorious, which is one way by which it could continue receiving
the patronage and protection of the government. Another reason is
that the redemption of the shares does not depend on the will of
the corporation alone but to a great extent on the will of a third
party, the National Development Company. In fact, as the evidence
shows, this Company had pledged these shares to the Philippine
National Bank and the Rehabilitation Finance Corporation as a
security to obtain certain loans to finance the purchase of certain
ships to be built for the use of the company under management
contract entered into between the corporation and the National
Development Company, and this was what prevented the
corporation from carrying out its offer to pay the sum
P1,956,513.07 on April 5, 1951. Had this offer been accepted, or
favorably acted upon by the National Development Company, the
indebtedness would have been practically liquidated, leaving
outstanding only one certificate worth P217,390.45. Of course, the
corporation could have insisted in redeeming the shares if it wanted
to even to the extent of taking a court action if necessary to force its
creditor to relinquish the shares that may be necessary to
accomplish the redemption, but such would be a drastic step which
would have not been advisable considering the policy right along
maintained by the corporation to preserve its cordial and smooth
relation with the government. At any rate, whether such attitude be
considered as a mere excuse to justify the delay in effecting the
redemption of the shares, or a mere desire on the part of the
corporation to retain in its possession more funds available to
attend to other pressing need as demanded by the interest of the
corporation, we fail to see in such an attitude an improper motive
to circumvent the early realization of the desire of the minors to
obtain the immediate payment of the donation which was made
dependent upon the redemption of said shares there being no clear
evidence that may justify such design. Anyway, a great portion of
the funds went to the stockholders themselves by way of dividends
to offset, so it appears, the huge advances that the corporation had
made to them which were entered in the books of the corporation
as loans and, therefore, they were invested for their own benefit. As
General Manager Osmeña said, "we were first confronted with the
problem of the withdrawals of the family which had to be repaid
back to the National Development Company and one of the most
practical solutions to that was to declare dividends and reduce the
amounts of their withdrawals", which then totalled about
P3,000,000.
All things considered, we are of the opinion that the finding of the
lower court that the failure of the defendant corporation to comply
with the condition of the donation is merely due to its desistance
from obeying the mandate of the majority of the stockholders and
not to lack of funds, or to lack of authority, has no foundation in law
or in fact, and, therefore, its conclusion that because of such
desistance that condition should be deemed as fulfilled and the
payment of the donation due and demandable, is not justified. In
this respect, the decision of the lower court should be reversed.