BERNAS V.

CINCO CORP: Chapter VI

71
G.R. No. 146089 July 10, 2015
Petitioners:
JOSE A. BERNAS, CECILE H. CHENG, VICTOR
AFRICA, JESUS B. MARAMARA, JOSE T.
FRONDOSO, IGNACIO T. MACROHON, JR., AND
PAULINO T. LIM, ACTING IN THEIR CAP A CITY
AS INDIVIDUAL DIRECTORS OF MAKATI
SPORTS CLUB, INC., AND ON BEHALF OF THE
BOARD OF DIRECTORS OF MAKATI SPORTS
CLUB
Recit Ready Summary
PEREZ, J. Matt
Respondents:
JOVENCIO F. CINCO, VICENTE R. AYLLON,
RICARDO G. LIBREA, SAMUEL L. ESGUERRA,
ROLANDO P. DELA CUESTA, RUBEN L.
TORRES, ALEX Y. PARDO, MA. CRISTINA SIM,
ROGER T. AGUILING, JOSE B. QUIMSON,
CELESTINO L. ANG, ELISEO V. VILLAMOR,
FELIPE L. GOZON, CLAUDIO B. ALTURA,
ROGELIO G. VILLAROSA, MANUEL R.
SANTIAGO, BENJAMIN A. CARANDANG,
REGINA DE LEON-HERLIHY, CARLOS Y.
RAMOS, JR., ALEJANDRO Z. BARIN, EFRENILO
M. CAYANGA AND JOHN DOES,

The Bernas Group were among the incumbent members of the Board of Directors and Officers of the Makati
Sports Club. The MSC Oversight Committee (MSCOC) called for a Special Stockholders’ Meeting because
of rumored anomalies in handling corporate funds. During the meeting, the Cinco Group was elected to
replace the Bernas Group and the shares of the latter were also sold for P902k. Subsequently, 3 annual
stockholders’ meetings were held and, in those meetings, the previous election of the Cinco Group was
ratified. Aggrieved, the Bernas Group filed a complaint before the Securities Investigation and Clearing
Department of the SEC seeking the nullification of the SSM. SICD granted the petition but the SEC en banc
reversed it. The CA held that the SSM was invalid but the Annual Stockholders Meeting was valid.

The issues before the court are: 1) Whether the SSM is valid -- NO and 2) Whether the SSM is valid
-- NO.

First, the SC said that Section 28 of the Corp Code laid down the rules on the removal of the Directors of
the corporation by providing the persons authorized to call the meeting and the number of votes required:
“…A special meeting of the stockholders or members of a corporation for the purpose of removal of directors
or trustees, or any of them, must be called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority of the outstanding capital
stock.”

The MSC by-laws state that only the president and the board of directors are authorized to call a special
meeting. In this case, there’s no dispute that the SSM was called neither by the President nor by the
BOD but by the MSCOC. While the MSCOC is created for the purpose of overseeing the corporate affairs,
nowhere in the by-laws does it state that it is authorized to exercise corporate powers such as the
power to call a special meeting. Thus, the void election in the SSM cannot be ratified by the subsequent
Annual Stockholders’ Meeting.

Second, the Court held that the subsequent annual meetings were valid. Every corporation has the
inherent power to adopt by-laws for its internal government, and to regulate the conduct and
prescribe the rights and duties of its members. The by-laws are its own private laws which substantially
have the same effect as the laws of the corporation. The rules set in the by-laws are mandatory for every
member of the corporation to respect. The 1998 annual meeting was valid because it was sanctioned by
Section 8 of the MSC by-laws. Unlike in the SSM wherein the by-laws mandated that such meeting shall
be called by specific persons only, no such specific requirement was given under Section 8.

DOCTRINE: Every corporation has the inherent power to adopt by-laws for its internal government, and to
regulate the conduct and prescribe the rights and duties of its members. The by-laws are its own private

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 laws which substantially have the same effect as the laws of the corporation. The rules set in the by-laws
are mandatory for every member of the corporation to respect

Facts
1. Makati Sports Club (MSC) is a domestic corporation duly organized under PH laws for establishing,
maintaining, and providing social, cultural, recreational, and athletic activities among its members.
2. Bernas et al (Bernas Group) were among the members of the Board of Directors and Officers of
the corporation.
3. On the other hand, Cinco et al (Cinco Group) are the members and stockholders of the corporation
who were elected Members of the Board of Directors and Officers of the club during the December
1997 Special Stockholders Meeting (SSM)
4. What happened during that meeting
- Alarmed with the rumored anomalies in handling corporate funds, the MSC Oversight
Committee (MSCOC) demanded from the Bernas Group, the incumbent officers, to resign from
the respective positions to pave way for the election new set of officers.
- This was because of complaints of the stockholders of MSC representing at least 100 shares.
- The MSCOC then called a SSM and sent out notices to all stockholders.
- The Bernas Group failed to secure an injunction from the SEC, and then the meeting proceeded
- Bernas group was removed from office, Cinco group was elected.
5. Aggrieved, the Bernas Group initiated an action before the Securities Investigation and Clearing
Department (SICD) of the SEC seeking the nullification of the SSM on the ground that it was
improperly called. Citing Sec. 28 of the Corp Code1, the Bernas Group argued that the authority
to call a meeting lies with the Corporate Secretary and not with the MSCOC which functions
merely as an oversight body.
6. The Cinco Group insisted that the SSM is sanctioned by the Corp Code and the MSC By-Laws.
Section 25 of their By-Laws merely authorized the Corp Secretary to issue notices of meeting and
nowhere does it state that such authority belongs solely to him. And that it would be useless to
course the request through the corporate secretary since despite repeated demands, he refused
to call a SSM.
7. Meanwhile, Cinco group initiated an investigation on the alleged anomalies in administering the
corporate affairs. After finding Bernas guilty of irregularities, the Board resolved to expel him from
the club by selling his shares at public auction for P902,000)
8. Before the resolution of the SEC case that the Bernas Group filed, an Annual Stockholders’ Meeting
1998 (ASM) was held pursuant to Section 8 of the by-laws. During the meeting, a lot of the
stockholders attended which represented ⅔ of the outstanding shares, the majority resolved to
approve and confirm the December 1997 SSM.
9. There were two other ASMs that were held (1999 and 2000). The 1999 meeting was supervised
by the SEC.
10. The SICD rendered a decision finding that the SSM and the ASMs were invalid. The SICD also
nullified the expulsion of Bernas from the corporation and the sale of his share at the public auction.
- They were saying it was prematurely called for.
- It wasn’t attended by a sufficient number of valid proxies meaning no quorum.
- It wasn’t called by the Corporate Secretary not presided over by the validly elected president
(Bernas)
11. On appeal, the SEC En Banc reversed the decision of the SICD
12. CA held that the SSM was invalid but the ASM was valid.
Issues Ruling
1. W/N the Special Stockholders’ Meeting is valid 1. NO.
2. W/N the subsequent Annual Stockholders’ Meetings were valid

1Sec. 28. Removal of directors or trustees. - … A special meeting of the stockholders or members of a corporation for the
purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on
the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it
be a non-stock corporation, on the written demand of a majority of the members entitled to vote. …

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 2. YES, except the
ratification of the
removal of the
Bernas group and
the sale of their
shares.
Rationale
1. The special stockholders’ meeting is valid.
- Section 282 of the Corp Code laid down the rules on the removal of the Directors of the
corporation by providing the persons authorized to call the meeting and the number of votes
required.
- The pertinent provisions of the MSC by laws which govern the manner of calling and sending of
notices of the ASM and the SSM provide: “Only the president and the board of directors are
authorized to call a special meeting.”
- In this case, there’s no dispute that the SSM was called neither by the President nor by the
BOD but by the MSCOC. While the MSCOC is created for the purpose of overseeing the
corporate affairs, nowhere in the by-laws does it state that it is authorized to exercise
corporate powers such as the power to call a special meeting.
- The MSCOC does not have the authority to call a special meeting for the purpose of removing
existing officers. Thus, the void election in the SSM cannot be ratified by the subsequent ASM.
You cannot ratify something that is void to begin with.
-

2.Powers of the Board of Directors

- The BOD is the directing and controlling body of the corporation; it should exercise not only care
and diligence, but utmost good faith in the management of the corporate affairs.
- The underlying policy of the Corp Code is that the business and affairs of a corporation must be
governed by a BOD whose members have stood for election, and who have actually been elected
by the stockholders on an annual basis. Only in that way can the continued accountability to
shareholders, and the legitimacy of their decisions that bind the corporation’s stockholders, be
assured. Its members have characterized as trustees clothed with fiduciary character. This
fiduciary relation is between the stockholders and the BOD.
- The BOD:
o Exercises all powers provided for under the Corp Code
o Conducts all business of the corporation
o Controls and holds all the property of the Corporation
- There’s a distinction between corporate acts which are ILLEGAL and ULTRA VIRES.
o ILLEGAL: acts which are contrary to law, morals, public policy and cannot be ratified
ever.
o ULTRA VIRES: pertain to acts which are not illegal or void ab initio but are not merely
within the scope of articles of incorporation and are just voidable and can be ratified.

- Also, the Cinco Group cannot invoke the application of de facto officership doctrine to justify the
actions taken after the invalid elections since the operation of the principle is limited to THIRD
PERSONS who were originally not part of the corporation but became such by reason of voting of
government-sequestered shares.
- The case would’ve been different if the Cinco Group went directly to the SEC and sought its
assistance to call an SSM citing the previous refusal of the corporate secretary to call a meeting.
- Under the Corp code, where there is an officer authorized to call a meeting and that officer
refuses, the SEC can assume jurisdiction and issue an order to call a meeting upon showing of
good cause in the exercise of its regulatory and administrative powers.

3. The Subsequent Annual Stockholders’ Meeting is Valid

2
Id.

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 - Every corporation has the inherent power to adopt by-laws for its internal government, and to
regulate the conduct and prescribe the rights and duties of its members. The by-laws are its own
private laws which substantially have the same effect as the laws of the corporation. The rules set
in the by-laws are mandatory for every member of the corporation to respect.
- It is on this score that we cannot sustain the Bernas Group’s stance that the subsequent ASMs
were invalid:
o The 1998 annual meeting was valid because it was sanctioned by Section 8 of the
MSC by-laws. Unlike in the SSM wherein the by-laws mandated that such meeting shall
be called by specific persons only, no such specific requirement was given under
Section 8.
o The 1999 meeting was also valid because not only was it conducted pursuant to
Section 8 but the SEC also supervised such meeting.
- Considering that a new of officers were already duly elected in 1998 and 1999 annual
stockholders meeting, the Bernas group cannot be permitted to use the holdover principle as a
shield to perpetuate in office. Members of the group had no right to continue as directors of the
corporation unless rejected by the stockholders in a meeting called for that purpose every year.

IN SHORT:
- The SSM was void.
- The 1998, 1999, 2000 ASMs were valid and binding EXCEPT the ratification of the removal of the
Bernas group and the sale of their shares.
- A void act cannot be the subject of ratification.
Disposition

Petition denied. Assailed decision affirmed.