CORPORATION (control and management)
The loans were covered by promissory notes which
[G.R. No. 126006. January 29, 2004]
LAPULAPU FOUNDATION, INC. and ELIAS Q. TAN, petitioners, vs.
COURT OF APPEALS (Seventeenth Division) and ALLIED BANKING
CORP., respondents
DECISION
CALLEJO, SR., J.:
Before the Court is the petition for review on certiorari filed by the
Lapulapu Foundation, Inc. and Elias Q. Tan seeking to reverse and set
aside the Decision[1] dated June 26, 1996 of the Court of Appeals
(CA) in CA-G.R. CV No. 37162 ordering the petitioners, jointly and
solidarily, to pay the respondent Allied Banking Corporation the
amount of P493,566.61 plus interests and other charges. Likewise,
sought to be reversed and set aside is the appellate courts Resolution
dated August 19, 1996 denying the petitioners motion for
reconsideration.
The case stemmed from the following facts:
Sometime in 1977, petitioner Elias Q. Tan, then President of the co-
petitioner Lapulapu Foundation, Inc., obtained four loans from the
respondent Allied Banking Corporation covered by four promissory
notes in the amounts of P100,000 each. The details of the promissory
notes are as follows:
P/N No. Date of P/N Maturity Date Amount as of 1/23/79
BD No. 504 Nov. 7, 1977 Feb. 5, 1978 P123,377.76
BD No. 621 Nov. 28, 1977 Mar. 28, 1978 P123,411.10
BD No. 716 Dec. 12, 1977 Apr. 11, 1978 P122,322.21
BD No. 839 Jan. 5, 1978 May 5, 1978 P120,455.54[2]
As of January 23, 1979, the entire obligation amounted to P493,566.61
and despite demands made on them by the respondent Bank, the
petitioners failed to pay the same. The respondent Bank was
constrained to file with the Regional Trial Court of Cebu City, Branch
15, a complaint seeking payment by the petitioners, jointly and
solidarily, of the sum of P493,566.61 representing their loan obligation,
exclusive of interests, penalty charges, attorneys fees and costs.
In its answer to the complaint, the petitioner Foundation denied
incurring indebtedness from the respondent Bank alleging that the
loans were obtained by petitioner Tan in his personal capacity, for his
own use and benefit and on the strength of the personal information he
furnished the respondent Bank. The petitioner Foundation maintained
that it never authorized petitioner Tan to co-sign in his capacity as its
President any promissory note and that the respondent Bank fully
knew that the loans contracted were made in petitioner Tans personal
capacity and for his own use and that the petitioner Foundation never
benefited, directly or indirectly, therefrom. The petitioner Foundation
then interposed a cross-claim against petitioner Tan alleging that he,
having exceeded his authority, should be solely liable for said loans,
and a counterclaim against the respondent Bank for damages and
attorneys fees.
For his part, petitioner Tan admitted that he contracted the loans from
the respondent Bank in his personal capacity. The parties, however,
agreed that the loans were to be paid from the proceeds of petitioner
Tans shares of common stocks in the Lapulapu Industries Corporation,
a real estate firm.
were automatically renewable (rolled-over) every year at an amount
including unpaid interests, until such time as petitioner Tan was able to
pay the same from the proceeds of his aforesaid shares.
According to petitioner Tan, the respondent Banks employee required
him to affix two signatures on every promissory note, assuring him that
the loan documents would be filled out in accordance with their
agreement. However, after he signed and delivered the loan
documents to the respondent Bank, these were filled out in a manner
not in accord with their agreement, such that the petitioner Foundation
was included as party thereto. Further, prior to its filing of the
complaint, the respondent Bank made no demand on him.
After due trial, the court a quo rendered judgment the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing evidences [sic], arguments and
considerations, this court hereby finds the preponderance of evidence
in favor of the plaintiff and hereby renders judgment as follows:
1. Requiring the defendants Elias Q. Tan and Lapulapu Foundation,
Inc. [the petitioners herein] to pay jointly and solidarily to the plaintiff
Allied Banking Corporation [the respondent herein] the amount of
P493,566.61 as principal obligation for the four promissory notes,
including all other charges included in the same, with interest at 14%
per annum, computed from January 24, 1979, until the same are fully
paid, plus 2% service charges and 1% monthly penalty charges.
2. Requiring the defendants Elias Q. Tan and Lapulapu Foundation,
Inc., to pay jointly and solidarily, attorneys fees in the equivalent
amount of 25% of the total amount due from the defendants on the
promissory notes, including all charges;
3. Requiring the defendants Elias Q. Tan and Lapulapu Foundation,
Inc., to pay jointly and solidarily litigation expenses of P1,000.00 plus
costs of the suit.[3]
On appeal, the CA affirmed with modification the judgment of the court
a quo by deleting the award of attorneys fees in favor of the
respondent Bank for being without basis.
The appellate court disbelieved petitioner Tans claim that the loans
were his personal loans as the promissory notes evidencing them
showed upon their faces that these were obligations of the petitioner
Foundation, as contracted by petitioner Tan himself in his official and
personal character. Applying the parol evidence rule, the CA likewise
rejected petitioner Tans assertion that there was an unwritten
agreement between him and the respondent Bank that he would pay
the loans from the proceeds of his shares of stocks in the Lapulapu
Industries Corp.
Further, the CA found that demand had been made by the respondent
Bank on the petitioners prior to the filing of the complaint a quo. It
noted that the two letters of demand dated January 3, 1979[4] and
January 30, 1979[5] asking settlement of the obligation were sent by
the respondent Bank. These were received by the petitioners as shown
by the registry return cards[6] presented during trial in the court a quo.
Finally, like the court a quo, the CA applied the doctrine of piercing the
veil of corporate entity in holding the petitioners jointly and solidarily
liable. The evidence showed that petitioner Tan had represented
himself as the President of the petitioner Foundation, opened savings
and current accounts in its behalf, and signed the loan documents for
and in behalf of the latter. The CA, likewise, found that the petitioner
Foundation had allowed petitioner Tan to act as though he had the
authority to contract the loans in its behalf. On the other hand,
petitioner Tan could not escape liability as he had used the petitioner
Foundation for his benefit.
Aggrieved, the petitioners now come to the Court alleging that:
I. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT
THE LOANS SUBJECT MATTER OF THE INSTANT PETITION ARE
ALREADY DUE AND DEMANDABLE DESPITE ABSENCE OF PRIOR
DEMAND.
II. THE COURT OF APPEALS GRAVELY ERRED IN APPLYING THE
PAROL EVIDENCE RULE AND THE DOCTRINE OF PIERCING THE
VEIL OF CORPORATE ENTITY AS BASIS FOR ADJUDGING JOINT
AND SOLIDARY LIABILITY ON THE PART OF PETITIONERS ELIAS
Q. TAN AND LAPULAPU FOUNDATION, INC.[7]
The petitioners assail the appellate courts finding that the loans had
become due and demandable in view of the two demand letters sent to
them by the respondent Bank. The petitioners insist that there was no
prior demand as they vigorously deny receiving those letters.
According to petitioner Tan, the signatures on the registry return cards
were not his.
The petitioners denial of receipt of the demand letters was rightfully
given scant consideration by the CA as it held:
Exhibits R and S are two letters of demand, respectively dated January
3, 1979 and January 30, 1979, asking settlement of the obligations
covered by the promissory notes. The first letter was written by Ben Tio
Peng Seng, Vice-President of the bank, and addressed to Lapulapu
Foundation, Inc., attention of Mr. Elias Q. Tan, President, while the
second was a final demand written by the appellees counsel,
addressed to both defendants-appellants, and giving them five (5) days
from receipt within which to settle or judicial action would be instituted
against them. Both letters were duly received by the defendants, as
shown by the registry return cards, marked as Exhibits R-2 and S-1,
respectively. The allegation of Tan that he does not know who signed
the said registry return receipts merits scant consideration, for there is
no showing that the addresses thereon were wrong. Hence, the
disputable presumption that a letter duly directed and mailed was
received in the regular course of mail (per par. V, Section 3, Rule 131
of the Revised Rules on Evidence) still holds.[8]
There is no dispute that the promissory notes had already matured.
However, the petitioners insist that the loans had not become due and
demandable as they deny receipt of the respondent Banks demand
letters. When presented the registry return cards during the trial,
petitioner Tan claimed that he did not recognize the signatures
thereon. The petitioners allegation and denial are self-serving. They
cannot prevail over the registry return cards which constitute
documentary evidence and which enjoy the presumption that, absent
clear and convincing evidence to the contrary, these were regularly
issued by the postal officials in the performance of their official duty
and that they acted in good faith.[9] Further, as the CA correctly
opined, mails are presumed to have been properly delivered and
received by the addressee in the regular course of the mail.[10] As the
CA noted, there is no showing that the addresses on the registry return
cards were wrong. It is the petitioners burden to overcome the
presumptions by sufficient evidence, and other than their barefaced
denial, the petitioners failed to support their claim that they did not
receive the demand letters; therefore, no prior demand was made on
them by the respondent Bank.
Having established that the loans had become due and demandable,
the Court shall now resolve the issue of whether the CA correctly held
the petitioners jointly and solidarily liable therefor.
In disclaiming any liability for the loans, the petitioner Foundation
maintains that these were contracted by petitioner Tan in his personal
capacity and that it did not benefit therefrom. On the other hand, while
admitting that the loans were his personal obligation, petitioner Tan
avers that he had an unwritten agreement with the respondent Bank
that these loans would be renewed on a year-to-year basis and paid
from the proceeds of his shares of stock in the Lapulapu Industries
Corp.
These contentions are untenable.
The Court particularly finds as incredulous petitioner Tans allegation
that he was made to sign blank loan documents and that the phrase IN
MY OFFICIAL/PERSONAL CAPACITY was superimposed by the
respondent Banks employee despite petitioner Tans protestation. The
Court is hard pressed to believe that a businessman of petitioner Tans
stature could have been so careless as to sign blank loan documents.
In contrast, as found by the CA, the promissory notes[11] clearly
showed upon their faces that they are the obligation of the petitioner
Foundation, as contracted by petitioner Tan in his official and personal
capacity.[12] Moreover, the application for credit accommodation,[13]
the signature cards of the two accounts in the name of petitioner
Foundation,[14] as well as New Current Account Record,[15] all
accompanying the promissory notes, were signed by petitioner Tan for
and in the name of the petitioner Foundation.[16] These documentary
evidence unequivocally and categorically establish that the loans were
solidarily contracted by the petitioner Foundation and petitioner Tan.
As a corollary, the parol evidence rule likewise constrains this Court to
reject petitioner Tans claim regarding the purported unwritten
agreement between him and the respondent Bank on the payment of
the obligation. Section 9, Rule 130 of the of the Revised Rules of Court
provides that [w]hen the terms of an agreement have been reduced to
writing, it is to be considered as containing all the terms agreed upon
and there can be, between the parties and their successors-in-interest,
no evidence of such terms other than the contents of the written
agreement.[17]
In this case, the promissory notes are the law between the petitioners
and the respondent Bank. These promissory notes contained maturity
dates as follows: February 5, 1978, March 28, 1978, April 11, 1978 and
May 5, 1978, respectively. That these notes were to be paid on these
dates is clear and explicit. Nowhere was it stated therein that they
would be renewed on a year-to-year basis or rolled-over annually until
paid from the proceeds of petitioner Tans shares in the Lapulapu
Industries Corp. Accordingly, this purported unwritten agreement could
not be made to vary or contradict the terms and conditions in the
promissory notes.
Evidence of a prior or contemporaneous verbal agreement is generally
not admissible to vary, contradict or defeat the operation of a valid
contract.[18] While parol evidence is admissible to explain the meaning
of written contracts, it cannot serve the purpose of incorporating into
the contract additional contemporaneous conditions which are not
mentioned at all in writing, unless there has been fraud or mistake.[19]
No such allegation had been made by the petitioners in this case.
Finally, the appellate court did not err in holding the petitioners jointly
and solidarily liable as it applied the doctrine of piercing the veil of
corporate entity. The petitioner Foundation asserts that it has a
personality separate and distinct from that of its President, petitioner
Tan, and that it cannot be held solidarily liable for the loans of the
latter.
The Court agrees with the CA that the petitioners cannot hide behind
the corporate veil under the following circumstances:
The evidence shows that Tan has been representing himself as the
President of Lapulapu Foundation, Inc. He opened a savings account
and a current account in the names of the corporation, and signed the
application form as well as the necessary specimen signature cards
(Exhibits A, B and C) twice, for himself and for the foundation. He
submitted a notarized Secretarys Certificate (Exhibit G) from the
corporation, attesting that he has been authorized, inter alia, to sign for
and in behalf of the Lapulapu Foundation any and all checks, drafts or
other orders with respect to the bank; to transact business with the
Bank, negotiate loans, agreements, obligations, promissory notes and
other commercial documents; and to initially obtain a loan for
P100,000.00 from any bank (Exhibits G-1 and G-2). Under these
circumstances, the defendant corporation is liable for the transactions
entered into by Tan on its behalf.[20]
Per its Secretarys Certificate, the petitioner Foundation had given its
President, petitioner Tan, ostensible and apparent authority to inter alia
deal with the respondent Bank. Accordingly, the petitioner Foundation
is estopped from questioning petitioner Tans authority to obtain the
subject loans from the respondent Bank. It is a familiar doctrine that if a
corporation knowingly permits one of its officers, or any other agent, to
act within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts; and thus, the
corporation will, as against anyone who has in good faith dealt with it
through such agent, be estopped from denying the agents
authority.[21]
In fine, there is no cogent reason to deviate from the CAs ruling that
the petitioners are jointly and solidarily liable for the loans contracted
with the respondent Bank.
WHEREFORE, premises considered, the petition is DENIED and the
Decision dated June 26, 1996 and Resolution dated August 19, 1996
of the Court of Appeals in CA-G.R. CV No. 37162 are AFFIRMED in
toto.
SO ORDERED.
G.R. No. L-18805 August 14, 1967
THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT
OF THE REPUBLIC OF THE PHILIPPINES,plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE
DECEASED CASIMIRO GARCIA,3 and LEONOR MOLL, defendants-
appellees.
Simeon M. Gopengco and Solicitor General for plaintiff-appellant.
L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.;
Ponce Enrile, Siguion Reyna, Montecillo and Belo for defendants-
appellees.
SANCHEZ, J.:
The National Coconut Corporation (NACOCO, for short) was chartered
as a non-profit governmental organization on May 7, 1940 by
Commonwealth Act 518 avowedly for the protection, preservation and
development of the coconut industry in the Philippines. On August 1,
1946, NACOCO's charter was amended [Republic Act 5] to grant that
corporation the express power "to buy, sell, barter, export, and in any
other manner deal in, coconut, copra, and dessicated coconut, as well
as their by-products, and to act as agent, broker or commission
merchant of the producers, dealers or merchants" thereof. The charter
amendment was enacted to stabilize copra prices, to serve coconut
producers by securing advantageous prices for them, to cut down to a
minimum, if not altogether eliminate, the margin of middlemen, mostly
aliens.4
General manager and board chairman was Maximo M. Kalaw;
defendants Juan Bocar and Casimiro Garcia were members of the
Board; defendant Leonor Moll became director only on December 22,
1947.
NACOCO, after the passage of Republic Act 5, embarked on copra
trading activities. Amongst the scores of contracts executed by general
manager Kalaw are the disputed contracts, for the delivery of
copra, viz:
(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons,
$167.00: per ton, f. o. b., delivery: August and September, 1947. This
contract was later assigned to Louis Dreyfus & Co. (Overseas) Ltd.
(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons
$145.00 per long ton, f.o.b., Philippine ports, to be shipped:
September-October, 1947. This contract was also assigned to Louis
Dreyfus & Co. (Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per
ton, delivery: September, 1947.
(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons,
$160.00 per ton, c.i.f., Los Angeles, California, delivery: November,
1947.
(e) September 9, 1947: Franklin Baker Division of General Foods
Corporation, for 1,500 long tons, $164,00 per ton, c.i.f., New York, to
be shipped in November, 1947.
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000
long tons, $154.00 per ton, f.o.b., 3 Philippine ports, delivery:
November, 1947.
(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per
ton, delivery: November and December, 1947. This contract was
assigned to Pacific Vegetable Co.
(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per
short ton, c.i.f., Pacific ports, delivery: December, 1947 and January,
1948. This contract was assigned to Pacific Vegetable Co.
(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short
ton, c.i.f., Pacific ports, delivery: January, 1948. This contract was
assigned to Pacific Vegetable Co.
An unhappy chain of events conspired to deter NACOCO from fulfilling
these contracts. Nature supervened. Four devastating typhoons visited
the Philippines: the first in October, the second and third in November,
and the fourth in December, 1947. Coconut trees throughout the
country suffered extensive damage. Copra production decreased.
Prices spiralled. Warehouses were destroyed. Cash requirements
doubled. Deprivation of export facilities increased the time necessary
to accumulate shiploads of copra. Quick turnovers became impossible, the typhoons. To project the utter unreasonableness of this
financing a problem. compromise, we reproduce in haec verba this finding below:

When it became clear that the contracts would be unprofitable, Kalaw
submitted them to the board for approval. It was not until December
22, 1947 when the membership was completed. Defendant Moll took
her oath on that date. A meeting was then held. Kalaw made a full
disclosure of the situation, apprised the board of the impending heavy
losses. No action was taken on the contracts. Neither did the board
vote thereon at the meeting of January 7, 1948 following. Then, on
January 11, 1948, President Roxas made a statement that the
NACOCO head did his best to avert the losses, emphasized that
government concerns faced the same risks that confronted private
companies, that NACOCO was recouping its losses, and that Kalaw
was to remain in his post. Not long thereafter, that is, on January 30,
1948, the board met again with Kalaw, Bocar, Garcia and Moll in
attendance. They unanimously approved the contracts hereinbefore
enumerated.
x x x However, in similar cases brought by the same claimant [Louis
Dreyfus & Co. (Overseas) Ltd.] against Santiago Syjuco for non-
delivery of copra also involving a claim of P345,654.68 wherein
defendant set up same defenses as above, plaintiff accepted
a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following the same
proportion, the claim of Dreyfus against NACOCO should have been
compromised for only P10,000.00, if at all. Now, why should
defendants be held liable for the large sum paid as compromise by the
Board of Liquidators? This is just a sample to show how unjust it would
be to hold defendants liable for the readiness with which the Board of
Liquidators disposed of the NACOCO funds, although there was much
possibility of successfully resisting the claims, or at least settlement for
nominal sums like what happened in the Syjuco case.5
All the settlements sum up to P1,343,274.52.

As was to be expected, NACOCO but partially performed the In this suit started in February, 1949, NACOCO seeks to recover the
contracts, as follows: above sum of P1,343,274.52 from general manager and board
chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro
Garcia and Leonor Moll. It charges Kalaw with negligence under Article
Tons
Buyers Undelivered 1902 of the old Civil Code (now Article 2176, new Civil Code); and
Delivered
defendant board members, including Kalaw, with bad faith and/or
breach of trust for having approved the contracts. The fifth amended
Pacific Vegetable Oil 2,386.45 4,613.55 complaint, on which this case was tried, was filed on July 2, 1959.
Defendants resisted the action upon defenses hereinafter in this
opinion to be discussed.
Spencer Kellog None 1,000
The lower court came out with a judgment dismissing the complaint
without costs as well as defendants' counterclaims, except that plaintiff
Franklin Baker 1,000 500 was ordered to pay the heirs of Maximo Kalaw the sum of P2,601.94
for unpaid salaries and cash deposit due the deceased Kalaw from
NACOCO.
Louis Dreyfus 800 2,200
Plaintiff appealed direct to this Court.

Louis Dreyfus (Adamson Plaintiff's brief did not, question the judgment on Kalaw's counterclaim
1,150 850
contract of July 30, 1947) for the sum of P2,601.94.

Right at the outset, two preliminary questions raised before, but

Louis Dreyfus (Adamson
1,755 245
Contract of August 14, 1947)
TOTALS 7,091.45 9,408.55
The buyers threatened damage suits. Some of the claims were
settled, viz: Pacific Vegetable Oil Co., in copra delivered by NACOCO,
P539,000.00; Franklin Baker Corporation, P78,210.00; Spencer Kellog
& Sons, P159,040.00.
But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue
before the Court of First Instance of Manila, upon claims as follows:
For the undelivered copra under the July 30 contract (Civil Case 4459);
P287,028.00; for the balance on the August 14 contract (Civil Case
4398), P75,098.63; for that per the September 12 contract reduced to
judgment (Civil Case 4322, appealed to this Court in L-2829),
P447,908.40. These cases culminated in an out-of-court amicable
settlement when the Kalaw management was already out. The
corporation thereunder paid Dreyfus P567,024.52 representing 70% of
the total claims. With particular reference to the Dreyfus claims,
NACOCO put up the defenses that: (1) the contracts were void
because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to
do business here; and (2) failure to deliver was due to force majeure,
adversely decided by, the court below, arrest our attention. On appeal,
defendants renew their bid. And this, upon established jurisprudence
that an appellate court may base its decision of affirmance of the
judgment below on a point or points ignored by the trial court or in
which said court was in error.6
1. First of the threshold questions is that advanced by defendants that
plaintiff Board of Liquidators has lost its legal personality to continue
with this suit.
Accepted in this jurisdiction are three methods by which a corporation
may wind up its affairs: (1) under Section 3, Rule 104, of the Rules of
Court [which superseded Section 66 of the Corporation Law] 7 whereby,
upon voluntary dissolution of a corporation, the court may direct "such
disposition of its assets as justice requires, and may appoint a receiver
to collect such assets and pay the debts of the corporation;" (2) under
Section 77 of the Corporation Law, whereby a corporation whose
corporate existence is terminated, "shall nevertheless be continued as
a body corporate for three years after the time when it would have
been so dissolved, for the purpose of prosecuting and defending suits
by or against it and of enabling it gradually to settle and close its
affairs, to dispose of and convey its property and to divide its capital
stock, but not for the purpose of continuing the business for which it
was established;" and (3) under Section 78 of the Corporation Law, by
virtue of which the corporation, within the three year period just
mentioned, "is authorized and empowered to convey all of its property
to trustees for the benefit of members, stockholders, creditors, and
others interested."8
It is defendants' pose that their case comes within the coverage of the
second method. They reason out that suit was commenced in
February, 1949; that by Executive Order 372, dated November 24,
1950, NACOCO, together with other government-owned corporations,
was abolished, and the Board of Liquidators was entrusted with the
function of settling and closing its affairs; and that, since the three year
period has elapsed, the Board of Liquidators may not now continue
with, and prosecute, the present case to its conclusion, because
Executive Order 372 provides in Section 1 thereof that —
Sec.1. The National Abaca and Other Fibers Corporation, the National
Coconut Corporation, the National Tobacco Corporation, the National
Food Producer Corporation and the former enemy-owned or controlled
corporations or associations, . . . are hereby abolished. The said
corporations shall be liquidated in accordance with law, the provisions
of this Order, and/or in such manner as the President of the Philippines
may direct; Provided, however, That each of the said corporations shall
nevertheless be continued as a body corporate for a period of three (3)
years from the effective date of this Executive Order for the purpose of
prosecuting and defending suits by or against it and of enabling the
Board of Liquidators gradually to settle and close its affairs, to dispose
of and, convey its property in the manner hereinafter provided.
Citing Mr. Justice Fisher, defendants proceed to argue that even where
it may be found impossible within the 3 year period to reduce disputed
claims to judgment, nonetheless, "suits by or against a corporation
abate when it ceases to be an entity capable of suing or being sued"
(Fisher, The Philippine Law of Stock Corporations, pp. 390-
391). Corpus Juris Secundum likewise is authority for the statement
that "[t]he dissolution of a corporation ends its existence so that there
must be statutory authority for prolongation of its life even for purposes
of pending litigation"9and that suit "cannot be continued or revived; nor
can a valid judgment be rendered therein, and a judgment, if rendered,
is not only erroneous, but void and subject to collateral attack." 10 So it
is, that abatement of pending actions follows as a matter of course
upon the expiration of the legal period for liquidation, 11 unless the
statute merely requires a commencement of suit within the added
time. 12 For, the court cannot extend the time alloted by statute. 13
We, however, express the view that the executive order abolishing
NACOCO and creating the Board of Liquidators should be examined in
context. The proviso in Section 1 of Executive Order 372, whereby the
corporate existence of NACOCO was continued for a period of three
years from the effectivity of the order for "the purpose of prosecuting
and defending suits by or against it and of enabling the Board of
Liquidators gradually to settle and close its affairs, to dispose of and
convey its property in the manner hereinafter provided", is to be read
not as an isolated provision but in conjunction with the whole. So
reading, it will be readily observed that no time limit has been tacked to
the existence of the Board of Liquidators and its function of closing the
affairs of the various government owned corporations, including
NACOCO.
By Section 2 of the executive order, while the boards of directors of the
various corporations were abolished, their powers and functions and
duties under existing laws were to be assumed and exercised by the
Board of Liquidators. The President thought it best to do away with the
boards of directors of the defunct corporations; at the same time,
however, the President had chosen to see to it that the Board of
Liquidators step into the vacuum. And nowhere in the executive order
was there any mention of the lifespan of the Board of Liquidators. A
glance at the other provisions of the executive order buttresses our
conclusion. Thus, liquidation by the Board of Liquidators may, under
section 1, proceed in accordance with law, the provisions of the
executive order, "and/or in such manner as the President of the
Philippines may direct." By Section 4, when any property, fund, or
project is transferred to any governmental instrumentality "for
administration or continuance of any project," the necessary funds
therefor shall be taken from the corresponding special fund created in
Section 5. Section 5, in turn, talks of special funds established from the
"net proceeds of the liquidation" of the various corporations abolished.
And by Section, 7, fifty per centum of the fees collected from the copra
standardization and inspection service shall accrue "to the special fund
created in section 5 hereof for the rehabilitation and development of
the coconut industry." Implicit in all these, is that the term of life of the
Board of Liquidators is without time limit. Contemporary history gives
us the fact that the Board of Liquidators still exists as an office with
officials and numerous employees continuing the job of liquidation and
prosecution of several court actions.
Not that our views on the power of the Board of Liquidators to proceed
to the final determination of the present case is without jurisprudential
support. The first judicial test before this Court is National Abaca and
Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that
case, the corporation, already dissolved, commenced suit within the
three-year extended period for liquidation. That suit was for recovery of
money advanced to defendant for the purchase of hemp in behalf of
the corporation. She failed to account for that money. Defendant
moved to dismiss, questioned the corporation's capacity to sue. The
lower court ordered plaintiff to include as co-party plaintiff, The Board
of Liquidators, to which the corporation's liquidation was entrusted
by Executive Order 372. Plaintiff failed to effect inclusion. The lower
court dismissed the suit. Plaintiff moved to reconsider. Ground:
excusable negligence, in that its counsel prepared the amended
complaint, as directed, and instructed the board's incoming and
outgoing correspondence clerk, Mrs. Receda Vda. de Ocampo, to mail
the original thereof to the court and a copy of the same to defendant's
counsel. She mailed the copy to the latter but failed to send the original
to the court. This motion was rejected below. Plaintiff came to this
Court on appeal. We there said that "the rule appears to be well settled
that, in the absence of statutory provision to the contrary, pending
actions by or against a corporation are abated upon expiration of the
period allowed by law for the liquidation of its affairs." We there said
that "[o]ur Corporation Law contains no provision authorizing a
corporation, after three (3) years from the expiration of its lifetime, to
continue in its corporate name actions instituted by it within said period
of three (3) years." 14 However, these precepts notwithstanding, we, in
effect, held in that case that the Board of Liquidators escapes from the
operation thereof for the reason that "[o]bviously, the complete loss of
plaintiff's corporate existence after the expiration of the period of
three (3) years for the settlement of its affairs is what impelled the
President to create a Board of Liquidators, to continue the
management of such matters as may then be pending." 15 We
accordingly directed the record of said case to be returned to the lower
court, with instructions to admit plaintiff's amended complaint to
include, as party plaintiff, the Board of Liquidators.
Defendants' position is vulnerable to attack from another direction.
By Executive Order 372, the government, the sole stockholder,
abolished NACOCO, and placed its assets in the hands of the Board of
Liquidators. The Board of Liquidators thus became the trustee on
behalf of the government. It was an express trust. The legal interest
became vested in the trustee — the Board of Liquidators. The
beneficial interest remained with the sole stockholder — the
government. At no time had the government withdrawn the property, or
the authority to continue the present suit, from the Board of
Liquidators. If for this reason alone, we cannot stay the hand of the
Board of Liquidators from prosecuting this case to its final
conclusion. 16 The provisions of Section 78 of the Corporation Law —
the third method of winding up corporate affairs — find application.
We, accordingly, rule that the Board of Liquidators has personality to
proceed as: party-plaintiff in this case.
2. Defendants' second poser is that the action is unenforceable against
the heirs of Kalaw.
Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was
overruled, and in their nineteenth special defense, that plaintiff's action
is personal to the deceased Maximo M. Kalaw, and may not be
deemed to have survived after his death.18 They say that the
controlling statute is Section 5, Rule 87, of the 1940 Rules of
Court.19which provides that "[a]ll claims for money against the
decedent, arising from contract, express or implied", must be filed in
the estate proceedings of the deceased. We disagree.
The suit here revolves around the alleged negligent acts of Kalaw for
having entered into the questioned contracts without prior approval of
the board of directors, to the damage and prejudice of plaintiff; and is
against Kalaw and the other directors for having subsequently
approved the said contracts in bad faith and/or breach of trust." Clearly
then, the present case is not a mere action for the recovery of money
nor a claim for money arising from contract. The suit involves alleged
tortious acts. And the action is embraced in suits filed "to recover
damages for an injury to person or property, real or personal", which
survive. 20
The leading expositor of the law on this point is Aguas vs. Llemos, L-
18107, August 30, 1962. There, plaintiffs sought to recover damages
from defendant Llemos. The complaint averred that Llemos had served
plaintiff by registered mail with a copy of a petition for a writ of
possession in Civil Case 4824 of the Court of First Instance at
Catbalogan, Samar, with notice that the same would be submitted to
the Samar court on February 23, 1960 at 8:00 a.m.; that in view of the
copy and notice served, plaintiffs proceeded to the said court of Samar
from their residence in Manila accompanied by their lawyers, only to
discover that no such petition had been filed; and that defendant
Llemos maliciously failed to appear in court, so that plaintiffs'
expenditure and trouble turned out to be in vain, causing them mental
anguish and undue embarrassment. Defendant died before he could
answer the complaint. Upon leave of court, plaintiffs amended their
complaint to include the heirs of the deceased. The heirs moved to
dismiss. The court dismissed the complaint on the ground that the
legal representative, and not the heirs, should have been made the
party defendant; and that, anyway, the action being for recovery of
money, testate or intestate proceedings should be initiated and the
claim filed therein. This Court, thru Mr. Justice Jose B. L. Reyes, there
declared:
Plaintiffs argue with considerable cogency that contrasting the
correlated provisions of the Rules of Court, those concerning claims
that are barred if not filed in the estate settlement proceedings (Rule
87, sec. 5) and those defining actions that survive and may be
prosecuted against the executor or administrator (Rule 88, sec. 1), it is
apparent that actions for damages caused by tortious conduct of a
defendant (as in the case at bar) survive the death of the latter. Under
Rule 87, section 5, the actions that are abated by death are: (1) claims
for funeral expenses and those for the last sickness of the decedent;
(2) judgments for money; and (3) "all claims for money against the
decedent, arising from contract express or implied." None of these
includes that of the plaintiffs-appellants; for it is not enough that the
claim against the deceased party be for money, but it must arise from
"contract express or implied", and these words (also used by the Rules
in connection with attachments and derived from the common law)
were construed in Leung Ben vs. O'Brien, 38 Phil. 182, 189-194,
"to include all purely personal obligations other than those which have
their source in delict or tort."
Upon the other hand, Rule 88, section 1, enumerates actions that
survive against a decedent's executors or administrators, and they are:
(1) actions to recover real and personal property from the estate; (2)
actions to enforce a lien thereon; and (3) actions to recover damages
for an injury to person or property. The present suit is one for damages
under the last class, it having been held that "injury to property" is not
limited to injuries to specific property, but extends to other wrongs by
which personal estate is injured or diminished (Baker vs. Crandall, 47
Am. Rep. 126; also 171 A.L.R., 1395). To maliciously cause a party to
incur unnecessary expenses, as charged in this case, is certainly injury
to that party's property (Javier vs. Araneta, L-4369, Aug. 31, 1953).
The ruling in the preceding case was hammered out of facts
comparable to those of the present. No cogent reason exists why we
should break away from the views just expressed. And, the conclusion
remains: Action against the Kalaw heirs and, for the matter, against the
Estate of Casimiro Garcia survives.
The preliminaries out of the way, we now go to the core of the
controversy.
3. Plaintiff levelled a major attack on the lower court's holding that
Kalaw justifiedly entered into the controverted contracts without the
prior approval of the corporation's directorate. Plaintiff leans heavily on
NACOCO's corporate by-laws. Article IV (b), Chapter III thereof,
recites, as amongst the duties of the general manager, the obligation:
"(b) To perform or execute on behalf of the Corporation upon prior
approval of the Board, all contracts necessary and essential to the
proper accomplishment for which the Corporation was organized."
Not of de minimis importance in a proper approach to the problem at
hand, is the nature of a general manager's position in the corporate
structure. A rule that has gained acceptance through the years is that a
corporate officer "intrusted with the general management and control of
its business, has implied authority to make any contract or do any
other act which is necessary or appropriate to the conduct of the
ordinary business of the corporation. 21 As such officer, "he may,
without any special authority from the Board of Directors perform all
acts of an ordinary nature, which by usage or necessity are incident to
his office, and may bind the corporation by contracts in matters arising
in the usual course of business. 22
The problem, therefore, is whether the case at bar is to be taken out of
the general concept of the powers of a general manager, given the
cited provision of the NACOCO by-laws requiring prior directorate
approval of NACOCO contracts.
The peculiar nature of copra trading, at this point, deserves express
articulation. Ordinary in this enterprise are copra sales for future
delivery. The movement of the market requires that sales agreements
be entered into, even though the goods are not yet in the hands of the
seller. Known in business parlance as forward sales, it is concededly
the practice of the trade. A certain amount of speculation is inherent in
the undertaking. NACOCO was much more conservative than the
exporters with big capital. This short-selling was inevitable at the time
in the light of other factors such as availability of vessels, the quantity
required before being accepted for loading, the labor needed to
prepare and sack the copra for market. To NACOCO, forward sales
were a necessity. Copra could not stay long in its hands; it would lose
weight, its value decrease. Above all, NACOCO's limited funds
necessitated a quick turnover. Copra contracts then had to be
executed on short notice — at times within twenty-four hours. To be
appreciated then is the difficulty of calling a formal meeting of the
board.
Such were the environmental circumstances when Kalaw went into
copra trading.
Long before the disputed contracts came into being, Kalaw contracted
— by himself alone as general manager — for forward sales of copra.
For the fiscal year ending June 30, 1947, Kalaw signed some 60 such
contracts for the sale of copra to divers parties. During that period,
from those copra sales, NACOCO reaped a gross profit of
P3,631,181.48. So pleased was NACOCO's board of directors that, on
December 5, 1946, in Kalaw's absence, it voted to grant him a special
bonus "in recognition of the signal achievement rendered by him in
putting the Corporation's business on a self-sufficient basis within a
few months after assuming office, despite numerous handicaps and
difficulties."
These previous contract it should be stressed, were signed by
Kalaw without prior authority from the board. Said contracts were
known all along to the board members. Nothing was said by them. The
aforesaid contracts stand to prove one thing: Obviously, NACOCO
board met the difficulties attendant to forward sales by leaving the
adoption of means to end, to the sound discretion of NACOCO's
general manager Maximo M. Kalaw.
Liberally spread on the record are instances of contracts executed by
NACOCO's general manager and submitted to the board after their
consummation, not before. These agreements were not Kalaw's alone.
One at least was executed by a predecessor way back in 1940, soon
after NACOCO was chartered. It was a contract of lease executed on
November 16, 1940 by the then general manager and board chairman,
Maximo Rodriguez, and A. Soriano y Cia., for the lease of a space in
Soriano Building On November 14, 1946, NACOCO, thru its general
manager Kalaw, sold 3,000 tons of copra to the Food Ministry, London,
thru Sebastian Palanca. On December 22, 1947, when the controversy
over the present contract cropped up, the board voted to approve a
lease contract previously executed between Kalaw and Fidel Isberto
and Ulpiana Isberto covering a warehouse of the latter. On the same
date, the board gave its nod to a contract for renewal of the services of
Dr. Manuel L. Roxas. In fact, also on that date, the board requested
Kalaw to report for action all copra contracts signed by him "at the
meeting immediately following the signing of the contracts." This
practice was observed in a later instance when, on January 7, 1948,
the board approved two previous contracts for the sale of 1,000 tons of
copra each to a certain "SCAP" and a certain "GNAPO".
And more. On December 19, 1946, the board resolved to ratify the
brokerage commission of 2% of Smith, Bell and Co., Ltd., in the sale of
4,300 long tons of copra to the French Government. Such ratification
was necessary because, as stated by Kalaw in that same meeting,
"under an existing resolution he is authorized to give a brokerage fee
of only 1% on sales of copra made through brokers." On January 15,
1947, the brokerage fee agreements of 1-1/2% on three export
contracts, and 2% on three others, for the sale of copra were approved
by the board with a proviso authorizing the general manager to pay a
commission up to the amount of 1-1/2% "without further action by the
Board." On February 5, 1947, the brokerage fee of 2% of J. Cojuangco
& Co. on the sale of 2,000 tons of copra was favorably acted upon by
the board. On March 19, 1947, a 2% brokerage commission was
similarly approved by the board for Pacific Trading Corporation on the
sale of 2,000 tons of copra.
It is to be noted in the foregoing cases that only the brokerage fee
agreements were passed upon by the board, not the sales contracts
themselves. And even those fee agreements were
submitted only when the commission exceeded the ceiling fixed by the
board.
Knowledge by the board is also discernible from other recorded
instances.1äwphï1.ñët
When the board met on May 10, 1947, the directors discussed the
copra situation: There was a slow downward trend but belief was
entertained that the nadir might have already been reached and an
improvement in prices was expected. In view thereof, Kalaw informed
the board that "he intends to wait until he has signed contracts to sell
before starting to buy copra."23
In the board meeting of July 29, 1947, Kalaw reported on the copra
price conditions then current: The copra market appeared to have
become fairly steady; it was not expected that copra prices would
again rise very high as in the unprecedented boom during January-
April, 1947; the prices seemed to oscillate between $140 to $150 per
ton; a radical rise or decrease was not indicated by the trends. Kalaw
continued to say that "the Corporation has been closing contracts for
the sale of copra generally with a margin of P5.00 to P7.00 per
hundred kilos." 24
We now lift the following excerpts from the minutes of that same board
meeting of July 29, 1947:
521. In connection with the buying and selling of copra the Board
inquired whether it is the practice of the management to close
contracts of sale first before buying. The General Manager replied
that this practice is generally followed but that it is not always possible
to do so for two reasons:
(1) The role of the Nacoco to stabilize the prices of copra requires that
it should not cease buying even when it does not have actual contracts
of sale since the suspension of buying by the Nacoco will result in
middlemen taking advantage of the temporary inactivity of the
Corporation to lower the prices to the detriment of the producers.
(2) The movement of the market is such that it may not be practical
always to wait for the consummation of contracts of sale before
beginning to buy copra.
The General Manager explained that in this connection a certain
amount of speculation is unavoidable. However, he said that the
Nacoco is much more conservative than the other big exporters in this
respect.25
Settled jurisprudence has it that where similar acts have been
approved by the directors as a matter of general practice, custom, and
policy, the general manager may bind the company without formal
authorization of the board of directors. 26 In varying language,
existence of such authority is established, by proof of the course of
business, the usage and practices of the company and by
the knowledge which the board of directors has, or must
bepresumed to have, of acts and doings of its subordinates in and
about the affairs of the corporation. 27 So also,
x x x authority to act for and bind a corporation may be presumed from
acts of recognition in other instances where the power was in fact
exercised. 28
x x x Thus, when, in the usual course of business of a corporation, an
officer has been allowed in his official capacity to manage its affairs,
his authority to represent the corporation may be implied from the
manner in which he has been permitted by the directors to manage its
business.29
In the case at bar, the practice of the corporation has been to allow its
general manager to negotiate and execute contracts in its copra
trading activities for and in NACOCO's behalf without prior board
approval. If the by-laws were to be literally followed, the board should
give its stamp of prior approval on all corporate contracts. But that
board itself, by its acts and through acquiescence, practically laid aside
the by-law requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid
corporate acts.
4. But if more were required, we need but turn to the board's ratification
of the contracts in dispute on January 30, 1948, though it is our (and
the lower court's) belief that ratification here is nothing more than a
mere formality.
Authorities, great in number, are one in the idea that "ratification by a
corporation of an unauthorized act or contract by its officers or others
relates back to the time of the act or contract ratified, and is equivalent
to original authority;" and that " [t]he corporation and the other party to
the transaction are in precisely the same position as if the act or
contract had been authorized at the time." 30 The language of one case
is expressive: "The adoption or ratification of a contract by a
corporation is nothing more or less than the making of an original
contract. The theory of corporate ratification is predicated on the right
of a corporation to contract, and any ratification or adoption
is equivalent to a grant of prior authority." 31
Indeed, our law pronounces that "[r]atification cleanses the contract
from all its defects from the moment it was constituted." 32 By corporate
confirmation, the contracts executed by Kalaw are thus purged of
whatever vice or defect they may have. 33
In sum, a case is here presented whereunder, even in the face of an
express by-law requirement of prior approval, the law on corporations
is not to be held so rigid and inflexible as to fail to recognize equitable
considerations. And, the conclusion inevitably is that the embattled
contracts remain valid.
5. It would be difficult, even with hostile eyes, to read the record in
terms of "bad faith and/or breach of trust" in the board's ratification of
the contracts without prior approval of the board. For, in reality, all that
we have on the government's side of the scale is that the board knew
that the contracts so confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute the
contracts without need of prior approval. Everybody, including Kalaw
himself, thought so, and for a long time. Doubts were first thrown on
the way only when the contracts turned out to be unprofitable for
NACOCO.
Rightfully had it been said that bad faith does not simply connote bad
judgment or negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing of wrong; it means breach of a known
duty thru some motive or interest or ill will; it partakes of the nature of
fraud.34 Applying this precept to the given facts herein, we find that
there was no "dishonest purpose," or "some moral obliquity," or
"conscious doing of wrong," or "breach of a known duty," or "Some
motive or interest or ill will" that "partakes of the nature of fraud."
Nor was it even intimated here that the NACOCO directors acted for
personal reasons, or to serve their own private interests, or to pocket
money at the expense of the corporation. 35 We have had occasion to
affirm that bad faith contemplates a "state of mind affirmatively
operating with furtive design or with some motive of self-interest or ill
will or for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132,
148-149, 35 L. ed. 662, 669, quotes with approval from Judge
Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a close
examination of all the reported cases, although there are many dicta
not easily reconcilable, yet I have found no judgment or decree which
has held directors to account, except when they have themselves been
personally guilty of some fraud on the corporation, or have known and
connived at some fraud in others, or where such fraud might have
been prevented had they given ordinary attention to their duties. . . ."
Plaintiff did not even dare charge its defendant-directors with any of
these malevolent acts.
Obviously, the board thought that to jettison Kalaw's contracts would
contravene basic dictates of fairness. They did not think of raising their
voice in protest against past contracts which brought in enormous
profits to the corporation. By the same token, fair dealing disagrees
with the idea that similar contracts, when unprofitable, should not merit
the same treatment. Profit or loss resulting from business ventures is
no justification for turning one's back on contracts entered into. The
truth, then, of the matter is that — in the words of the trial court — the
ratification of the contracts was "an act of simple justice and fairness to
the general manager and the best interest of the corporation whose
prestige would have been seriously impaired by a rejection by the
board of those contracts which proved disadvantageous." 37
The directors are not liable." 38
6. To what then may we trace the damage suffered by NACOCO.
The facts yield the answer. Four typhoons wreaked havoc then on our
copra-producing regions. Result: Copra production was impaired,
prices spiralled, warehouses destroyed. Quick turnovers could not be
expected. NACOCO was not alone in this misfortune. The record
discloses that private traders, old, experienced, with bigger facilities,
were not spared; also suffered tremendous losses. Roughly estimated,
eleven principal trading concerns did run losses to about
P10,300,000.00. Plaintiff's witness Sisenando Barretto, head of the
copra marketing department of NACOCO, observed that from late
1947 to early 1948 "there were many who lost money in the
trade." 39 NACOCO was not immune from such usual business risk.
The typhoons were known to plaintiff. In fact, NACOCO resisted the
suits filed by Louis Dreyfus & Co. by pleading in its answers force
majeure as an affirmative defense and there vehemently asserted that
"as a result of the said typhoons, extensive damage was caused to the
coconut trees in the copra producing regions of the Philippines and
according to estimates of competent authorities, it will take about one
year until the coconut producing regions will be able to produce their
normal coconut yield and it will take some time until the price of copra
will reach normal levels;" and that "it had never been the intention of
the contracting parties in entering into the contract in question that, in
the event of a sharp rise in the price of copra in the Philippine market
produce by force majeure or by caused beyond defendant's control,
the defendant should buy the copra contracted for at exorbitant prices
far beyond the buying price of the plaintiff under the contract." 40
A high regard for formal judicial admissions made in court pleadings
would suffice to deter us from permitting plaintiff to stray away
therefrom, to charge now that the damage suffered was because of
Kalaw's negligence, or for that matter, by reason of the board's
ratification of the contracts. 41
Indeed, were it not for the typhoons, 42 NACOCO could have, with
ease, met its contractual obligations. Stock accessibility was no
problem. NACOCO had 90 buying agencies spread throughout the
islands. It could purchase 2,000 tons of copra a day. The various
contracts involved delivery of but 16,500 tons over a five-month period.
Despite the typhoons, NACOCO was still able to deliver a little short of
50% of the tonnage required under the contracts.
As the trial court correctly observed, this is a case of damnum absque
injuria. Conjunction of damage and wrong is here absent. There cannot
be an actionable wrong if either one or the other is wanting. 43
7. On top of all these, is that no assertion is made and no proof is
presented which would link Kalaw's acts — ratified by the board — to a
matrix for defraudation of the government. Kalaw is clear of the stigma
of bad faith. Plaintiff's corporate counsel 44 concedes that Kalaw all
along thought that he had authority to enter into the contracts, that he
did so in the best interests of the corporation; that he entered into the
contracts in pursuance of an overall policy to stabilize prices, to free
the producers from the clutches of the middlemen. The prices for which
NACOCO contracted in the disputed agreements, were at a level
calculated to produce profits and higher than those prevailing in the
local market. Plaintiff's witness, Barretto, categorically stated that "it
would be foolish to think that one would sign (a) contract when you are
going to lose money" and that no contract was executed "at a price
unsafe for the Nacoco." 45 Really, on the basis of prices then
prevailing, NACOCO envisioned a profit of around P752,440.00. 46
Kalaw's acts were not the result of haphazard decisions either. Kalaw
invariably consulted with NACOCO's Chief Buyer, Sisenando Barretto,
or the Assistant General Manager. The dailies and quotations from
abroad were guideposts to him.
Of course, Kalaw could not have been an insurer of profits. He could
not be expected to predict the coming of unpredictable typhoons. And
even as typhoons supervened Kalaw was not remissed in his duty. He
exerted efforts to stave off losses. He asked the Philippine National
Bank to implement its commitment to extend a P400,000.00 loan. The
bank did not release the loan, not even the sum of P200,000.00,
which, in October, 1947, was approved by the bank's board of
directors. In frustration, on December 12, 1947, Kalaw turned to the
President, complained about the bank's short-sighted policy. In the
end, nothing came out of the negotiations with the bank. NACOCO
eventually faltered in its contractual obligations.
That Kalaw cannot be tagged with crassa negligentia or as much as
simple negligence, would seem to be supported by the fact that even
as the contracts were being questioned in Congress and in the
NACOCO board itself, President Roxas defended the actuations of
Kalaw. On December 27, 1947, President Roxas expressed his desire
"that the Board of Directors should reelect Hon. Maximo M. Kalaw as
General Manager of the National Coconut Corporation." 47 And, on
January 7, 1948, at a time when the contracts had already been openly
disputed, the board, at its regular meeting, appointed Maximo M.
Kalaw as acting general manager of the corporation.
Well may we profit from the following passage from Montelibano vs.
Bacolod-Murcia Milling Co., Inc., L-15092, May 18, 1962:
"They (the directors) 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 a business depression, or closed 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 of management are left solely to the
honest decision of officers and directors of a corporation, and the court
is without authority to substitute its judgment for the judgment of the
board of directors; the board is the business manager of the
corporation, and so long as it acts in good faith its orders are not
reviewable by the courts." (Fletcher on Corporations, Vol. 2, p. 390.) 48
Kalaw's good faith, and that of the other directors, clinch the case for
defendants. 49
Viewed in the light of the entire record, the judgment under review
must be, as it is hereby, affirmed.
Without costs. So ordered.
G.R. No.176897 December 11, 2013
ADVANCE PAPER CORPORATION and GEORGE HAW, in his
capacity as President of Advance Paper Corporation, Petitioners,
vs.
ARMA TRADERS CORPORATION, MANUEL TING, CHENG GUI
and BENJAMIN NG, Respondents.
x-------------------------------------------------x
ANTONIO TAN and UY SENG KEE WILLY, Respondents.
DECISION
BRION, J.:
Before us is a Petition for Review1 seeking to set aside the Decision of
the Court of Appeals (CA) in CA-G.R. CV No. 71499 dated March 31,
2006 and the Resolution dated March 7, 2007. 2 The Decision reversed
and set aside the ruling of the Regional Trial Court (RTC) of Manila,
Branch 18 in Civil Case No. 94-72526 which ordered Arma Traders
Corporation (Arma Traders) to pay Advance Paper
Corporation (Advance Paper) the sum of ₱15,321,798.25 with interest,
and ₱1,500,000.00 for attorney’s fees, plus the cost of the suit.3
Factual Antecedents
Petitioner Advance Paper is a domestic corporation engaged in the
business of producing, printing, manufacturing, distributing and selling
of various paper products.4 Petitioner George Haw (Haw) is the
President while his wife, Connie Haw, is the General Manager. 5
Respondent Arma Traders is also a domestic corporation engaged in
the wholesale and distribution of school and office supplies, and
novelty products.6 Respondent Antonio Tan (Tan) was formerly the
President while respondent Uy Seng Kee Willy (Uy) is the Treasurer of
Arma Traders.7 They represented Arma Traders when dealing with its
supplier, Advance Paper, for about 14 years.8
On the other hand, respondents Manuel Ting, Cheng Gui and
Benjamin Ng worked for Arma Traders as Vice-President, General
Manager and Corporate Secretary, respectively.9
On various dates from September to December 1994, Arma Traders
purchased on credit notebooks and other paper products amounting to
₱7,533,001.49 from Advance Paper. 10
Upon the representation of Tan and Uy, Arma Traders also obtained
three loans from Advance Paper in November 1994 in the amounts of
₱3,380,171.82, ₱1,000,000.00, and ₱3,408,623.94 or a total of
₱7,788,796.76.11 Arma Traders needed the loan to settle its obligations
to other suppliers because its own collectibles did not arrive on
time.12 Because of its good business relations with Arma Traders,
Advance Paper extended the loans.13
As payment for the purchases on credit and the loan transactions,
Arma Traders issued 82 postdated checks14payable to cash or to
Advance Paper. Tan and Uy were Arma Traders’ authorized bank
signatories who signed and issued these checks which had the
aggregate amount of ₱15,130,636.87.15
Advance Paper presented the checks to the drawee bank but these
were dishonored either for "insufficiency of funds" or "account closed."
Despite repeated demands, however, Arma Traders failed to settle its
account with Advance Paper.16
On December 29, 1994, the petitioners filed a complaint17 for collection
of sum of money with application for preliminary attachment against
Arma Traders, Tan, Uy, Ting, Gui, and Ng.
Claims of the petitioners
The petitioners claimed that the respondents fraudulently issued the
postdated checks as payment for the purchases and loan transactions
knowing that they did not have sufficient funds with the drawee
banks.18
To prove the purchases on credit, the petitioners presented the
summary of the transactions and their corresponding sales invoices as
their documentary evidence.19
During the trial, Haw also testified that within one or two weeks upon
delivery of the paper products, Arma Traders paid the purchases in the
form of postdated checks. Thus, he personally collected these checks
on Saturdays and upon receiving the checks, he surrendered to Arma
Traders the original of the sales invoices while he retained the
duplicate of the invoices.20
To prove the loan transactions, the petitioners presented the copies
of the checks21 which Advance Paper issued in favor of Arma Traders.
The petitioners also filed a manifestation22 dated June 14, 1995,
submitting a bank statement from Metrobank EDSA Kalookan Branch.
This was to show that Advance Paper’s credit line with Metrobank has
been transferred to the account of Arma Traders as payee from
October 1994 to December 1994.
Moreover, Haw testified to prove the loan transactions. When asked
why he considered extending the loans without any collateral and loan
agreement or promissory note, and only on the basis of the issuance of
the postdated checks, he answered that it was because he trusted
Arma Traders since it had been their customer for a long time and that
none of the previous checks ever bounced.23
Claims of the respondents
The respondents argued that the purchases on credit were spurious,
simulated and fraudulent since there was no delivery of the
₱7,000,000.00 worth of notebooks and other paper products.24
During the trial, Ng testified that Arma Traders did not purchase
notebooks and other paper products from September to December
1994. He claimed that during this period, Arma Traders concentrated
on Christmas items, not school and office supplies. He also narrated
that upon learning about the complaint filed by the petitioners, he
immediately looked for Arma Traders’ records and found no receipts
involving the purchases of notebooks and other paper products from
Advance Paper.25
As to the loan transactions, the respondents countered that these
were the personal obligations of Tan and Uy to Advance Paper. These
loans were never intended to benefit the respondents.
The respondents also claimed that the loan transactions were ultra
vires because the board of directors of Arma Traders did not issue a
board resolution authorizing Tan and Uy to obtain the loans from
Advance Paper. They claimed that the borrowing of money must be
done only with the prior approval of the board of directors because
without the approval, the corporate officers are acting in excess of their
authority or ultra vires. When the acts of the corporate officers are ultra
vires, the corporation is not liable for whatever acts that these officers
committed in excess of their authority. Further, the respondents
claimed that Advance Paper failed to verify Tan and Uy’s authority to
transact business with them. Hence, Advance Paper should suffer the
consequences.26
The respondents accused Tan and Uy for conspiring with the
petitioners to defraud Arma Traders through a series of transactions
known as rediscounting of postdated checks. In rediscounting, the
respondents explained that Tan and Uy would issue Arma Traders’
postdated checks to the petitioners in exchange for cash, discounted
by as much as 7% to 10% depending on how long were the terms of
repayment. The rediscounted percentage represented the interest or
profit earned by the petitioners in these transactions.27
Tan did not file his Answer and was eventually declared in default.
On the other hand, Uy filed his Answer28 dated January 20, 1995 but
was subsequently declared in default upon his failure to appear during
the pre-trial. In his Answer, he admitted that Arma Traders together
with its corporate officers have been transacting business with
Advance Paper.29 He claimed that he and Tan have been authorized
by the board of directors for the past 13 years to issue checks in behalf
of Arma Traders to pay its obligations with Advance
Paper.30 Furthermore, he admitted that Arma Traders’ checks were
issued to pay its contractual obligations with Advance
Paper.31 However, according to him, Advance Paper was informed
beforehand that Arma Traders’ checks were funded out of the
₱20,000,000.00 worth of collectibles coming from the provinces.
Unfortunately, the expected collectibles did not materialize for
unknown reasons.32
Ng filed his Answer33 and claimed that the management of Arma
Traders was left entirely to Tan and Uy. Thus, he never participated in
the company’s daily transactions.34
Atty. Ernest S. Ang, Jr. (Atty. Ang), Arma Traders’ Vice-President for
Legal Affairs and Credit and Collection, testified that he investigated
the transactions involving Tan and Uy and discovered that they were
financing their own business using Arma Traders’ resources. He also
accused Haw for conniving with Tan and Uy in fraudulently making
Arma Traders liable for their personal debts. He based this conclusion
from the following: First, basic human experience and common sense
tell us that a lender will not agree to extend additional loan to another
person who already owes a substantial sum from the lender – in this
case, petitioner Advance Paper. Second, there was no other document
proving the existence of the loan other than the postdated
checks. Third, the total of the purchase and loan transactions vis-à-vis
the total amount of the postdated checks did not tally. Fourth, he found
out that the certified true copy of Advance Paper’s report with the
Securities and Exchange Commission (SEC report) did not reflect the
₱15,000,000.00 collectibles it had with Arma Traders.35
Atty. Ang also testified that he already filed several cases of estafa and
qualified theft36 against Tan and Uy and that several warrants of arrest
had been issued against them.
In their pre-trial brief,37 the respondents named Sharow Ong, the
secretary of Tan and Uy, to testify on how Tan and Uy conspired with
the petitioners to defraud Arma Traders. However, the respondents did
not present her on the witness stand.
The RTC Ruling
On June 18, 2001, the RTC ruled that the purchases on credit and
loans were sufficiently proven by the petitioners. Hence, the RTC
ordered Arma Traders to pay Advance Paper the sum of
₱15,321,798.25 with interest, and ₱1,500,000.00 for attorney’s fees,
plus the cost of the suit.
The RTC held that the respondents failed to present hard, admissible
and credible evidence to prove that the sale invoices were forged or
fictitious, and that the loan transactions were personal obligations of
Tan and Uy. Nonetheless, the RTC dismissed the complaint against
Tan, Uy, Ting, Gui and Ng due to the lack of evidence showing that
they bound themselves, either jointly or solidarily, with Arma Traders
for the payment of its account.38
Arma Traders appealed the RTC decision to the CA.
The CA Ruling
The CA held that the petitioners failed to prove by preponderance of
evidence the existence of the purchases on credit and loans based on
the following grounds:
First, Arma Traders was not liable for the loan in the absence of a
board resolution authorizing Tan and Uy to obtain the loan from
Advance Paper.39 The CA acknowledged that Tan and Uy were Arma
Traders’ authorized bank signatories. However, the CA explained that
this is not sufficient because the authority to sign the checks is different
from the required authority to contract a loan.40
Second, the CA also held that the petitioners presented incompetent
and inadmissible evidence to prove the purchases on credit since the
sales invoices were hearsay.41 The CA pointed out that Haw’s
testimony as to the identification of the sales invoices was not an
exception to the hearsay rule because there was no showing that the
secretaries who prepared the sales invoices are already dead or
unable to testify as required by the Rules of Court. 42 Further, the CA
noted that the secretaries were not identified or presented in court. 43
Third, the CA ruling heavily relied on Ng’s Appellant’s Brief 44 which
made the detailed description of the "badges of fraud." The CA averred
that the petitioners failed to satisfactorily rebut the badges of
fraud45 which include the inconsistencies in:
(1) "Exhibit E-26," a postdated check, which was allegedly issued in
favor of Advance Paper but turned out to be a check payable to Top
Line, Advance Paper’s sister company;46
(2) "Sale Invoice No. 8946," an evidence to prove the existence of the
purchases on credit, whose photocopy failed to reflect the amount
stated in the duplicate copy,47 and;
(3) The SEC report of Advance Paper for the year ended 1994
reflected its account receivables amounting to ₱219,705.19 only – an
amount far from the claimed ₱15,321,798.25 receivables from Arma
Traders.48
Hence, the CA set aside the RTC’s order for Arma Traders to pay
Advance Paper the sum of ₱15,321,798.25, ₱1,500,000.00 for
attorney’s fees, plus cost of suit.49 It affirmed the RTC decision
dismissing the complaint against respondents Tan, Uy, Ting, Gui and
Ng.50 The CA also directed the petitioners to solidarily pay each of the
respondents their counterclaims of ₱250,000.00 as moral damages,
₱250,000.00 as exemplary damages, and ₱250,000.00 as attorney’s
fees.51
The Petition
The petitioners raise the following arguments.
First, Arma Traders led the petitioners to believe that Tan and Uy had
the authority to obtain loans since the respondents left the active and
sole management of the company to Tan and Uy since 1984. In fact,
Ng testified that Arma Traders’ stockholders and board of directors
never conducted a meeting from 1984 to 1995. Therefore, if the
respondents’ position will be sustained, they will have the absurd
power to question all the business transactions of Arma
Traders.52 Citing Lipat v. Pacific Banking Corporation,53 the petitioners
said that if a corporation knowingly permits one of its officers or any
other agent to act within the scope of an apparent authority, it holds
him out to the public as possessing the power to do those acts; thus,
the corporation will, as against anyone who has in good faith dealt with
it through such agent, be estopped from denying the agent’s authority.
Second, the petitioners argue that Haw’s testimony is not hearsay.
They emphasize that Haw has personal knowledge of the assailed
purchases and loan transactions because he dealt with the customers,
and supervised and directed the preparation of the sales invoices and
the deliveries of the goods.54 Moreover, the petitioners stress that the
respondents never objected to the admissibility of the sales invoices on
the ground that they were hearsay.55
Third, the petitioners dispute the CA’s findings on the existence of the
badges of fraud. The petitioners countered:
(1) The discrepancies between the figures in the 15 out of the 96
photocopies and duplicate originals of the sales invoices amounting
to ₱4,624.80 – an insignificant amount compared to the total
purchases of ₱7,533,001.49 – may have been caused by the failure
to put the carbon paper.56 Besides, the remaining 81 sales invoices
are uncontroverted. The petitioners also raise the point that this
discrepancy is a nonissue because the duplicate originals were
surrendered in the RTC.57
(2) The respondents misled Haw during the cross-examination and
took his answer out of context.58 The petitioners argue that this
maneuver is insufficient to discredit Haw’s entire testimony.59
(3) Arma Traders should be faulted for indicating Top Line as the
payee in Exhibit E-26 or PBC check no. 091014. Moreover, Exhibit E-
26 does not refer to PBC check no. 091014 but to PBC check no.
091032 payable to the order of cash.60
(4) The discrepancy in the total amount of the checks which
is ₱15,130,363.87 as against the total obligation
of ₱15,321,798.25 does not necessarily prove that the transactions are
spurious.61
(5) The difference in Advance Paper’s accounts receivables in the SEC
report and in Arma Traders’ obligation with Advance Paper was based
on non-existent evidence because Exhibit 294-NG does not pertain to
any balance sheet.62 Moreover, the term "accounts receivable" is not
synonymous with "cause of action." The respondents cannot escape
their liability by simply pointing the SEC report because the petitioners
have established their cause of action – that the purchases on credit
and loan transactions took place, the respondents issued the
dishonored checks to cover their debts, and they refused to settle their
obligation with Advance Paper.63
The Case for the Respondents
The respondents argue that the Petition for Review should be
dismissed summarily because of the following procedural
grounds: first, for failure to comply with A.M. No. 02-8-13-
SC;64 and second, the CA decision is already final and executory since
the petitioners filed their Motion for Reconsideration out of time. They
explain that under the rules of the CA, if the last day for filing of any
pleading falls on a Saturday not a holiday, the same must be filed on
said Saturday, as the Docket and Receiving Section of the CA is open
on a Saturday.65
The respondents argue that while as a general rule, a corporation is
estopped from denying the authority of its agents which it allowed to
deal with the general public; this is only true if the person dealing with
the agent dealt in good faith.66 In the present case, the respondents
claim that the petitioners are in bad faith because the petitioners
connived with Tan and Uy to make Arma Traders liable for the non-
existent deliveries of notebooks and other paper products.67 They also
insist that the sales invoices are manufactured evidence.68
As to the loans, the respondents aver that these were Tan and Uy’s
personal obligations with Advance Paper.69Moreover, while the three
cashier’s checks were deposited in the account of Arma Traders, it is
likewise true that Tan and Uy issued Arma Traders’ checks in favor of
Advance Paper. All these checks are evidence of Tan, Uy and Haw’s
systematic conspiracy to siphon Arma Traders corporate funds. 70
The respondents also seek to discredit Haw’s testimony on the basis of
the following. First, his testimony as regards the sales invoices is
hearsay because he did not personally prepare these documentary
evidence.71 Second, Haw suspiciously never had any written authority
from his own Board of Directors to lend money. Third, the respondents
also questioned why Advance Paper granted the ₱7,000,000.00 loan
without requiring Arma Traders to present any collateral or
guarantees.72
The Issues
The main procedural and substantive issues are:
I. Whether the petition for review should be dismissed for failure to
comply with A.M. No. 02-8-13-SC.
II. Whether the petition for review should be dismissed on the ground
of failure to file the motion for reconsideration with the CA on time.
III. Whether Arma Traders is liable to pay the loans applying the
doctrine of apparent authority.
IV. Whether the petitioners proved Arma Traders’ liability on the
purchases on credit by preponderance of evidence.
The Court's Ruling
We grant the petition.
The procedural issues.
First, the respondents correctly cited A.M. No. 02-8-13-SC dated
February 19, 2008 which refer to the amendment of the 2004 Rules on
Notarial Practice. It deleted the Community Tax Certificate among the
accepted proof of identity of the affiant because of its inherent
unreliability. The petitioners violated this when they used Community
Tax Certificate No. 05730869 in their Petition for
Review.73 Nevertheless, the defective jurat in the
Verification/Certification of Non-Forum Shopping is not a fatal defect
because it is only a formal, not a jurisdictional, requirement that the
Court may waive.74 Furthermore, we cannot simply ignore the millions
of pesos at stake in this case. To do so might cause grave injustice to
a party, a situation that this Court intends to avoid.
Second, no less than the CA itself waived the rules on the period to file
the motion for reconsideration. A review of the CA Resolution75 dated
March 7, 2007, reveals that the petitioners’ Motion for Reconsideration
was denied because the allegations were a mere rehash of what the
petitioners earlier argued – not because the motion for reconsideration
was filed out of time.
The substantive issues.
Arma Traders is liable to pay the
loans on the basis of the doctrine of
apparent authority.
The doctrine of apparent authority provides that a corporation will be
estopped from denying the agent’s authority if it knowingly permits one
of its officers or any other agent to act within the scope of an apparent
authority, and it holds him out to the public as possessing the power to
do those acts.76 The doctrine of apparent authority does not apply if the
principal did not commit any acts or conduct which a third party knew
and relied upon in good faith as a result of the exercise of reasonable
prudence. Moreover, the agent’s acts or conduct must have produced
a change of position to the third party’s detriment.77
In Inter-Asia Investment Industries v. Court of Appeals,78 we explained:
Under this provision [referring to Sec. 23 of the Corporation Code], the
power and responsibility to decide whether the corporation should
enter into a contract that will bind the corporation is lodged in the
board, subject to the articles of incorporation, bylaws, or relevant
provisions of law. However, just as a natural person who may
authorize another to do certain acts for and on his behalf, the
board of directors may validly delegate some of its functions and
powers to officers, committees or agents. The authority of such
individuals to bind the corporation is generally derived from law,
corporate bylaws or authorization from the board, either
expressly or impliedly by habit, custom or acquiescence in the
general course of business, viz.:
A corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that [the] authority to do so
has been conferred upon him, and this includes powers as, in the
usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by
custom and usage, as usually pertaining to the particular officer or
agent, and such apparent powers as the corporation has caused
person dealing with the officer or agent to believe that it has conferred.
[A]pparent authority is derived not merely from practice. Its
existence may be ascertained through (1) the general manner in
which the corporation holds out an officer or agent as having the power
to act or, in other words the apparent authority to act in general, with
which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof,
within or beyond the scope of his ordinary powers. It requires
presentation of evidence of similar act(s) executed either in its
favor or in favor of other parties. It is not the quantity of similar
acts which establishes apparent authority, but the vesting of a
corporate officer with the power to bind the
corporation. [emphases and underscores ours]
In People’s Aircargo and Warehousing Co., Inc. v. Court of
Appeals,79 we ruled that the doctrine of apparent authority is applied
when the petitioner, through its president Antonio Punsalan Jr.,
entered into the First Contract without first securing board approval.
Despite such lack of board approval, petitioner did not object to or
repudiate said contract, thus "clothing" its president with the power to
bind the corporation.
"Inasmuch as a corporate president is often given general supervision
and control over corporate operations, the strict rule that said officer
has no inherent power to act for the corporation is slowly giving way to
the realization that such officer has certain limited powers in the
transaction of the usual and ordinary business of the corporation." 80 "In
the absence of a charter or bylaw provision to the contrary, the
president is presumed to have the authority to act within the
domain of the general objectives of its business and within the
scope of his or her usual duties."81
In the present petition, we do not agree with the CA’s findings that
Arma Traders is not liable to pay the loans due to the lack of board
resolution authorizing Tan and Uy to obtain the loans. To begin with,
Arma Traders’ Articles of Incorporation82 provides that the
corporation may borrow or raise money to meet the financial
requirements of its business by the issuance of bonds, promissory
notes and other evidence of indebtedness. Likewise, it states that
Tan and Uy are not just ordinary corporate officers and authorized
bank signatories because they are also Arma
Traders’ incorporators along with respondents Ng and Ting, and
Pedro Chao. Furthermore, the respondents, through Ng who is Arma
Traders’ corporate secretary, incorporator, stockholder and director,
testified that the sole management of Arma Traders was left to Tan
and Uy and that he and the other officers never dealt with the
business and management of Arma Traders for 14 years. He also
confirmed that since 1984 up to the filing of the complaint against
Arma Traders, its stockholders and board of directors never had
its meeting.83
Thus, Arma Traders bestowed upon Tan and Uy broad powers by
allowing them to transact with third persons without the necessary
written authority from its non-performing board of directors. Arma
Traders failed to take precautions to prevent its own corporate officers
from abusing their powers. Because of its own laxity in its business
dealings, Arma Traders is now estopped from denying Tan and Uy’s
authority to obtain loan from Advance Paper.
We also reject the respondents’ claim that Advance Paper, through
Haw, connived with Tan and Uy. The records do not contain any
evidence to prove that the loan transactions were personal to Tan and
Uy. A different conclusion might have been inferred had the cashier’s
checks been issued in favor of Tan and Uy, and had the postdated
checks in favor of Advance Paper been either Tan and/or Uy’s, or had
the respondents presented convincing evidence to show how Tan and
Uy conspired with the petitioners to defraud Arma Traders. 84 We note
that the respondents initially intended to present Sharow Ong, the
secretary of Tan and Uy, to testify on how Advance Paper connived
with Tan and Uy. As mentioned, the respondents failed to present her
on the witness stand.
The respondents failed to object to
the admissibility of the sales invoices
on the ground that they are hearsay
The rule is that failure to object to the offered evidence renders it
admissible, and the court cannot, on its own, disregard such
evidence.85 When a party desires the court to reject the evidence
offered, it must so state in the form of a timely objection and it cannot
raise the objection to the evidence for the first time on appeal. Because
of a party’s failure to timely object, the evidence becomes part of the
evidence in the case. Thereafter, all the parties are considered bound
by any outcome arising from the offer of evidence properly presented. 86
In Heirs of Policronio M. Ureta, Sr. v. Heirs of Liberato M.
Ureta,87 however, we held:
[H]earsay evidence whether objected to or not cannot be given
credence for having no probative value.1âwphi1 This principle,
however, has been relaxed in cases where, in addition to the failure to
object to the admissibility of the subject evidence, there were other
pieces of evidence presented or there were other circumstances
prevailing to support the fact in issue. (emphasis and underscore
ours; citation omitted)
We agree with the respondents that with respect to the identification of
the sales invoices, Haw’s testimony was hearsay because he was not
present during its preparation88 and the secretaries who prepared them
were not presented to identify them in court. Further, these sales
invoices do not fall within the exceptions to the hearsay rule even
under the "entries in the course of business" because the petitioners
failed to show that the entrant was deceased or was unable to testify. 89
But even though the sales invoices are hearsay, nonetheless, they
form part of the records of the case for the respondents’ failure to
object as to the admissibility of the sales invoices on the ground that
they are hearsay.90Based on the records, the respondents through Ng
objected to the offer "for the purpose [to] which they are being offered"
only – not on the ground that they were hearsay.91
The petitioners have proven their
claims for the unpaid purchases on
credit by preponderance of evidence.
We are not convinced by the respondents’ argument that the
purchases are spurious because no less than Uy admitted that all the
checks issued were in payments of the contractual obligations of
the Arma Traders with Advance Paper.92 Moreover, there are other
pieces of evidence to prove the existence of the purchases other than
the sales invoices themselves. For one, Arma Traders’ postdated
checks evince the existence of the purchases on credit. Moreover,
Haw testified that within one or two weeks, Arma Traders paid the
purchases in the form of postdated checks. He personally collected
these checks on Saturdays and upon receiving the checks, he
surrendered to Arma Traders the original of the sales invoices while he
retained the duplicate of the invoices.93
The respondents attempted to impugn the credibility of Haw by
pointing to the inconsistencies they can find from the transcript of
stenographic notes. However, we are not persuaded that these
inconsistencies are sufficiently pervasive to affect the totality of
evidence showing the general relationship between Advance Paper
and Arma Traders.
Additionally, the issue of credibility of witnesses is to be resolved
primarily by the trial court because it is in the better position to assess
the credibility of witnesses as it heard the testimonies and observed
the deportment and manner of testifying of the witnesses. Accordingly,
its findings are entitled to great respect and will not be disturbed on
appeal in the absence of any showing that the trial court overlooked,
misunderstood, or misapplied some facts or circumstances of weight
and substance which would have affected the result of the case. 94
In the present case, the RTC judge took into consideration the
substance and the manner by which Haw answered each propounded
questions to him in the witness stand. Hence, the minor
inconsistencies in Haw’s testimony notwithstanding, the RTC held that
the respondents claim that the purchase and loan transactions were
spurious is "not worthy of serious consideration." Besides, the
respondents failed to convince us that the RTC judge overlooked,
misunderstood, or misapplied some facts or circumstances of weight
and substance which would have affected the result of the case.
On the other hand, we agree with the petitioners that the discrepancies
in the photocopy of the sales invoices and its duplicate copy have been
sufficiently explained. Besides, this is already a non-issue since the
duplicate copies were surrendered in the RTC.95 Furthermore, the fact
that the value of Arma Traders' checks does not tally with the total
amount of their obligation with Advance Paper is not inconsistent with
the existence of the purchases and loan transactions.
As against the case and the evidence Advance Paper presented, the
respondents relied on the core theory of an alleged conspiracy
between Tan, Uy and Haw to defraud Arma Traders. However, the
records are bereft of supporting evidence to prove the alleged
conspiracy. Instead, the respondents simply dwelled on the minor
inconsistencies from the petitioners' evidence that the respondents
appear to have magnified. From these perspectives, the
preponderance of evidence thus lies heavily in the petitioners' favor as
the RTC found. For this reason, we find the petition meritorious.
WHEREFORE, premises considered, we GRANT the petition. The
decision dated March 31, 2006 and the resolution dated March 7, 2007
of the Court of Appeals in CA-G.R. CV No. 71499 are REVERSED and
SET ASIDE. The Regional Trial Court decision in Civil Case No. 94-
72526 dated June 18, 2001 is REINSTATED. No costs.
SO ORDERED.

G.R. No. 201298 February 5, 2014
RAUL C. COSARE, Petitioner,
vs.
BROADCOM ASIA, INC. and DANTE AREVALO, Respondents.
DECISION
REYES, J.:
Before the Court is a petition for review on certiorari 1 under Rule 45 of
the Rules of Court, which assails the Decision2 dated November 24,
2011 and Resolution3 dated March 26, 2012 of the Court of Appeals
(CA) in CA-G.R. SP. No. 117356, wherein the CA ruled that the
Regional Trial Court (RTC), and not the Labor Arbiter (LA), had the
jurisdiction over petitioner Raul C. Cosare's (Cosare) complaint for
illegal dismissal against Broadcom Asia, Inc. (Broadcom) and Dante
Arevalo (Arevalo), the President of Broadcom (respondents).
The Antecedents
The case stems from a complaint4 for constructive dismissal, illegal
suspension and monetary claims filed with the National Capital Region
Arbitration Branch of the National Labor Relations Commission (NLRC)
by Cosare against the respondents.
Cosare claimed that sometime in April 1993, he was employed as a
salesman by Arevalo, who was then in the business of selling
broadcast equipment needed by television networks and production
houses. In December 2000, Arevalo set up the company Broadcom,
still to continue the business of trading communication and broadcast
equipment. Cosare was named an incorporator of Broadcom, having
been assigned 100 shares of stock with par value of ₱1.00 per
share.5 In October 2001, Cosare was promoted to the position of
Assistant Vice President for Sales (AVP for Sales) and Head of the
Technical Coordination, having a monthly basic net salary and average
commissions of ₱18,000.00 and ₱37,000.00, respectively. 6
Sometime in 2003, Alex F. Abiog (Abiog) was appointed as
Broadcom’s Vice President for Sales and thus, became Cosare’s
immediate superior. On March 23, 2009, Cosare sent a confidential
memo7 to Arevalo to inform him of the following anomalies which were
allegedly being committed by Abiog against the company: (a) he failed
to report to work on time, and would immediately leave the office on
the pretext of client visits; (b) he advised the clients of Broadcom to
purchase camera units from its competitors, and received commissions
therefor; (c) he shared in the "under the-table dealings" or "confidential
commissions" which Broadcom extended to its clients’ personnel and
engineers; and (d) he expressed his complaints and disgust over
Broadcom’s uncompetitive salaries and wages and delay in the
payment of other benefits, even in the presence of office staff. Cosare
ended his memo by clarifying that he was not interested in Abiog’s
position, but only wanted Arevalo to know of the irregularities for the
corporation’s sake.
Apparently, Arevalo failed to act on Cosare’s accusations. Cosare
claimed that he was instead called for a meeting by Arevalo on March
25, 2009, wherein he was asked to tender his resignation in exchange
for "financial assistance" in the amount of ₱300,000.00. 8 Cosare
refused to comply with the directive, as signified in a letter9dated March
26, 2009 which he sent to Arevalo.
On March 30, 2009, Cosare received from Roselyn Villareal (Villareal),
Broadcom’s Manager for Finance and Administration, a memo10 signed
by Arevalo, charging him of serious misconduct and willful breach of
trust, and providing in part:
1. A confidential memo was received from the VP for Sales informing
me that you had directed, or at the very least tried to persuade, a
customer to purchase a camera from another supplier. Clearly, this
action is a gross and willful violation of the trust and confidence this
company has given to you being its AVP for Sales and is an attempt to
deprive the company of income from which you, along with the other
employees of this company, derive your salaries and other benefits. x x
x.
2. A company vehicle assigned to you with plate no. UNV 402 was
found abandoned in another place outside of the office without proper
turnover from you to this office which had assigned said vehicle to you.
The vehicle was found to be inoperable and in very bad condition,
which required that the vehicle be towed to a nearby auto repair shop
for extensive repairs.
3. You have repeatedly failed to submit regular sales reports informing
the company of your activities within and outside of company premises
despite repeated reminders. However, it has been observed that you
have been both frequently absent and/or tardy without proper
information to this office or your direct supervisor, the VP for Sales Mr.
Alex Abiog, of your whereabouts.
4. You have been remiss in the performance of your duties as a Sales
officer as evidenced by the fact that you have not recorded any sales
for the past immediate twelve (12) months. This was inspite of the fact
that my office decided to relieve you of your duties as technical
coordinator between Engineering and Sales since June last year so
that you could focus and concentrate [on] your activities in sales. 11
Cosare was given forty-eight (48) hours from the date of the memo
within which to present his explanation on the charges. He was also
"suspended from having access to any and all company files/records
and use of company assets effective immediately."12 Thus, Cosare
claimed that he was precluded from reporting for work on March 31,
2009, and was instead instructed to wait at the office’s receiving
section. Upon the specific instructions of Arevalo, he was also
prevented by Villareal from retrieving even his personal belongings
from the office.
On April 1, 2009, Cosare was totally barred from entering the company
premises, and was told to merely wait outside the office building for
further instructions. When no such instructions were given by 8:00
p.m., Cosare was impelled to seek the assistance of the officials of
Barangay San Antonio, Pasig City, and had the incident reported in the
barangay blotter.13
On April 2, 2009, Cosare attempted to furnish the company with a
Memo14 by which he addressed and denied the accusations cited in
Arevalo’s memo dated March 30, 2009. The respondents refused to
receive the memo on the ground of late filing, prompting Cosare to
serve a copy thereof by registered mail. The following day, April 3,
2009, Cosare filed the subject labor complaint, claiming that he was
constructively dismissed from employment by the respondents. He
further argued that he was illegally suspended, as he placed no
serious and imminent threat to the life or property of his employer and
co-employees.15
In refuting Cosare’s complaint, the respondents argued that Cosare
was neither illegally suspended nor dismissed from employment. They
also contended that Cosare committed the following acts inimical to the
interests of Broadcom: (a) he failed to sell any broadcast equipment
since the year 2007; (b) he attempted to sell a Panasonic HMC 150
Camera which was to be sourced from a competitor; and (c) he made
an unauthorized request in Broadcom’s name for its principal,
Panasonic USA, to issue an invitation for Cosare’s friend, one Alex
Paredes, to attend the National Association of Broadcasters’
Conference in Las Vegas, USA.16 Furthermore, they contended that
Cosare abandoned his job17 by continually failing to report for work
beginning April 1, 2009, prompting them to issue on April 14, 2009 a
memorandum18 accusing Cosare of absence without leave beginning
April 1, 2009.
The Ruling of the LA
On January 6, 2010, LA Napoleon M. Menese (LA Menese) rendered
his Decision19 dismissing the complaint on the ground of Cosare’s
failure to establish that he was dismissed, constructively or otherwise,
from his employment. For the LA, what transpired on March 30, 2009
was merely the respondents’ issuance to Cosare of a show-cause
memo, giving him a chance to present his side on the charges against
him. He explained:
It is obvious that [Cosare] DID NOT wait for respondents’ action
regarding the charges leveled against him in the show-cause memo.
What he did was to pre-empt that action by filing this complaint just a
day after he submitted his written explanation. Moreover, by
specifically seeking payment of "Separation Pay" instead of
reinstatement, [Cosare’s] motive for filing this case becomes more
evident.20
It was also held that Cosare failed to substantiate by documentary
evidence his allegations of illegal suspension and non-payment of
allowances and commissions.
Unyielding, Cosare appealed the LA decision to the NLRC.
The Ruling of the NLRC
On August 24, 2010, the NLRC rendered its Decision21 reversing the
Decision of LA Menese. The dispositive portion of the NLRC Decision
reads:
WHEREFORE, premises considered, the DECISION is REVERSED
and the Respondents are found guilty of Illegal Constructive Dismissal.
Respondents BROADCOM ASIA, INC. and Dante Arevalo are ordered
to pay [Cosare’s] backwages, and separation pay, as well as damages,
in the total amount of ₱1,915,458.33, per attached Computation.
SO ORDERED.22
In ruling in favor of Cosare, the NLRC explained that "due weight and
credence is accorded to [Cosare’s] contention that he was
constructively dismissed by Respondent Arevalo when he was asked
to resign from his employment."23The fact that Cosare was suspended
from using the assets of Broadcom was also inconsistent with the
respondents’ claim that Cosare opted to abandon his employment.
Exemplary damages in the amount of ₱100,000.00 was awarded,
given the NLRC’s finding that the termination of Cosare’s employment
was effected by the respondents in bad faith and in a wanton,
oppressive and malevolent manner. The claim for unpaid commissions
was denied on the ground of the failure to include it in the prayer of
pleadings filed with the LA and in the appeal.
The respondents’ motion for reconsideration was
denied.24 Dissatisfied, they filed a petition for certiorari with the CA
founded on the following arguments: (1) the respondents did not have
to prove just cause for terminating the employment of Cosare because
the latter’s complaint was based on an alleged constructive dismissal;
(2) Cosare resigned and was thus not dismissed from employment; (3)
the respondents should not be declared liable for the payment of
Cosare’s monetary claims; and (4) Arevalo should not be held
solidarily liable for the judgment award.
In a manifestation filed by the respondents during the pendency of the
CA appeal, they raised a new argument, i.e., the case involved an
intra-corporate controversy which was within the jurisdiction of the
RTC, instead of the LA.25They argued that the case involved a
complaint against a corporation filed by a stockholder, who, at the
same time, was a corporate officer.
The Ruling of the CA
On November 24, 2011, the CA rendered the assailed
Decision26 granting the respondents’ petition. It agreed with the
respondents’ contention that the case involved an intra-corporate
controversy which, pursuant to Presidential Decree No. 902-A, as
amended, was within the exclusive jurisdiction of the RTC. It reasoned:
Record shows that [Cosare] was indeed a stockholder of [Broadcom],
and that he was listed as one of its directors. Moreover, he held the
position of [AVP] for Sales which is listed as a corporate office.
Generally, the president, vice-president, secretary or treasurer are
commonly regarded as the principal or executive officers of a
corporation, and modern corporation statutes usually designate them
as the officers of the corporation. However, it bears mentioning that
under Section 25 of the Corporation Code, the Board of Directors of
[Broadcom] is allowed to appoint such other officers as it may deem
necessary. Indeed, [Broadcom’s] By-Laws provides:
Article IV
Officer
Section 1. Election / Appointment – Immediately after their election, the
Board of Directors shall formally organize by electing the President, the
Vice-President, the Treasurer, and the Secretary at said meeting.
The Board, may, from time to time, appoint such other officers as it
may determine to be necessary or proper. x x x
We hold that [the respondents] were able to present substantial
evidence that [Cosare] indeed held a corporate office, as evidenced by
the General Information Sheet which was submitted to the Securities
and Exchange Commission (SEC) on October 22, 2009.27 (Citations
omitted and emphasis supplied)
Thus, the CA reversed the NLRC decision and resolution, and then
entered a new one dismissing the labor complaint on the ground of
lack of jurisdiction, finding it unnecessary to resolve the main issues
that were raised in the petition. Cosare filed a motion for
reconsideration, but this was denied by the CA via the
Resolution28 dated March 26, 2012. Hence, this petition.
The Present Petition
The pivotal issues for the petition’s full resolution are as follows: (1)
whether or not the case instituted by Cosare was an intra-corporate
dispute that was within the original jurisdiction of the RTC, and not of
the LAs; and (2) whether or not Cosare was constructively and illegally
dismissed from employment by the respondents.
The Court’s Ruling
The petition is impressed with merit.
Jurisdiction over the controversy
As regards the issue of jurisdiction, the Court has determined that
contrary to the ruling of the CA, it is the LA, and not the regular courts,
which has the original jurisdiction over the subject controversy. An
intra-corporate controversy, which falls within the jurisdiction of regular
courts, has been regarded in its broad sense to pertain to disputes that
involve any of the following relationships: (1) between the corporation,
partnership or association and the public; (2) between the corporation,
partnership or association and the state in so far as its franchise,
permit or license to operate is concerned; (3) between the corporation,
partnership or association and its stockholders, partners, members or
officers; and (4) among the stockholders, partners or associates,
themselves.29 Settled jurisprudence, however, qualifies that when the
dispute involves a charge of illegal dismissal, the action may fall under
the jurisdiction of the LAs upon whose jurisdiction, as a rule, falls
termination disputes and claims for damages arising from employer-
employee relations as provided in Article 217 of the Labor Code.
Consistent with this jurisprudence, the mere fact that Cosare was a
stockholder and an officer of Broadcom at the time the subject
controversy developed failed to necessarily make the case an intra-
corporate dispute.
In Matling Industrial and Commercial Corporation v. Coros,30 the Court
distinguished between a "regular employee" and a "corporate officer"
for purposes of establishing the true nature of a dispute or complaint
for illegal dismissal and determining which body has jurisdiction over it.
Succinctly, it was explained that "[t]he determination of whether the
dismissed officer was a regular employee or corporate officer unravels
the conundrum" of whether a complaint for illegal dismissal is
cognizable by the LA or by the RTC. "In case of the regular employee,
the LA has jurisdiction; otherwise, the RTC exercises the legal
authority to adjudicate.31
Applying the foregoing to the present case, the LA had the original
jurisdiction over the complaint for illegal dismissal because Cosare,
although an officer of Broadcom for being its AVP for Sales, was not a
"corporate officer" as the term is defined by law. We emphasized in
Real v. Sangu Philippines, Inc.32 the definition of corporate officers for
the purpose of identifying an intra-corporate controversy. Citing Garcia
v. Eastern Telecommunications Philippines, Inc.,33 we held:
" ‘Corporate officers’ in the context of Presidential Decree No. 902-A
are those officers of the corporation who are given that character by
the Corporation Code or by the corporation’s by-laws. There are three
specific officers whom a corporation must have under Section 25 of the
Corporation Code. These are the president, secretary and the
treasurer. The number of officers is not limited to these three. A
corporation may have such other officers as may be provided for by its
by-laws like, but not limited to, the vice-president, cashier, auditor or
general manager. The number of corporate officers is thus limited by
law and by the corporation’s by-laws."34 (Emphasis ours)
In Tabang v. NLRC,35 the Court also made the following
pronouncement on the nature of corporate offices:
It has been held that an "office" is created by the charter of the
corporation and the officer is elected by the directors and stockholders.
On the other hand, an "employee" usually occupies no office and
generally is employed not by action of the directors or stockholders but
by the managing officer of the corporation who also determines the
compensation to be paid to such employee.36 (Citations omitted)
As may be deduced from the foregoing, there are two circumstances
which must concur in order for an individual to be considered a
corporate officer, as against an ordinary employee or officer, namely:
(1) the creation of the position is under the corporation’s charter or by-
laws; and (2) the election of the officer is by the directors or
stockholders. It is only when the officer claiming to have been illegally
dismissed is classified as such corporate officer that the issue is
deemed an intra-corporate dispute which falls within the jurisdiction of
the trial courts.
To support their argument that Cosare was a corporate officer, the
respondents referred to Section 1, Article IV of Broadcom’s by-laws,
which reads:
ARTICLE IV
OFFICER
Section 1. Election / Appointment – Immediately after their election, the
Board of Directors shall formally organize by electing the President, the
Vice-President, the Treasurer, and the Secretary at said meeting.
The Board may, from time to time, appoint such other officers as it may
determine to be necessary or proper. Any two (2) or more compatible
positions may be held concurrently by the same person, except that no
one shall act as President and Treasurer or Secretary at the same
time.37 (Emphasis ours)
This was also the CA’s main basis in ruling that the matter was an
intra-corporate dispute that was within the trial courts’ jurisdiction.
The Court disagrees with the respondents and the CA. As may be
gleaned from the aforequoted provision, the only officers who are
specifically listed, and thus with offices that are created under
Broadcom’s by-laws are the following: the President, Vice-President,
Treasurer and Secretary. Although a blanket authority provides for the
Board’s appointment of such other officers as it may deem necessary
and proper, the respondents failed to sufficiently establish that the
position of AVP for Sales was created by virtue of an act of
Broadcom’s board, and that Cosare was specifically elected or
appointed to such position by the directors. No board resolutions to
establish such facts form part of the case records. Further, it was held
in Marc II Marketing, Inc. v. Joson38 that an enabling clause in a
corporation’s by-laws empowering its board of directors to create
additional officers, even with the subsequent passage of a board
resolution to that effect, cannot make such position a corporate office.
The board of directors has no power to create other corporate offices
without first amending the corporate by-laws so as to include therein
the newly created corporate office.39 "To allow the creation of a
corporate officer position by a simple inclusion in the corporate by-laws
of an enabling clause empowering the board of directors to do so can
result in the circumvention of that constitutionally well-protected right
[of every employee to security of tenure]."40
The CA’s heavy reliance on the contents of the General Information
Sheets41, which were submitted by the respondents during the appeal
proceedings and which plainly provided that Cosare was an "officer" of
Broadcom, was clearly misplaced. The said documents could neither
govern nor establish the nature of the office held by Cosare and his
appointment thereto. Furthermore, although Cosare could indeed be
classified as an officer as provided in the General Information Sheets,
his position could only be deemed a regular office, and not a corporate
office as it is defined under the Corporation Code. Incidentally, the
Court noticed that although the Corporate Secretary of Broadcom, Atty.
Efren L. Cordero, declared under oath the truth of the matters set forth
in the General Information Sheets, the respondents failed to explain
why the General Information Sheet officially filed with the Securities
and Exchange Commission in 2011 and submitted to the CA by the
respondents still indicated Cosare as an AVP for Sales, when among
their defenses in the charge of illegal dismissal, they asserted that
Cosare had severed his relationship with the corporation since the year
2009.
Finally, the mere fact that Cosare was a stockholder of Broadcom at
the time of the case’s filing did not necessarily make the action an
intra- corporate controversy. "Not all conflicts between the stockholders
and the corporation are classified as intra-corporate. There are other
facts to consider in determining whether the dispute involves corporate
matters as to consider them as intra-corporate controversies."42 Time
and again, the Court has ruled that in determining the existence of an
intra-corporate dispute, the status or relationship of the parties and the
nature of the question that is the subject of the controversy must be
taken into account.43 Considering that the pending dispute particularly
relates to Cosare’s rights and obligations as a regular officer of
Broadcom, instead of as a stockholder of the corporation, the
controversy cannot be deemed intra-corporate. This is consistent with
the "controversy test" explained by the Court in Reyes v. Hon. RTC,
Br. 142,44 to wit:
Under the nature of the controversy test, the incidents of that
relationship must also be considered for the purpose of ascertaining
whether the controversy itself is intra-corporate. The controversy must
not only be rooted in the existence of an intra-corporate relationship,
but must as well pertain to the enforcement of the parties’ correlative
rights and obligations under the Corporation Code and the internal and
intra-corporate regulatory rules of the corporation. If the relationship
and its incidents are merely incidental to the controversy or if there will
still be conflict even if the relationship does not exist, then no intra-
corporate controversy exists.45 (Citation omitted)
It bears mentioning that even the CA’s finding46 that Cosare was a
director of Broadcom when the dispute commenced was unsupported
by the case records, as even the General Information Sheet of 2009
referred to in the CA decision to support such finding failed to provide
such detail.
All told, it is then evident that the CA erred in reversing the NLRC’s
ruling that favored Cosare solely on the ground that the dispute was an
intra-corporate controversy within the jurisdiction of the regular courts.
The charge of constructive dismissal
Towards a full resolution of the instant case, the Court finds it
appropriate to rule on the correctness of the NLRC’s ruling finding
Cosare to have been illegally dismissed from employment.
In filing his labor complaint, Cosare maintained that he was
constructively dismissed, citing among other circumstances the
charges that were hurled and the suspension that was imposed
against him via Arevalo’s memo dated March 30, 2009. Even prior to
such charge, he claimed to have been subjected to mental torture,
having been locked out of his files and records and disallowed use of
his office computer and access to personal belongings. 47While Cosare
attempted to furnish the respondents with his reply to the charges, the
latter refused to accept the same on the ground that it was filed beyond
the 48-hour period which they provided in the memo.
Cosare further referred to the circumstances that allegedly transpired
subsequent to the service of the memo, particularly the continued
refusal of the respondents to allow Cosare’s entry into the company’s
premises. These incidents were cited in the CA decision as follows:
On March 31, 2009, [Cosare] reported back to work again. He asked
Villareal if he could retrieve his personal belongings, but the latter said
that x x x Arevalo directed her to deny his request, so [Cosare] again
waited at the receiving section of the office. On April 1, 2009, [Cosare]
was not allowed to enter the office premises. He was asked to just wait
outside of the Tektite (PSE) Towers, where [Broadcom] had its offices,
for further instructions on how and when he could get his personal
belongings. [Cosare] waited until 8 p.m. for instructions but none were
given. Thus, [Cosare] sought the assistance of the officials of
Barangay San Antonio, Pasig who advised him to file a labor or
replevin case to recover his personal belongings. x x x. 48 (Citation
omitted)
It is also worth mentioning that a few days before the issuance of the
memo dated March 30, 2009, Cosare was allegedly summoned to
Arevalo’s office and was asked to tender his immediate resignation
from the company, in exchange for a financial assistance of
₱300,000.00.49 The directive was said to be founded on Arevalo’s
choice to retain Abiog’s employment with the company. 50 The
respondents failed to refute these claims.
Given the circumstances, the Court agrees with Cosare’s claim of
constructive and illegal dismissal. "[C]onstructive dismissal occurs
when there is cessation of work because continued employment is
rendered impossible, unreasonable, or unlikely as when there is a
demotion in rank or diminution in pay or when a clear discrimination,
insensibility, or disdain by an employer becomes unbearable to the
employee leaving the latter with no other option but to quit."51 In
Dimagan v. Dacworks United, Incorporated,52 it was explained:
The test of constructive dismissal is whether a reasonable person in
the employee’s position would have felt compelled to give up his
position under the circumstances. It is an act amounting to dismissal
but is made to appear as if it were not. Constructive dismissal is
therefore a dismissal in disguise. The law recognizes and resolves this
situation in favor of employees in order to protect their rights and
interests from the coercive acts of the employer.53(Citation omitted)
It is clear from the cited circumstances that the respondents already
rejected Cosare’s continued involvement with the company. Even their
refusal to accept the explanation which Cosare tried to tender on April
2, 2009 further evidenced the resolve to deny Cosare of the
opportunity to be heard prior to any decision on the termination of his
employment. The respondents allegedly refused acceptance of the
explanation as it was filed beyond the mere 48-hour period which they
granted to Cosare under the memo dated March 30, 2009. However,
even this limitation was a flaw in the memo or notice to explain which
only further signified the respondents’ discrimination, disdain and
insensibility towards Cosare, apparently resorted to by the respondents
in order to deny their employee of the opportunity to fully explain his
defenses and ultimately, retain his employment. The Court
emphasized in King of Kings Transport, Inc. v. Mamac 54 the standards
to be observed by employers in complying with the service of notices
prior to termination:
[T]he first written notice to be served on the employees should contain
the specific causes or grounds for termination against them, and a
directive that the employees are given the opportunity to submit their
written explanation within a reasonable period. "Reasonable
opportunity" under the Omnibus Rules means every kind of assistance
that management must accord to the employees to enable them to
prepare adequately for their defense. This should be construed as a
period of at least five (5) calendar days from receipt of the notice to
give the employees an opportunity to study the accusation against
them, consult a union official or lawyer, gather data and evidence, and
decide on the defenses they will raise against the complaint. Moreover,
in order to enable the employees to intelligently prepare their
explanation and defenses, the notice should contain a detailed
narration of the facts and circumstances that will serve as basis for the
charge against the employees. A general description of the charge will
not suffice. Lastly, the notice should specifically mention which
company rules, if any, are violated and/or which among the grounds
under Art. 282 is being charged against the employees.55 (Citation
omitted, underscoring ours, and emphasis supplied)
In sum, the respondents were already resolute on a severance of their
working relationship with Cosare, notwithstanding the facts which could
have been established by his explanations and the respondents’ full
investigation on the matter. In addition to this, the fact that no further
investigation and final disposition appeared to have been made by the
respondents on Cosare’s case only negated the claim that they
actually intended to first look into the matter before making a final
determination as to the guilt or innocence of their employee. This also
manifested from the fact that even before Cosare was required to
present his side on the charges of serious misconduct and willful
breach of trust, he was summoned to Arevalo’s office and was asked
to tender his immediate resignation in exchange for financial
assistance.
The clear intent of the respondents to find fault in Cosare was also
manifested by their persistent accusation that Cosare abandoned his
post, allegedly signified by his failure to report to work or file a leave of
absence beginning April 1, 2009. This was even the subject of a
memo56 issued by Arevalo to Cosare on April 14, 2009, asking him to
explain his absence within 48 hours from the date of the memo. As the
records clearly indicated, however, Arevalo placed Cosare under
suspension beginning March 30, 2009. The suspension covered
access to any and all company files/records and the use of the assets
of the company, with warning that his failure to comply with the memo
would be dealt with drastic management action. The charge of
abandonment was inconsistent with this imposed suspension.
"Abandonment is the deliberate and unjustified refusal of an employee
to resume his employment. To constitute abandonment of work, two
elements must concur: ‘(1) the employee must have failed to report for
work or must have been absent without valid or justifiable reason; and
(2) there must have been a clear intention on the part of the employee
to sever the employer- employee relationship manifested by some
overt act.’"57Cosare’s failure to report to work beginning April 1, 2009
was neither voluntary nor indicative of an intention to sever his
employment with Broadcom. It was illogical to be requiring him to
report for work, and imputing fault when he failed to do so after he was
specifically denied access to all of the company’s assets. As correctly
observed by the NLRC:
[T]he Respondent[s] had charged [Cosare] of abandoning his
employment beginning on April 1, 2009. However[,] the show-cause
letter dated March 3[0], 2009 (Annex "F", ibid) suspended [Cosare]
from using not only the equipment but the "assets" of Respondent
[Broadcom]. This insults rational thinking because the Respondents
tried to mislead us and make [it appear] that [Cosare] failed to report
for work when they had in fact had [sic] placed him on suspension. x x
x.58
Following a finding of constructive dismissal, the Court finds no cogent
reason to modify the NLRC's monetary awards in Cosare's favor. In
Robinsons Galleria/Robinsons Supermarket Corporation v.
Ranchez,59 the Court reiterated that an illegally or constructively
dismissed employee is entitled to: (1) either reinstatement, if viable, or
separation pay, if reinstatement is no longer viable; and (2)
backwages.60 The award of exemplary damages was also justified
given the NLRC's finding that the respondents acted in bad faith and in
a wanton, oppressive and malevolent manner when they dismissed
Cosare. It is also by reason of such bad faith that Arevalo was correctly
declared solidarily liable for the monetary awards.
WHEREFORE, the petition is GRANTED. The Decision dated
November 24, 2011 and Resolution dated March 26, 2012 of the Court
of Appeals in CA-G.R. SP. No. 117356 are SET ASIDE. The Decision
dated August 24, 2010 of the National Labor Relations Commission in
favor of petitioner Raul C. Cosare is AFFIRMED.
SO ORDERED.
G.R. No. 201298 February 5, 2014
RAUL C. COSARE, Petitioner,
vs.
BROADCOM ASIA, INC. and DANTE AREVALO, Respondents.
DECISION
REYES, J.:
Before the Court is a petition for review on certiorari 1 under Rule 45 of
the Rules of Court, which assails the Decision2 dated November 24,
2011 and Resolution3 dated March 26, 2012 of the Court of Appeals
(CA) in CA-G.R. SP. No. 117356, wherein the CA ruled that the
Regional Trial Court (RTC), and not the Labor Arbiter (LA), had the
jurisdiction over petitioner Raul C. Cosare's (Cosare) complaint for
illegal dismissal against Broadcom Asia, Inc. (Broadcom) and Dante
Arevalo (Arevalo), the President of Broadcom (respondents).
The Antecedents
The case stems from a complaint4 for constructive dismissal, illegal
suspension and monetary claims filed with the National Capital Region
Arbitration Branch of the National Labor Relations Commission (NLRC)
by Cosare against the respondents.
Cosare claimed that sometime in April 1993, he was employed as a
salesman by Arevalo, who was then in the business of selling
broadcast equipment needed by television networks and production
houses. In December 2000, Arevalo set up the company Broadcom,
still to continue the business of trading communication and broadcast
equipment. Cosare was named an incorporator of Broadcom, having
been assigned 100 shares of stock with par value of ₱1.00 per
share.5 In October 2001, Cosare was promoted to the position of
Assistant Vice President for Sales (AVP for Sales) and Head of the
Technical Coordination, having a monthly basic net salary and average
commissions of ₱18,000.00 and ₱37,000.00, respectively.6
Sometime in 2003, Alex F. Abiog (Abiog) was appointed as
Broadcom’s Vice President for Sales and thus, became Cosare’s
immediate superior. On March 23, 2009, Cosare sent a confidential
memo7 to Arevalo to inform him of the following anomalies which were
allegedly being committed by Abiog against the company: (a) he failed
to report to work on time, and would immediately leave the office on
the pretext of client visits; (b) he advised the clients of Broadcom to
purchase camera units from its competitors, and received commissions
therefor; (c) he shared in the "under the-table dealings" or "confidential
commissions" which Broadcom extended to its clients’ personnel and
engineers; and (d) he expressed his complaints and disgust over
Broadcom’s uncompetitive salaries and wages and delay in the
payment of other benefits, even in the presence of office staff. Cosare
ended his memo by clarifying that he was not interested in Abiog’s
position, but only wanted Arevalo to know of the irregularities for the
corporation’s sake.
Apparently, Arevalo failed to act on Cosare’s accusations. Cosare
claimed that he was instead called for a meeting by Arevalo on March
25, 2009, wherein he was asked to tender his resignation in exchange
for "financial assistance" in the amount of ₱300,000.00. 8 Cosare
refused to comply with the directive, as signified in a letter9dated March
26, 2009 which he sent to Arevalo.
On March 30, 2009, Cosare received from Roselyn Villareal (Villareal),
Broadcom’s Manager for Finance and Administration, a memo10 signed
by Arevalo, charging him of serious misconduct and willful breach of
trust, and providing in part:
1. A confidential memo was received from the VP for Sales informing
me that you had directed, or at the very least tried to persuade, a
customer to purchase a camera from another supplier. Clearly, this
action is a gross and willful violation of the trust and confidence this
company has given to you being its AVP for Sales and is an attempt to
deprive the company of income from which you, along with the other
employees of this company, derive your salaries and other benefits. x x
x.
2. A company vehicle assigned to you with plate no. UNV 402 was
found abandoned in another place outside of the office without proper
turnover from you to this office which had assigned said vehicle to you.
The vehicle was found to be inoperable and in very bad condition,
which required that the vehicle be towed to a nearby auto repair shop
for extensive repairs.
3. You have repeatedly failed to submit regular sales reports informing
the company of your activities within and outside of company premises
despite repeated reminders. However, it has been observed that you
have been both frequently absent and/or tardy without proper
information to this office or your direct supervisor, the VP for Sales Mr.
Alex Abiog, of your whereabouts.
4. You have been remiss in the performance of your duties as a Sales
officer as evidenced by the fact that you have not recorded any sales
for the past immediate twelve (12) months. This was inspite of the fact
that my office decided to relieve you of your duties as technical
coordinator between Engineering and Sales since June last year so
that you could focus and concentrate [on] your activities in sales. 11
Cosare was given forty-eight (48) hours from the date of the memo
within which to present his explanation on the charges. He was also
"suspended from having access to any and all company files/records
and use of company assets effective immediately."12 Thus, Cosare
claimed that he was precluded from reporting for work on March 31,
2009, and was instead instructed to wait at the office’s receiving
section. Upon the specific instructions of Arevalo, he was also
prevented by Villareal from retrieving even his personal belongings
from the office.
On April 1, 2009, Cosare was totally barred from entering the company
premises, and was told to merely wait outside the office building for
further instructions. When no such instructions were given by 8:00
p.m., Cosare was impelled to seek the assistance of the officials of
Barangay San Antonio, Pasig City, and had the incident reported in the
barangay blotter.13
On April 2, 2009, Cosare attempted to furnish the company with a
Memo14 by which he addressed and denied the accusations cited in
Arevalo’s memo dated March 30, 2009. The respondents refused to
receive the memo on the ground of late filing, prompting Cosare to
serve a copy thereof by registered mail. The following day, April 3,
2009, Cosare filed the subject labor complaint, claiming that he was
constructively dismissed from employment by the respondents. He
further argued that he was illegally suspended, as he placed no
serious and imminent threat to the life or property of his employer and
co-employees.15
In refuting Cosare’s complaint, the respondents argued that Cosare
was neither illegally suspended nor dismissed from employment. They
also contended that Cosare committed the following acts inimical to the
interests of Broadcom: (a) he failed to sell any broadcast equipment
since the year 2007; (b) he attempted to sell a Panasonic HMC 150
Camera which was to be sourced from a competitor; and (c) he made
an unauthorized request in Broadcom’s name for its principal,
Panasonic USA, to issue an invitation for Cosare’s friend, one Alex
Paredes, to attend the National Association of Broadcasters’
Conference in Las Vegas, USA.16 Furthermore, they contended that
Cosare abandoned his job17 by continually failing to report for work
beginning April 1, 2009, prompting them to issue on April 14, 2009 a
memorandum18 accusing Cosare of absence without leave beginning
April 1, 2009.
The Ruling of the LA
On January 6, 2010, LA Napoleon M. Menese (LA Menese) rendered
his Decision19 dismissing the complaint on the ground of Cosare’s
failure to establish that he was dismissed, constructively or otherwise,
from his employment. For the LA, what transpired on March 30, 2009
was merely the respondents’ issuance to Cosare of a show-cause
memo, giving him a chance to present his side on the charges against
him. He explained:
It is obvious that [Cosare] DID NOT wait for respondents’ action
regarding the charges leveled against him in the show-cause memo.
What he did was to pre-empt that action by filing this complaint just a
day after he submitted his written explanation. Moreover, by
specifically seeking payment of "Separation Pay" instead of
reinstatement, [Cosare’s] motive for filing this case becomes more
evident.20
It was also held that Cosare failed to substantiate by documentary
evidence his allegations of illegal suspension and non-payment of
allowances and commissions.
Unyielding, Cosare appealed the LA decision to the NLRC.
The Ruling of the NLRC
On August 24, 2010, the NLRC rendered its Decision21 reversing the
Decision of LA Menese. The dispositive portion of the NLRC Decision
reads:
WHEREFORE, premises considered, the DECISION is REVERSED
and the Respondents are found guilty of Illegal Constructive Dismissal.
Respondents BROADCOM ASIA, INC. and Dante Arevalo are ordered
to pay [Cosare’s] backwages, and separation pay, as well as damages,
in the total amount of ₱1,915,458.33, per attached Computation.
SO ORDERED.22
In ruling in favor of Cosare, the NLRC explained that "due weight and
credence is accorded to [Cosare’s] contention that he was
constructively dismissed by Respondent Arevalo when he was asked
to resign from his employment."23The fact that Cosare was suspended
from using the assets of Broadcom was also inconsistent with the
respondents’ claim that Cosare opted to abandon his employment.
Exemplary damages in the amount of ₱100,000.00 was awarded,
given the NLRC’s finding that the termination of Cosare’s employment
was effected by the respondents in bad faith and in a wanton,
oppressive and malevolent manner. The claim for unpaid commissions
was denied on the ground of the failure to include it in the prayer of
pleadings filed with the LA and in the appeal.
The respondents’ motion for reconsideration was
denied.24 Dissatisfied, they filed a petition for certiorari with the CA
founded on the following arguments: (1) the respondents did not have
to prove just cause for terminating the employment of Cosare because
the latter’s complaint was based on an alleged constructive dismissal;
(2) Cosare resigned and was thus not dismissed from employment; (3)
the respondents should not be declared liable for the payment of
Cosare’s monetary claims; and (4) Arevalo should not be held
solidarily liable for the judgment award.
In a manifestation filed by the respondents during the pendency of the
CA appeal, they raised a new argument, i.e., the case involved an
intra-corporate controversy which was within the jurisdiction of the
RTC, instead of the LA.25They argued that the case involved a
complaint against a corporation filed by a stockholder, who, at the
same time, was a corporate officer.
The Ruling of the CA
On November 24, 2011, the CA rendered the assailed
Decision26 granting the respondents’ petition. It agreed with the
respondents’ contention that the case involved an intra-corporate
controversy which, pursuant to Presidential Decree No. 902-A, as
amended, was within the exclusive jurisdiction of the RTC. It reasoned:
Record shows that [Cosare] was indeed a stockholder of [Broadcom],
and that he was listed as one of its directors. Moreover, he held the
position of [AVP] for Sales which is listed as a corporate office.
Generally, the president, vice-president, secretary or treasurer are
commonly regarded as the principal or executive officers of a
corporation, and modern corporation statutes usually designate them
as the officers of the corporation. However, it bears mentioning that
under Section 25 of the Corporation Code, the Board of Directors of
[Broadcom] is allowed to appoint such other officers as it may deem
necessary. Indeed, [Broadcom’s] By-Laws provides:
Article IV
Officer
Section 1. Election / Appointment – Immediately after their election, the
Board of Directors shall formally organize by electing the President, the
Vice-President, the Treasurer, and the Secretary at said meeting.
The Board, may, from time to time, appoint such other officers as it
may determine to be necessary or proper. x x x
We hold that [the respondents] were able to present substantial
evidence that [Cosare] indeed held a corporate office, as evidenced by
the General Information Sheet which was submitted to the Securities
and Exchange Commission (SEC) on October 22, 2009.27 (Citations
omitted and emphasis supplied)
Thus, the CA reversed the NLRC decision and resolution, and then
entered a new one dismissing the labor complaint on the ground of
lack of jurisdiction, finding it unnecessary to resolve the main issues
that were raised in the petition. Cosare filed a motion for
reconsideration, but this was denied by the CA via the
Resolution28 dated March 26, 2012. Hence, this petition.
The Present Petition
The pivotal issues for the petition’s full resolution are as follows: (1)
whether or not the case instituted by Cosare was an intra-corporate
dispute that was within the original jurisdiction of the RTC, and not of
the LAs; and (2) whether or not Cosare was constructively and illegally
dismissed from employment by the respondents.
The Court’s Ruling
The petition is impressed with merit.
Jurisdiction over the controversy
As regards the issue of jurisdiction, the Court has determined that
contrary to the ruling of the CA, it is the LA, and not the regular courts,
which has the original jurisdiction over the subject controversy. An
intra-corporate controversy, which falls within the jurisdiction of regular
courts, has been regarded in its broad sense to pertain to disputes that
involve any of the following relationships: (1) between the corporation,
partnership or association and the public; (2) between the corporation,
partnership or association and the state in so far as its franchise,
permit or license to operate is concerned; (3) between the corporation,
partnership or association and its stockholders, partners, members or
officers; and (4) among the stockholders, partners or associates,
themselves.29 Settled jurisprudence, however, qualifies that when the
dispute involves a charge of illegal dismissal, the action may fall under
the jurisdiction of the LAs upon whose jurisdiction, as a rule, falls
termination disputes and claims for damages arising from employer-
employee relations as provided in Article 217 of the Labor Code.
Consistent with this jurisprudence, the mere fact that Cosare was a
stockholder and an officer of Broadcom at the time the subject
controversy developed failed to necessarily make the case an intra-
corporate dispute.
In Matling Industrial and Commercial Corporation v. Coros, 30 the Court
distinguished between a "regular employee" and a "corporate officer"
for purposes of establishing the true nature of a dispute or complaint
for illegal dismissal and determining which body has jurisdiction over it.
Succinctly, it was explained that "[t]he determination of whether the
dismissed officer was a regular employee or corporate officer unravels
the conundrum" of whether a complaint for illegal dismissal is
cognizable by the LA or by the RTC. "In case of the regular employee,
the LA has jurisdiction; otherwise, the RTC exercises the legal
authority to adjudicate.31
Applying the foregoing to the present case, the LA had the original
jurisdiction over the complaint for illegal dismissal because Cosare,
although an officer of Broadcom for being its AVP for Sales, was not a
"corporate officer" as the term is defined by law. We emphasized in
Real v. Sangu Philippines, Inc.32 the definition of corporate officers for
the purpose of identifying an intra-corporate controversy. Citing Garcia
v. Eastern Telecommunications Philippines, Inc.,33 we held:
" ‘Corporate officers’ in the context of Presidential Decree No. 902-A
are those officers of the corporation who are given that character by
the Corporation Code or by the corporation’s by-laws. There are three
specific officers whom a corporation must have under Section 25 of the
Corporation Code. These are the president, secretary and the
treasurer. The number of officers is not limited to these three. A
corporation may have such other officers as may be provided for by its
by-laws like, but not limited to, the vice-president, cashier, auditor or
general manager. The number of corporate officers is thus limited by
law and by the corporation’s by-laws."34 (Emphasis ours)
In Tabang v. NLRC,35 the Court also made the following
pronouncement on the nature of corporate offices:
It has been held that an "office" is created by the charter of the
corporation and the officer is elected by the directors and stockholders.
On the other hand, an "employee" usually occupies no office and
generally is employed not by action of the directors or stockholders but
by the managing officer of the corporation who also determines the
compensation to be paid to such employee.36 (Citations omitted)
As may be deduced from the foregoing, there are two circumstances
which must concur in order for an individual to be considered a
corporate officer, as against an ordinary employee or officer, namely:
(1) the creation of the position is under the corporation’s charter or by-
laws; and (2) the election of the officer is by the directors or
stockholders. It is only when the officer claiming to have been illegally
dismissed is classified as such corporate officer that the issue is
deemed an intra-corporate dispute which falls within the jurisdiction of
the trial courts.
To support their argument that Cosare was a corporate officer, the
respondents referred to Section 1, Article IV of Broadcom’s by-laws,
which reads:
ARTICLE IV
OFFICER
Section 1. Election / Appointment – Immediately after their election, the
Board of Directors shall formally organize by electing the President, the
Vice-President, the Treasurer, and the Secretary at said meeting.
The Board may, from time to time, appoint such other officers as it may
determine to be necessary or proper. Any two (2) or more compatible
positions may be held concurrently by the same person, except that no
one shall act as President and Treasurer or Secretary at the same
time.37 (Emphasis ours)
This was also the CA’s main basis in ruling that the matter was an
intra-corporate dispute that was within the trial courts’ jurisdiction.
The Court disagrees with the respondents and the CA. As may be
gleaned from the aforequoted provision, the only officers who are
specifically listed, and thus with offices that are created under
Broadcom’s by-laws are the following: the President, Vice-President,
Treasurer and Secretary. Although a blanket authority provides for the
Board’s appointment of such other officers as it may deem necessary
and proper, the respondents failed to sufficiently establish that the
position of AVP for Sales was created by virtue of an act of
Broadcom’s board, and that Cosare was specifically elected or
appointed to such position by the directors. No board resolutions to
establish such facts form part of the case records. Further, it was held
in Marc II Marketing, Inc. v. Joson38 that an enabling clause in a
corporation’s by-laws empowering its board of directors to create
additional officers, even with the subsequent passage of a board
resolution to that effect, cannot make such position a corporate office.
The board of directors has no power to create other corporate offices
without first amending the corporate by-laws so as to include therein
the newly created corporate office.39 "To allow the creation of a
corporate officer position by a simple inclusion in the corporate by-laws
of an enabling clause empowering the board of directors to do so can
result in the circumvention of that constitutionally well-protected right
[of every employee to security of tenure]."40
The CA’s heavy reliance on the contents of the General Information
Sheets41, which were submitted by the respondents during the appeal
proceedings and which plainly provided that Cosare was an "officer" of
Broadcom, was clearly misplaced. The said documents could neither
govern nor establish the nature of the office held by Cosare and his
appointment thereto. Furthermore, although Cosare could indeed be
classified as an officer as provided in the General Information Sheets,
his position could only be deemed a regular office, and not a corporate
office as it is defined under the Corporation Code. Incidentally, the
Court noticed that although the Corporate Secretary of Broadcom, Atty.
Efren L. Cordero, declared under oath the truth of the matters set forth
in the General Information Sheets, the respondents failed to explain
why the General Information Sheet officially filed with the Securities
and Exchange Commission in 2011 and submitted to the CA by the
respondents still indicated Cosare as an AVP for Sales, when among
their defenses in the charge of illegal dismissal, they asserted that
Cosare had severed his relationship with the corporation since the year
2009.
Finally, the mere fact that Cosare was a stockholder of Broadcom at
the time of the case’s filing did not necessarily make the action an
intra- corporate controversy. "Not all conflicts between the stockholders
and the corporation are classified as intra-corporate. There are other
facts to consider in determining whether the dispute involves corporate
matters as to consider them as intra-corporate controversies."42 Time
and again, the Court has ruled that in determining the existence of an
intra-corporate dispute, the status or relationship of the parties and the
nature of the question that is the subject of the controversy must be
taken into account.43 Considering that the pending dispute particularly
relates to Cosare’s rights and obligations as a regular officer of
Broadcom, instead of as a stockholder of the corporation, the
controversy cannot be deemed intra-corporate. This is consistent with
the "controversy test" explained by the Court in Reyes v. Hon. RTC,
Br. 142,44 to wit:
Under the nature of the controversy test, the incidents of that
relationship must also be considered for the purpose of ascertaining
whether the controversy itself is intra-corporate. The controversy must
not only be rooted in the existence of an intra-corporate relationship,
but must as well pertain to the enforcement of the parties’ correlative
rights and obligations under the Corporation Code and the internal and
intra-corporate regulatory rules of the corporation. If the relationship
and its incidents are merely incidental to the controversy or if there will
still be conflict even if the relationship does not exist, then no intra-
corporate controversy exists.45 (Citation omitted)
It bears mentioning that even the CA’s finding46 that Cosare was a
director of Broadcom when the dispute commenced was unsupported
by the case records, as even the General Information Sheet of 2009
referred to in the CA decision to support such finding failed to provide
such detail.
All told, it is then evident that the CA erred in reversing the NLRC’s
ruling that favored Cosare solely on the ground that the dispute was an
intra-corporate controversy within the jurisdiction of the regular courts.
The charge of constructive dismissal
Towards a full resolution of the instant case, the Court finds it
appropriate to rule on the correctness of the NLRC’s ruling finding
Cosare to have been illegally dismissed from employment.
In filing his labor complaint, Cosare maintained that he was
constructively dismissed, citing among other circumstances the
charges that were hurled and the suspension that was imposed
against him via Arevalo’s memo dated March 30, 2009. Even prior to
such charge, he claimed to have been subjected to mental torture,
having been locked out of his files and records and disallowed use of
his office computer and access to personal belongings. 47While Cosare
attempted to furnish the respondents with his reply to the charges, the
latter refused to accept the same on the ground that it was filed beyond
the 48-hour period which they provided in the memo.
Cosare further referred to the circumstances that allegedly transpired
subsequent to the service of the memo, particularly the continued
refusal of the respondents to allow Cosare’s entry into the company’s
premises. These incidents were cited in the CA decision as follows:
On March 31, 2009, [Cosare] reported back to work again. He asked
Villareal if he could retrieve his personal belongings, but the latter said
that x x x Arevalo directed her to deny his request, so [Cosare] again
waited at the receiving section of the office. On April 1, 2009, [Cosare]
was not allowed to enter the office premises. He was asked to just wait
outside of the Tektite (PSE) Towers, where [Broadcom] had its offices,
for further instructions on how and when he could get his personal
belongings. [Cosare] waited until 8 p.m. for instructions but none were
given. Thus, [Cosare] sought the assistance of the officials of
Barangay San Antonio, Pasig who advised him to file a labor or
replevin case to recover his personal belongings. x x x. 48 (Citation
omitted)
It is also worth mentioning that a few days before the issuance of the
memo dated March 30, 2009, Cosare was allegedly summoned to
Arevalo’s office and was asked to tender his immediate resignation
from the company, in exchange for a financial assistance of
₱300,000.00.49 The directive was said to be founded on Arevalo’s
choice to retain Abiog’s employment with the company.50 The
respondents failed to refute these claims.
Given the circumstances, the Court agrees with Cosare’s claim of
constructive and illegal dismissal. "[C]onstructive dismissal occurs
when there is cessation of work because continued employment is
rendered impossible, unreasonable, or unlikely as when there is a
demotion in rank or diminution in pay or when a clear discrimination,
insensibility, or disdain by an employer becomes unbearable to the
employee leaving the latter with no other option but to quit."51 In
Dimagan v. Dacworks United, Incorporated,52 it was explained:
The test of constructive dismissal is whether a reasonable person in
the employee’s position would have felt compelled to give up his
position under the circumstances. It is an act amounting to dismissal
but is made to appear as if it were not. Constructive dismissal is
therefore a dismissal in disguise. The law recognizes and resolves this
situation in favor of employees in order to protect their rights and
interests from the coercive acts of the employer.53(Citation omitted)
It is clear from the cited circumstances that the respondents already
rejected Cosare’s continued involvement with the company. Even their
refusal to accept the explanation which Cosare tried to tender on April
2, 2009 further evidenced the resolve to deny Cosare of the
opportunity to be heard prior to any decision on the termination of his
employment. The respondents allegedly refused acceptance of the
explanation as it was filed beyond the mere 48-hour period which they
granted to Cosare under the memo dated March 30, 2009. However,
even this limitation was a flaw in the memo or notice to explain which
only further signified the respondents’ discrimination, disdain and
insensibility towards Cosare, apparently resorted to by the respondents
in order to deny their employee of the opportunity to fully explain his
defenses and ultimately, retain his employment. The Court
emphasized in King of Kings Transport, Inc. v. Mamac 54 the standards
to be observed by employers in complying with the service of notices
prior to termination:
[T]he first written notice to be served on the employees should contain
the specific causes or grounds for termination against them, and a
directive that the employees are given the opportunity to submit their
written explanation within a reasonable period. "Reasonable
opportunity" under the Omnibus Rules means every kind of assistance
that management must accord to the employees to enable them to
prepare adequately for their defense. This should be construed as a
period of at least five (5) calendar days from receipt of the notice to
give the employees an opportunity to study the accusation against
them, consult a union official or lawyer, gather data and evidence, and
decide on the defenses they will raise against the complaint. Moreover,
in order to enable the employees to intelligently prepare their
explanation and defenses, the notice should contain a detailed
narration of the facts and circumstances that will serve as basis for the
charge against the employees. A general description of the charge will
not suffice. Lastly, the notice should specifically mention which
company rules, if any, are violated and/or which among the grounds
under Art. 282 is being charged against the employees. 55 (Citation
omitted, underscoring ours, and emphasis supplied)
In sum, the respondents were already resolute on a severance of their
working relationship with Cosare, notwithstanding the facts which could
have been established by his explanations and the respondents’ full
investigation on the matter. In addition to this, the fact that no further
investigation and final disposition appeared to have been made by the
respondents on Cosare’s case only negated the claim that they
actually intended to first look into the matter before making a final
determination as to the guilt or innocence of their employee. This also
manifested from the fact that even before Cosare was required to
present his side on the charges of serious misconduct and willful
breach of trust, he was summoned to Arevalo’s office and was asked
to tender his immediate resignation in exchange for financial
assistance.
The clear intent of the respondents to find fault in Cosare was also
manifested by their persistent accusation that Cosare abandoned his
post, allegedly signified by his failure to report to work or file a leave of
absence beginning April 1, 2009. This was even the subject of a
memo56 issued by Arevalo to Cosare on April 14, 2009, asking him to
explain his absence within 48 hours from the date of the memo. As the
records clearly indicated, however, Arevalo placed Cosare under
suspension beginning March 30, 2009. The suspension covered
access to any and all company files/records and the use of the assets
of the company, with warning that his failure to comply with the memo
would be dealt with drastic management action. The charge of
abandonment was inconsistent with this imposed suspension.
"Abandonment is the deliberate and unjustified refusal of an employee
to resume his employment. To constitute abandonment of work, two
elements must concur: ‘(1) the employee must have failed to report for
work or must have been absent without valid or justifiable reason; and
(2) there must have been a clear intention on the part of the employee
to sever the employer- employee relationship manifested by some
overt act.’"57Cosare’s failure to report to work beginning April 1, 2009
was neither voluntary nor indicative of an intention to sever his
employment with Broadcom. It was illogical to be requiring him to
report for work, and imputing fault when he failed to do so after he was
specifically denied access to all of the company’s assets. As correctly
observed by the NLRC:
[T]he Respondent[s] had charged [Cosare] of abandoning his
employment beginning on April 1, 2009. However[,] the show-cause
letter dated March 3[0], 2009 (Annex "F", ibid) suspended [Cosare]
from using not only the equipment but the "assets" of Respondent
[Broadcom]. This insults rational thinking because the Respondents
tried to mislead us and make [it appear] that [Cosare] failed to report
for work when they had in fact had [sic] placed him on suspension. x x
x.58
Following a finding of constructive dismissal, the Court finds no cogent
reason to modify the NLRC's monetary awards in Cosare's favor. In
Robinsons Galleria/Robinsons Supermarket Corporation v.
Ranchez,59 the Court reiterated that an illegally or constructively
dismissed employee is entitled to: (1) either reinstatement, if viable, or
separation pay, if reinstatement is no longer viable; and (2)
backwages.60 The award of exemplary damages was also justified
given the NLRC's finding that the respondents acted in bad faith and in
a wanton, oppressive and malevolent manner when they dismissed
Cosare. It is also by reason of such bad faith that Arevalo was correctly
declared solidarily liable for the monetary awards.
WHEREFORE, the petition is GRANTED. The Decision dated
November 24, 2011 and Resolution dated March 26, 2012 of the Court
of Appeals in CA-G.R. SP. No. 117356 are SET ASIDE. The Decision
dated August 24, 2010 of the National Labor Relations Commission in
favor of petitioner Raul C. Cosare is AFFIRMED.
SO ORDERED.
G.R. No. L-27694 October 24, 1928
ZAMBOANGA TRANSPORTATION COMPANY, INC., plaintiff-
appellee,
vs.
THE BACHRACH MOTOR CO., INC., defendant-appellant.
-------------------------
G.R. No. L-27997 October 24, 1928
THE BACHRACH MOTOR CO., INC., plaintiff-appellee,
vs.
ZAMBOANGA TRANSPORTATION COMPANY, INC., defendant-
appellant.
Gibbs and McDonough and Roman Ozaeta for appellant in case No.
27694 and for appellee in case No. 27997.
C. A. Sobral and Jose Erquiaga for appellee in case No. 27694 and for
appellant in case No. 27997.
VILLA-REAL, J.:
We are here concerned with two appeals, one taken by the defendant
the Bachrach Motor Co., Inc., from the judgment of the Court of First
Instance of Zamboanga in civil case No. 1286 of said court (G.R. No.
27694) holding that the chattel mortgage executed by the president
and general manager of the plaintiff corporation, the Zamboanga
Transportation Co., Inc., is null and void, and ordering the register of
deeds of said province to cancel the registration of said mortgage at
the instance of said defendant, the Bachrach Motor Co., Inc., with
costs; and the other by the defendant Zamboanga Transportation Co.,
Inc., from the judgment of the Court of First Instance of Manila in civil
case No. 28123 (G.R. No. 27997) ordering said defendant Zamboanga
Transportation Co., Inc., the sum of P18,298.58, with 10 per cent
interest on the sum of P6,254.81, from May 19, 1925, and legal
interest on the balance of said sum from May 23, 1925, when the
complaint was filed, plus the costs, and dismissing all the
counterclaims and cross complaints set up by the defendant
corporation.
In support of its appeal, the Bachrach Motor Co., Inc., assigns the
following alleged errors as committed by the Court of First Instance of
Zamboanga in its judgment to wit:
1. The trial court erred in not finding that Mr. Jose Erquiaga, president,
general manager, director, stockholder, auditor, attorney and legal
adviser, and principal witness of the Zamboanga Transportation Co.,
Inc., personified and practically constituted that corporation at the time
he signed the chattel mortgage in question in its behalf;
2. The trial court erred in not finding that the so-called board of
directors of the Zamboanga Transportation Co., Inc., was composed of
"dummy" directors, who were mere puppets in the hands of the said
Jose Erquiaga;
3. The trial court erred in not finding that the pretended resolution of
the said so-called board of directors dated of May 20, 1925 (Exhibit
FF), purporting to disapprove the chattel mortgage in question was
mere contrivance of the said Jose Erquiaga, framed up for the purpose
of attempting to avoid the obligation of said mortgage;
4. Trial court erred in holding that the chattel mortgage in question was
void and of no effect because it had not been previously approved by
the Public Utility Commission;
5. The trial court erred in not dismissing plaintiff's complaint.
In support of its appeal the Zamboanga Transportation Co., Inc., in turn
assigns the following alleged errors as committed by the Court of First
Instance of Manila, to wit:
1. The Manila trial court erred in holding that chattel mortgage in
question was valid and binding upon the corporation notwithstanding
the fact that it was disapproved by a resolution of its board of directors
and that it had not been previously approved by the Public Utility
Commission as required by law;
2. In not finding that Jose Erquiaga, president and general manager of
the corporation, executed and signed said mortgage upon the express
condition that it would not be valid unless it was ratified by a resolution
of the board of directors, as required by the by-laws of the corporation
and that it was agreed that in case said mortgage was not approved by
said board of directors, Bachrach would be at liberty to foreclose the
other two previous mortgage which were the real basis of the debt
represented by the mortgage in question;
3. In not finding as a fact that all previous contracts of any kind signed
by Jose Erquiaga, as president or general manager or by his
predecessors in office, affecting the company, had to be submitted for
approval or ratification by the board of directors, as shown by the
minutes kept by the secretary of the corporation, and that Bachrach
was in possesssion of and knew the by-laws of the company at least
since 1923;
4. In not finding that it was verbally agreed between the said Jose
Erquiaga and E. M. Bachrach that the chattel mortgage in question
would not be registered in the offices of the register of deeds
concerned until it was approved by the board of directors of the
mortgagor and by the Public Utility Commission;
5. In not finding that it was also agreed between said Jose Erquiaga, E.
M. Bachrach, and Mons. Jose Clos, Bishop of Zamboanga, in
connection with the execution of the agreement of February 14, 1925,
that the mortgagee would not foreclose said mortgage before the
return of the Bishop of Zamboanga from his trip to Rome calculated to
last six months, and without first giving the bishop opportunity to pay
the whole amount of the mortgage with a ten per cent rebate;
6. In utterly disregarding the testimony, in support of mortgagor's
contention, of the Right Rev. Jose Clos, Bishop of Zamboanga, and in
not admitting his deposition, as corrected by deponent, notwithstanding
the fact that said deposition was obtained at mortgagee's request, and
the questions made to the bishop were made by mortgagee's attorney
in the absence of the mortgagor or his attorney;
7. In not finding as a fact that at least two of the directors, Jose Camins
and Ciriaco Bernal, were big stackholders owning nearly twenty
thousand pesos of stock each and were not dummy directors who
were mere puppets in the hands of said Jose Erquiaga, president and
general manager of the corporation;
8. In finding that the mortgator took advantage of the alleged benefits
of the mortgage in question with the full knowledge of said board of
directors and that the validity of the mortgage was not disputed until
after the mortgagee began proceedings for the foreclosure of said
mortgage, when as a matter of fact the mortgagor filed the action in the
Zamboanga court asking that the mortgage, be declared null and void
as soon as he discovered that the mortgage had been registered with
the register of deeds of Zamboanga, contrary to what had been
stipulated, and before the mortgator had any notice that the mortgagee
was going to foreclose said mortgage;
9. In finding that the execution of the chattel mortgage in question was
merely a novation of the two previous mortgages in favor of the
mortgagee and of the mortgage in favor of the Bishop of Zamboanga;
The complaint filed by the Zamboanga Transportation Co., Inc.,
against the Bachrach Motor Co., Inc., in the Court of First Instance of
Zamboanga seeks the annulment of a chattel mortgage executed on
Febuary 14, 1925 (Exhibit B and C), by the plaintiff's president and
general manager in favor of the Bachrach Motor Co., Inc. 1awph!l.net
The complaint filed by the Bachrach Motor Co., Inc., against the
Zamboanga Transportation Co., Inc., in the Court of First Instance of
Manila seeks the foreclosure of said chattel mortgage.
By their respective assignments of error both appellants raise
questions of fact as well as of law, rendering it necessary to make our
findings of facts.
The preponderance of the evidence established the following pertinent
and essential facts:
Both appellants are corporations created and organized under the laws
of the Philippine Islands. The Zamboanga Transportation Co., Inc., is
managed by a board of directors composed of five stockholders
elected at a general annual meeting of the stockholders. The directors
for the year 1925 were elected at the general meeting of the
stockholders on January 26th of that year, as appears from the
following copy of the minutes:
Total
There being a total of 10,017 shares represented, which constitute a
majority or quorum according to the by-laws, the following business
was considered:
Upon motion of Mr. G. J. Cristobal, seconded by Mr. Ciriaco Bernal,
the minutes of the previous general meeting were read and approved.
The Manager's Annual Report of the condition of the business and the
accounts corresponding thereto for 1924 were submitted for
consideration. After the reading and examination of said report and
accounts, on motion of Mr. C. Camins, seconded by Mr. G. J.
Cristobal, said report was approved.
Immediately afterwards they proceeded to the election of the directors
for the year 1925, the following being elected:
Votes

MINUTES OF THE GENERAL MEETING OF STOCKHOLDERS OF

THE ZAMBOANGA TRANSPORTATION CO., INC., HELD ON Mr. Jose Erquiaga 10,505
JANUARY 26, 1925, IN THE OFFICES OF THE COMPANY AT NO.
20 CORCUERA STREET, ZAMBOANGA, P. I. Mr. C. Camins 10,500

The meeting was called to order with the Vice-President, Mr. Jose
Erquiaga, in the absence of the President, Mr. Jose Longa, as Mr. Jose Camins 10,055
chairman at 5 o'clock in the afternoon of this 26th day of January 1925,
the following stockholders being present either personally or by proxy:
Mr. G.J. Cristobal 9,755

Shares
Mr. Ciriaco Bernal 9,270

Carlos Camins, in his own behalf 1

There being no further business the meeting adjourned at 6:30 p.m.

Jose Erquiaga, in his own behalf 466 that the foregoing minutes are correct, and that the same were
I certify
approved at the abovementioned general meeting.

Valera C. de Erquiaga, for Jose Erquiaga 1,800

(Sgd.) JOSE ERQUIAGA
President ad interim
Eduardo Montenegro, for Jose Erquiaga 1,000
(Sgd.) C. CAMINS
Secretary
Mons. Jose Clos, Bishop of Zamboanga, for Jose Erquiaga 2,410
For nearly ten years the two associations have had business relations
with each other, the Zamboanga Transportation Co., Inc., purchasing
Mission of the society of Jesus, for Jose Erquiaga 115 automobiles, repair and accessory parts for use in the business
trucks,
of transportation in which it is engaged, from the Bachrach Motor Co.,
Inc. Payments were made by installments, and for the security of the
Melecio Ramos, for Jose Erquiaga 40
vendor the Bachrach Motor Co., Inc., the purchaser, the Zamboanga
Transportation Co., Inc., executed in its favor several chattel
Jose Arguirre, for Jose Erquiaga mortgages.
200

From the year 1920 Jose Erquiaga, one of the stockholders and
Ciriaco Bernal, in his own behalf 1,854 of the Zamboanga Transportation Co., Inc., has been also its
directors
attorney and legal adviser. In March 1924, he was appointed general
manager, and in January 1925 was elected president. Lastly, he also
Superior of the Jesuit Fathers, for Jose Erquiaga 200
acted as auditor.

Dolores C. de Longa, for G. J. Cristobal In 1,950

February 1925, the Zamboanga Transportation Co., Inc., owed the
Bachrach Motor Co., Inc., the sum of P44,095.78, which was the
balance due on the purchase price of several White trucks and
G. J. Cristobal, in his own behalf 1
accessory parts, bought on the installments plan from the latter. This
balance was secured by two chattel mortgages, executed on February
17, 1923 (Exhibit 2) and December 4, 1923 (Exhibit 1), respectively.
During the last five years the Zamboanga Transportation Co., Inc.,
found itself in financial straits and on several occasions appealed to
Mons. Jose Clos, Bishop of Zamboanga for loans of money. As the
latter, who was the principal stock holder of the Zamboanga
Transportation Co. Inc., was leaving for Rome in February 1925 and
could not continue to loan money to said corporation to pay the
installments stipulated in the chattel mortgages Exhibits 1 and 2, and in
view of the fact that the hypothecated trucks were in a bad state or
repair, and that the mortgagee required more security, additional
agreements were entered between Mons. Clos and the Bachrach
Motor Co., Inc. These agreements, in which the Zamboanga
Trasportation Co., Inc., intervened and took part, are evidence in the
letter quoted below:
February 14, 1925
The RIGHT REVEREND JOSE CLOS
Bishop of Zamboanga
Manila, P.I.
MOST REVEREND SIR: The purpose of this letter is to set forth in
writing certain conditions and stipulations connected with the transfer
to us of certain securities now held by you consisting of a mortgage
made and executed in your favor by the Zamboanga Transportation
Co., Inc., covering certain equipment, business credits, privileges, etc.,
as set forth therein.
1. You agree to release, and hereby do release and cancel said
mortgage made and executed in your favor by the Zamboanga
Transporation Co. under date of January 10th, 1925.
2. The Zamboanga Transportation Co. is to be permitted to execute in
our favor a new mortgage covering all property, business credits and
privileges mentioned and set forth therein, excepting the second
mortgage on property mortgaged by the Zamboanga Transportation
Company to the Standard Oil Company. This is in addition to and to be
included with property already mortgaged to us by the Zamboanga
Transportation Company for which purpose an entirely new document,
bearing a new schedule of payments inclusive of interest thereon to
dates of maturity, will be made and executed in our favor by the said
Zamboanga Transportation Company.
3. For and in consideration of the release and cancellation of the
mortgage to us the property mentioned therein by the Zamboanga
Transportation Company, we agree to accept a reduced schedule of
payments for a period of six months from date, after which period the
former schedule of payments will be taken up and resumed as set forth
in our memorandum of January 10th. It is further agreed that such
payments instead of falling due on the 15th of each month shall
become due and payable on the 1st day of the succeeding month as
set forth and made of record in the new notes and mortgages to be
made and executed in our favor by the Zamboanga Transportation
Company. We also agree to permit the transfer of trucks and
equipment now mortgage to us by the Zamboanga Transportation
Company or such portion thereof as may be necessary for their
purpose to Dansalan, Lanao.
4. As a further consideration, we also agree to permit you to liquidate
the entire indebtedness of the Zamboanga Transportation Company by
paying to us at any time that may be convenient for you to do so the
entire amount due less a discount of 10 per cent as outlined in our
letter of December 26, 1924; such discount, however, is to be based
on the amount actually due by the Zamboanga Transportation
Company at that time inclusive of balance due by them on their current
account.
5. It is further stipulated and agreed that the President and General
Manager of the Zamboanga Transportation Company will furnish us a
copy of the Resolution of the board of directors authorizing him to
execute this new mortgage in our favor.
Kindly confirm and ratify this agreement by signing with us at the
bottom of this letter.
Very truly yours,
THE BACHRACH MOTOR CO., INC.
By (Sgd.) E.M. BACHRACH
Conforme:
THE ZAMBOANGA TRANSPORATION CO., INC.
By (Sgd.) JOSE ERQUIAGA
I agree to and accept conditions outlined.
(Sgd.) JOSE CLOS
In pursuance of said agreement the new chattel mortgage (Exhibits B
and C) was executed on February 14, 1925 by the Zamboanga
Transportation Co., Inc., represented by its president, general
manager, and attorney Jose Erquiaga. In this last mortgage the same
goods were pledged that had been hypothecated by the Zamboanga
Transporatation Co., Inc., to the Bachrach Motor Co., by virtue of
instruments Exhibits 1 and 2, and to Mons. Jose Clos Bishop of
Zamboanga, by the virtue of the deed Exhibit 3.
In a letter written on February 28, 1925, Jose Erquiaga submitted said
mortgage deed to the board of directors through its secretary, and
upon his return to Zamboanga from Manila, discussed said mortgage
with directors Carlos Camins and Ciriaco Bernal, who expressed their
satisfaction with the advantages obtained by their president and
general manager.
The Zamboanga Transportation Co., Inc., partially complied with the
conditions of said mortgage deed, paying the Bachrach Motor Co.,
Inc., on March 1 and April 1, 1925.
During the latter half of the month of April 1925, the mortgagor
received a letter dated April 13, 1925, through its president and
general manager, Jose Erquiaga, from the mortgagee, enclosing the
cancellation of the two former chattel mortgages Exhibits 1 and 2, in
order to be recorded in the registries of deeds of Cebu and
Zamboanga, respectively, where said mortgages were registered. On
April 27, 1925, said president and general manager, Jose Eraquiaga,
sent the mortgage letter (Exhibits HH and 14) in which, replying to the
latter's communication dated April 13, 1925, he informed it that said
cancellations could not be registered, because the new chattel
mortgage had not been approved by the mortgagor's board of
directors, according to the express stipulation of the parties, and that
as soon as it was approved it would be submitted to the Public Utility
Commission for approval in conformity with the law.
On May 3, 1925, the Zamboanga Transportation Co., Inc., through its
general manager, Jose Erquiaga, addressed the letter marked Exhibit
C to the Bachrach Motor Co., Inc., which, among other things, said the
following:
This is to inform you that on account of our Dansalan's Branch failure
to send us any money so far, we are utterly unable, for the present, to
make our remittances to you in accordance with our last contract.
xxx xxx xxx
In view of all this and having in mind the fact that you hold now a
mortgage practically on all our business and your credit is perfectly
secured we would request that during this period of business
depression we be allowed to make smaller payments and furthermore
that we be authorized by you to sell our equipments in Cebu and
Dansalan, or part of it, upon the condition that any amount obtained
from such sales, will be paid to you to apply to our monthly payments
as per contract. Should you not be satisfied with this letter, I request
that you send a man of your confidence down here to examine our
business and report to you.
I will try to be in Manila by twelve of this month, passing thru Cebu and
will take this matter with you personally. In this connection, I may tell
you that I have already advanced some of my personal funds to help
the company. Inasmuch as Bishop Clos who holds a second mortgage
on our properties, is not here at present and he is not expected to be
back until August, it is requested that no action be taken by you until
he returns.
Expecting to see you personally within a few days and hoping a
favorable consideration, I am,
Yours very truly,
ZAMBOANGA TRANSPORTATION CO., INC.
By (Sgd.) JOSE ERQUIAGA
President and General Manager
When, as announced in the foregoing letter, Jose Erquiaga interviewed
E.M. Bachrach, president of Bachrach Motor Co., Inc., in the latter's
office in Manila on May 6 and 12, 1925, in order to secure his consent
to the sale of some trucks in Cebu and Dansalan, the same being
included in those mortgaged, in order to apply the proceeds to the
payment of the unpaid debt, said E.M. Bachrach asked Jose Erquiaga
why the board of directors of the Zamboanga Transportation had not
approved the mortgage yet, and without waiting for an answer, denied
his request saying that the mortgagor was "at their mercy" and that
they did not care whether the board of directors approved the
mortgage or not, adding, "You cannot impose conditions now." After
this interview Jose Erquiaga returned to Zamboanga and immediately
made special efforts to have the mortgagor's board of directors meet
and take definite action on said mortgage, which was done, said
mortgage being rejected by the resolution of May 20, 1925. At that time
the mortgagor discovered that the mortgagee had registered the
chattel mortgage in question in the registry of deeds of Zamboanga, by
a letter dated February 17, 1924, addressed to the register of deeds of
Zamboanga, without the knowledge or consent of said mortgagor, and
without having first registered the cancellations of the two previous
mortgages which included part of the goods affected by the mortgage
in question, as required by the law, which cancellations, as stated,
were sent to the mortgagor only two months afterwards with the
communication of April 13, 1925. This discovery was the cause of the
resolution adopted by the board of directors of the Zamboanga
Transprotation Co., Inc., dated May 21, 1925, directing its attorney to
institute an action for the annulment of said mortgage, which was done
on May 21, 1925, the complaint being registered in the Court of First
Instance of Zamboanga as No. 2186.
The Bachrach Motor Co., Inc., acting through its president, filed a
complaint against the Zamboanga Transportation Co., Inc., in the
Court of First Instance of Manila on May 23, 1925, and by means of a
bond fixed by the court, obtained through the sheriff of Zamboanga,
possession of all the chattels described in the chattel mortgages
(Exhibits B and C) and their sale at public auction in conformity with
the provision of section 14 of the Chattel Mortgage Law, and having
been the highest bidder they were awarded to it for the sum of
P35,000, which amount was reduced to P34,642.63 after deducting the
expenses of the auction and the sheriff's fees, which amounted to
P357.37. The aforesaid sum of P34,642.63 having been applied to the
defendant's account, there remained a balance of P18,298.58 which is
the amount owed by the Zamboanga Transportation Co., Inc., to the
Bachrach Motor Co., Inc., icluding the stipulated penalty.
The Zamboanga Transportation Co., Inc., tried to prove that at the time
the chattel mortgage was executed there existed an oral agreement
between the parties, which contained the following stipulations: (1)
That the mortgage would not be valid until it was approved by
resolution of the board of directors of the mortgagor; (2) that it would
not be recorded in the proper registry of deeds until such approval was
obtained; (3) that after the mortgagor's board of directors had approved
it, the approval of the Public Utility Commission as required by Act No.
3108 would also be requested; (4) that should the mortgagor's board of
directors disapproved said mortgage, the mortgagee would have a
right to foreclose the two previous mortgages at any time; (5) that even
if the mortgage be approved by the mortgagor's board of directors, the
mortgagee would not foreclose said mortgage in case of violation of
the condition until after the return of the Bishop of Zamboanga from his
trip to Rome, which, it was calculated would take about six months and
without first giving said Bishop the option to pay the whole debt to the
mortgagee with a 10 per cent discount; (6) that notwithstanding the fact
that said mortgage is not valid without the approval of the board of
directors of the Zamboanga Transportation Co., Inc., its conditions
would go into effect immediately after being signed by Jose Erquiaga,
as president of the mortgagor, the sum and the amount of the monthly
payments being suspended from the date; (7) that in view of this
stipulation Jose Erquiaga, as president and general manager of the
mortgagor, made two payments in accordance with the terms of said
mortgage, but without the knowledge of the board of directors and
before the formal disapproval of the said mortgage by resolution dated
May 20, 1925.
In view of the facts recited above as proven at the trial, partly by a
preponderance of the evidence and partly by the admission of the
parties, the following questions of law are raised:
(1) Whether the chattel mortgage evidenced by Exhibits B and C,
dated February 14, 1925, and executed by Jose Erquiaga, president,
general manager, attorney, and auditor of the Zamboanga
Transaportation Co., Inc., in behalf thereof is valid and binding upon
said corporation, after payments have been made to the Bachrach
Motor Co., Inc., by virtue thereof, notwithstanding the fact that it was
disapproved by the mortgagor's board of directors four months after its
execution.
(2) If so, whether said mortgage was effective not withstanding the fact
that the authorization and approval of the Public Utility Commission
were not obtained until after and action for annulment had been
instituted by the Zamboanga Transportation Co., Inc., on May 21,
1925, and almost a year after said mortgage had been executed.
With regard to the first question, we have seen that Jose Erquiaga is
one of the largest stockholders of the Zamboanga Transportation Co.,
Inc., and represented the greatest majority of the stock at the general
meeting of stockholders held on January 26, 1925 at which he was
elected president. In addition to this office, he acted as general
manager, auditor, and attorney of legal adviser of said corporation. In
this manifold capacity Jose Erquiaga entered into the chattel mortgage
contract here in question with the Bachrach Motor Co., Inc., by virtue of
which the Zamboanga Transportaion Co., Inc., obtained greater
advantages; and upon his return to Zamboanga after having entered
into said contract, he discussed the new chattel mortgage with the
directors of said corporation, Carlos Camins and Ciriaco Bernal, who
expresed their president and general manager, and the Zamboanga
Transportation Co., Inc., availed itself fo these advantages, making two
payments under the new contract to the Bachrach Motor Co., Inc.: The
first on March 1, 1925, and the second on the first of April of the same
year.
While it is true that said last chattel mortgage contract was not Avancena, C.J., Street, Malcolm, Villamor, Ostrand and Romualdez,
approved by the board of directors of the Zamboanga Transportation JJ., concur.
Co., Inc., whose approval was necessary in order to validate it
according to the by-laws of said corporation, the broad powers vested
in Jose Erquiaga as president, general manager, auditor, attorney or
legal adviser, and one of the largest shareholders; the approval of his
act in connection with said chattel mortgage contract in question, with
which two other directors expressed satisfaction, one of which is also
one of the largest shareholders, who together with the president
constitute a majority: The payments made under said contract with the
knowledge of said three directors are equivalent to a tacit approval by
the board of directors of said chattel mortgage contract and binds the EN BANC
Zamboanga Transportation Co., Inc. In truth and in fact Jose Erquiaga,
in his multiple capacity, was and is the factotum of the corporation and G.R. No. L-12282 March 31, 1959
may be said to be the corporation itself.
THE BOARD OF DIRECTORS AND ELECTION COMMITTEE OF
In the case of Halley First National Bank vs. G. V. B. Min. Co. (89 Fed., THE SMB WORKERS SAVINGS AND LOAN ASSOCIATION, INC.,
439), the following rule was laid down: ET AL., petitioners,
vs.
Where the chief officers of a corporation are in reality its owners, HON. BIENVENIDO A. TAN, ETC., ET AL., respondents.
holding nearly all of its stock, and are permitted to manage the
business by the directors, who are only interested nominally or to a Panfilo M. Manguera and Restituto L. Opiz for petitioners.
small extent, and are controlled entirely by the officers, the acts of such Cipriano Cid and Associates for respondents.
officers are binding on the corporation, which cannot escape liability as
PADILLA, J.:
to third persons dealing with it in good faith on the pretense that such
acts were ultra vires.
Petitioners pray for a writ of certiorari with the preliminary injunction.
We therefore conclude that when the president of a corporation, who is
On 17 January 1957 John Castillo et al., commenced a suit in the court
one of the principal stockholders and at the same time its general
of First Instance of Manila to declare null and void election of the
manager, auditor, attorney or legal adviser, is empowered by its by-
members of the board of directors of the SMB Workers Savings and
laws to enter into chattel mortgage contracts, subject to the approval of
Loan Association, Inc. and of the members of the board of directors of
the board of directors, and enters into such contracts with the tacit
the association to call for and hold another election in accordance with
approval of two other members of the board of directors, one of whom
its constitution and by-laws and the Corporation Law; to restain the
is also a principal shareholder, both of whom, together with the
defendants who had been illegally elected as members of the board of
president, form a majority, and said corporation takes advantage of the
directors from exercising the functions of their office; to order the
benefits afforded by said contract, such acts are equivalent to an
defendants to pay the plaintiffs attorney's fees and costs of the suit;
implied ratification of said contract by the board of directors and binds
and to grant them other just and equitable relief (civil No. 31584,
the corporation even if not formally approved by said board of directors
Annex A). The defendants filed an answer (Annex B), and after joinder
as required by the by-laws of the aforesaid corporation.
of issues the Court set the case for trial. On the day set for trial of the
case, neither the defendants nor their attorney appeared. The Court
With respect to the second question, having arrived at the conclusion
proceeded to received the plaintiffs' evidence. On 11 February, the
that the chattel mortgage deed, which is the subject matter of this
litigation, is valid and effective, the lack of previous authorization and Court rendered judgment declaring the election held on 11 and 12
January null and void, ordering the defendants to call for and hold
approval of the Public Utility Commission, while it, indeed, rendered
another election in accordance with the constitution and by-laws of the
said contract ineffective, was cured by the nunc pro tunc authorization
association and the Corporation Law, and sentencing the defendants
and approval granted by said Commission, and the contract was made
to pay the plaintiffs the sum of P1,500 as attorney's fees, and to pay
effective from its execution, for, as this court held in the case of
the cost of the suit (Annex C).1 On 15 February, before the expiration
Zamboanga Transportation Co., vs. Public Utility Commission (50 Phil.,
237), although the authorization and approval of said Commission of the time to appeal, the plaintiffs move for immediate execution of the
were needed to render said chattel mortgage contract effective, they judgment (Annex F). On 4 March the Court granted the plaintiffs
motion and issued the writ of execution prayed for (Annex G). On 9
were not necessary for the intrinsic validity of said contract so long as
March the defendants moved for stay of execution of the judgment, for
the legal elements necessary to give it juridical life are present.
which they offered to file a supersedeas bond in the amount to be fixed
In consideration of the premises, we are of the opinion and so hold, by the Court (Annex H). On 23 March the Court denied the defendants'
that while a chattel mortgage contract entered into by a public service motion. In compliance with the judgment rendered by the Court, on 26
corporation is ineffective without the authorization and approval of the March the election committee composed of Quintin Tesalona, Manuel
Public Utility Commission, it may be valid if it contains all the material Dumaup and Jose' Capinio Santos set the meeting of the members of
and formal requisites demanded by the law for its validity, and said the association for 28 March at 5:30 o'clock in the afternoon to elect
Public Utility Commission may make it retroactive by nunc pro the new members of the board of directors (Annexes J & 4). On 27
tunc authorization and approval. March the plaintiff filed an ex-parte motion alleging that the election
committee that had called the meeting of members of the association
Wherefore, the judgment appealed from in the case of Zamboanga is composed of the same members that had conducted and supervised
Transporatation Co., Inc., vs. Bachrach Motor Co., Inc., of the Court of the election of the members of the board of directors that was declared
First Instance of Zamboanga, G.R. No. 27694, is reversed with costs null and void by the Court; that in view thereof it would be inequitable
against the appellee, and the judgment in the case of Bachrach Motor to allow them to conduct and supervise again the forthcoming election;
Co., Inc., vs. Zamboanga Transportation Co., Inc., rendered by the that the election to be conducted and supervised by the said
Court of First Instance of Manila, is affirmed, with the costs against the committee would not be held in accordance with the constitution and
appellant. So ordered. by laws of the association providing for five days notice to the
members before the election, since the notice was posted and sent out
only on 26 March, and the election would be held on 28 March, or two
days after notice; that the notice that beginning 26 March any member
could secure his ballot and proxy from the office of the association is in
violation of section 5, article III of the constitution and by laws, which
prohibits voting by proxy in the election of members of the board of
directors,2 and that the defendant did not show that arrangement is
being made "to guarantee that the election will be held in accordance
with the constitution and by laws." They prayed that the Court appoint
its representative or representatives, whose compensation shall be
paid out of the funds of the association, to supervise and conduct the
election ordered by it (Annex 4). On the same day, 27 March the Court
entered an order providing as follows:
. . . the Court hereby orders that the election scheduled for March 28,
1957 be, as it hereby is, cancelled, and a committee of three is hereby
constituted and appointed to call, conduct and supervise the election of
the members of the board of directors of the association for 1957, said
committee to be composed of: Mr. Candido C. Viernes as
representative of the Court and to act as Chairman; and one
representative each from the plaintiffs and defendant, as members.
The committee is vested with the sole and exclusive power and
authority to call conduct and supervise the election of the members of
the board of directors of the association for the year 1957.
The chairman of the committee shall received a compensation of
P50.00 per day and the members thereof P30.00 each per day, said
compensation to be paid by the association.
SO ORDERED. (Annexes E & 3.)
On 28 March the defendants moved for reconsideration of the
foregoing order (Annex L). On 30 March the Court denied the motion
for reconsideration.
Claiming that in issuing the order of 27 March 1957 (Annexes E & 3)
and in denying their motion for reconsideration, the Court acted without
or in excess of jurisdiction or with grave abuse of discretion; and that
there being no appeal or any plain, speedy and adequate remedy in
the ordinary course of law, the petitioners pray for a writ of certiorari to
annul and set aside the order assailed, and a writ of preliminary
injunction to restrain the respondent court from enforcing its order of 27
March 1957 (Annexes E & 3) after filing of a bond in the amount to be
fixed by this Court; for costs to be taxed against the respondents, and
for such other just and equitable relief as may be granted to them. On
14 May 1957, after the petitioners had filed a bond in the sum of P200,
this Court issued a writ of preliminary injunction prayed for.
Section 3, article III, of the constitution and by-laws the association
provides:
Notice of the time and place of holding of any annual meeting, or any
special meeting, the members, shall be given either by posting the
same in a postage prepaid envelope, addressed to each member on
the record at the address left by such member with the Secretary of the
Association, or at his known post-office address or by delivering the
same person at least (5) days before the date set for such meeting. . . .
In lieu of addressing or serving personal notices to the members,
notice of the members, notice of a regular annual meeting or of a
special meeting of the members may be given by posting copies of
said notice at the different departments and plants of the San Miguel
Brewery Inc., not less than five (5) days prior to the date of the
meeting. (Annex K.)
Notice of a special meeting of the members should be given at leasts
five days before the date of the meeting. Therefore, the five days
previous notice required would not be complied with.
As regards the creation of a committee of three vested with the
authority to call, conduct and supervise the election, and the
appointment thereto of Candido C. Viernes as chairman and the
representative of the court and one representative each from the
parties, the Court in the exercise of its equity jurisdiction may
appointment such committee, it having been shown that the Election
Committee provided for in section 7 of the by-laws of the association
that conducted the election annulled by the respondent court if allowed
to act as such may jeopardise the rights of the respondents.
In a proper proceeding a court for equity may direct the holding of a
stockholders' meeting under the control of a special master, and the
action taken at such a meeting will not be set aside because of a
wrongful use of the court' interlocutory decree, where not brought to
the attention of the court prior to the meeting. (18 C.J.S. 1270.)
A court of equity may, on showing of good reason, appoint a master to
conduct and supervise an election of directors when it appears that a
fair election cannot make directions contrary to statute and public
policy with respect to the conduct of such election. (19 C.J.S. 41)
The writ prayed for is denied and the writ of preliminary injunction
heretofore issued dissolved, with costs against the petitioners.
Paras, C.J., Bengzon, Montemayor, Reyes , A., Bautista Angelo,
Labrador, Concepcion, Reyes, J.B.L. and Endencia, JJ., concur.
EN BANC
[G.R. No. L-5883. November 28, 1953.]
DOMINGO PONCE and BUHAY L. PONCE, Petitioners, v.
DEMETRIO B. ENCARNACION, Judge of the Court of First
Instance of Manila, Branch I, and POTENCIANO
GAPOL, Respondents.
Marcelino Lontok, for Petitioners.
Zavalla, Bautista & Nuevas for Respondents.
SYLLABUS
1. CORPORATION LAW; STOCKHOLDERS’ MEETING TO ELECT A
NEW BOARD OF DIRECTORS; CALL OF MEETING BY A
STOCKHOLDER ON COURT’S AUTHORITY — Under and pursuant
to section 26 of Act. No. 1459, on the showing of good cause therefor
the court may authorize a stockholder to call a meeting and to preside
thereat until the majority stockholders representing a majority of the
stockholders present and permitted to be voted shall have chosen one
among them to preside it. And this showing of good cause therefor
exists when court is apprised of the fact that the by-laws of the
corporation require the calling of a general meeting of the stockholders
to elect the board of directors but the call for such meeting has not
been done.
2. ID.; ID.; ID.; PETITION FOR SUCH PURPOSE NEED NOT BE SET
FOR HEARING. — The requirement that "on the showing of good
cause therefor," the court may grant to a stockholder the authority to
call such meeting and to preside thereat does not mean that the
petition for such authority must be set for hearing with notice served
upon the board of directors. It may be likened to a writ of preliminary
injunction or of attachment may be issued ex-parte upon compliance
with the requirements of the rules and upon the court being satisfied
that the same should issue. Such provisional reliefs have not been
deemed and held as violative of the due process of law clause of the
Constitution.
3. ID.; ID.; ID.; "QUO WARRANTO" TO QUESTION AN ILLEGALITY
IN THE ELECTION OF A MEMBER OF THE BOARD OF
DIRECTORS. — The alleged illegality of the election of one member of
the board of directors at the meeting called as authorized by the court
being subsequent to the order complained of cannot affect the validity
and legality of the order. If it be true that one of the directors elected at
such meeting was not qualified in accordance with the provisions of the
by-laws, the remedy of an aggrieved party would be quo warranto.
4. ID.; ID.; ID.; AGREEMENT TO DISSOLVE CORPORATION, IS NO
HINDRANCE TO THE COURT’S POWER TO AUTHORIZE
STOCKHOLDER TO CALL SUCH MEETING. — An alleged previous
agreement to dissolve the corporation does not affect or render illegal
the said order issued by the court.
DECISION
PADILLA, J.:
This is a petition for a writ of certiorari to annul an order of the
respondent court granting Potenciano Gapol authority, pursuant to
section 26, Act No. 1459, otherwise known as the Corporation Law, to
call a meeting of the stockholders of the Daguhoy Enterprises, Inc. and
to preside at such meeting by giving proper notice to the stockholders,
as required by law or the by-laws of the corporation, until after the
majority of the stockholders present and qualified to vote shall have
chosen one of them to act as presiding officer of the meeting; another
order denying a motion of the petitioners to have the previous order set
aside; and a third order denying a motion to the same effect as the one
previously filed.
The petitioners aver that the Daguhoy Enterprises, Inc., was duly
registered as such on 24 June 1948; that on 16 April 1951 at a meeting
duly called, the voluntary dissolution of the corporation and the
appointment of Potenciano Gapol as receiver were agreed upon and to
that end a petition for voluntary dissolution was drafted which was sent
to, and signed by, the petitioner Domingo Ponce; that instead of filing
the petition for voluntary dissolution of the corporation as agreed upon,
the respondent Potenciano Gapol, who is the largest stockholder,
changed his mind and filed a complaint in the Court of First Instance of
Manila (civil No. 13753) to compel the petitioners to render an
accounting of the funds and assets of the corporation, to reimburse it,
jointly and severally, in the sum of P4,500, the purchase price of a
parcel of land acquired by the corporation; P6,190 loaned to the wife of
petitioner Domingo Ponce; and P8,000 spent by the latter in his trip to
the United States, or a total sum of P18,690, plus interest, or such sum
as may be found after the accounting shall have been rendered to
have been misspent, misapplied, misappropriated and converted by
the petitioner Domingo Ponce to his own use and benefit; that on 18
May 1951 the plaintiff in that case, the respondent Potenciano Gapol in
this case, filed a motion praying that the petitioners be removed as
members of the board of directors which was denied by the court; that
on 3 January 1952 respondent Potenciano Gapol filed a petition (civil
No. 15445, Exhibit L) praying for an order directing him to call a
meeting of the stockholders of the corporation and to preside at such
meeting in accordance with section 26 of the Corporation Law; that
two-days later, without notice to the petitioners and to the other
members of the board of directors and in violation of the Rules of Court
which require that the adverse parties be notified of the hearing of the
motion three days in advance, the respondent court issued the order
as prayed for (Exhibit M); that the petitioners learned only of this order
of the court on 27 February, when the Bank of America refused to
recognize the new board of directors elected at such meeting and
returned the checks drawn upon it by the said board of directors; that
the election of Juanito R. Tianzon as member of the board of directors
was illegal because to be elected to the board of directors of the
corporation he must be a member of the Legionarios del Trabajo, as
required and provided for in article 7 of the by-laws of the corporation;
that on 5 March the petitioners filed a petition in the respondent court
to have the order of 5 January set aside but on 5 April, the date set for
the hearing of the petition, as the respondent judge was on leave the
vacation judge directed its transfer to the branch of the respondent
judge; that without having set the motion for hearing, the respondent
court denied the motion of 5 March in its order of 7 May; that on 14
May the petitioners filed another motion inviting the attention of the
respondent court to the irregularity and illegality of its procedure and
setting the motion for hearing on 21 May, but the court denied the
motion by its order of 13 June.
The only question to determine in this case is whether under and
pursuant to section 26 of Act No. 1459, known as the Corporation Law,
the respondent court may issue the order complained of. Said section
provides: —
Whenever, from any cause, there is no person authorized to call a
meeting, or when the officer authorized to do so refuses, fails, or
neglects to call a meeting, any judge of a Court of First Instance, on
the showing of good cause therefor, may issue an order to any
stockholder or member of a corporation, directing him to call a meeting
of the corporation by giving the proper notice required by this Act or the
by-laws; and if there be no person legally authorized to preside at such
meeting, the judge of the Court of First Instance may direct the person
calling the meeting to preside at the same until a majority of the
members or stockholders representing a majority of the stock present
and permitted by law to be voted have chosen one of their number to
act as presiding officer for the purposes of the meeting.
On the showing of good cause therefor, the court may authorize a
stockholder to call a meeting and to preside thereat until the majority
stockholders representing a majority of the stock present and permitted
to be voted shall have chosen one among them to preside it. And this
showing of good cause therefor exists when the court is apprised of
the fact that the by-laws of the corporation require the calling of a
general meeting of the stockholders to elect the board of directors but
the call for such meeting has not been done.
Article 9 of the by-laws of the Daguhoy Enterprises, Inc.,
provides:chanrob1es virtual 1aw library
The Board of Directors shall compose of five (5) members who shall be
elected by the stockholders in a general meeting called for that
purpose which shall be held every even year during the month of
January.
Article 20 of the by-laws in part provides:chanrob1es virtual 1aw library
. . . Regular general meetings are those which shall be called for every
even year, . . .
Article 22 of the by-laws provides:chanrob1es virtual 1aw library
The Chairman shall have the right to fix the date, the time and the
place where the general meeting shall be held, either special or
general.
The requirement that "on the showing of good cause therefor," the
court may grant to a stockholder the authority to call such meeting and
to preside thereat does not mean that the petition must be. set for
hearing with notice served upon the board of directors. The respondent
court was satisfied that there was a showing of good cause for
authorizing the respondent Potenciano Gapol to call a meeting of the
stockholders for the purpose of electing the board of directors as
required and provided for in the by-laws, because the chairman of the
board of directors called upon to do so had failed, neglected, or
refused to perform his duty. It may be likened to a writ of preliminary
injunction or of attachment which may be issued ex-parte upon
compliance with the requirements of the rules and upon the court being
satisfied that the same should issue. Such provisional reliefs have not
been deemed and held as violative of the due process of law clause of
the Constitution.
In several states of the Union 1 the remedy which may be availed of or
resorted to in a situation such as the one brought about in this case is
mandamus to compel the officer or incumbent board of directors to
perform a duty specifically enjoined by law or the by-laws, to wit: to call
a meeting of the stockholders. Delaware is the state that has a law
similar to ours and there the chancellor of a chancery court may
summarily issue or enter an order authorizing a stockholder to call a
meeting of the stockholders of the corporation and preside thereat. 2 It
means that the chancellor may issue such order without notice and
hearing.
That the relief granted by the respondent court lies within its jurisdiction
is not disputed. Having the authority to grant the relief, the respondent
court did not exceed its jurisdiction; nor did it abuse its discretion in
granting it.
With persistency petitioners claim that they have been deprived of their
right without due process of law. They had no right to continue as
directors of the corporation unless reelected by the stockholders in a
meeting called for that purpose every even year. They had no right to a
hold-over brought about by the failure to perform the duty incumbent
upon one of them. If they felt they were sure to be reelected, why did
they fail, neglect, or refuse to call the meeting to elect the members of
the board? Or, why did they not seek their reelection at the meeting
called to elect the directors pursuant to the order of the respondent
court?
The alleged illegality of the election of one member of the board of
directors at the meeting called by the respondent Potenciano Gapol as
authorized by the court being subsequent to the order complained of
cannot affect the validity and legality of the order. If it be true that one
of the directors elected at the meeting called by the respondent
Potenciano Gapol, as authorized by the order of the court complained
of, was not qualified in accordance with the provisions of the by-laws,
the remedy of an aggrieved party would be quo warranto. Also, the
alleged previous agreement to dissolve the corporation does not affect
or render illegal the order issued by the respondent court.
The petition is denied, with costs against the petitioners.
Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo,
Bautista Angelo and Labrador, JJ., concur.
G.R. No. L-23428 November 29, 1968
DETECTIVE & PROTECTIVE BUREAU, INC., petitioner,
vs.
THE HONORABLE GAUDENCIO CLORIBEL, in his capacity as
Presiding Judge of Branch VI, Court of First Instance of Manila,
and FAUSTINO S. ALBERTO, respondents.
Crispin D. Biazas and Associates and Jose S. Sarte for petitioner.
Gaudencio T. Bocobo for respondents.
ZALDIVAR, J.:
The complaint, in Civil Case No. 56949 of the Court of First Instance of
Manila, dated May 4, 1964, filed by Detective and Protective Bureau,
Inc., therein plaintiff (petitioner herein) against Fausto S. Alberto,
therein defendant (respondent herein), for accounting with preliminary
injunction and receivership, alleged that plaintiff was a corporation duly
organized and existing under the laws of the Philippines; that
defendant was managing director of plaintiff corporation from 1952
until January 14, 1964; that in June, 1963, defendant illegally seized
and took control of all the assets as well as the books, records,
vouchers and receipts of the corporation from the accountant-cashier,
concealed them illegally and refused to allow any member of the
corporation to see and examine the same; that on January 14, 1964,
the stockholders, in a meeting, removed defendant as managing
director and elected Jose de la Rosa in his stead; that defendant not
only had refused to vacate his office and to deliver the assets and
books to Jose de la Rosa, but also continued to perform unauthorized
acts for and in behalf of plaintiff corporation; that defendant had been
required to submit a financial statement and to render an accounting of
his administration from 1952 but defendant has failed to do so; that
defendant, contrary to a resolution adopted by the Board of Directors
on November 24, 1963, had been illegally disposing of corporate
funds; that defendant, unless immediately restrained ex-parte, would
continue discharging the functions of managing director; and that it
was necessary to appoint a receiver to take charge of the assets and
receive the income of the corporation. Plaintiff prayed that a
preliminary injunction ex-parte be issued restraining defendant from
exercising the functions of managing director and from disbursing and
disposing of its funds; that Jose M. Barredo be appointed receiver;
that, after judgment, the injunction be made permanent and defendant
be ordered to render an accounting.
Herein respondent Judge, the Honorable Gaudencio Cloribel, set for
hearing plaintiff's prayer for ancillary relief and required the parties to
submit their respective memoranda. On June 18, 1964, respondent
Judge granted the writ of preliminary injunction prayed for, conditioned
upon plaintiff's filing a bond of P5,000.00. Plaintiff filed the bond, but
while the same was pending approval defendant Fausto S. Alberto
filed, on July 1, 1964, a motion to admit a counter-bond for the purpose
of lifting the order granting the writ of preliminary injunction. Inspite of
the opposition filed by plaintiff, respondent Judge issued, on August 5,
1964, an order admitting the counterbond and setting aside the writ of
preliminary injunction.
On the belief that the order approving the counter-bond and lifting the
writ of preliminary injunction was contrary to law and the act of
respondent Judge constituted a grave abuse of discretion, and that
there was no plain, speedy and adequate remedy available to it,
plaintiff filed with this Court the instant petition for certiorari, praying
that a writ of preliminary injunction enjoining defendant Fausto S.
Albert from exercising the functions of managing director be issued,
and that the order dated August 5, 1964 of respondent Judge
approving the counter-bond and lifting the writ of preliminary injunction
he had previously issued be set aside and declared null and void. The
Court gave due course to the petition but did not issue a preliminary
injunction.
In his answer, now respondent Fausto S. Alberto traversed the
material allegations of the petition, justified the order complained of,
and prayed for the dismissal of the petition.
From the pleadings, it appears that the only issue to be resolved is
whether the order of respondent Judge dated August 5, 1964,
admitting and approving the counter-bond of P5,000 and setting aside
the writ of preliminary injunction granted in his order dated June 18,
164, was issued contrary to law and with grave abuse of discretion.
Now petitioner contends that the setting aside of the order granting the
writ was contrary to law and was done with a grave abuse of
discretion, because: (1) the motion to admit defendant's counter-bond
was not supported by affidavits showing why the counter-bond should
be admitted, as required by Section 6 of Rule 58; (2) the preliminary
injunction was not issued ex-parte but after hearing, and the admission
of the counter-bond rendered said writ ineffective; (3) the writ was
granted in accordance with Rule 58 of the Rules of Court and
established precedents' (4) public interest required that the writ be not
set aside because respondent had arrogated unto himself all the
powers of petitioning corporation, to the irreparable damage of the
corporation; and that (5) the counter-bond could not compensate
petitioner's damage.
1. The first reason given by petitioner in support of its contention that
the dissolution of the writ of preliminary injunction was contrary to law
is that the motion to admit respondent's counter-bond for the
dissolution of the writ was not supported by affidavits as required by
section 6 of Rule 58 of the Rules of Court. The controverted motion,
however, does not appear in the record. However, the record shows
that respondent Alberto had filed a verified answer to the complaint
and a verified opposition to the issuance of the writ of preliminary
injunction.
Regarding the necessity of verification of the motion for dissolution of a
writ of preliminary injunction, this Court has ruled that the requirement
of verification is not absolute but is dependent on the circumstances
obtaining in a particular case. In the case of Sy Sam Bio, et al. vs.
Barrios and Buyson Lampa,1 the only question raised was whether the
respondent Judge exceeded his jurisdiction and abused his discretion
in setting aside an order directing the issuance of a writ of preliminary
injunction. In maintaining the affirmative, petitioners in that case
alleged that the questioned order was issued in violation of the
provisions of Section 169 of Act 190(which is one of the sources of
Sec. 6 of Rule 58 of the revised Rules of Court)inasmuch as the Judge
set aside said order and directed the dissolution of the preliminary
injunction without any formal petition of the parties and without having
followed the procedure prescribed by the statute. There was, however,
a verbal application for the dissolution of the writ, based upon the
ground of the in suficiency of the complaint which was the basis of the
application for the issuance of said writ of preliminary injunction. This
Court said:
Section 169 of Act 1909 does not prescribe the manner of filing the
application to annul or modify a writ of preliminary injunction. It simply
states that if a temporary injunction be granted without notice, the
defendant, at any time before trial, may apply, upon reasonable notice
to the adverse party, to the judge who granted the injunction, or to the
judge of the court of which the action was brought, to dissolve or
modify the same.
On the strength of the decision in the above-cited case, this Court
in Caluya, et al. vs. Ramos, et al.,2 said;
Petitioners' criticism that the motion to dissolve filed by the defendants
in Civil Case No. 4634 was not verified, is also groundless inasmuch
as even an indirect verbal application for the dissolution of an ex
parteorder of preliminary injunction has been held to be a sufficient
compliance with the provisions of Section 6 of Rule 60 (Moran,
Comments on the Rules of Court, Second Edition, Vol. II, p. 65, citing
the case of Sy Yam Bio v. Barrios, etc., 63 Phil. 206), the obvious
reason being that said rule does not prescribe the form by which an
application for the dissolution or modification of an order of preliminary
injunction should be presented.
If according to the above rulings, Section 6 of Rule 60 (now sec. 6,
Rule 58) of the Rules of Court did not require any form for the
application for the dissolution of the writ of preliminary injunction, then
respondent Fausto Alberto's motion to lift the preliminary injunction in
the court below need not be verified, and much less must the motion
be supported by affidavits, as urged by petitioner.
However, in Canlas, et al. vs. Aquino, et al.,3 this Court ruled that a
motion for the dissolution of a writ of preliminary injunction should be
verified. In that case, respondent Tayag filed an unverified motion for
the dissolution of a writ of preliminary injunction, alleging that the same
"would work great damage to the defendant who had already spend a
considerable sum of money" and that petitioners "can be fully
compensated for any damages that they may suffer." The court
granted the motion and dissolved the preliminary injunction. In an
original action for a writ of certiorari filed with this Court to annual said
order, this Court remarked in part:
Petitioners herein are entitled to the writ prayed for. The motion of
respondent Tayag for the dissolution of the writ of preliminary
injunction issued on October 22, 1959, was unverified....
From the precedents quoted above, as well as from the terminology of
Section 6 of Rule 58 of the new Rules of Court, it is evident that
whether the application for the dissolution of the writ of preliminary
injunction must be verified or not depends upon the ground upon which
such application is based. If the application is based on the
insufficiency of the complaint, the motion need not be verified. If the
motion is based on the ground that the injunction would cause great
damage to defendant while the plaintiff can be fully compensated for
such damages as he may suffer, the motion should be verified.
In the instant case, it is alleged by petitioner that the motion for the
dissolution of the writ of preliminary injunction was not verified. This
allegation was not denied in the answer. But because said motion does
not appear in the record of the case now before this Court, We cannot
determine what are the grounds for the dissolution that are alleged
therein, and so We cannot rule on whether the motion should have
been verified or not. This Court, therefore, has to rely on the order of
respondent Judge, dated August 5, 1964, which states that "the filing
of the counter-bond is in accordance with law." Consequently, the first
ground alleged by petitioner must be brushed aside.
2. The second and third reasons alleged by petitioner in its petition for
certiorari assume that a preliminary injunction issued after hearing and
in accordance with Rule 58 cannot be set aside. This contention is
untenable. The provision of Section 6 of Rule 58 that "the injunction
may be refused, or, if granted ex parte, may be dissolved" can not be
construed as putting beyond the reach of the court the dissolution of an
injunction which was granted after hearing. The reason is because a
writ of preliminary injunction is an interlocutory order, and as such it is
always under the control of the court before final judgment. Thus,
in Caluya, et al. vs. Ramos, et al.,4 this Court said:
The first contention of the petitioners is that, as said injunction was
issued after a hearing, the same cannot be dissolved, specially on the
strength of an unverified motion for dissolution and in the absence to
support it. Reliance is placed on Section 6 of Rule 60 of the Rules of
Court which provides that "the injunction may be reduced, or, if
granted ex parte, maybe dissolved," thereby arguing that if an
injunction is not issued ex partethe same cannot be dissolved. The
contention is clearly erroneous. Although said section prescribes the
grounds for objecting to, or for moving the dissolution of, a preliminary
injunction prior to its issuance or after its granting ex parte, it does not
thereby outlaw a dissolution if the injunction has been issued after a
hearing. This is to be so, because a writ of preliminary injunction is an
interlocutory order which is always under the control of the court before
final judgment. (Manila Electric Company vs. Artiaga and Green, 50
Phil. 144, 147).
This Court has also ruled that the dissolution of a writ of preliminary
injunction issued after hearing, even if the dissolution is ordered
without giving the other party an opportunity to be heard, does not
constitute an abuse of discretion and may be cured not by certiorari but
by appeal. In Clarke vs. Philippine Ready Mix Concrete Co., Inc., et
al.,5 one of the issues presented was whether a writ of preliminary
injunction granted the plaintiff by a trial court after hearing, might be
dissolved upon an ex parte application by the defendant, and this
Court ruled that:
The action of a trial court in dissolving a writ of preliminary injunction
already issued after hearing, without giving petitioner an opportunity to
be heard, does not constitute lack or excess of jurisdiction or an abuse
of discretion, and any irregularity committed by the trial court on this
score may be cured not by certiorari but by appeal.
3. The fourth reason alleged by petitioner in support of its stand is that
public interest demanded that the writ enjoining respondent Fausto
Alberto from exercising the functions of managing director be
maintained. Petitioner contended that respondent Alberto had
arrogated to himself the power of the Board of Directors of the
corporation because he refused to vacate the office and surrender the
same to Jose de la Rosa who had been elected managing director by
the Board to succeed him. This assertion, however, was disputed by
respondent Alberto who stated that Jose de la Rosa could not be
elected managing director because he did not own any stock in the
corporation.
There is in the record no showing that Jose de la Rosa owned a share
of stock in the corporation. If he did not own any share of stock,
certainly he could not be a director pursuant to the mandatory
provision of Section 30 of the Corporation Law, which in part provides:
There is in the record no showing that Jose de la Rosa owned a share
of stock in the corporation. If he did not own any share of stock,
certainly he could not be a director pursuant to the mandatory
provision of Section 30 of the Corporation Law, which in part provides:
Sec. 30. Every director must own in his own right at least one share of
the capital stock of the stock corporation of which he is a director,
which stock shall stand in his name on the books of the corporations....
If he could not be a director, he could also not be a managing director
of the corporation, pursuant to Article V, Section 3 of the By-Laws of
the Corporation which provides that:
The manager shall be elected by the Board of Directors from among its
members.... (Record, p. 48)
If the managing director-elect was not qualified to become managing
director, respondent Fausto Alberto could not be compelled to vacate
his office and cede the same to the managing director-elect because
the by-laws of the corporation provides in Article IV, Section 1 that
"Directors shall serve until the election and qualification of their duly
qualified successor."
4. The fifth reason alleged by herein petitioner in support of its
contention that respondent Judge gravely abused his discretion when
he lifted the preliminary injunction upon the filing of the counter-bond
was that said counter-bond could not compensate for the irreparable
damage that the corporation would suffer by reason of the continuance
of respondent Fausto Alberto as managing director of the corporation.
Respondent Alberto, on the contrary, contended that he really was the
owner of the controlling interest in the business carried on the name of
the petitioner, having invested therein a total of P57,727.29 as against
the sum of P4,000 only invested by one other director, Jose M.
Barredo. We find that there was a question as to who own the
controlling interest in the corporation. Where ownership is in dispute,
the party in control or possession of the disputed interest is presumed
to have the better right until the contrary is adjudged, and hence that
party should not be deprived of the control or possession until the court
is prepared to adjudicate the controverted right in favor of the other
party.6
Should it be the truth that respondent Alberto is the controlling
stockholder, then the damages said respondent would suffer would be
the same, if not more, as the damages that the corporation would
suffer if the injunction were maintained. If the bond of P5,000 filed by
petitioner for the injunction would be sufficient to answer for the
damages that would be suffered by respondent Alberto by reason of
the injunction, there seems to be no reason why the same amount
would not be sufficient to answer for the damages that might be
suffered by the petitioning corporation by reason of the lifting of the
injunction. The following ruling of this Court has a persuasive
application in this case:
The rule that a court should not, by means of a preliminary injunction,
transfer property in litigation from the possession of one party to
another is more particularly applicable where the legal title is in dispute
and the party having possession asserts ownership in himself. 7
Let it be stated, in relation to all the reason given by petitioner, that it is
a settled rule that the issuance of the writ of preliminary injunction as
an ancillary or preventive remedy to secure the rights of a party in a
pending case is entirely within the discretion of the court taking
cognizance of the case — the only limitation being that this discretion
should be exercised based upon the grounds and in the manner
provided by law,8 and it is equally well settled that a wide latitude is
given under Section 7 of Rule 58 of the Rules of Court to the trial court
to modify or dissolve the injunction as justice may require. The court
which is to exercise that discretion is the trial court, not the appellate
court.9 The exercise of sound judicial discretion by the lower court in
injunctive matters should not be interfered with except in cases of
manifest abuse.10 In the instant case, We find that petitioner failed to
show manifest abuse of discretion by respondent Judge in setting
aside the writ of preliminary injunction.
There is, however, one vital reason why the instant petition for
certiorari should be denied. And it is, that from the order dissolving the
writ of preliminary injunction, the petitioner has gone directly to this
Court without giving the respondent Judge (or trial court) a chance or
opportunity to correct his error, if any, in an appropriate motion for
reconsideration. An omission to comply with this procedural
requirement justifies a denial of the writ applied for.11
The instant case is not one of the exceptions in the application of this
rule, which are: where the questions of jurisdiction has been squarely
raised, argued before, submitted to, and met and decided by the
respondent court; where the questioned order is a patent nullity; and
where there is a deprivation of the petitioner's fundamental right to due
process.12
It being our considered view that respondent Judge had not committed
grave abuse of discretion in issuing the order dated August 5, 1964
lifting the writ of preliminary injunction which had previously been
granted in the order dated June 18, 1964, and the herein petition for
certiorari having been filed without previously complying with a well
settled procedural requirement, there is no alternative for this Court but
to order its dismissal.
WHEREFORE, the instant petition for certiorari with preliminary
injunction is dismissed, with costs againsts the petitioner. It is so
ordered.
G.R. No. L-26555 November 16, 1926
BALDOMERO ROXAS, ENRIQUE ECHAUS and ROMAN J.
LACSON, petitioners,
vs.
Honorable MARIANO DE LA ROSA, Auxiliary Judge of First
Instance of Occidental Negros, AGUSTIN CORUNA, MAURO
LEDESMA and BINALBAGAN ESTATE, INC., respondents.
Roman J. Lacson, for petitioners.
The respondent judge in his own behalf.
The respondent corporation in its own behalf.
R. Nolan and Feria and La O for the respondents Coruna and
Ledesma.
STREET, J.:
This is an original petition for the writ of certiorari whereby the
petitioners, Baldomeo Roxas, Enrique Echaus, and Roman J. Lacson,
seek to procure the abrogation of an order of the respondent judge
granting a preliminary injunction in an action in the Court of First
Instance of Occidental Negros, instituted by Agustin Coruna and
Mauro Ledesma against the petitioners and the Binalbagan Estate, Inc.
The cause is now before us upon the issues made by the answers filed
by the respondents.
It appears that the Binalbagan Estate, Inc., is a corporation having its
principal plant in Occidental Negros where it is engaged in the
manufacture of raw sugar from canes grown upon farms accessible to
its central. In July, 1924, the possessors of a majority of the shares of
the Binalbagan Estate, Inc., formed a voting trust composed of three
members, namely, Salvador Laguna, Segunda Monteblanco, and
Arthur F. Fisher, as trustee. By the document constituting this voting
trust the trustees were authorized to represent and vote the shares
pertaining to their constituents, and to this end the shareholders
undertook to assign their shares to the trustees on the books of the
company. The total number of outstanding shares of the corporation is
somewhat over 5,500, while the number of shares controlled by the
voting trust is less than 3,000.
On February 1, 1926, the general annual meeting of the shareholders
of the Binalbagan Estate, Inc., took place, at which Mr. J. P. Heilbronn
appeared as representative of the voting trust, his authority being
recognized by the holders of all the other shares present at this
meeting. Upon said occasion Heilbronn, by virtue of controlling the
majority of the shares, was able to nominate and elect a board of
directors to his own liking, without opposition from the minority. After
the board of directors had been thus elected and had qualified, they
chose a set of officers constituting of Jose M. Yusay, president,
Timoteo Unson, vice-president, Jose G. Montalvo, secretary-treasurer,
and H. W. Corp and Agustin Coruna, as members. Said officials
immediately entered upon the discharged of their duties and have
continued in possession of their respective offices until the present
time.
Since the creation of the voting trust there have been a number of
vacancies caused by resignation or the absence of members from the
Philippine Islands, with the result that various substitutions have been
made in the personnel of the voting trust. At the present time the
petitioners Roxas, Echaus, and Lacson presumably constitute its
membership. We say presumably, because in the present proceedings
an issue of fact is made by the respondents upon the point whether the
three individuals named have been regularly substituted for their
several predecessors. In the view we take of the case it is not
necessary to determine this issue; and we shall assume provisionally
that the three petitioners are the lawful components of the voting trust.
Although the present officers of the Binalbagan Estate, Inc., were
elected by the representative of the voting trust, the present trustee are
apparently desirous of ousting said officers, without awaiting the
termination of their official terms at the expiration of one year from the
date of their election. In other to effect this purpose the petitioners in
their character as members of the voting trust, on August 2, 1926,
caused the secretary of the Binalbagan Estate, Inc., to issue to the
shareholders a notice calling for a special general meeting of
shareholders to be held at 10 a. m., on August 16, 1926, "for the
election of the board of directors, for the amendment of the By-Laws,
and for any other business that can be dealt with in said meeting."
Within a few days after said notice was issued Agustin Coruña, as
member of the existing board, and Mauro Ledesma, as a simple
shareholder of the corporation, instituted a civil action (No. 3840) in the
Court of First Instance of Occidental Negros against the trustees and
the Binalbagan Estate, Inc., for the purpose of enjoining the meeting
completed in the notice above-mentioned.
In response to a proper for a preliminary injunction, in connection with
said action, the respondent judge issued the restraining order, or
preliminary injunction, which gave rise to the present petition for the
writ of certiorari. In the dispositive part of said order the Binalbagan
Estate, Inc., its lawyers, agents, representatives, and all others who
may be assisting or corroborating with them, are restrained from
holding the general shareholders' meeting called for the date
mentioned and from electing new directors for the company in
substitution of the present incumbents, said injunction to be effective
until further order of the court. it is now asserted here by the petitioners
that the making of this order was beyond the legitimate powers of the
respondent judge, and it is accordingly prayed that said order be set
aside.
We are of the opinion that this contention is untenable and that the
respondent judge acted within his legitimate powers in making the
order against which relief is sought. In order to expose the true
inwardness of the situation before us it is necessary to take not of the
fact that under the law the directors of a corporation can only be
removed from office by a vote of the stockholders representing at least
two-thirds of the subscribed capital stock entitled to vote (Act No. 1459,
sec. 34); while vacancies in the board, when they exist, can be filled by
mere majority vote, (Act No. 1459, sec. 25). Moreover, the law requires
that when action is to be taken at a special meeting to remove the
directors, such purpose shall be indicated in the call (Act No. 1459,
sec. 34).
Now, upon examining into the number of shares controlled by the
voting trust, it will be seen that, while the trust controls a majority of the
stock, it does not have a clear two-thirds majority. It was therefore
impolitic for the petitioners, in forcing the call for the meeting of August
16, to come out frankly and say in the notice that one of the purpose of
the meeting was to removed the directors of the corporation from
office. Instead, the call was limited to the election of the board of
directors, it being the evident intention of the voting trust to elect a new
board as if the directorate had been then vacant.
But the complaint in civil No. 3840 directly asserts that the members of
the present directorate were regularly elected at the general annual
meeting held in February, 1926; and if that assertion be true, the
proposal to elect, another directorate, as per the call of August 2, if
carried into effect, would result in the election of a rival set of directors,
who would probably need the assistance of judgment of court in an
independent action of quo warranto to get them installed into office,
even supposing that their title to the office could be maintained. That
the trial judge had jurisdiction to forestall that step and enjoin the
contemplated election is a matter about which there cannot be the
slightest doubt. The law contemplates and intends that there will be
one of directors at a time and that new directors shall be elected only
as vacancies occur in the directorate by death, resignation, removal, or
otherwise. lawphil.net
It is instituted that there was some irregularity or another in the election
of the present directorate. We see nothing upon which this suggestion
can be safely planted; And at any rate the present board of directors
are de facto incumbents of the office whose acts will be valid until they
shall be lawfully removed from the office or cease from the discharge
of their functions. In this case it is not necessary for us to agitate
ourselves over the question whether the respondent judge properly
exercised his judicial discretion in granting the order complained of. If
suffices to know that in making the order he was acting within the limits
of his judicial powers.
It will be noted that the order in question enjoins the defendants from
holding the meeting called for August 16; and said order must not be
understood as constituting any obstacle for the holding of the regular
meeting at the time appointed in the by-laws of the corporation.
For the reasons stated the petition will be denied, and it is so ordered,
with costs.
Johnson, Malcom, Ostrand, Johns, Romualdez and Villa-Real, JJ.,
concur.
G.R. No. L-43413 August 31, 1937
HIGINIO ANGELES, JOSE E. LARA and AGUEDO BERNABE,
as stockholders for an in behalf and for the benefit of the
corporation, Parañaque Rice Mill, Inc. and the other stockholders
who may desire to join, plaintiffs-appellees,
vs.
TEODORICO B. SANTOS, ESTANISLAO MAYUGA, APOLONIO
PASCUAL, and BASILISA RODRIGUEZ,defendant-appellants.
P. Masalin and A. Sta. Maria for appellants.
Eulogio P. Revilla and Barrera and Reyes for appellees.
LAUREL, J.:
The plaintiff and the defenant aree all stockholders and member of the
board of directors of the "Parañaque Rice Mill, Inc., "a corporation
organized for the purpose of operating a rice mill in the municipality of
Parañaque, Province of Rizal. On September 6, 1932, a complaint
entitle "Higinio Angeles, Jose de Lara, Aguedo Bernabe, as
stockholders, for and in behalf of the corporation, Parañaque Rice Mill,
Inc., and other stockholders of said corporation who may desire to join,
plaintiff, vs. Teodorico B. Santos, Estanislao Mayuga, Apolonio
Pascual, and Basilisa Rodriguez, defendant was filed with the Court of
First Instance of Rizal. After formal allegation relative to age and
residence of the parties and the due incorporation of the Parañaque
Rice Mill, Inc., the complaint avers subtantially the following: (a) That
the plaintiffs are stockholders and constitute the minority and the
defendants are also stockholers and constitute the majority of the
board of directors of the Parañaque Rice Mill, Inc.; (b) that at an
extraordinary meeting held on February 21, 1932, the stockholders
appointed an investigation committee of which the plaintiff Jose de
Lara was chairman and the stockholers Dionisio Tomas and Aguedo
Bernabe were members, to investigate and determine the properties,
operations, and losses of the corporation as shown in the auditor's
report corresponding to the year 1931, but the defendants, particularly
Teodorico B. Santos, who was the president of the corporation, denied
access to the properties, books and record of the corporation which
were in their possession (c) That the defendant Teodorico B. Santos,
in violation of the by-laws of the corporation, had taken possession of
the books, vouchers, and corporate records as well as of the funds and
income of the Parañaque Rice Mill, Inc., all of which, according to the
by-laws, should be under the exclusive control and possession of the
secretary-treasurer, the plaintiff Aguedo Bernabe; (d) That the said
Teodorico B. Santos, had appropriated to his own benefit properties,
funds, and income of the corporation in the sum of P10,000; (e) that
Teodoro B. Santos, for the purpose of illegally controlling the affairs of
the corporation, refuse to sign and issue the corresponding certificate
of stock for the 600 fully paid-up share of the plaintiff, Higinio Angeles,
of the total value of P15,000; ( f ) that notwithstanding written requests
made in conformity with the by-laws of the corporation of three
members of the board of directors who are holders of more than one-
third of the subscribed capital stock of the corporation, the defendant
Teodorico B. Santos as president of the corporation refuse to call a
meeting of the board of directors and of the stockholers; (g) that in
violation of the by-laws of the corporation, the defendant who
constitute the majority of the board of directors refused to hold ordinary
monthly meetings of the board since March, 19332; (h) that Teodorico
B. Santos as president of the corporation, in connivance with his
co-defendants, was disposing of the properties and records of the
corporation without authority from the board of directors or the
stockholders of the corporation and without making any report of his
acts to the said board of directors or to any other officer of the
corporation, and that, to prevent any interferrence with or examination
of his arbitrary acts, he arbitrarily suspended plaintiff Jose de Lara from
the office of general manager to which office the latter had been
lawfully elected by the stockholders; and (i) that the corporation had
gained about P4,000 during the first half of the year 1932, but that
because of the illegal and arbitrary acts of the defendants not only the
funds but also the books and records of the corporation are in danger
of disappearing.
The complaint prays: (a) That after the filing of the bond in an amount
to be fixed by the court, Melchor de Lara of Parañaque, Rizal, be
appointed receiver of the properties, funds and business of the
Parañaque Rice Mill, Inc., as well as the books and record thereof, with
authority to continue the business of the corporation; (b) that the
defendant Teodorico B. Santos be ordered to render a detailed
accounting of the properties, funds and income of the corporation from
the year 1927 to date; (c) that the said defendant be required to pay to
the corporation the amount of P10,000 and other amounts which may
be found due to the said corporation as damages or for my other
cause, (d) that said defendant be ordered to sign the certificate of
stock subscribed to and paid by the plaintiff Higinio Angeles; and (e)
that the members of the board of directors of the Parañaque Rice Mill,
Inc., be removed and an exrtraodinary meeting of the stockholders
called for the purpose of electing a new board of directors.
On the date of the filling of the complaint, September 6, 1932, the court
issue an ex parte order of receivership appointing Melchor de Lara as
receiver of the corporation upon the filling of a bond of P1,000 by the
plaintiffs-appellees. The bond of the receiver was fixed at P4,000.
Upon an urgent motion of the defendants-appellants setting forth the
reasons why Melchor de Lara should not have been appointed
receiver, and upon agreement of the parties, the trial court, by order of
September 13, 1932, appointed Benigno Agco, as receiver, in lieu of
Melchor de Lara. About a month after, or on October 14, 1932, the
court, after considering the memoranda filed by both parties revoked
its order appointing Agco as receiver.
On July 12, 1933, the defendants-appellants presented their amended
answer to the complaint, containing a general and specific denial, and
alleging as special defense that the defendant Teodorico B. Santos
refused to sign the certificate of stock in favor of the plaintiff Higinio
Angeles for 600 shares valued at P15,00, because the board of
directors decided to give Higinio Angeles only 320 shares of stock
worth P8,000. The answer contains a counter-claim for P5,000 alleged
illegal and malicious procurement by the plaintiffs of an ex parte order
of receivership. Damages in the amount of P2,000 are also alleged to
have been suffered by the defendants by reason of the failure of the
plaintiffs to present their grievances to the Board of directors before
going to court. The amended answer sets forth, furthermore, a cross-
complaint against the plaintiffs, and in behalf of the Parañaque Rice
Mill, Inc., based on the alleged failure of the plaintiff Higinio Angeles to
render a report of his administration of the corporation from February
14 to June 30, 1928, during which time the corporation is alleged to
have accrued earnings of approximately P3,000. In both the counter
claim and cross-complaint Parañaque Rice Mill, Inc. is joined as party
defendant.
On July 24, 1934, the plaintiffs-appellees renewed their petition for the
appointment of a receiver pendente lite alleging, among other things,
that defendant Teodorico B. Santos was using the funds of the
corporation for purely personal ends; that said Teodorico B. Santos
was managing to the interest of the Corporation and its stockholders;
that said defendant did not render any account of his management or
for the condition of the business of the corporation; that since 1932
said defendant called no meeting of the board of directors or of the
stockholders thus enabling him to continue holding, without any
election, the position of present and, finally, that of manager; and that,
without the knowledge and consent of the stockholders and of the
board of directors, the said defendant installed a small rice mill for
converting rice husk into "tiqui-tiqui", the income of which was never
turned over or reported to the treasurer of the corporation.
The defendant-appellants objected to the petition for the appointment
of a receiver on the ground, among others, that the court had no
jurisdiction over the Parañaque Rice Mill, Inc., because it had not been
include as party defendant in this case and that, therefore the court
could not properly appoint a receiver of the corporation pendente lite.
After hearing both parties, the trial court by order of October 31, 1934,
appointed Emilio Figueroa, as receiver of the corporation, after giving a
bond in the amount of P2,000. An urgent for the reconsideration of this
order filed by counsel for the defendant-appellant on November 3,
1934, was denied by the court on November 7, 1934.
On November 8, 1934, the trial court, having heard the case on its
merits rendered a decision, the dispositive part of which is as follows:
Por todo lo expuesto el Juzgado fall este asunto:
1. Ordenando al demandado Teodorico B. Santos a rendircuenta
ellada de las propiedads, fondos e ingresos dela corporacion
Parañaque Rice Mill, Inc., de el año 1931 hasta la fecha;
2. Condenando a dicho demandado a pagar a la corporacion
Parañaque Rice Mill, Inc., cualesquiera cantida o cantidades que
resultate en deber a dicha corporacion; de acuerdo con dicha
rendicion de cuentas;
3. Declarando al demanante Higinio M. Angeles con derecho a tener
expedido a su nombre 600 acciones por valor par de P15,000.
4. Destituyendo a los demandados de su cargo como directores e la
corporacion hasta la nueva eleccion por los accionistas que se
convocara una vez firme esta sentencia; y
5. Condenando a los demandados a pagar las costas.
On November 21, 1934, the defendants-appellants, moved for
reconsideration of the decision and at the same time prayed for the
dismissal of the case, because of defect of parties defendant.
On December 6, 1934, the Parañaque Rice Mill, Inc., thru counsel for
the defendants, entered a special appearance for the sole purpose of
objecting to the order of the court of October 31, 1934, appointing a
receiver, on the ground that the Parañaque Rice Mill, Inc., was not a
party to the proceedings. And on December 8, 1934, the defendants
excepted to the decision of the trial court and moved for a new trial on
the ground that the evidence presented was insufficient to justify the
decision and that said decision was contrary to law. The motions for
reconsideration and new trial and the special appearance were, by
separate orders bearing date of December 19, 1934, denied by the trial
court. The case was finally elevated to this court by bill of exceptions.
The defendants-appellants submit the following assignment of errors:
1. The lower court erred in holding that it has jurisdiction to appoint a
receiver o the corporation, "Parañaque Rice Mill, Inc.," on October 31,
1934.
2. The lower court erred in overruling the motion of the defendants the
include the defendant corporation as party defendant and in holding
that it is not a necessary party.
3. The lower court erred in not granting a motion for a new trial
because there is a defect of party defendant.
4. The lower court erred in not dismissing the case because a
necessary defendant was not made a party in the case.
5. The lower court erred in ordering the defendant Teodorico B. Santos
to render a detailed accounting of the properties, funds and income of
the corporation "Parañaque Rice Mill, Inc.," from the year 1931 to this
date.
6. The lower court erred in condemning the defendant Teodorico B.
Santos to pay the corporation whatever sum or sums which may be
found owing to said corporation, in accordance with the said
accounting to be one by him.
7. The lower court erred in ordering the destitution of the defendants
from their office as members of the board of directors of the
corporation, until the new election of the stockholders which shall be
held once the decision has become final..
8. The lower court erred in declaring that Higino Angeles is entitled to
have in his name 600 shares of stock of the par value of P15,000.
9. The lower court erred in overruling and denying appellants' motion
for the reconsideration and the dismissal of the case dated November
21, 1934.
10. The lower court erred in denying the motion of these appellants for
new trial.
In their discussion of the first, second, third, and fourth assignment of
error, the defendants-appellants vigorously assert that the Parañaque
Rice Mill, Inc., is a necessary party in this case, and that not having
been made a party, the trial court was without jurisdiction to appoint a
receiver and should have dismissed the case.
There is ample evidence in the present case to show that the
defendants have been guilty of breach of trust as directors of the
corporation and the lower court so found. The board of directors of a
corporation is a creation of the stockholders and controls and directs
the affairs of the corporation by allegation of the stockholers. But the
board of directors, or the majority thereof, in drawing to themselves the
power of the corporation, occupies a position of trusteeship in relation
to the minority of the stock in the sense that the board should exercise
good faith, care and diligence in the administration of the affairs of the
corporation and should protect not only the interest of the majority but
also those of the minority of the stock. Where a majority of the board of
directors wastes or dissipates the funds of the corporation or
fraudulently disposes of its properties, or performs ultra vires acts, the
court, in the exercise of its equity jurisdiction, and upon showing that
intracorporate remedy is unavailing, will entertain a suit filed by the
minority members of the board of directors, for and in behalf of the
corporation, to prevent waste and dissipation and the commission of
illegal acts and otherwise redress the injuries of the minority
stockholders against the wrongdoing of the majority. The action in such
a case is said to be brought derivatively in behalf of the corporation to
protect the rights of the minority stockholers thereof (7 R. C. L., pars.
293 and 294, and authority therein cited; 13 Fletcher, Cyc. of Corp.,
pars. 593, et seq., an authorities therein cite).
It is well settled in this jurisdiction that where corporate directors are
guilty of a breach of trust — not of mere error of judgment or abuse of
discretion — and intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholers. An illustration of a suit of this kind is
found in the case of Pascual vs. Del Sanz Orozco (19 Phil., 82),
decided by this court as early as 1911. In that case, the Banco
Español-Filipino suffered heavy losses due to fraudulent connivance
between a depositor and an employee of the bank, which losses, it
was contened, could have been avoided if the president and directors
has been more vigilant in the administration of the affairs of the bank.
The stockholers constituting the minority brought a suit in behalf of the
bank against the directors to recover damages, and this over the
objection of the majority of the stockholers and the directors. This court
held that the suit properly be maintained.
The contention of the defendants in the case at bar that the Parañaque
Rice Mill, Inc., should have been brought in as necessary party and the
action maintained in its name and in its behalf directly states the
general rule, but not the exception recognize by this court in the case
of Everrett vs. Asia Banking Corporation (49 Phil., 512, 527). In that
case, upon invocation of the general rule by the appellees there, this
court said:
Invoking the well-known rule that shareholers cannot ordinarily sue in
equity to redress wrong done to the corporation, but that the action
must be brought by the board of directors, the appellees argue — and
the court below held — that the corporation Teal & Company is a
necessary party plaintiff and that the plaintiff stockholder, not having
made any demand on the board to bring the action, are not the proper
parties plaintiff. But, like most rules, the rule in question has its
exceptions. It is alleged in the complaint and, consequently, admitted
through the demurrer that the corporation Teal & Company is under
the complete control of the principal defendants in the case, and, in
these circumstances it is obvious that a demand upon the board of
directors to institute action and prosecute the same effectively would
have been useless, and the law does not require litigants to perform
useless acts. (Exchange Bank of Wewoka vs. Bailey, 29 Okla., 246;
Fleming and Hewins vs. Black Warrior Copper Co., 15 Ariz., 1;
Wickersham vs. Crittenen, 106 Cal., 329; Glem vs. Kittanning Brewing
Co., 259 Pa., 510; Hawes vs. Contra Costa Water Company, 104 U.S.,
450.)
The action having been properly brought and by the lower court
entertained it was within its power, upon proper showing, to appoint a
receiver of the corporation pendente lite (secs. 173, 174, et seq. Code
of Civil Procedure). The appointment of a receiver upon application of
the minority stockholers is power to be exercised with great caution.
But this does not mean that right of the minority stockholers may be
entirely disregarded, and where the necessity has arisen, the
appointment of a receiver for a corporation is a matter resting largely in
the sound discretion of the trial court. Counsel for appellants argue that
the appointment of a receiver pendente lite in the present case has
deprived the corporation, Parañaque Rice Mill, Inc., of property without
due process of law. But it is too plain to require argument that the
receiver was precisely appointed to preserve the properties of the
corporation. The receivership in this case shall continue until a new
board of directors shall have been elected and the corporation.
The first, second, third, and fourth assignments of error are, therefore,
overruled.
The appellants contend in their fifth and sixth assignments of error that
lower court erred in ordering the defendant, Tedorico B. Santos, to
render a detailed accounting of the properties, funds and income of the
corporation, Parañaque Rice Mill., Inc., from the year 1931 and in
condemning him to pay "the corporation whatever sum or sums which
may be found owing to said corporation, in accordance with said
accounting to be done by him." We note that the lower court in its
decision not only orders the defendant Santos to account for the
properties and funds of the corporation, but it also and at the same
time adjudges him to pay an undermine amount which is made to
depend upon the result of such accounting. The accounting order was
probably intended by the lower court to be file with it in this proceeding.
This requirement will delay the final disposition of the case and we are
of the opinion that this accounting should better be filed with the new
board of directors whose election has been ordered by the lower court.
The decision of the lower court in this respect is therefore modified so
that the defendant Santos shall render a complete accounting of all the
corporate properties and funds that may have come to his possession
during the period mentioned in the jugment of the lower court to the
new board of director to be elected by the stockholders.
In the seventh assignment of error, the appellants contend that the
lower court erred in ordering the removal of the defendants from their
offices as members of the board of directors of the corporation. The
Corporation Law, as amended, in section 29 to 34, provide for the
election and removal of the directors of a corporation. Our Corporation
Law (Act No. 1459, as amended), does not confer expressly upon the
court the power to remove a director of a corporation. In some
jurisdictions, statutes expressly provide a more or less summary
method for the confirmation of the election and for the a motion of the
directors of a corporation. This is true in New York, New Jersey,
Virginia and other states of the American Union. There are abundant
authorities, however, which hold that if the court has acquire
jurisdiction to appoint a receiver because of the mismanagement of
directors these may thereafter be remove and others appointed in their
place by the court in the exercise of its equity jurisdiction (2 Fletcher,
Cyc. of Corp., ftn. sec. 358, pp. 18 an 119). In the present case,
however, the properties and assets of the corporation being amply
protected by the appointment of a receiver and view of the statutory
provisions above referred to, we are of the opinion that the removal of
the directors is, under the circumstances, unnecessary and
unwarranted. The seventh assignment of error is, therefore, sustained.
possession to the corporation, or such person or persons as may be
duly authorized by it; and.
(7) That Higinio Angeles, or his successor in interest, is entitled to 600
shares of stock at the par value of P15,000 and the lower court
committed no error in ordering the issuance of the corresponding
certificate of stock.

Under the eighth assignment of error, the appellants argue that the On June 10, 1937, counsel for the plaintiff-appellees filed a motion
lower court erred in deciding that the plaintiff Higinio Angeles is entitled making it appear of record that Higinio Angeles, one of the plaintiffs
to the issuance in his name of a certificate covering 600 shares of and appellees, died on May 4, 1937 and that one of his daughters,
stock of the total par value of P15,000. A review of the evidence, oral Maura Angeles y Reyes, had been granted letters of administration as
and documentary, relative to the number of shares of stock to which evidenced by the document attached to the motion as Exhibit A, and
Higinio Angeles is entitled, shows that Higinio Angeles brought in praying that said Maura Angeles y Reyes be substituted as one of the
P15,000 party in money and party in property, for 600 shares of stock. plaintiffs and appellees in lieu of Higinio Angeles, deceased. This
The very articles of incorporation signed by all the incorporators, motion is hereby granted.
among whom are the defendants, show that Higinio Angeles paid
P5,600 on account of his subscription amounting to P10,000. The Defendant-appellants shall pay the costs in both instances. So
amount of P5,600 is the value of Angeles' cinematograph building in ordered.
Bacoor, Cavite, which he transferred to the municipality of Parañaque
where the same was reconstructed for the use of the corporation. The Avanceña, C.J., Villa-Real, Abad Santos, Imperial, Diaz and
receipts signed by the Philippine Engineering Company and the Concepcion, JJ., concur.
testimony of Higinio Angeles and Aguedo Bernabe (secretary-treasurer
of the corporation) show that Higinio Angeles paid with his own funds
the sum of P2,750 to the Philippine Engineering Co., as part of the
purchase price of the ricemill bought for the corporation. Angeles paid
a further sum of P2,397.99 to the Philippine Engineering Company. It
also appears that for the installation of the Rice Mill, the construction Ralph B. CAMPBELL, Plaintiff, v. LOEW'S, INCORPORATED, a
of camarin, and the cement paving (cementacion) of the whole area of Delaware corporation, Joseph R. Vogel, William A. Parker, George L.
two camarines, and for the excavation of a well for the use of the rice Killion and John L. Sullivan, Defendants.
mill the plaintiff Higinio Angeles paid with his own funds the amount of
Court of Chancery of Delaware, New Castle.
P7,431.47. Adding all these sums together we have a total of P18,
179.46. At a meeting of the board of directors on December 27, 1931,
September 19, 1957.
which meeting was convoked by Angeles, it seemed to have been
agreed that Angeles was to be given shares of stock of the total par
*854 Henry M. Canby of Richards, Layton & Finger and Arthur G.
value of P15,000. Angeles wanted to have P16,000 worth of stock to
Logan and Aubrey B. Lank of Logan, Marvel, Boggs & Theisen,
his credit for having made the disbursements mentioned above, but he
Wilmington, and Milton S. Pollack, New York City, for plaintiff.
finally agreed to accept 600 share worth only P15,000. The certificate
of stock, however, was not issued as disagreement arose between him
David F. Anderson of Berl, Potter & Anderson, Wilmington, and Louis
and the defendant Santos. We, therefore, find no error in the decision
Nizer of Phillips, Nizer, Benjamin & Krim, New York City, and Benjamin
of the lower court ordering the issuance of a certificate for 600 shares
Melniker, New York City, for corporate defendant.
of stock of the total par value of P15,000 to Higinio Angeles.
The individual defendants have not yet appeared.
It is unnecessary to consider the ninth and tenth assignments of error.
SEITZ, Chancellor.
In view of the foregoing, we hold:
This is the decision on plaintiff's request for a preliminary injunction to
(1) That the action in the present case was properly instituted by the
restrain the holding of a stockholders' meeting or alternatively to
plaintiff as stockholders for and in behalf of the corporation Parañaque
prevent the meeting from considering certain matters or to prevent the
Rice Mill, Inc., and other stockholders of the said corporation;
voting of certain proxies. Certain other relief is also requested.
(2) That the lower court committed no reveiwable error in appointing a
The corporate defendant appeared and resisted the motion.[1] The
receiver of the corporation pendente lite;
four individual defendants, who are directors, were given until
September 23, to appear and as of this date (September 19, 1957)
(3) That the lower court committed no error in ordering an election of
have not appeared. Consequently, reference to "defendant" will
the new board of directors, which election shall be held within thirty
embrace only the corporation unless otherwise indicated.
days from the date this decision becomes final;
*855 Some background is in order if the many difficult and novel issues
(4) That Teodorico B. Santos shall render an accounting of all the
are to be understood. Two factions have been fighting for control of
properties, funds and income of the corporation which may have come
Loew's. One faction is headed by Joseph Tomlinson (hereafter
into his possession to the new board of directors;
"Tomlinson faction") while the other is headed by the President of
Loew's, Joseph Vogel (hereafter "Vogel faction"). At the annual
(5) That the receiver, Emilio Figueroa, shall continue in office until the
meeting of stockholders last February a compromise was reached by
election and qualification of the members of the new board of directors;
which each nominated six directors and they in turn nominated a
thirteenth or neutral director. But the battle had only begun. Passing by
(6) That upon the constitution of the new board of directors, the said
much of the controversy, we come to the July 17-18 period of this year
receiver shall turn over all the properties of the corporation in his
when two of the six Vogel directors and the thirteenth or neutral
director resigned. A quorum is seven.
On the 19th of July the Tomlinson faction asked that a directors'
meeting be called for July 30 to consider, inter alia, the problem of
filling director vacancies. On the eve of this meeting one of the
Tomlinson directors resigned. This left five Tomlinson directors and
four Vogel directors in office. Only the five Tomlinson directors
attended the July 30 meeting. They purported to fill two of the director
vacancies and to take other action. This Court has now ruled that for
want of a quorum the two directors were not validly elected and the
subsequent action taken at that meeting was invalid. See Tomlinson v.
Loew's, Inc., Del.Ch., 134 A.2d 518.
On July 29, the day before the noticed directors' meeting, Vogel, as
president, sent out a notice calling a stockholders' meeting for
September 12 for the following purposes:
1. to fill director vacancies.
2. to amend the by-laws to increase the number of the board from 13
to 19; to increase the quorum from 7 to 10 and to elect six additional
directors.
3. to remove Stanley Meyer and Joseph Tomlinson as directors and to
fill such vacancies.
Still later, another notice for a September 12 stockholders' meeting as
well as a proxy statement went out over the signature of Joseph R.
Vogel, as president. It was accompanied by a letter from Mr. Vogel
dated August 9, 1957, soliciting stockholder support for the matters
noticed in the call of the meeting, and particularly seeking to fill the
vacancies and newly created directorships with "his" nominees.
Promptly thereafter, plaintiff began this action. An order was entered
requiring that the stockholders' meeting be adjourned until October 15,
to give the Court more time to decide the serious and novel issues
raised. See Campbell v. Loew's, Inc., Del.Ch., 134 A.2d 565.
I believe it is appropriate first to consider those contentions made by
plaintiff which concern the legality of the call of the stockholders'
meeting for the purposes stated.
Plaintiff contends that the president had no authority in fact to call a
special meeting of stockholders to act upon policy matters which have
not been defined by the board of directors. Defendant says that the by-
laws specifically authorize the action taken.
It is helpful to have in mind the pertinent by-law provisions:
Section 7 of Article I provides:
"Special meetings of the stockholders for any purpose or purposes,
other than those regulated by statute, may be called by the President *
* *"
Section 2 of Article IV reads:
"The President * * * shall have power to call special meetings of the
stockholders * * * for any purpose or purposes * * *"
It is true that Section 8(11) of Article II also provides that the board of
directors may call a special meeting of stockholders for any purpose.
But, in view of the explicit language of the by-laws above quoted, can
this Court say that the president was without authority to call this
meeting *856 for the purposes stated? I think not. I agree that the
purposes for which the president called the meeting were not in
furtherance of the routine business of the corporation. Nevertheless, I
think the stockholders, by permitting the quoted by-laws to stand, have
given the president the power to state these broad purposes in his call.
Moreover, it may be noted that at least one other by-law (Article V, § 2)
makes certain action of the president subject to board approval. The
absence of such language in connection with the call provision, while
not conclusive, is some evidence that it was intended that the call
provision should not be so circumscribed.
The plaintiff argues that if this by-law purports to give the president the
power to call special stockholders' meetings for the purposes here
stated, then it is contrary to 8 Del.C. § 141(a), which provides:
"The business of every corporation organized under the provisions of
this chapter shall be managed by a board of directors, except as
hereinafter or in its certificate of incorporation otherwise provided."
I do not believe the call of a stockholders' meeting for the purposes
mentioned is action of the character which would impinge upon the
power given the directors by the statute. I say this because I believe a
by-law giving the president the power to submit matters for stockholder
action presumably only embraces matters which are appropriate for
stockholder action. So construed the by-laws do not impinge upon the
statutory right and duty of the board to manage the business of the
corporation. Plaintiff does not suggest that the matters noticed are
inappropriate for stockholder consideration. And, of course, the Court
is not concerned with the wisdom of the grant of such power to the
president.
Plaintiff's next argument is that the president has no authority, without
board approval, to propose an amendment of the by-laws to enlarge
the board of directors. Admittedly this would be a most radical change
in this corporate management. Indeed, it may well involve the
determination of control. However, as I have already indicated, I
believe the wording of the by-laws authorizes such action.
Plaintiff next argues that the president had no power to call a
stockholders' meeting to fill vacancies on the board. As I understand
plaintiff's argument it is that the existence of Article V, § 2 of the by-
laws, which provides that the stockholders or the remaining directors
may fill vacancies, by implication, precludes the president from calling
a stockholders' meeting for that purpose; that provision being intended
for stockholder use only at the initiative of the stockholders. First of all,
the by-laws permit the president to call a meeting for any purpose. This
is broad and all-embracing language and I think it must include the
power to call a meeting to fill vacancies. The fact that the stockholders
may on their initiative have the right to call a meeting for that purpose
does not seem to be a sufficient reason for implying that the president
is thereby deprived of such power.
Plaintiff points to the "extraordinary state of affairs" which the
recognition of such power in the president would create. Obviously it
gives the president power which may place him in conflict with the
members of the board. But such consequences inhere in a situation
where those adopting the by-laws grant such broad and concurrent
power to the board and to the president. The validity but not the
wisdom of the grant of power is before the Court. I conclude that under
the by-laws the president has the power to call a meeting to fill
vacancies on the board.
Plaintiff next argues that the president's action in calling a
stockholders' meeting to fill vacancies was unlawful because it was in
conflict with the previously scheduled action by the board on the same
subject. It should be noted that the proxy statement *857 sent out by
the president states that the stockholders would only fill the two
vacancies purportedly filled by the board, if their election by the board
was held to be invalid. To this extent then the call was not in conflict
with this aspect of the board's action. But in any event I have now ruled
that the board did not legally fill the vacancies and so the matter would
seem to be moot. Moreover, the record is so cloudy as to some of the
facts involved on this point that it would not warrant the granting of
relief at this time.
The next point made in plaintiff's brief is that the president had no
power to fix the record date for voting purposes. However, it turned out
that the executive committee fixed the record date and plaintiff's
counsel, although given the opportunity at oral argument, did not attack
the action of the executive committee. I assume that plaintiff has in
effect abandoned this contention.
I therefore conclude that the president had the power to call the
meeting for the purposes noticed. I need not consider the effect of the
fact that the executive committee recommended that a special
stockholders' meeting be called.
Plaintiff next argues that the stockholders have no power between
annual meetings to elect directors to fill newly created directorships.
Plaintiff argues in effect that since the Loew's by-laws provide that the
stockholders may fill "vacancies", and since our Courts have construed
"vacancy" not to embrace "newly created directorships" (Automatic
Steel Products v. Johnston, 31 Del. Ch. 469, 64 A.2d 416, 6 A.L.R.2d
170), the attempted call by the president for the purpose of filling newly
created directorships was invalid.
Conceding that "vacancy" as used in the by-laws does not embrace
"newly created directorships", that does not resolve this problem. I say
this because in Moon v. Moon Motor Car Co., 17 Del.Ch. 176, 151 A.
298, it was held that the stockholders had the inherent right between
annual meetings to fill newly created directorships. See also Automatic
Steel Products v. Johnston, above. There is no basis to distinguish the
Moon case unless it be because the statute has since been amended
to provide that not only vacancies but newly created directorships "may
be filled by a majority of the directors then in office * * * unless it is
otherwise provided in the certificate of incorporation or the by-laws * *
*". 8 Del.C. § 223. Obviously, the amendment to include new directors
is not worded so as to make the statute exclusive. It does not prevent
the stockholders from filling the new directorships.
Is there any reason to consider the absence of a reference in the by-
laws to new directorships to be significant? I think not. The by-law
relied upon by plaintiff was adopted long before the statutory
amendment and it does not purport to be exclusive in its operation. It
would take a strong by-law language to warrant the conclusion that
those adopting the by-laws intended to prohibit the stockholders from
filling new directorships between annual meetings. No such strong
language appears here and I do not think the implication is warranted
in view of the subject matter.
I therefore conclude that the stockholders of Loew's do have the right
between annual meetings to elect directors to fill newly created
directorships.
Plaintiff next argues that the shareholders of a Delaware corporation
have no power to remove directors from office even for cause and thus
the call for that purpose is invalid. The defendant naturally takes a
contrary position.
While there are some cases suggesting the contrary, I believe that the
stockholders have the power to remove a director for cause. See Auer
v. Dressel, 306 N.Y. 427, 118 N.E.2d 590, 48 A.L.R.2d 604; *858
compare Bruch v. National Guarantee Credit Corp., 13 Del.Ch. 180,
116 A. 738. This power must be implied when we consider that
otherwise a director who is guilty of the worst sort of violation of his
duty could nevertheless remain on the board. It is hardly to be believed
that a director who is disclosing the corporation's trade secrets to a
competitor would be immune from removal by the stockholders. Other
examples, such as embezzlement of corporate funds, etc., come
readily to mind.
But plaintiff correctly states that there is no provision in our statutory
law providing for the removal of directors by stockholder action. In
contrast he calls attention to § 142 of 8 Del.C., dealing with officers,
which specifically refers to the possibility of a vacancy in an office by
removal. He also notes that the Loew's by-laws provide for the removal
of officers and employees but not directors. From these facts he
argues that it was intended that directors not be removed even for
cause. I believe the statute and by-law are of course some evidence to
support plaintiff's contention. But when we seek to exclude the
existence of a power by implication, I think it is pertinent to consider
whether the absence of the power can be said to subject the
corporation to the possibility of real damage. I say this because we
seek intention and such a factor would be relevant to that issue.
Considering the damage a director might be able to inflict upon his
corporation, I believe the doubt must be resolved by construing the
statutes and by-laws as leaving untouched the question of director
removal for cause. This being so, the Court is free to conclude on
reason that the stockholders have such inherent power.
I therefore conclude that as a matter of Delaware corporation law the
stockholders do have the power to remove directors for cause. I need
not and do not decide whether the stockholders can by appropriate
charter or by-law provision deprive themselves of this right.
Plaintiff next argues that the removal of Tomlinson and Meyer as
directors would violate the right of minority shareholders to
representation on the board and would be contrary to the policy of the
Delaware law regarding cumulative voting. Plaintiff contends that
where there is cumulative voting, as provided by the Loew's certificate,
a director cannot be removed by the stockholders even for cause.
It is true that the Chancellor noted in the Bruch case that the provision
for cumulative voting in the Delaware law was one reason why
directors should not be considered to have the power to remove a
fellow director even for cause. And it is certainly evident that if not
carefully supervised the existence of a power in the stockholders to
remove a director even for cause could be abused and used to defeat
cumulative voting. See 66 Harvard L.R. 531.
Does this mean that there can be no removal of a director by the
stockholders for cause in any case where cumulative voting exists?
The conflicting considerations involved make the answer to this
question far from easy. Some states have passed statutes dealing with
this problem but Delaware has not. The possibility of stockholder
removal action designed to circumvent the effect of cumulative voting
is evident. This is particularly true where the removal vote is, as here,
by mere majority vote. On the other hand, if we assume a case where
a director's presence or action is clearly damaging the corporation and
its stockholders in a substantial way, it is difficult to see why that
director should be free to continue such damage merely because he
was elected under a cumulative voting provision.
On balance, I conclude that the stockholders have the power to
remove a director for cause even where there is a provision for
cumulative voting. I think adequate protection is afforded not only by
the legal safeguards announced in this opinion but by the existence of
a remedy to test the validity of any such action, if taken.
The foregoing points constitute all of the arguments advanced by
plaintiff which *859 go to the validity of the call of the meeting for the
purposes stated. It follows from my various conclusions that the
meeting was validly called by the president to consider the matters
noticed.
I turn next to plaintiff's charges relating to procedural defects and to
irregularities in proxy solicitation by the Vogel group.
Plaintiff's first point is that the stockholders can vote to remove a
director for cause only after such director has been given adequate
notice of charges of grave impropriety and afforded an opportunity to
be heard.
Defendant raises a preliminary point that plaintiff, being only a
stockholder, has no standing to make the contention that the foregoing
requirements have not been met.[2] It may be noted that the director
whose removal was involved in the Bruch case was not a party in that
case and yet the Court considered the issue properly raised. The same
situation applied in the Auer case in New York. Moreover, on reason,
there would seem no basis for telling a stockholder, particularly where
cumulative voting is involved, that he has no right to challenge the
legal propriety of action proposed to be taken to remove a member of
the board of directors. After all, the board is managing the corporation
for all the stockholders and while a director may have sufficient
standing to attack the action himself, I cannot believe that a
stockholder is lacking a sufficient interest to warrant legal recognition.
I am inclined to agree that if the proceedings preliminary to submitting
the matter of removal for cause to the stockholders appear to be legal
and if the charges are legally sufficient on their face, the Court should
ordinarily not intervene. The sufficiency of the evidence would be a
matter for evaluation in later proceedings. But where the procedure
adopted to remove a director for cause is invalid on its face, a
stockholder can attack such matters before the meeting. This
conclusion is dictated both by the desirability of avoiding unnecessary
and expensive action and by the importance of settling internal
disputes, where reasonably possible, at the earliest moment. Compare
Empire Southern Gas Co. v. Gray, 29 Del.Ch. 95, 46 A.2d 741.
Otherwise a director could be removed and his successor could be
appointed and participate in important board action before the illegality
of the removal was judicially established. This seems undesirable
where the illegality is clear on the face of the proceedings.
Defendant contends that the sufficiency of the charges or the evidence
in support thereof is not for the Court to consider, citing Griffith v.
Sprowl, 45 Ind.App. 504, 91 N.E. 25; New Founded Indus. Missionary
Baptist Ass'n v. Anderson, La.App., 49 So. 2d 342; State ex rel.
Blackwood v. Brast, 98 W.Va. 596, 127 S.E. 507. These cases
involved either a pertinent by-law or statute, and none involved the
removal of a director. They are not contrary to the rules here
announced. I conclude that plaintiff can raise the issue as to the
propriety of the removal procedure.
Turning now to plaintiff's contentions, it is certainly true that when the
shareholders attempt to remove a director for cause, "* * * there must
be the service of specific charges, adequate notice and full opportunity
of meeting the accusation * * *". See Auer v. Dressel *860 [306 N.Y.
427, 118 N.E.2d 593], above. While it involved an invalid attempt by
directors to remove a fellow director for cause, nevertheless, this same
general standard was recognized in Bruch v. National Guarantee
Credit Corp. [13 Del.Ch. 180, 116 A. 741], above. The Chancellor said
that the power of removal could not "be exercised in an arbitrary
manner. The accused director would be entitled to be heard in his own
defense".
Plaintiff asserts that no specific charges have been served upon the
two directors sought to be ousted; that the notice of the special
meeting fails to contain a specific statement of the charges; that the
proxy statement which accompanied the notice also failed to notify the
stockholders of the specific charges; and that it does not inform the
stockholders that the accused must be afforded an opportunity to meet
the accusations before a vote is taken.
Matters for stockholder consideration need not be conducted with the
same formality as judicial proceedings. The proxy statement
specifically recites that the two directors are sought to be removed for
the reasons stated in the president's accompanying letter. Both
directors involved received copies of the letter. Under the
circumstances I think it must be said that the two directors involved
were served with notice of the charges against them. It is true, as
plaintiff says, that the notice and the proxy statement failed to contain a
specific statement of charges. But as indicated, I believe the
accompanying letter was sufficient compliance with the notice
requirement.
Contrary to plaintiff's contention, I do not believe the material sent out
had to advise the stockholders that the accused must be afforded an
opportunity to defend the charges before the stockholders voted. Such
an opportunity had to be afforded as a matter of law and the failure to
so advise them did not affect the necessity for compliance with the law.
Thus, no prejudice is shown.
I next consider plaintiff's contention that the charges against the two
directors do not constitute "cause" as a matter of law. It would take too
much space to narrate in detail the contents of the president's letter. I
must therefore give my summary of its charges. First of all, it charges
that the two directors (Tomlinson and Meyer) failed to cooperate with
Vogel in his announced program for rebuilding the company; that their
purpose has been to put themselves in control; that they made
baseless accusations against him and other management personnel
and attempted to divert him from his normal duties as president by
bombarding him with correspondence containing unfounded charges
and other similar acts; that they moved into the company's building,
accompanied by lawyers and accountants, and immediately proceeded
upon a planned scheme of harassment. They called for many records,
some going back twenty years, and were rude to the personnel.
Tomlinson sent daily letters to the directors making serious charges
directly and by means of innuendos and misinterpretations.
Are the foregoing charges, if proved, legally sufficient to justify the
ouster of the two directors by the stockholders? I am satisfied that a
charge that the directors desired to take over control of the corporation
is not a reason for their ouster. Standing alone, it is a perfectly
legitimate objective which is a part of the very fabric of corporate
existence. Nor is a charge of lack of cooperation a legally sufficient
basis for removal for cause.
The next charge is that these directors, in effect, engaged in a
calculated plan of harassment to the detriment of the corporation.
Certainly a director may examine books, ask questions, etc., in the
discharge of his duty, but a point can be reached when his actions
exceed the call of duty and become deliberately obstructive. In such a
situation, if his actions constitute a real burden on the corporation then
the stockholders are entitled to relief. The *861 charges in this area
made by the Vogel letter are legally sufficient to justify the stockholders
in voting to remove such directors. Compare Markovitz v. Markovitz,
336 Pa. 145, 8 A.2d 46, 124 A.L.R. 359, and see 19 C.J.S.
Corporations § 738(4). In so concluding I of course express no opinion
as to the truth of the charges.
I therefore conclude that the charge of "a planned scheme of
harassment" as detailed in the letter constitutes a justifiable legal basis
for removing a director.
I next consider whether the directors sought to be removed have been
given a reasonable opportunity to be heard by the stockholders on the
charges made.
The corporate defendant freely admits that it has flatly refused to give
the five Tomlinson directors or the plaintiff a stockholders' list. Any
doubt about the matter was removed by the statement of defendant's
counsel in open court at the argument that no such list would be
supplied. The Vogel faction has physical control of the corporate
offices and facilities. By this action the corporation through the Vogel
group has deliberately refused to afford the directors in question an
adequate opportunity to be heard by the stockholders on the charges
made. This is contrary to the legal requirements which must be met
before a director can be removed for cause.
At the oral argument the defendant's attorney offered to mail any
material which might be presented by the Tomlinson faction. This falls
far short of meeting the requirements of the law when directors are
sought to be ousted for cause. Nor does the granting of the statutory
right to inspect and copy some 26,000 names fulfill the requirement
that a director sought to be removed for cause must be afforded an
opportunity to present his case to the stockholders before they vote.
When Vogel as president caused the notice of meeting to be sent, he
accompanied it with a letter requesting proxies granting authority to
vote for the removal of the two named directors. It is true that the proxy
form also provided a space for the stockholder to vote against such
removal. However, only the Vogel accusations accompanied the
request for a proxy. Thus, while the stockholder could vote for or
against removal, he would be voting with only one view-point
presented. This violates every sense of equity and fair play in a
removal for cause situation.
While the directors involved or some other group could mail a letter to
the stockholders and ask for a proxy which would revoke the earlier
proxy, this procedure does not comport with the legal requirement that
the directors in question must be afforded an opportunity to be heard
before the shareholders vote. This is not an ordinary proxy contest
case and a much more stringent standard must be invoked, at least at
the initial stage, where it is sought to remove a director for cause. This
is so for several reasons. Under our statute the directors manage the
corporation and each has a somewhat independent status during his
term of office. This right could be greatly impaired if substantial
safeguards were not afforded a director whose removal for cause is
sought. The possibility of abuse is evident. Also, as the Chancellor
pointed out in the Bruch case, the power of removal can be a threat to
cumulative voting rights. This is particularly true where, as here, the
removal is by mere majority vote.
There seems to be an absence of cases detailing the appropriate
procedure for submitting a question of director removal for cause for
stockholder consideration. I am satisfied, however, that to the extent
the matter is to be voted upon by the use of proxies, such proxies may
be solicited only after the accused directors are afforded an opportunity
to present their case to the stockholders. This means, in my opinion,
that an opportunity must be provided such directors to present their
defense to the stockholders by a statement which must accompany or
precede the initial solicitation of proxies seeking authority to vote *862
for the removal of such director for cause. If not provided then such
proxies may not be voted for removal. And the corporation has a duty
to see that this opportunity is given the directors at its expense.
Admittedly, no such opportunity was given the two directors involved.
Indeed, the corporation admittedly refused to supply them with a
stockholders' list.
To require anything less than the foregoing is to deprive the
stockholders of the opportunity to consider the case made by both
sides before voting and would make a mockery of the requirement that
a director sought to be removed for cause is entitled to an opportunity
to be heard before the stockholders vote. See the persuasive language
of the dissent in Auer v. Dressel, above. But in referring to the
language of the dissent I do not thereby suggest that my conclusion
here is necessarily contrary to the majority decision on this point.
I therefore conclude that the procedural sequence here adopted for
soliciting proxies seeking authority to vote on the removal of the two
directors is contrary to law. The result is that the proxy solicited by the
Vogel group, which is based upon unilateral presentation of the facts
by those in control of the corporate facilities, must be declared invalid
insofar as they purport to give authority to vote for the removal of the
directors for cause.
A preliminary injunction will issue restraining the corporation from
recognizing or counting any proxies held by the Vogel group and
others insofar as such proxies purport to grant authority to vote for the
removal of Tomlinson and Meyer as directors of the corporation.
The Court emphasizes that it is considering only the proxy solicitation
and use aspect of this problem and is considering those only where
advance authority is given to vote in a particular way. I am not called
upon to consider what procedural and substantive requirements must
be met if the matter is raised for consideration by stockholders present
in person at the meeting.
Plaintiff seeks a preliminary injunction restraining the defendant from
using the corporate funds, employees and facilities for the solicitation
of proxies for the Vogel group and from voting proxies so solicited.
Plaintiff bases this request upon the contention that Vogel and his
group, by calling the meeting and by using corporate funds and
facilities, are usurping the authority of the board of directors. Plaintiff
says that the president in effect is using his corporate authority and the
corporate resources to deny the will of the board of directors and to
maintain himself in office.
This brings the Court to an analysis of this most unusual aspect of this
most unusual case. The by-laws provide for thirteen directors. Seven is
a quorum. Due to four resignations there are now nine directors in
office. Five of the nine are of the Tomlinson faction while the remaining
four are of the Vogel faction. Since the Vogel faction will not attend
directors' meetings, or at least will not attend directors meetings at
which matters may possibly be considered which they do not desire to
have considered, it follows that the Tomlinson faction is unable to
muster a quorum of the board and thus is unable to take action on
behalf of the board. See Tomlinson v. Loew's, Inc., Del.Ch., 134 A.2d
518. In this setting, where a special stockholders' meeting for the
election of directors is pending, it becomes necessary to determine the
status of each faction in order to resolve the issues posed. And it must
be kept in mind that this election can determine which faction will
control the corporation.
We start with the basic proposition that the board of directors acting as
a board must be recognized as the only group authorized to speak for
"management" in the sense that under the statute they are responsible
for the management of the corporation. 8 Del.C. § 141(a). In substance
that was the holding of the Court *863 in Empire Southern Gas Co. v.
Gray, 29 Del.Ch. 95, 46 A.2d 741. However, we are not here
confronted with the situation in the Gray case because Loew's board
as such cannot act for want of a quorum. Thus, there is no board policy
as such with respect to the matters noticed for stockholder
consideration. I am nevertheless persuaded that at least where a
quorum of directors is in office the majority thereof are not "outsiders"
merely because they cannot procure the attendance of a quorum at a
meeting. By this I mean that they are not like the customary opposition
which is seeking to take control of corporate management. To hold
otherwise would be to set a most undesirable legal precedent in
connection with the allocation of corporate powers.
Since the Vogel group, being in physical possession of the records and
facilities of the corporation, treated the request of the directors for a
stockholders' list as though it were to be judged by standards
applicable to a mere stockholder's request, I think they violated the
duty owed such directors as directors. I need not decide how far the
rights of such directors go but I am satisfied that they are not less than
the rights of the four "in" directors insofar as the right to have a
stockholders' list is concerned. The fact that Vogel, as president, had
the power to call a stockholders' meeting to elect directors, and is, so
to speak, in physical control of the corporation, cannot obscure the fact
that the possible proxy fight is between two sets of directors. Vogel, as
president, has no legal standing to make "his" faction the exclusive
voice of Loew's in the forthcoming election.
On balance, I believe the conclusion on this point should not result in
the absolute nullification of all proxies submitted by the Vogel group.
However, I believe it does require that their use be made subject to
terms. I say this because they should not be permitted to benefit
merely because they have physical control of the corporate facilities
when they represent less than a majority of the directors in office.
I conclude that the Vogel group should be enjoined from voting any
proxies unless and until the Tomlinson board members are given a
reasonable period to solicit proxies after a stockholders' list is made
available to them without expense by the corporation.
If the list is submitted on or before September 24, 1957, the Court will
not interfere with the holding of the meeting set for October 15, 1957. If
the corporation decides to accept this condition the following
constitutes the mechanics for compliance. Plaintiff's Delaware counsel,
who is also counsel for the Tomlinson faction, should be delivered the
stockholders' list in his office unless the parties agree in writing to a
different method. If there is delivery the defendant should serve and file
an affidavit in the Court immediately showing such delivery. Unless
plaintiff attacks the sufficiency of defendant's compliance by motion
within one day thereafter it will be assumed that the condition imposed
has been fully met. In such event the preliminary injunction will be
considered as vacated to the extent it enjoins all recognition of proxies
held by the Vogel group.
I next consider how these two groups should be classified for purposes
of determining the rights of the Vogel group in connection with the use
of corporate money and facilities for proxy solicitation at a
stockholders' meeting duly called by the president. Basically, the
stockholders are being asked whether they approve of a record made
by one group and perhaps opposed by another. While the Tomlinson
faction has five of the nine directors, it would be most misleading to
have them represent to the stockholders that they are "management"
in the sense that they have been responsible for the corporate policy
and administration up to this stage. Resignations of directors have
created the unusual situation now presented.
Viewing the situation in the light of what has just been said, it is
apparent that the Vogel group is entitled to solicit proxies, *864 not as
representing a majority of the board, but as representing those who
have been and are now responsible for corporate policy and
administration. Whereas, the Tomlinson group, while not management
in the sense that it is able on its own to take effective director action, is
representative of the majority of the encumbent directors and is entitled
to so represent to the stockholders if it decides to solicit proxies.
Since the stockholders will, in the event of a proxy fight, be asked to
determine which group should run the corporation in the future, the
Vogel faction, because it symbolizes existing policy, has sufficient
status to justify the reasonable use of corporate funds to present its
position to the stockholders. I am not called upon to decide whether
the Tomlinson board members would also be entitled to have the
corporation pay its reasonable charges for proxy solicitation.
Since I have concluded that the Vogel faction is entitled to expend
reasonable sums of corporate funds in the solicitation of proxies, it
follows that the request for a preliminary injunction against such use
will be denied. The restraining order heretofore entered will be vacated
to the extent that it prevents such expenditures.
I next consider whether the Vogel faction is entitled to use corporate
facilities and employees in connection with its solicitation. Because
such action would carry the intra-corporate strife even deeper within
the corporation and because there is no practical way, if there is a
proxy contest, to assure equal treatment for both factions in this area
when only one is in physical control of such facilities and personnel, I
conclude that the defendant should be preliminarily enjoined from
using corporate facilities and personnel in soliciting proxies. I
emphasize that this conclusion is based upon the corporate status of
the two factions herein involved.
Plaintiff next claims that the Vogel group should be enjoined from
voting any proxies obtained as a result of the material sent out by
Vogel. He argues that Vogel's letter to the stockholders, the proxy
statement and the form of proxy deceived and misled the stockholders
into believing that the matters noticed for consideration by the
stockholders were proposed by the company or its management,
whereas the Vogel group is not authorized to speak as "management".
I should say preliminarily that I believe the proxy statement would have
been more accurately informative had it contained a concise statement
showing the factual situation which created the present status of the
two groups. The proxy statement did receive S.E.C. clearance.
However, that agency labored under a difficult burden since it did not
know the legal rights and status of the Vogel group.
I turn now to the various factors which, according to plaintiff, show that
the Vogel faction represented, contrary to fact, that it was soliciting
proxies as management.
1. The letter of Mr. Vogel to the shareholders is reproduced on the
letterhead of Loew's, Incorporated and comes from the "Office of the
President".
I have already pointed out that this is not the case of a working majority
of the board versus the president. Indeed, in this case Vogel's
administration as president symbolizes one choice in the policy
dispute. This dispute is evident from a reading of the material in its
entirety. I therefore conclude that by sending the letter on Loew's
stationery from the office of the president, Vogel, was not misleading
the stockholders.
2. The notice of the special meeting is reproduced on the letterhead of
Loew's, Incorporated, signed, by order of the president, by Irving H.
Greenfield, Secretary.
The fact is that there was no misrepresentation when the notice of the
special meeting was reproduced on Loew's letterhead and signed by
the order of the president. *865 I say this because the president was
authorized as president to call such a meeting.
3. I assume that plaintiff had now abandoned this point which deals
with the power to close the transfer books.
4. The proxy statement recites that "it is considered to be in the best
interest of Loew's and the stockholders to remove * * * [Mr. Meyer and
Mr. Tomlinson] as a director".
This is nothing more than a statement of belief of Vogel and his group.
I cannot see how it is misleading.
5. The proxy material states that Loew's will bear all costs in
connection with the solicitation of proxies; that Loew's will reimburse
the brokerage houses for expenses incident to the solicitation of
proxies; that Loew's has entered into contracts with certain firms to
solicit proxies and has agreed to pay them a fee for their services, and
that the costs to be paid by Loew's for proxy solicitation will be
approximately $100,000.
Plaintiff is here saying in effect that Vogel's group was representing to
the stockholders that the corporation would pay for the expenses of
proxy solicitation for the Vogel group and thus leading the reader to
believe that it was a management solicitation. First of all, such was the
intention of the Vogel group and thus it did not constitute a
misrepresentation as to their intention. But, in any event, I have now
held that reasonable expenses of such solicitation are properly
chargeable to the corporation and so no factual misrepresentation was
involved. In any event, since the Vogel group was synonymous with
management in the policy sense, I cannot see how a stockholder
would be misled.
6. The proxy material states that the officers and employees of Loew's
will solicit and request the return of proxies.
This is not a misrepresentation in the sense that it was contrary to the
intention of the Vogel group. The Court has now determined that the
officers and employees in such capacity, cannot solicit proxies. This
does not mean that the representation is so material that it can be said
to influence stockholders to the extent that the proxies should be
voided.
7. The proxy statement is signed by Joseph R. Vogel, as president.
There is no merit to this contention. Vogel as president was certainly
authorized to sign the statement in view of the fact that he had the
authority to call the meeting.
8. The business reply envelope included with the proxy has on it that
postage will be paid by the secretary of Loew's Inc., and is addressed
to him in his official capacity. The permit on the envelope is Loew's
permit.
The foregoing facts are true but I do not believe that they are so
misleading as to void the proxies. After all, the Vogel group is soliciting
proxies on the basis of its record in administering the corporation.
Plaintiff contends that in any event the cumulative effect of the various
statements mentioned is to lead the ordinary reader to believe that the
solicitation is by management.
Plaintiff recognizes that the proxy statement and the form of proxy both
recite that "this proxy is solicited by the President and George L. Killion
[of the Vogel group] who are members of the executive committee of
Loew's, Inc., and in view of the circumstances, not by the
management". However, he argues that the import of this statement is
lost in the overall impact of the material. Since the meeting was validly
called by the president, there was nothing misleading in the creation of
the impression that the meeting and material were initiated by the
company. I think the whole impact of the proxy material conveyed to
the average reader the impression that there is a bitter fight between
the president and his faction and another faction on the board.
*866 While I have no doubt that it would have been better for the
material to have contained a more explicit factual narrative of the
status of the board personnel at the time of the proxy solicitation, I
cannot believe that the overall result is so misleading as to justify this
Court in concluding that the proxies may not be used for any purpose.
Compare Schiff v. RKO Pictures Corp., Del.Ch., 104 A.2d 267. This is
particularly so in view of the statement made that it was not solicited by
management. Indeed, I think the statement, which was apparently
required by the S.E.C. may have been somewhat misleading in the
sense that it may have suggested to the reader that the Vogel group
was not responsible for the corporate policy up to that date. To this
extent, it was more prejudicial to the Vogel group than the Tomlinson
group, if a stockholder desired to vote for "management" in the policy
sense.
Plaintiff's request that the Vogel group be enjoined from voting any
proxies solicited under the material sent out by Vogel will be denied.
This disposes of the issues raised in connection with the stockholders'
meeting.
Plaintiff next seeks a mandatory injunction to compel the individual
defendants (four Vogel directors) to attend directors' meetings. He
argues that Vogel and his associates acted unlawfully in attempting to
cause the absence of a quorum at meetings of the board of directors
for the purpose of preventing the board from exercising its powers.
While a concerted plan to abstain from attending directors' meetings
may be improper under some circumstances, I cannot find that the fact
that the so-called Vogel directors did not attend directors' meetings
called to take action which would give an opposing faction an absolute
majority of the board solely because of director resignations is such a
breach of their fiduciary duty that they should be judicially compelled to
attend board meetings. This is particularly so where stockholder action
is in the offing to fill the board.
Other considerations aside, no mandatory injunction will issue to
compel the individual defendants (Vogel directors) to attend directors'
meetings. I have considered this issue on its merits because no point
was made of the fact that the individual defendants have not appeared
and because of my conclusion that plaintiff's contention lacks merit.
Plaintiff also argues that Vogel violated his fiduciary duty to the board
of directors by issuing statements impugning the propriety and
necessity of a meeting of the board and attacking the legality of the
action taken at the July 30 directors' meeting. Plaintiff does not indicate
what relief is requested under this head of his argument and so I see
no profit in discussing the matter.
I should add that the prolix factual presentation was put before the
Court in such a fashion that it has been at times difficult for the Court to
determine whether or not the facts relied upon here are all of record. If
I have taken liberties with the record I will expect counsel to promptly
so inform me in detail.
I now summarize my conclusions with respect to the relief requested:
1. No preliminary injunction will issue to enjoin the holding of the
meeting, now fixed for October 15, 1957.
2. The corporation will be preliminarily enjoined from recognizing and
counting any proxies held by the individual defendants unless the
corporation supplies the Tomlinson board members the stockholders'
list as herein provided.
3. Without regard to the action taken by the defendant under Point 2,
the corporation will be preliminarily enjoined from recognizing or
counting any proxies held by the Vogel group or others to the extent
that such proxies purport to grant authority to vote for the removal of
Tomlinson and Meyer as directors.
*867 4. No preliminary injunction will issue to restrain the corporation
from paying reasonable sums incurred by the Vogel group in soliciting
proxies.
5. A preliminary injunction will issue restraining the corporation from
permitting the use of its personnel and facilities for the solicitation of
proxies by the Vogel group.
6. No mandatory preliminary injunction will issue to compel the
individual defendants to attend directors' meetings.
Present order on notice.
NOTES
[1] Since the point is not raised, I need not consider whether those
speaking for the corporation are authorized to do so. Compare Bruch
v. National Guarantee Credit Corporation, 13 Del.Ch. 180, 116 A. 738.
[2] This defense comes with somewhat poor grace from the
corporation when we consider that the corporation, as represented by
this same faction, consented to the entry of an injunction in New York
restraining the Tomlinson faction (which involves the two directors
sought to be removed) from interfering with the stockholders' meeting
called for September 12, 1957. While later modified, at the time this
action was filed the directors who are sought to be removed for cause
appear to have been under an injunction (whether effective, I need not
decide) preventing them from attacking the proposed action even in
Court.
G.R. No. L-17504 & L-17506 February 28, 1969
RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA
SALAS, PAZ SALAS and PATRIA SALAS, heirs of Magdalena
Salas, as stockholders on their own behalf and for the benefit of
the Ma-ao Sugar Central Co., Inc., and other stockholders thereof
who may wish to join in this action, plaintiffs-appellants,
vs.
MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS.
RAMON S. ARANETA, ROMUALDO M. ARANETA, and RAMON A.
YULO, defendants-appellants.
San Juan, Africa and Benedicto for plaintiffs-appellants.
Vicente Hilado and Gianzon, Sison, Yulo and Associates for
defendants-appellants.
CAPISTRANO, J.:
This was a representative or derivative suit commenced on October
20, 1953, in the Court of First Instance of Manila by four minority
stockholders against the Ma-ao Sugar Central Co., Inc. and J. Amado
Araneta and three other directors of the corporation.
The complaint comprising the period November, 1946 to October,
1952, stated five causes of action, to wit: (1) for alleged illegal and
ultra-vires acts consisting of self-dealing irregular loans, and
unauthorized investments; (2) for alleged gross mismanagement; (3)
for alleged forfeiture of corporate rights warranting dissolution; (4) for
alleged damages and attorney's fees; and (5) for receivership.
Plaintiffs prayed, in substance, as follows:
Under the FIRST CAUSE OF ACTION, that the defendant J. Amado
Araneta and his individual co-defendants be ordered to render an
accounting of all transactions made and carried out by them for
defendant corporation, and "to collect, produce and/or pay to the
defendant corporation the outstanding balance of the amounts so
diverted and still unpaid to defendant corporation";
Under the SECOND CAUSE OF ACTION, that the individual
defendants be held liable and be ordered to pay to the defendant
corporation "whatever amounts may be recovered by the plaintiffs in
Civil Case No. 20122, entitled 'Francisco Rodriguez vs. Ma-ao Sugar
Central Co.'"; to return to the defendant corporation all amounts
withdrawn by way of discretionary funds or backpay, and to account for
the difference between the corporation's crop loan accounts payable
and its crop loan accounts receivable;
Under the THIRD CAUSE OF ACTION, that the corporation be
dissolved and its net assets be distributed to the stockholders; and
Under the FOURTH CAUSE OF ACTION, that the defendants be
ordered "to pay the sum of P300,000.00 by way of compensatory,
moral and exemplary damages and for expenses of litigation, including
attorney's fees and costs of the suit."
THE FIFTH CAUSE OF ACTION was an application for the provisional
remedy of receivership.
In their answer originally filed on December 1, 1953, and amended on
February 1, 1955, defendants denied "the allegations regarding the
supposed gross mismanagement, fraudulent use and diversion of
corporate funds, disregard of corporate requirements, abuse of trust
and violation of fiduciary relationship, etc., supposed to have been
discovered by plaintiffs, all of which are nothing but gratuitous,
unwarranted, exaggerated and distorted conclusions not supported by
plain and specific facts and transactions alleged in the complaint."
BY WAY OF SPECIAL DEFENSES, the defendants alleged, among
other things: (1) that the complaint "is premature, improper and
unjustified"; (2) that plaintiffs did not make an "earnest, not simulated
effort" to exhaust first their remedies within the corporation before filing
their complaint; (3) that no actual loss had been suffered by the
defendant corporation on account of the transactions questioned by
plaintiffs; (4) that the payments by the debtors of all amounts due to
the defendant corporation constituted a full, sufficient and adequate
remedy for the grievances alleged in the complaint and (5) that the
dissolution and/or receivership of the defendant corporation would
violate and impair the obligation of existing contracts of said
corporation.
BY WAY OF COUNTERCLAIM, the defendants in substance further
alleged, among others, that the complaint was premature, improper
and malicious, and that the language used was "unnecessarily
vituperative abusive and insulting, particularly against defendant J.
Amado Araneta who appears to be the main target of their hatred."
Wherefore, the defendant sought to recover "compensation for
damages, actual, moral, exemplary and corrective, including
reasonable attorney's fees."
After trial, the Lower Court rendered its Decision (later supplemented
by an Order resolving defendants' Motion for Reconsideration), the
dispositive portion of which reads:
IN VIEW WHEREOF, the Court dismisses the petition for dissolution
but condemns J. Amado Araneta to pay unto Ma-ao Sugar Central Co.,
Inc. the amount of P46,270.00 with 8% interest from the date of the
filing of this complaint, plus the costs; the Court reiterates the
preliminary injunction restraining the Ma-ao Sugar Central Co., Inc.
management to give any loans or advances to its officers and orders
that this injunction be as it is hereby made, permanent; and orders it to
refrain from making investments in Acoje Mining, Mabuhay Printing,
and any other company whose purpose is not connected with the
Sugar Central business; costs of plaintiffs to be borne by the
Corporation and J. Amado Araneta.
From this judgment both parties appealed directly to the Supreme
Court.
Before taking up the errors respectively, assigned by the parties, we
should state that the following findings of the Lower Court on the
commission of corporate irregularities by the defendants have not been
questioned by the defendants:
1. Failure to hold stockholders' meetings regularly. No stockholders'
meetings were held in 1947, 1950 and 1951;
2. Irregularities in the keeping of the books. Untrue entries were made
in the books which could not simply be considered as innocent errors;
3. Illegal investments in the Mabuhay Printing, P2,280,00, and the
Acoje Mining, P7,000.00. The investments were made not in
pursuance of the corporate purpose and without the requisite authority
of two-thirds of the stockholders;
4. Unauthorized loans to J. Amado Araneta totalling P132,082.00
(which, according to the defendants, had been fully paid), in violation of
the by-laws of the corporation which prohibits any director from
borrowing money from the corporation;
5. Diversion of corporate funds of the Ma-ao Sugar Central Co., Inc. to:
J. Amado Araneta & Co. P243,415.62
Luzon Industrial Corp. 585,918.17
(1) ".... Finally, as to the Philippine Fiber, the Court takes it that
defendants admit having invested P655,000.00 in shares of stock of
this company but that this was ratified by the Board of Directors in
Resolutions 60 and 80, Exhibits "R" and "R-2"; more than that,
defendants contend that since said company was engaged in the
manufacture of sugar bags it was perfectly legitimate for Ma-ao Sugar
either to manufacture sugar bags or invest in another corporation
engaged in said manufacture, and they quote authorities for the
purpose, pp. 28-31, memorandum; the Court is persuaded to believe
that the defendants on this point are correct, because while Sec. 17-
1/2 of the Corporation Law provides that:
No corporation organized under this act shall invest its funds in any
other corporation or business or for any purpose other than the main
purpose for which it was organized unless its board of directors has
been so authorized in a resolution by the affirmative vote of
stockholders holding shares in the corporation entitling them to
exercise at least two-thirds of the voting power on such proposal at the
stockholders' meeting called for the purpose.

the Court is convinced that that law should be understood to mean as

Associated Sugar 463,860.36
the authorities state, that it is prohibited to the Corporation to invest in
shares of another corporation unless such an investment is authorized
General Securities 86,743.65 by two-thirds of the voting power of the stockholders, if the purpose of
the corporation in which investment is made is foreign to the purpose
of the investing corporation because surely there is more logic in the
Bacolod Murcia 501,030.61 stand that if the investment is made in a corporation whose business is
important to the investing corporation and would aid it in its purpose, to
require authority of the stockholders would be to unduly curtail the
Central Azucarera del Danao 97,884.42
Power of the Board of Directors; the only trouble here is that the
investment was made without any previous authority of the Board of
Talisay-Silay 4,365.90 Directors but was only ratified afterwards; this of course would have
the effect of legalizing the unauthorized act but it is an indication of the
manner in which corporate business is transacted by the Ma-ao Sugar
The Court found that sums were taken out of the funds of the Ma-ao
administration, the fact that off and on, there would be passed by the
Sugar Central Co., Inc. and delivered to these affiliated companies,
Board of Directors, resolutions ratifying all acts previously done by the
and vice versa, without the approval of the Ma-ao Board of Directors,
management, e.g. resolutions passed on February 25, 1947, and
in violation of Sec. III, Art. 6-A of the by-laws.
February 25, 1952, by the Board of Directors as set forth in the affidavit
of Isidro T. Dunca p. 127, etc. Vol. 1. (Decision, pp. 239-241 of Record
The errors assigned in the appeal of the plaintiffs, as appellants, are as
on Appeal.)
follows:

xxx xxx xxx

I.

(2) "On the other hand, the Court has noted against plaintiffs that their
THE LOWER COURT ERRED IN HOLDING THAT THE
contention that Ma-ao Sugar is on the verge of bankruptcy has not
INVESTMENT OF CORPORATE FUNDS OF THE MA-AO SUGAR
been clearly shown; against this are Exh. C to Exh. C-3 perhaps the
CENTRAL CO., INC., IN THE PHILIPPINE FIBER PROCESSING CO.,
best proof that insolvency is still far is that this action was filed in 1953
INC. WAS NOT A VIOLATION OF SEC. 17-½ OF THE
and almost seven years have passed since then without the company
CORPORATION LAW.
apparently getting worse than it was before; ..." (Decision, pp. 243-
II. 244, supra.)

THE LOWER COURT ERRED IN NOT FINDING THAT THE MA-AO
SUGAR CENTRAL CO., INC. WAS INSOLVENT.
III.
THE LOWER COURT ERRED IN HOLDING THAT THE
DISCRIMINATORY ACTS COMMITTED AGAINST PLANTERS DID
NOT CONSTITUTE MISMANAGEMENT.
IV.
THE LOWER COURT ERRED IN HOLDING THAT ITS CULPABLE
ACTS WERE INSUFFICIENT FOR THE DISSOLUTION OF THE
CORPORATION.
The portions of the Decision of the Lower Court assailed by the
plaintiffs as appellants are as follows:
xxx xxx xxx
(3) "As to the crop loan anomalies in that instead of giving unto the
planters the entire amount alloted for that, the Central withheld a
certain portion for their own use, as can be seen in Appendix A of Exh.
C-1, while the theory of plaintiffs is that since between the amount of
P3,791,551.78 the crop loan account payable, and the amount of
P1,708,488.22, the crop loan receivable, there is a difference of
P2,083,063.56, this would indicate that this latter sum had been used
by the Central itself for its own purposes; on the other hand,
defendants contend that the first amount did not represent the totality
of the crop loans obtained from the Bank for the purpose of relending
to the planters, but that it included the Central's own credit line on its
40% share in the standing crop; and that this irregularity amounts to a
grievance by plaintiffs as planters and not as stockholders, the Court
must find that as to this count, there is really reason to find that said
anomaly is not a clear basis for the derivative suit, first, because
plaintiffs' evidence is not very sufficient to prove clearly the alleged
diversion in the face of defendants' defense; there should have been a
showing that the Central had no authority to make the diversion; and
secondly, if the anomaly existed, there is ground to hold with
defendants that it was an anomaly pernicious not to the Central but to
the planters; it was not even pernicious to the stockholders.
Going to the discriminatory acts of J. Amado Araneta, namely,
manipulation of cane allotments, withholding of molasses and alcohol
shares, withholding of trucking allowance, formation of rival planters
associations, refusal to deal with legitimate planters group, Exh. S; the
Court notices that as to the failure to provide hauling transportation,
this in a way is corroborated by Exh. 7, that part containing the
decision of the Court of First Instance of Manila, civil 20122, Francisco
Rodriguez v. Ma-ao Sugar; for the reason, however, that even if these
were true, those grievances were grievances of plaintiffs as planters
and not as stockholders — just as the grievance as to the crop loans
already adverted to, — this Court will find insufficient merit on this
count. (Decision, pp. 230-231, supra.)
xxx xxx xxx
(4) "...; for the Court must admit its limitations and confess that it
cannot pretend to know better than the Board in matters where the
Board has not transgressed any positive statute or by-law especially
where as here, there is the circumstance that presumably, an impartial
representative in the Board of Directors, — the one from the Philippine
National Bank, — against whom apparently plaintiffs have no quarrel,
does not appear to have made any protest against the same; the net
result will be to hold that the culpable acts proved are not enough to
secure a dissolution; the Court will only order the correction of abuses,
proved as already mentioned; nor will the Court grant any more
damages one way or the other. (Decision, p. 244, supra.)
On the other hand, the errors assigned in the appeal of the defendants
as appellants are as follows:
I.
THE LOWER COURT ERRED IN ADJUDGING J. AMADO ARANETA
TO PAY TO MA-AO SUGAR CENTRAL CO., INC., THE AMOUNT OF
P46,270.00, WITH 8% INTEREST FROM THE DATE OF FILING OF
THE COMPLAINT.
II.
THE LOWER COURT ERRED IN NOT ORDERING THE PLAINTIFFS
TO PAY THE DEFENDANTS, PARTICULARLY J. AMADO ARANETA,
THE DAMAGES PRAYED FOR IN THE COUNTERCLAIM OF SAID
DEFENDANTS.
The portions of the Decision of the Lower Court assailed by the
defendants as appellants are as follows:
(1) "As to the alleged juggling of books in that the personal account of
J. Amado Araneta of P46,270.00 was closed on October 31, 1947 by
charges transferred to loans receivable nor was interest paid on this
amount, the Court finds that this is related to charge No. 1, namely, the
granting of personal loans to J. Amado Araneta; it is really true that
according to the books, and as admitted by defendants, J. Amado
Araneta secured personal loans; in 1947, the cash advance to him was
P132,082.00 (Exh. A); the Court has no doubt that this was against the
By-Laws which provided that:
The Directors shall not in any case borrow money from the Company.
(Sec. III, Art. 7);
the Court therefore finds this count to be duly proved; worse, the Court
also finds that as plaintiffs contend, while the books of the Corporation
would show that the last balance of P46,270.00 was written off as paid,
as testified to by Auditor Mr. Sanchez, the payment appeared to be
nothing more than a transfer of his loan receivable account, stated
otherwise, the item was only transferred from the personal account to
the loan receivable account, so that again the Court considers
established the juggling of the books; and then again, it is also true that
the loans were secured without any interest and while it is true that in
the Directors' meeting of 21 October, 1953, it was resolved to collect
8%, the Court does not see how such a unilateral action of the Board
could bind the borrowers. Be it stated that defendants have presented
in evidence Exh. 5 photostatic copy of the page in loan receivable and
it is sought to be proved that J. Amado Araneta's debt was totally paid
on 31 October, 1953; to the Court, in the absence of definite primary
proof of actual payment having found out that there had already been a
juggling of books, it cannot just believe that the amount had been paid
as noted in the books. (Decision, pp. 233-235 of Record on Appeal.)
(2) "With respect to the second point in the motion for reconsideration
to the effect that the Court did not make any findings of fact on the
counterclaim of defendants, although the Court did not say that in so
many words, the Court takes it that its findings of fact on pages 17 to
21 of its decision were enough to justify a dismissal of the
counterclaim, because the counterclaims were based on the fact that
the complaint was premature, improper, malicious and that the
language is unnecessarily vituperative abusive and insulting; but the
Court has not found that the complaint is premature; nor has the Court
found that the complaint was malicious; these findings can be gleaned
from the decision with respect to the allegation that the complaint was
abusive and insulting, the Court does not concur; for it has not seen
anything in the evidence that would justify a finding that plaintiffs and
been actuated by bad faith, nor is there anything in the complaint
essentially libelous; especially as the rule is that allegations in pleading
where relevant, are privileged even though they may not clearly proved
afterwards; so that the Court has not seen any merit in the
counterclaims; and the Court had believed that the decision already
carried with it the implication of the dismissal of the counterclaims, but
if that is not enough, the Court makes its position clear on this matter in
this order, and clarifies that it has dismissed the counterclaims of
defendant; ..." (Order of September 3, 1960, pp. 248-249, supra.)
Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the brief
of the plaintiffs as appellants, it appears to us that the Lower Court was
correct in its appreciation (1) that the evidence presented did not show
that the defendant Ma-ao Sugar Company was insolvent (2) that the
alleged discriminatory acts committed by the defendant Central against
the planters were not a proper subject of derivative suit, but, at most,
constituted a cause of action of the individual planters; and (3) that the
acts of mismanagement complained of and proved do not justify a
dissolution of the corporation.
Whether insolvency exists is usually a question of fact, to be
determined from an inventory of the assets and their value, as well as
a consideration of the liabilities.... But the mere impairment of capital
stock alone does not establish insolvency there being other evidence
as to the corporation being a going concern with sufficient assets. Also,
the excess of liabilities over assets does not establish insolvency,
when other assets are available. (Fletcher Cyc. of the Law of Private
Corporations, Vol. 15A, 1938 Ed pp. 34-37; Emphasis supplied).
But relief by dissolution will be awarded in such cases only where no
other adequate remedy is available, and is not available where the
rights of the stockholders can be, or are, protected in some other way.
(16 Fletcher Cyc. Corporations, 1942 Ed., pp. 812-813, citing "Thwing
v. McDonald", 134 Minn. 148, 156 N.W. 780, 158 N.W. 820, 159 N.W.
564, Ann. Cas. 1918 E 420; Mitchell v. Bank of St. Paul, 7 Minn. 252).
The First Assignment of Error in the brief of the plaintiffs as appellants,
contending that the investment of corporate funds by the Ma-ao Sugar
Co., Inc., in another corporation (the Philippine Fiber Processing Co.,
Inc.) constitutes a violation of Sec. 17-½ of the Corporation Law,
deserves consideration.
Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar Central Co.,
Inc., through its President, J. Amado Araneta,, subscribed for
P300,000.00 worth of capital stock of the Philippine Fiber Processing
Co. Inc., that payments on the subscription were made on September
20, 1950, for P150,000.00, on April 30, 1951, for P50,000.00, and on
March 6, 1952, for P100,000.00; that at the time the first two payments
were made there was no board resolution authorizing the investment;
and that it was only on November 26, 1951, that the President of Ma-
ao Sugar Central Co., Inc., was so authorized by the Board of
Directors.
In addition, 355,000 shares of stock of the same Philippine Fiber
Processing Co., Inc., owned by Luzon Industrial, corporation were
transferred on May 31, 1952, to the defendant Ma-ao Sugar Central
Co., Inc., with a valuation of P355,000.00 on the basis of P1.00 par
value per share. Again the "investment" was made without prior board
resolution, the authorizing resolution having been subsequentIy
approved only on June 4, 1952.
Plaintiffs-appellants also contend that even assuming, arguendo, that
the said Board Resolutions are valid, the transaction, is still wanting in
legality, no resolution having been approved by the affirmative vote of
stockholders holding shares in the corporation entitling them to
exercise at least two-thirds of the voting power, as required in Sec. 17-
½ of the Corporation Law.
The legal provision invoked by the plaintiffs, as appellants, Sec. 17-½
of the Corporation Law, provides:
No corporation organized under this act shall invest its funds in any
other corporation or business, or for any purpose other than the main
purpose for which it was organized, unless its board of directors has
been so authorized in a resolution by the affirmative vote of
stockholders holding shares in the corporation entitling them to
exercise at least two-thirds of the voting power on such proposal at a
stockholders' meeting called for the purpose ....
On the other hand, the defendants, as appellees, invoked Sec. 13, par.
10 of the Corporation Law, which provides:
SEC. 13. — Every corporation has the power:
xxx xxx xxx
(9) To enter into any obligation or contract essential to the proper
administration of its corporate affairs or necessary for the proper
transaction of the business or accomplishment of the purpose for
which the corporation was organized;
(10) Except as in this section otherwise provided, and in order to
accomplish its purpose as stated in the articles of incorporation, to
acquire, hold, mortgage, pledge or dispose of shares, bonds, securities
and other evidences of indebtedness of any domestic or foreign
corporation.
A reading of the two afore-quoted provisions shows that there is need
for interpretation of the apparent conflict.
In his work entitled "The Philippine Corporation Law," now in its 5th
edition, Professor Sulpicio S. Guevara of the University of the
Philippines, College of Law, a well-known authority in commercial law,
reconciled these two apparently conflicting legal provisions, as follows:
j. Power to acquire or dispose of shares or securities. — A private
corporation, in order to accomplish its purpose as stated in its articles
of incorporation, and subject to the limitations imposed by the
Corporation Law, has the power to acquire, hold, mortgage, pledge or
dispose of shares, bonds, securities, and other evidences of
indebtedness of any domestic or foreign corporation. Such an act, if
done in pursuance of the corporate purpose, does not need the
approval of the stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of approval of the
stockholders is necessary. In any case, the purchase of such shares or
securities must be subject to the limitations established by the
Corporation Law; namely, (a) that no agricultural or mining corporation
shall in anywise be interested in any other agricultural or mining
corporation; or (b) that a non-agricultural or non-mining corporation
shall be restricted to own not more than 15% of the voting stock of any
agricultural or mining corporation; and (c) that such holdings shall be
solely for investment and not for the purpose of bringing about a
monopoly in any line of commerce or combination in restraint of trade.
(The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p.
89.) (Emphasis ours.)lawphi1.nêt
40. Power to invest corporate funds. — A private corporation has the
power to invest its corporate funds in any other corporation or
business, or for any purpose other than the main purpose for which it
was organized, provided that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power on such a proposal at a stockholders'
meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in any
other agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in it articles
of incorporation, the approval of the stockholders is not necessary. (Id.,
p. 108.) (Emphasis ours.)
We agree with Professor Guevara.
We therefore agree with the finding of the Lower Court that the
investment in question does not fall under the purview of Sec. 17- ½ of
the Corporation Law.
With respect to the defendants' assignment of errors, the second
(referring to the counterclaim) is clearly without merit. As the Lower
Court aptly ruled in its Order of September 3, 1960 (resolving the
defendants' Motion for Reconsideration) the findings of fact were
enough to justify a dismissal of the counterclaim, "because the
counterclaims were based on the fact that the complaint was
premature, improper, malicious and that the language is unnecessarily
vituperative abusive and insulting; but the Court has not found that the
complaint is premature; nor has the Court found that the complaint was
malicious; these findings can be gleaned from the decision; with
respect to the allegation that the complaint was abusive and insulting,
the Court does not concur; for it has not seen anything in the evidence
that would justify a finding that plaintiffs had been actuated by bad
faith, nor is there anything in the complaint essentially libelous
especially as the rule is that allegations in pleadings where relevant,
are privileged even though they may not be clearly proved afterwards;
..."
As regards defendants' first assignment of error, referring to the status
of the account of J. Amado Araneta in the amount of P46,270.00, this
Court likewise agrees with the finding of the Lower Court that Exhibit 5,
photostatic copy of the page on loans receivable does not constitute
definite primary proof of actual payment, particularly in this case where
there is evidence that the account in question was transferred from one
account to another. There is no better substitute for an official receipt
and a cancelled check as evidence of payment.
In the judgment, the lower court ordered the management of the Ma-ao
Sugar Central Co., Inc. "to refrain from making investments in Acoje
Mining, Mabuhay Printing and any other company whose purpose is
not connected with the sugar central business." This portion of the
decision should be reversed because, Sec. 17-½ of the Corporation
Law allows a corporation to "invest its fund in any other corporation or
business, or for any purpose other than the main purpose for which it
was organized," provided that its board of directors has been so
authorized by the affirmative vote of stockholders holding shares
entitling them to exercise at least two-thirds of the voting power.
IN VIEW OF ALL THE FOREGOING, that part of the judgment which
orders the Ma-ao Sugar Central Co., Inc. "to refrain from making
investments in Acoje Mining, Mabuhay Printing, and any other:
company whose purpose is not connected with the sugar central
business," is reversed. The other parts of the judgment are, affirmed.
No special pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Castro, Fernando
and Barredo, JJ., concur.
Makalintal, Sanchez and Teehankee, JJ., took no part.
G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M.
SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO
ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION,
EMIGDIO TANJUATCO, SR., and EDUARDO R.
VISAYA, respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for
respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel
Corporation.
R. T Capulong for respondent Eduardo R. Visaya.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer
for issuance of writ of preliminary injunction, arose out of two cases
filed by petitioner with the Securities and Exchange Commission, as
follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San
Miguel Corporation, filed with the Securities and Exchange
Commission (SEC) a petition for "declaration of nullity of amended by-
laws, cancellation of certificate of filing of amended by- laws, injunction
and damages with prayer for a preliminary injunction" against the
majority of the members of the Board of Directors and San Miguel
Corporation as an unwilling petitioner. The petition, entitled "John
Gokongwei Jr. vs. Andres Soriano, Jr., Jose M. Soriano, Enrique
Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel
Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as
SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18,
1976, individual respondents amended by bylaws of the corporation,
basing their authority to do so on a resolution of the stockholders
adopted on March 13, 1961, when the outstanding capital stock of
respondent corporation was only P70,139.740.00, divided into
5,513,974 common shares at P10.00 per share and 150,000 preferred
shares at P100.00 per share. At the time of the amendment, the
outstanding and paid up shares totalled 30,127,047 with a total par
value of P301,270,430.00. It was contended that according to section
22 of the Corporation Law and Article VIII of the by-laws of the
corporation, the power to amend, modify, repeal or adopt new by-laws
may be delegated to the Board of Directors only by the affirmative vote
of stockholders representing not less than 2/3 of the subscribed and
paid up capital stock of the corporation, which 2/3 should have been
computed on the basis of the capitalization at the time of the
amendment. Since the amendment was based on the 1961
authorization, petitioner contended that the Board acted without
authority and in usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted
in 1961 had already been exercised in 1962 and 1963, after which the
authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of
the Board of Directors had changed since the authority was given in
1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned
amendment, petitioner had all the qualifications to be a director of
respondent corporation, being a Substantial stockholder thereof; that
as a stockholder, petitioner had acquired rights inherent in stock
ownership, such as the rights to vote and to be voted upon in the
election of directors; and that in amending the by-laws, respondents
purposely provided for petitioner's disqualification and deprived him of
his vested right as afore-mentioned hence the amended by-laws are
null and void. 1
As additional causes of action, it was alleged that corporations have no
inherent power to disqualify a stockholder from being elected as a
director and, therefore, the questioned act is ultra vires and void; that
Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing
other corporations, entered into contracts (specifically a management
contract) with respondent corporation, which was allowed because the
questioned amendment gave the Board itself the prerogative of
determining whether they or other persons are engaged in competitive
or antagonistic business; that the portion of the amended bylaws which
states that in determining whether or not a person is engaged in
competitive business, the Board may consider such factors as
business and family relationship, is unreasonable and oppressive and,
therefore, void; and that the portion of the amended by-laws which
requires that "all nominations for election of directors ... shall be
submitted in writing to the Board of Directors at least five (5) working
days before the date of the Annual Meeting" is likewise unreasonable
and oppressive.
It was, therefore, prayed that the amended by-laws be declared null
and void and the certificate of filing thereof be cancelled, and that
individual respondents be made to pay damages, in specified amounts,
to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed
with the Securities and Exchange Commission an "Urgent Motion for
Production and Inspection of Documents", alleging that the Secretary
of respondent corporation refused to allow him to inspect its records
despite request made by petitioner for production of certain documents
enumerated in the request, and that respondent corporation had been
attempting to suppress information from its stockholders despite a
negative reply by the SEC to its query regarding their authority to do
so. Among the documents requested to be copied were (a) minutes of
the stockholder's meeting field on March 13, 1961, (b) copy of the
management contract between San Miguel Corporation and A. Soriano
Corporation (ANSCOR); (c) latest balance sheet of San Miguel
International, Inc.; (d) authority of the stockholders to invest the funds
of respondent corporation in San Miguel International, Inc.; and (e) lists
of salaries, allowances, bonuses, and other compensation, if any,
received by Andres M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was
opposed by respondents, alleging, among others that the motion has
no legal basis; that the demand is not based on good faith; that the
motion is premature since the materiality or relevance of the evidence
sought cannot be determined until the issues are joined, that it fails to
show good cause and constitutes continued harrasment, and that
some of the information sought are not part of the records of the
corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San
Miguel Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto
filed their answer to the petition, denying the substantial allegations
therein and stating, by way of affirmative defenses that "the action
taken by the Board of Directors on September 18, 1976 resulting in the
... amendments is valid and legal because the power to "amend,
modify, repeal or adopt new By-laws" delegated to said Board on
March 13, 1961 and long prior thereto has never been revoked of
SMC"; that contrary to petitioner's claim, "the vote requirement for a
valid delegation of the power to amend, repeal or adopt new by-laws is
determined in relation to the total subscribed capital stock at the time
the delegation of said power is made, not when the Board opts to
exercise said delegated power"; that petitioner has not availed of his
intra-corporate remedy for the nullification of the amendment, which is
to secure its repeal by vote of the stockholders representing a majority
of the subscribed capital stock at any regular or special meeting, as
provided in Article VIII, section I of the by-laws and section 22 of the
Corporation law, hence the, petition is premature; that petitioner is
estopped from questioning the amendments on the ground of lack of
authority of the Board. since he failed, to object to other amendments
made on the basis of the same 1961 authorization: that the power of
the corporation to amend its by-laws is broad, subject only to the
condition that the by-laws adopted should not be respondent
corporation inconsistent with any existing law; that respondent
corporation should not be precluded from adopting protective
measures to minimize or eliminate situations where its directors might
be tempted to put their personal interests over t I hat of the
corporation; that the questioned amended by-laws is a matter of
internal policy and the judgment of the board should not be interfered
with: That the by-laws, as amended, are valid and binding and are
intended to prevent the possibility of violation of criminal and civil laws
prohibiting combinations in restraint of trade; and that the petition
states no cause of action. It was, therefore, prayed that the petition be
dismissed and that petitioner be ordered to pay damages and
attorney's fees to respondents. The application for writ of preliminary
injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their
opposition to the petition, denying the material averments thereof and
stating, as part of their affirmative defenses, that in August 1972, the
Universal Robina Corporation (Robina), a corporation engaged in
business competitive to that of respondent corporation, began
acquiring shares therein. until September 1976 when its total holding
amounted to 622,987 shares: that in October 1972, the Consolidated
Foods Corporation (CFC) likewise began acquiring shares in
respondent (corporation. until its total holdings amounted to
P543,959.00 in September 1976; that on January 12, 1976, petitioner,
who is president and controlling shareholder of Robina and CFC (both
closed corporations) purchased 5,000 shares of stock of respondent
corporation, and thereafter, in behalf of himself, CFC and Robina,
"conducted malevolent and malicious publicity campaign against SMC"
to generate support from the stockholder "in his effort to secure for
himself and in representation of Robina and CFC interests, a seat in
the Board of Directors of SMC", that in the stockholders' meeting of
March 18, 1976, petitioner was rejected by the stockholders in his bid
to secure a seat in the Board of Directors on the basic issue that
petitioner was engaged in a competitive business and his securing a
seat would have subjected respondent corporation to grave
disadvantages; that "petitioner nevertheless vowed to secure a seat in
the Board of Directors at the next annual meeting; that thereafter the
Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary
damages, expenses of litigation and attorney's fees were presented
against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion
for production and inspection of documents was filed by all the
respondents. This was duly opposed by petitioner. At this juncture,
respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were
allowed to intervene as oppositors and they accordingly filed their
oppositions-intervention to the petition.
On December 29, 1976, the Securities and Exchange Commission
resolved the motion for production and inspection of documents by
issuing Order No. 26, Series of 1977, stating, in part as follows:
Considering the evidence submitted before the Commission by the
petitioner and respondents in the above-entitled case, it is hereby
ordered:
1. That respondents produce and permit the inspection, copying and
photographing, by or on behalf of the petitioner-movant, John
Gokongwei, Jr., of the minutes of the stockholders' meeting of the
respondent San Miguel Corporation held on March 13, 1961, which are
in the possession, custody and control of the said corporation, it
appearing that the same is material and relevant to the issues involved
in the main case. Accordingly, the respondents should allow petitioner-
movant entry in the principal office of the respondent Corporation, San
Miguel Corporation on January 14, 1977, at 9:30 o'clock in the morning
for purposes of enforcing the rights herein granted; it being understood
that the inspection, copying and photographing of the said documents
shall be undertaken under the direct and strict supervision of this
Commission. Provided, however, that other documents and/or papers
not heretofore included are not covered by this Order and any
inspection thereof shall require the prior permission of this
Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as
the list of salaries, allowances, bonuses, compensation and/or
remuneration received by respondent Jose M. Soriano, Jr. and Andres
Soriano from San Miguel International, Inc. and/or its successors-in-
interest, the Petition to produce and inspect the same is hereby
DENIED, as petitioner-movant is not a stockholder of San Miguel
International, Inc. and has, therefore, no inherent right to inspect said
documents;
3. In view of the Manifestation of petitioner-movant dated November
29, 1976, withdrawing his request to copy and inspect the
management contract between San Miguel Corporation and A. Soriano
Corporation and the renewal and amendments thereof for the reason
that he had already obtained the same, the Commission takes note
thereof; and
4. Finally, the Commission holds in abeyance the resolution on the
matter of production and inspection of the authority of the stockholders
of San Miguel Corporation to invest the funds of respondent
corporation in San Miguel International, Inc., until after the hearing on
the merits of the principal issues in the above-entitled case.
2
This Order is immediately executory upon its approval.
Dissatisfied with the foregoing Order, petitioner moved for its
reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be
heard, respondent corporation issued a notice of special stockholders'
meeting for the purpose of "ratification and confirmation of the
amendment to the By-laws", setting such meeting for February 10,
1977. This prompted petitioner to ask respondent Commission for a
summary judgment insofar as the first cause of action is concerned, for
the alleged reason that by calling a special stockholders' meeting for
the aforesaid purpose, private respondents admitted the invalidity of
the amendments of September 18, 1976. The motion for summary
judgment was opposed by private respondents. Pending action on the
motion, petitioner filed an "Urgent Motion for the Issuance of a
Temporary Restraining Order", praying that pending the determination
of petitioner's application for the issuance of a preliminary injunction
and/or petitioner's motion for summary judgment, a temporary
restraining order be issued, restraining respondents from holding the
special stockholder's meeting as scheduled. This motion was duly
opposed by respondents.
On February 10, 1977, respondent Commission issued an order
denying the motion for issuance of temporary restraining order. After
receipt of the order of denial, respondents conducted the special
stockholders' meeting wherein the amendments to the by-laws were
ratified. On February 14, 1977, petitioner filed a consolidated motion
for contempt and for nullification of the special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's motion for
summary judgment was filed by petitioner before respondent
Commission on March 10, 1977. Petitioner alleges that up to the time
of the filing of the instant petition, the said motion had not yet been
scheduled for hearing. Likewise, the motion for reconsideration of the
order granting in part and denying in part petitioner's motion for
production of record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent
corporation had been scheduled for May 10, 1977, petitioner filed with
respondent Commission a Manifestation stating that he intended to run
for the position of director of respondent corporation. Thereafter,
respondents filed a Manifestation with respondent Commission,
submitting a Resolution of the Board of Directors of respondent
corporation disqualifying and precluding petitioner from being a
candidate for director unless he could submit evidence on May 3, 1977
that he does not come within the disqualifications specified in the
amendment to the by-laws, subject matter of SEC Case No. 1375. By
reason thereof, petitioner filed a manifestation and motion to resolve
pending incidents in the case and to issue a writ of injunction, alleging
that private respondents were seeking to nullify and render ineffectual
the exercise of jurisdiction by the respondent Commission, to
petitioner's irreparable damage and prejudice, Allegedly despite a
subsequent Manifestation to prod respondent Commission to act,
petitioner was not heard prior to the date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted
inability on the part of the SEC to act hence petitioner came to this
Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent
corporation has been investing corporate funds in other corporations
and businesses outside of the primary purpose clause of the
corporation, in violation of section 17 1/2 of the Corporation Law, he
filed with respondent Commission, on January 20, 1977, a petition
seeking to have private respondents Andres M. Soriano, Jr. and Jose
M. Soriano, as well as the respondent corporation declared guilty of
such violation, and ordered to account for such investments and to
answer for damages.
On February 4, 1977, motions to dismiss were filed by private
respondents, to which a consolidated motion to strike and to declare
individual respondents in default and an opposition ad abundantiorem
cautelam were filed by petitioner. Despite the fact that said motions
were filed as early as February 4, 1977, the commission acted thereon
only on April 25, 1977, when it denied respondents' motion to dismiss
and gave them two (2) days within which to file their answer, and set
the case for hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting,
including in the Agenda thereof, the following:
6. Re-affirmation of the authorization to the Board of Directors by the
stockholders at the meeting on March 20, 1972 to invest corporate
funds in other companies or businesses or for purposes other than the
main purpose for which the Corporation has been organized, and
ratification of the investments thereafter made pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the
SEC an urgent motion for the issuance of a writ of preliminary
injunction to restrain private respondents from taking up Item 6 of the
Agenda at the annual stockholders' meeting, requesting that the same
be set for hearing on May 3, 1977, the date set for the second hearing
of the case on the merits. Respondent Commission, however,
cancelled the dates of hearing originally scheduled and reset the same
to May 16 and 17, 1977, or after the scheduled annual stockholders'
meeting. For the purpose of urging the Commission to act, petitioner
filed an urgent manifestation on May 3, 1977, but this notwithstanding,
no action has been taken up to the date of the filing of the instant
petition.
With respect to the afore-mentioned SEC cases, it is petitioner's
contention before this Court that respondent Commission gravely
abused its discretion when it failed to act with deliberate dispatch on
the motions of petitioner seeking to prevent illegal and/or arbitrary
impositions or limitations upon his rights as stockholder of respondent
corporation, and that respondent are acting oppressively against
petitioner, in gross derogation of petitioner's rights to property and due
process. He prayed that this Court direct respondent SEC to act on
collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order
restraining private respondents from disqualifying or preventing
petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or from
causing the ratification or confirmation of Item 6 of the Agenda of the
annual stockholders' meeting on May 10, 1977, or from Making
effective the amended by-laws of respondent corporation, until further
orders from this Court or until the Securities and Ex-change
Commission acts on the matters complained of in the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that
after a restraining order had been issued by this Court, or on May 9,
1977, the respondent Commission served upon petitioner copies of the
following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying
petitioner's motion for reconsideration, with its supplement, of the order
of the Commission denying in part petitioner's motion for production of
documents, petitioner's motion for reconsideration of the order denying
the issuance of a temporary restraining order denying the issuance of
a temporary restraining order, and petitioner's consolidated motion to
declare respondents in contempt and to nullify the stockholders'
meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing
petitioner to run as a director of respondent corporation but stating that
he should not sit as such if elected, until such time that the
Commission has decided the validity of the bylaws in dispute, and
denying deferment of Item 6 of the Agenda for the annual stockholders'
meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying
petitioner's motion for reconsideration of the order of respondent
Commission denying petitioner's motion for summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that
respondent Commission acted with indecent haste and without
circumspection in issuing the aforesaid orders to petitioner's
irreparable damage and injury; (2) that it acted without jurisdiction and
in violation of petitioner's right to due process when it decided en
banc an issue not raised before it and still pending before one of its
Commissioners, and without hearing petitioner thereon despite
petitioner's request to have the same calendared for hearing , and (3)
that the respondents acted oppressively against the petitioner in
violation of his rights as a stockholder, warranting immediate judicial
intervention.
It is prayed in the supplemental petition that the SEC orders
complained of be declared null and void and that respondent
Commission be ordered to allow petitioner to undertake discovery
proceedings relative to San Miguel International. Inc. and thereafter to
decide SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose
M. Soriano filed their comment, alleging that the petition is without
merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in
business competitive and antagonistic to that of respondent San
Miguel Corporation, it appearing that the owns and controls a greater
portion of his SMC stock thru the Universal Robina Corporation and
the Consolidated Foods Corporation, which corporations are engaged
in business directly and substantially competing with the allied
businesses of respondent SMC and of corporations in which SMC has
substantial investments. Further, when CFC and Robina had
accumulated investments. Further, when CFC and Robina had
accumulated shares in SMC, the Board of Directors of SMC realized
the clear and present danger that competitors or antagonistic parties
may be elected directors and thereby have easy and direct access to
SMC's business and trade secrets and plans;
(2) that the amended by law were adopted to preserve and protect
respondent SMC from the clear and present danger that business
competitors, if allowed to become directors, will illegally and unfairly
utilize their direct access to its business secrets and plans for their own
private gain to the irreparable prejudice of respondent SMC, and,
ultimately, its stockholders. Further, it is asserted that membership of a
competitor in the Board of Directors is a blatant disregard of no less
that the Constitution and pertinent laws against combinations in
restraint of trade;
(3) that by laws are valid and binding since a corporation has the
inherent right and duty to preserve and protect itself by excluding
competitors and antogonistic parties, under the law of self-
preservation, and it should be allowed a wide latitude in the selection
of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos.
1375 and 1423 was due to petitioner's own acts or omissions, since he
failed to have the petition to suspend, pendente lite the amended by-
laws calendared for hearing. It was emphasized that it was only on
April 29, 1977 that petitioner calendared the aforesaid petition for
suspension (preliminary injunction) for hearing on May 3, 1977. The
instant petition being dated May 4, 1977, it is apparent that respondent
Commission was not given a chance to act "with deliberate dispatch",
and
(5) that, even assuming that the petition was meritorious was, it has
become moot and academic because respondent Commission has
acted on the pending incidents, complained of. It was, therefore,
prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his
comment, alleging that the petition has become moot and academic for
the reason, among others that the acts of private respondent sought to
be enjoined have reference to the annual meeting of the stockholders
of respondent San Miguel Corporation, which was held on may 10,
1977; that in said meeting, in compliance with the order of respondent
Commission, petitioner was allowed to run and be voted for as director;
and that in the same meeting, Item 6 of the Agenda was discussed,
voted upon, ratified and confirmed. Further it was averred that the
questions and issues raised by petitioner are pending in the Securities
and Exchange Commission which has acquired jurisdiction over the
case, and no hearing on the merits has been had; hence the elevation
of these issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the
petition presents justiciable questions for the determination of this
Court because (1) the respondent Commission acted without
circumspection, unfairly and oppresively against petitioner, warranting
the intervention of this Court; (2) a derivative suit, such as the instant
case, is not rendered academic by the act of a majority of
stockholders, such that the discussion, ratification and confirmation of
Item 6 of the Agenda of the annual stockholders' meeting of May 10,
1977 did not render the case moot; that the amendment to the bylaws
which specifically bars petitioner from being a director is void since it
deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a separate
comment, alleging that after receiving a copy of the restraining order
issued by this Court and noting that the restraining order did not
foreclose action by it, the Commission en banc issued Orders Nos.
449, 450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that
Order No. 450 which denied deferment of Item 6 of the Agenda of the
annual stockholders' meeting of respondent corporation, took into
consideration an urgent manifestation filed with the Commission by
petitioner on May 3, 1977 which prayed, among others, that the
discussion of Item 6 of the Agenda be deferred. The reason given for
denial of deferment was that "such action is within the authority of the
corporation as well as falling within the sphere of stockholders' right to
know, deliberate upon and/or to express their wishes regarding
disposition of corporate funds considering that their investments are
the ones directly affected." It was alleged that the main petition has,
therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition
with prayer for preliminary injunction, alleging that the actuations of
respondent SEC tended to deprive him of his right to due process, and
"that all possible questions on the facts now pending before the
respondent Commission are now before this Honorable Court which
has the authority and the competence to act on them as it may see fit."
(Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for
resolution;
(1) whether or not the provisions of the amended by-laws of
respondent corporation, disqualifying a competitor from nomination or
election to the Board of Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in
denying petitioner's request for an examination of the records of San
Miguel International, Inc., a fully owned subsidiary of San Miguel
Corporation; and
(3) whether or not respondent SEC committed grave abuse of
discretion in allowing discussion of Item 6 of the Agenda of the Annual
Stockholders' Meeting on May 10, 1977, and the ratification of the
investment in a foreign corporation of the corporate funds, allegedly in
violation of section 17-1/2 of the Corporation Law.
I purpose, the amended by-laws were ratified by more than 80% of the
Whether or not amended by-laws are valid is purely a legal question
which public interest requires to be resolved —
It is the position of the petitioner that "it is not necessary to remand the
case to respondent SEC for an appropriate ruling on the intrinsic
validity of the amended by-laws in compliance with the principle of
exhaustion of administrative remedies", considering that: first: "whether
or not the provisions of the amended by-laws are intrinsically valid ... is
purely a legal question. There is no factual dispute as to what the
provisions are and evidence is not necessary to determine whether
such amended by-laws are valid as framed and approved ... "; second:
"it is for the interest and guidance of the public that an immediate and
final ruling on the question be made ... "; third: "petitioner was denied
due process by SEC" when "Commissioner de Guzman had openly
shown prejudice against petitioner ... ", and "Commissioner Sulit ...
approved the amended by-laws ex-parte and obviously found the same
intrinsically valid; and finally: "to remand the case to SEC would only
entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly
pray that this Court resolve the legal issues raised by the parties in
keeping with the "cherished rules of procedure" that "a court should
always strive to settle the entire controversy in a single proceeding
leaving no root or branch to bear the seeds of future ligiation",
citing Gayong v. Gayos. 3 To the same effect is the prayer of San
Miguel Corporation that this Court resolve on the merits the validity of
its amended by laws and the rights and obligations of the parties
thereunder, otherwise "the time spent and effort exerted by the parties
concerned and, more importantly, by this Honorable Court, would have
been for naught because the main question will come back to this
Honorable Court for final resolution." Respondent Eduardo R. Visaya
submits a similar appeal.
It is only the Solicitor General who contends that the case should be
remanded to the SEC for hearing and decision of the issues involved,
invoking the latter's primary jurisdiction to hear and decide case
involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should
always strive to settle the entire controversy in a single proceeding,
leaving nor root or branch to bear the seeds of future litigation. 4 Thus,
in Francisco v. City of Davao, 5 this Court resolved to decide the case
on the merits instead of remanding it to the trial court for further
proceedings since the ends of justice would not be subserved by the
remand of the case. In Republic v. Security Credit and Acceptance
Corporation, et al., 6 this Court, finding that the main issue is one of
law, resolved to decide the case on the merits "because public interest
demands an early disposition of the case", and in Republic v. Central
Surety and Insurance Company, 7 this Court denied remand of the
third-party complaint to the trial court for further proceedings, citing
precedent where this Court, in similar situations resolved to decide the
cases on the merits, instead of remanding them to the trial court where
(a) the ends of justice would not be subserved by the remand of the
case; or (b) where public interest demand an early disposition of the
case; or (c) where the trial court had already received all the evidence
presented by both parties and the Supreme Court is now in a position,
based upon said evidence, to decide the case on its merits. 8 It is
settled that the doctrine of primary jurisdiction has no application where
only a question of law is involved. 8a Because uniformity may be
secured through review by a single Supreme Court, questions of law
may appropriately be determined in the first instance by courts. 8b In
the case at bar, there are facts which cannot be denied, viz.: that the
amended by-laws were adopted by the Board of Directors of the San
Miguel Corporation in the exercise of the power delegated by the
stockholders ostensibly pursuant to section 22 of the Corporation Law;
that in a special meeting on February 10, 1977 held specially for that
stockholders of record; that the foreign investment in the Hongkong
Brewery and Distellery, a beer manufacturing company in Hongkong,
was made by the San Miguel Corporation in 1948; and that in the
stockholders' annual meeting held in 1972 and 1977, all foreign
investments and operations of San Miguel Corporation were ratified by
the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a
competitor from nomination or election to the Board of Directors of
SMC are valid and reasonable —
The validity or reasonableness of a by-law of a corporation in purely a
question of law. 9 Whether the by-law is in conflict with the law of the
land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law. 10 This rule is
subject, however, to the limitation that where the reasonableness of a
by-law is a mere matter of judgment, and one upon which reasonable
minds must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those who are
authorized to make by-laws and who have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and
unreasonable because they were tailored to suppress the minority and
prevent them from having representation in the Board", at the same
time depriving petitioner of his "vested right" to be voted for and to vote
for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M.
Soriano and San Miguel Corporation content that ex. conclusion of a
competitor from the Board is legitimate corporate purpose, considering
that being a competitor, petitioner cannot devote an unselfish and
undivided Loyalty to the corporation; that it is essentially a preventive
measure to assure stockholders of San Miguel Corporation of
reasonable protective from the unrestrained self-interest of those
charged with the promotion of the corporate enterprise; that access to
confidential information by a competitor may result either in the
promotion of the interest of the competitor at the expense of the San
Miguel Corporation, or the promotion of both the interests of petitioner
and respondent San Miguel Corporation, which may, therefore, result
in a combination or agreement in violation of Article 186 of the Revised
Penal Code by destroying free competition to the detriment of the
consuming public. It is further argued that there is not vested right of
any stockholder under Philippine Law to be voted as director of a
corporation. It is alleged that petitioner, as of May 6, 1978, has
exercised, personally or thru two corporations owned or controlled by
him, control over the following shareholdings in San Miguel
Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares; (b)
Universal Robina Corporation — 738,647 shares; (c) CFC Corporation
— 658,313 shares, or a total of 1,403,285 shares. Since the
outstanding capital stock of San Miguel Corporation, as of the present
date, is represented by 33,139,749 shares with a par value of P10.00,
the total shares owned or controlled by petitioner represents 4.2344%
of the total outstanding capital stock of San Miguel Corporation. It is
also contended that petitioner is the president and substantial
stockholder of Universal Robina Corporation and CFC Corporation,
both of which are allegedly controlled by petitioner and members of his
family. It is also claimed that both the Universal Robina Corporation
and the CFC Corporation are engaged in businesses directly and
substantially competing with the alleged businesses of San Miguel
Corporation, and of corporations in which SMC has substantial
investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S
CORPORATIONS AND SAN MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of,
competition are enumerated in its Board the areas of competition are
enumerated in its Board Resolution dated April 28, 1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition
affecting SMC involved product sales of over P400 million or more than
20% of the P2 billion total product sales of SMC. Significantly, the
combined market shares of SMC and CFC-Robina in layer pullets
dressed chicken, poultry and hog feeds ice cream, instant coffee and
woven fabrics would result in a position of such dominance as to affect
the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct
competition on product lines which, for SMC, represented sales
amounting to more than ?478 million. In addition, CFC-Robina was
directly competing in the sale of coffee with Filipro, a subsidiary of
SMC, which product line represented sales for SMC amounting to
more than P275 million. The CFC-Robina group (Robitex, excluding
Litton Mills recently acquired by petitioner) is purportedly also in direct
competition with Ramie Textile, Inc., subsidiary of SMC, in product
sales amounting to more than P95 million. The areas of competition
between SMC and CFC-Robina in 1977 represented, therefore, for
SMC, product sales of more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting
of March 18, 1976, 9,894 stockholders, in person or by proxy, owning
23,436,754 shares in SMC, or more than 90% of the total outstanding
shares of SMC, rejected petitioner's candidacy for the Board of
Directors because they "realized the grave dangers to the corporation
in the event a competitor gets a board seat in SMC." On September
18, 1978, the Board of Directors of SMC, by "virtue of powers
delegated to it by the stockholders," approved the amendment to ' he
by-laws in question. At the meeting of February 10, 1977, these
amendments were confirmed and ratified by 5,716 shareholders
owning 24,283,945 shares, or more than 80% of the total outstanding
shares. Only 12 shareholders, representing 7,005 shares, opposed the
confirmation and ratification. At the Annual Stockholders' Meeting of
May 10, 1977, 11,349 shareholders, owning 27,257.014 shares, or
more than 90% of the outstanding shares, rejected petitioner's
candidacy, while 946 stockholders, representing 1,648,801 shares
voted for him. On the May 9, 1978 Annual Stockholders' Meeting,
12,480 shareholders, owning more than 30 million shares, or more
than 90% of the total outstanding shares. voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE
QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED BY
LAW
Private respondents contend that the disputed amended by laws were
adopted by the Board of Directors of San Miguel Corporation a-, a
measure of self-defense to protect the corporation from the clear and
present danger that the election of a business competitor to the Board
may cause upon the corporation and the other stockholders
inseparable prejudice. Submitted for resolution, therefore, is the issue
— whether or not respondent San Miguel Corporation could, as a
measure of self- protection, disqualify a competitor from nomination
and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the
inherent power to adopt by-laws 'for its internal government, and to
regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the
management of its affairs. 12 At common law, the rule was "that the
power to make and adopt by-laws was inherent in every corporation as
one of its necessary and inseparable legal incidents. And it is settled
throughout the United States that in the absence of positive legislative
provisions limiting it, every private corporation has this inherent power
as one of its necessary and inseparable legal incidents, independent of
any specific enabling provision in its charter or in general law, such
power of self-government being essential to enable the corporation to
accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a
corporation may prescribe in its by-laws "the qualifications, duties and
compensation of directors, officers and employees ... " This must
necessarily refer to a qualification in addition to that specified by
section 30 of the Corporation Law, which provides that "every director
must own in his right at least one share of the capital stock of the stock
corporation of which he is a director ... " In Government v. El
Hogar, 14 the Court sustained the validity of a provision in the corporate
by-law requiring that persons elected to the Board of Directors must be
holders of shares of the paid up value of P5,000.00, which shall be
held as security for their action, on the ground that section 21 of the
Corporation Law expressly gives the power to the corporation to
provide in its by-laws for the qualifications of directors and is "highly
prudent and in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED
DIRECTOR
Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majorityof the
stockholders and that he impliedly contracts that the will of the majority
shall govern in all matters within the limits of the act of incorporation
and lawfully enacted by-laws and not forbidden by law." 15 To this
extent, therefore, the stockholder may be considered to have "parted
with his personal right or privilege to regulate the disposition of his
property which he has invested in the capital stock of the corporation,
and surrendered it to the will of the majority of his fellow incorporators.
... It cannot therefore be justly said that the contract, express or
implied, between the corporation and the stockholders is infringed ...
by any act of the former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may
amend its articles of incorporation by a vote or written assent of the
stockholders representing at least two-thirds of the subscribed capital
stock of the corporation If the amendment changes, diminishes or
restricts the rights of the existing shareholders then the disenting
minority has only one right, viz.: "to object thereto in writing and
demand payment for his share." Under section 22 of the same law, the
owners of the majority of the subscribed capital stock may amend or
repeal any by-law or adopt new by-laws. It cannot be said, therefore,
that petitioner has a vested right to be elected director, in the face of
the fact that the law at the time such right as stockholder was acquired
contained the prescription that the corporate charter and the by-law
shall be subject to amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the
qualifications of its directors, the next question that must be considered
is whether the disqualification of a competitor from being elected to the
Board of Directors is a reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE
CORPORATION AND ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a private
corporation are not regarded as trustees, there cannot be any doubt
that their character is that of a fiduciary insofar as the corporation and
the stockholders as a body are concerned. As agents entrusted with
the management of the corporation for the collective benefit of the
stockholders, "they occupy a fiduciary relation, and in this sense the
relation is one of trust." 18 "The ordinary trust relationship of directors of
a corporation and stockholders", according to Ashaman v. Miller, 19 "is
not a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and
property and hence of the property interests of the stockholders. Equity
recognizes that stockholders are the proprietors of the corporate
interests and are ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the
standard of fiduciary obligation of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who
is in such fiduciary position cannot serve himself first and his cestuis
second. ... He cannot manipulate the affairs of his corporation to their
detriment and in disregard of the standards of common decency. He
cannot by the intervention of a corporate entity violate the ancient
precept against serving two masters ... He cannot utilize his inside
information and strategic position for his own preferment. He cannot
violate rules of fair play by doing indirectly through the corporation
what he could not do so directly. He cannot violate rules of fair play by
doing indirectly though the corporation what he could not do so
directly. He cannot use his power for his personal advantage and to
the detriment of the stockholders and creditors no matter how absolute
in terms that power may be and no matter how meticulous he is to
satisfy technical requirements. For that power is at all times subject to
the equitable limitation that it may not be exercised for the
aggrandizement, preference or advantage of the fiduciary to the
exclusion or detriment of the cestuis.
21
And in Cross v. West Virginia Cent, & P. R. R. Co., it was said:
... A person cannot serve two hostile and adverse master, without
detriment to one of them. A judge cannot be impartial if personally
interested in the cause. No more can a director. Human nature is too
weak -for this. Take whatever statute provision you please giving
power to stockholders to choose directors, and in none will you find
any express prohibition against a discretion to select directors having
the company's interest at heart, and it would simply be going far to
deny by mere implication the existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder
in a competing company from being a director, the same reasoning
would apply to disqualify the wife and immediate member of the family
of such stockholder, on account of the supposed interest of the wife in
her husband's affairs, and his suppose influence over her. It is perhaps
true that such stockholders ought not to be condemned as selfish and
dangerous to the best interest of the corporation until tried and tested.
So it is also true that we cannot condemn as selfish and dangerous
and unreasonable the action of the board in passing the by-law. The
strife over the matter of control in this corporation as in many others is
perhaps carried on not altogether in the spirit of brotherly love and
affection. The only test that we can apply is as to whether or not the
action of the Board is authorized and sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases.23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH
RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE
BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS
IN COMPETITION WITH THAT OF THE OTHER CORPORATION,
HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that
corporations have the power to make by-laws declaring a person
employed in the service of a rival company to be ineligible for the
corporation's Board of Directors. ... (A)n amendment which renders
ineligible, or if elected, subjects to removal, a director if he be also a
director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid." 24This is based upon the
principle that where the director is so employed in the service of a rival
company, he cannot serve both, but must betray one or the other.
Such an amendment "advances the benefit of the corporation and is
good." An exception exists in New Jersey, where the Supreme Court
held that the Corporation Law in New Jersey prescribed the only
qualification, and therefore the corporation was not empowered to add
additional qualifications. 25 This is the exact opposite of the situation in
the Philippines because as stated heretofore, section 21 of the
Corporation Law expressly provides that a corporation may make by-
laws for the qualifications of directors. Thus, it has been held that an
officer of a corporation cannot engage in a business in direct
competition with that of the corporation where he is a director by
utilizing information he has received as such officer, under "the
established law that a director or officer of a corporation may not enter
into a competing enterprise which cripples or injures the business of
the corporation of which he is an officer or director. 26
It is also well established that corporate officers "are not permitted to
use their position of trust and confidence to further their private
interests." 27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors entered
into a new contract themselves with the foreign firm for exclusive sale
of its products, the court held that equity would regard the new contract
as an offshoot of the old contract and, therefore, for the benefit of the
corporation, as a "faultless fiduciary may not reap the fruits of his
misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by
the courts that the fiduciary standards could not be upheld where the
fiduciary was acting for two entities with competing interests. This
doctrine rests fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of an
opportunity for his own personal profit when the interest of the
corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San
Miguel Corporation has access to sensitive and highly confidential
information, such as: (a) marketing strategies and pricing structure; (b)
budget for expansion and diversification; (c) research and
development; and (d) sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or
director of San Miguel Corporation, who is also the officer or owner of
a competing corporation, from taking advantage of the information
which he acquires as director to promote his individual or corporate
interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was
made. Certainly, where two corporations are competitive in a
substantial sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his
corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the
court sustained as valid and reasonable an amendment to the by-laws
of a bank, requiring that its directors should not be directors, officers,
employees, agents, nominees or attorneys of any other banking
corporation, affiliate or subsidiary thereof. Chief Judge Parker,
in McKee, explained the reasons of the court, thus:
... A bank director has access to a great deal of information concerning
the business and plans of a bank which would likely be injurious to the
bank if known to another bank, and it was reasonable and prudent to
enlarge this minimum disqualification to include any director, officer,
employee, agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection against
rivals and others who might acquire information which might be used
against the interests of the corporation as a legitimate object of by-law
protection. With respect to attorneys or persons associated with a firm
which is attorney for another bank, in addition to the direct conflict or
potential conflict of interest, there is also the danger of inadvertent
leakage of confidential information through casual office discussions or
accessibility of files. Defendant's directors determined that its welfare
was best protected if this opportunity for conflicting loyalties and
potential misuse and leakage of confidential information was
foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the
courts, as follows:
(1) A director shall not be directly or indirectly interested as a
stockholder in any other firm, company, or association which competes
with the subject corporation.
(2) A director shall not be the immediate member of the family of any
stockholder in any other firm, company, or association which competes
with the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or
trustee in any other firm, company, or association which compete with
the subject corporation.
(4) A director shall be of good moral character as an essential
qualification to holding office.
(5) No person who is an attorney against the corporation in a law suit is
eligible for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human
experience — that a person cannot serve two hostile masters without
detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his
taking unfair advantage of his position as director of San Miguel
Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the
validity and reasonableness of the by-laws here involved. Apart from
the impractical results that would ensue from such arrangement, it
would be inconsistent with petitioner's primary motive in running for
board membership — which is to protect his investments in San Miguel
Corporation. More important, such a proposed norm of conduct would
be against all accepted principles underlying a director's duty of fidelity
to the corporation, for the policy of the law is to encourage and enforce
responsible corporate management. As explained by Oleck: 31 "The
law win not tolerate the passive attitude of directors ... without active
and conscientious participation in the managerial functions of the
company. As directors, it is their duty to control and supervise the day
to day business activities of the company or to promulgate definite
policies and rules of guidance with a vigilant eye toward seeing to it
that these policies are carried out. It is only then that directors may be
said to have fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing
sensitive information with a director whose fiduciary duty of loyalty may
well require that he disclose this information to a competitive arrival.
These dangers are enhanced considerably where the common director
such as the petitioner is a controlling stockholder of two of the
competing corporations. It would seem manifest that in such situations,
the director has an economic incentive to appropriate for the benefit of
his own corporation the corporate plans and policies of the corporation
where he sits as director.
Indeed, access by a competitor to confidential information regarding
marketing strategies and pricing policies of San Miguel Corporation
would subject the latter to a competitive disadvantage and unjustly
enrich the competitor, for advance knowledge by the competitor of the
strategies for the development of existing or new markets of existing or
new products could enable said competitor to utilize such knowledge to
his advantage. 32
There is another important consideration in determining whether or not
the amended by-laws are reasonable. The Constitution and the law
prohibit combinations in restraint of trade or unfair competition. Thus,
section 2 of Article XIV of the Constitution provides: "The State shall
regulate or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition
shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. —The
penalty of prision correccional in its minimum period or a fine ranging
from two hundred to six thousand pesos, or both, shall be imposed
upon:
1. Any person who shall enter into any contract or agreement or shall
take part in any conspiracy or combination in the form of a trust or
otherwise, in restraint of trade or commerce or to prevent by artificial
means free competition in the market.
2. Any person who shag monopolize any merchandise or object of
trade or commerce, or shall combine with any other person or persons
to monopolize said merchandise or object in order to alter the price
thereof by spreading false rumors or making use of any other artifice to
restrain free competition in the market.
3. Any person who, being a manufacturer, producer, or processor of
any merchandise or object of commerce or an importer of any
merchandise or object of commerce from any foreign country, either as
principal or agent, wholesale or retailer, shall combine, conspire or
agree in any manner with any person likewise engaged in the
manufacture, production, processing, assembling or importation of
such merchandise or object of commerce or with any other persons not
so similarly engaged for the purpose of making transactions prejudicial
to lawful commerce, or of increasing the market price in any part of the
Philippines, or any such merchandise or object of commerce
manufactured, produced, processed, assembled in or imported into the
Philippines, or of any article in the manufacture of which such
manufactured, produced, processed, or imported merchandise or
object of commerce is used.
There are other legislation in this jurisdiction, which prohibit
monopolies and combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or
combinations in restraint of trade are aimed at raising levels of
competition by improving the consumers' effectiveness as the final
arbiter in free markets. These laws are designed to preserve free and
unfettered competition as the rule of trade. "It rests on the premise that
the unrestrained interaction of competitive forces will yield the best
allocation of our economic resources, the lowest prices and the highest
quality ... ." 34 they operate to forestall concentration of economic
power. 35 The law against monopolies and combinations in restraint of
trade is aimed at contracts and combinations that, by reason of the
inherent nature of the contemplated acts, prejudice the public interest
by unduly restraining competition or unduly obstructing the course of
trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair
competition" appear to have a well defined meaning in other
jurisdictions. A "monopoly" embraces any combination the tendency of
which is to prevent competition in the broad and general sense, or to
control prices to the detriment of the public. 37 In short, it is the
concentration of business in the hands of a few. The material
consideration in determining its existence is not that prices are raised
and competition actually excluded, but that power exists to raise prices
or exclude competition when desired. 38 Further, it must be considered
that the Idea of monopoly is now understood to include a condition
produced by the mere act of individuals. Its dominant thought is the
notion of exclusiveness or unity, or the suppression of competition by
the qualification of interest or management, or it may be thru
agreement and concert of action. It is, in brief, unified tactics with
regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of
petitioner are not in accord with reality. The election of petitioner to the
Board of respondent Corporation can bring about an illegal situation.
This is because an express agreement is not necessary for the
existence of a combination or conspiracy in restraint of trade. 40 It is
enough that a concert of action is contemplated and that the
defendants conformed to the arrangements, 41 and what is to be
considered is what the parties actually did and not the words they
used. For instance, the Clayton Act prohibits a person from serving at
the same time as a director in any two or more corporations, if such
corporations are, by virtue of their business and location of
operation, competitors so that the elimination of competition between
them would constitute violation of any provision of the anti-trust
laws. 42 There is here a statutory recognition of the anti-competitive
dangers which may arise when an individual simultaneously acts as a
director of two or more competing corporations. A common director of
two or more competing corporations would have access to confidential
sales, pricing and marketing information and would be in a position to
coordinate policies or to aid one corporation at the expense of another,
thereby stifling competition. This situation has been aptly explained by
Travers, thus:
The argument for prohibiting competing corporations from sharing
even one director is that the interlock permits the coordination of
policies between nominally independent firms to an extent that
competition between them may be completely eliminated. Indeed, if a
director, for example, is to be faithful to both corporations, some
accommodation must result. Suppose X is a director of both
Corporation A and Corporation B. X could hardly vote for a policy by A
that would injure B without violating his duty of loyalty to B at the same
time he could hardly abstain from voting without depriving A of his best
judgment. If the firms really do compete — in the sense of vying for
economic advantage at the expense of the other — there can hardly
be any reason for an interlock between competitors other than the
suppression of competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S.
Congress on section 9 of the Clayton Act, it was established that: "By
means of the interlocking directorates one man or group of men have
been able to dominate and control a great number of corporations ... to
the detriment of the small ones dependent upon them and to the injury
of the public. 44
Shared information on cost accounting may lead to price fixing.
Certainly, shared information on production, orders, shipments,
capacity and inventories may lead to control of production for the
purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost
conditions of the products of San Miguel Corporation, the essence of
competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated, The
competitor could so manipulate the prices of his products or vary its
marketing strategies by region or by brand in order to get the most out
of the consumers. Where the two competing firms control a substantial
segment of the market this could lead to collusion and combination in
restraint of trade. Reason and experience point to the inevitable
conclusion that the inherent tendency of interlocking directorates
between companies that are related to each other as competitors is to
blunt the edge of rivalry between the corporations, to seek out ways of
compromising opposing interests, and thus eliminate competition. As
respondent SMC aptly observes, knowledge by CFC-Robina of SMC's
costs in various industries and regions in the country win enable the
former to practice price discrimination. CFC-Robina can segment the
entire consuming population by geographical areas or income groups
and change varying prices in order to maximize profits from every
market segment. CFC-Robina could determine the most profitable
volume at which it could produce for every product line in which it
competes with SMC. Access to SMC pricing policy by CFC-Robina
would in effect destroy free competition and deprive the consuming
public of opportunity to buy goods of the highest possible quality at the
lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent,
engaged in agriculture, then the election of petitioner to the Board of
SMC may constitute a violation of the prohibition contained in section
13(5) of the Corporation Law. Said section provides in part that "any
stockholder of more than one corporation organized for the purpose of
engaging in agriculture may hold his stock in such corporations solely
for investment and not for the purpose of bringing about or attempting
to bring about a combination to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to
prevent the candidacy of petitioner for election to the Board. If the by-
law were to be applied in the case of one stockholder but waived in the
case of another, then it could be reasonably claimed that the by-law
was being applied in a discriminatory manner. However, the by law, by
its terms, applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally upon all
persons of a class. Besides, before petitioner can be declared
ineligible to run for director, there must be hearing and evidence must
be submitted to bring his case within the ambit of the disqualification.
Sound principles of public policy and management, therefore, support
the view that a by-law which disqualifies a competition from election to
the Board of Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide
latitude may be accorded to the corporation in adopting measures to
protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon
which reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of those
who are authorized to make by-laws and who have expressed their
authority. 45
Although it is asserted that the amended by-laws confer on the present
Board powers to perpetua themselves in power such fears appear to
be misplaced. This power, but is very nature, is subject to certain well
established limitations. One of these is inherent in the very convert and
definition of the terms "competition" and "competitor". "Competition"
implies a struggle for advantage between two or more forces, each
possessing, in substantially similar if not Identical degree, certain
characteristics essential to the business sought. It means an
independent endeavor of two or more persons to obtain the business
patronage of a third by offering more advantageous terms as an
inducement to secure trade. 46 The test must be whether the business
does in fact compete, not whether it is capable of an indirect and highly
unsubstantial duplication of an isolated or non-characteristics
activity. 47 It is, therefore, obvious that not every person or entity
engaged in business of the same kind is a competitor. Such factors as
quantum and place of business, Identity of products and area of
competition should be taken into consideration. It is, therefore,
necessary to show that petitioner's business covers a substantial
portion of the same markets for similar products to the extent of not
less than 10% of respondent corporation's market for competing
products. While We here sustain the validity of the amended by-laws, it
does not follow as a necessary consequence that petitioner is ipso
facto disqualified. Consonant with the requirement of due process,
there must be due hearing at which the petitioner must be given the
fullest opportunity to show that he is not covered by the
disqualification. As trustees of the corporation and of the stockholders,
it is the responsibility of directors to act with fairness to the
stockholders.48Pursuant to this obligation and to remove any suspicion
that this power may be utilized by the incumbent members of the
Board to perpetuate themselves in power, any decision of the Board to
disqualify a candidate for the Board of Directors should be reviewed by
the Securities behind Exchange Commission en banc and its decision
shall be final unless reversed by this Court on certiorari. 49 Indeed, it is
a settled principle that where the action of a Board of Directors is an
abuse of discretion, or forbidden by statute, or is against public policy,
or is ultra vires, or is a fraud upon minority stockholders or creditors, or
will result in waste, dissipation or misapplication of the corporation
assets, a court of equity has the power to grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in
denying petitioner's request for an examination of the records of San
Miguel International Inc., a fully owned subsidiary of San Miguel
Corporation —
Respondent San Miguel Corporation stated in its memorandum that
petitioner's claim that he was denied inspection rights as stockholder of
SMC "was made in the teeth of undisputed facts that, over a specific
period, petitioner had been furnished numerous documents and
information," to wit: (1) a complete list of stockholders and their
stockholdings; (2) a complete list of proxies given by the stockholders
for use at the annual stockholders' meeting of May 18, 1975; (3) a copy
of the minutes of the stockholders' meeting of March 18,1976; (4) a
breakdown of SMC's P186.6 million investment in associated
companies and other companies as of December 31, 1975; (5) a listing
of the salaries, allowances, bonuses and other compensation or
remunerations received by the directors and corporate officers of SMC;
(6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC;
and (7) copies of the minutes of all meetings of the Board of Directors
from January 1975 to May 1976, with deletions of sensitive data, which
deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in
writing on September 18, 1976; (1) that SMC's foreign investments are
handled by San Miguel International, Inc., incorporated in Bermuda
and wholly owned by SMC; this was SMC's first venture abroad,
having started in 1948 with an initial outlay of ?500,000.00, augmented
by a loan of Hongkong $6 million from a foreign bank under the
personal guaranty of SMC's former President, the late Col. Andres
Soriano; (2) that as of December 31, 1975, the estimated value of SMI
would amount to almost P400 million (3) that the total cash dividends
received by SMC from SMI since 1953 has amount to US $ 9.4 million;
and (4) that from 1972-1975, SMI did not declare cash or stock
dividends, all earnings having been used in line with a program for the
setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate
Secretary, enclosing photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation
Law, "(t)he record of all business transactions of the corporation and
minutes of any meeting shall be open to the inspection of any director,
member or stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and
records is based upon their ownership of the assets and property of
the corporation. It is, therefore, an incident of ownership of the
corporate property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership, or a ownership. 52 This
right is predicated upon the necessity of self-protection. It is generally
held by majority of the courts that where the right is granted by statute
to the stockholder, it is given to him as such and must be exercised by
him with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation. 53 In other words,
the inspection has to be germane to the petitioner's interest as a
stockholder, and has to be proper and lawful in character and not
inimical to the interest of the corporation. 54 In Grey v. Insular
Lumber, 55 this Court held that "the right to examine the books of the
corporation must be exercised in good faith, for specific and honest
purpose, and not to gratify curiosity, or for specific and honest purpose,
and not to gratify curiosity, or for speculative or vexatious purposes.
The weight of judicial opinion appears to be, that on application for
mandamus to enforce the right, it is proper for the court to inquire into
and consider the stockholder's good faith and his purpose and motives
in seeking inspection. 56 Thus, it was held that "the right given by
statute is not absolute and may be refused when the information is not
sought in good faith or is used to the detriment of the
corporation." 57 But the "impropriety of purpose such as will defeat
enforcement must be set up the corporation defensively if the Court is
to take cognizance of it as a qualification. In other words, the specific
provisions take from the stockholder the burden of showing propriety of
purpose and place upon the corporation the burden of showing
impropriety of purpose or motive. 58 It appears to be the general rule
that stockholders are entitled to full information as to the management
of the corporation and the manner of expenditure of its funds, and to
inspection to obtain such information, especially where it appears that
the company is being mismanaged or that it is being managed for the
personal benefit of officers or directors or certain of the stockholders to
the exclusion of others." 59
While the right of a stockholder to examine the books and records of a
corporation for a lawful purpose is a matter of law, the right of such
stockholder to examine the books and records of a wholly-owned
subsidiary of the corporation in which he is a stockholder is a different
thing.
Some state courts recognize the right under certain conditions, while
others do not. Thus, it has been held that where a corporation owns
approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the
holding company, the legal fiction of distinct corporate entities may be
disregarded and the books, papers and documents of all the
corporations may be required to be produced for examination, 60 and
that a writ of mandamus, may be granted, as the records of the
subsidiary were, to all incontents and purposes, the records of the
parent even though subsidiary was not named as a
party. 61 mandamus was likewise held proper to inspect both the
subsidiary's and the parent corporation's books upon proof of sufficient
control or dominion by the parent showing the relation of principal or
agent or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused
where the subsidiary corporation is a separate and distinct corporation
domiciled and with its books and records in another jurisdiction, and is
not legally subject to the control of the parent company, although it
owned a vast majority of the stock of the subsidiary. 63Likewise,
inspection of the books of an allied corporation by stockholder of the
parent company which owns all the stock of the subsidiary has been
refused on the ground that the stockholder was not within the class of
"persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the
contractual right of former stockholders to inspect books and records of
the corporation included the right to inspect corporation's subsidiaries'
books and records which were in corporation's possession and control
in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to
inspect the records of a controlled subsidiary corporation which used
the same offices and had Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents"
before respondent SEC, petitioner contended that respondent
corporation "had been attempting to suppress information for the
stockholders" and that petitioner, "as stockholder of respondent
corporation, is entitled to copies of some documents which for some
reason or another, respondent corporation is very reluctant in revealing
to the petitioner notwithstanding the fact that no harm would be caused
thereby to the corporation." 67 There is no question that stockholders
are entitled to inspect the books and records of a corporation in order
to investigate the conduct of the management, determine the financial
condition of the corporation, and generally take an account of the
stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly
owned by respondent San Miguel Corporation and, therefore, under its
control, it would be more in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as stockholder to
inspect the books and records of the corporation as extending to books
and records of such wholly subsidiary which are in respondent
corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in
allowing the stockholders of respondent corporation to ratify the
investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that
respondent corporation invested corporate funds in SMI without prior
authority of the stockholders, thus violating section 17-1/2 of the
Corporation Law, and alleges that respondent SEC should have
investigated the charge, being a statutory offense, instead of allowing
ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the
stockholders for ratification is a sound corporate practice and should
not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest
its funds in any other corporation or business or for any purpose other
than the main purpose for which it was organized" provided that its
Board of Directors has been so authorized by the affirmative vote of
stockholders holding shares entitling them to exercise at least two-
thirds of the voting power. If the investment is made in pursuance of
the corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done solely for
investment and not to accomplish the purpose of its incorporation that
the vote of approval of the stockholders holding shares entitling them
to exercise at least two-thirds of the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer
manufacturing facilities by SMC was an investment in the same
business stated as its main purpose in its Articles of Incorporation,
which is to manufacture and market beer. It appears that the original
investment was made in 1947-1948, when SMC, then San Miguel
Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong
Brewery & Distillery, Ltd.) for the manufacture and marketing of San
Miguel beer thereat. Restructuring of the investment was made in
1970-1971 thru the organization of SMI in Bermuda as a tax free
reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar
Central Co., Inc., supra, appears relevant. In said case, one of the
issues was the legality of an investment made by Manao Sugar Central
Co., Inc., without prior resolution approved by the affirmative vote of
2/3 of the stockholders' voting power, in the Philippine Fiber
Processing Co., Inc., a company engaged in the manufacture of sugar
bags. The lower court said that "there is more logic in the stand that if
the investment is made in a corporation whose business is important to
the investing corporation and would aid it in its purpose, to require
authority of the stockholders would be to unduly curtail the power of
the Board of Directors." This Court affirmed the ruling of the court a
quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. — A private
corporation, in order to accomplish is purpose as stated in its articles of
incorporation, and subject to the limitations imposed by the
Corporation Law, has the power to acquire, hold, mortgage, pledge or
dispose of shares, bonds, securities, and other evidence of
indebtedness of any domestic or foreign corporation. Such an act, if
done in pursuance of the corporate purpose, does not need the
approval of stockholders; but when the purchase of shares of another
corporation is done solely for investment and not to accomplish the
purpose of its incorporation, the vote of approval of the stockholders is
necessary. In any case, the purchase of such shares or securities must
be subject to the limitations established by the Corporations law;
namely, (a) that no agricultural or mining corporation shall be restricted
to own not more than 15% of the voting stock of nay agricultural or
mining corporation; and (c) that such holdings shall be solely for
investment and not for the purpose of bringing about a monopoly in
any line of commerce of combination in restraint of trade." The
Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89)
(Emphasis supplied.)
40. Power to invest corporate funds. — A private corporation has the
power to invest its corporate funds "in any other corporation or
business, or for any purpose other than the main purpose for which it
was organized, provide that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power on such a propose at a stockholders'
meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in any
other agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in its
articles of incorporation the approval of the stockholders is not
necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no
authority to make the assailed investment, there is no question that a
corporation, like an individual, may ratify and thereby render binding
upon it the originally unauthorized acts of its officers or other
agents. 70 This is true because the questioned investment is neither
contrary to law, morals, public order or public policy. It is a corporate
transaction or contract which is within the corporate powers, but which
is defective from a supported failure to observe in its execution the.
requirement of the law that the investment must be authorized by the
affirmative vote of the stockholders holding two-thirds of the voting
power. This requirement is for the benefit of the stockholders. The
stockholders for whose benefit the requirement was enacted may,
therefore, ratify the investment and its ratification by said stockholders
obliterates any defect which it may have had at the outset. "Mere ultra
vires acts", said this Court in Pirovano, 71 "or those which 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.
Besides, the investment was for the purchase of beer manufacturing
and marketing facilities which is apparently relevant to the corporate
purpose. The mere fact that respondent corporation submitted the
assailed investment to the stockholders for ratification at the annual
meeting of May 10, 1977 cannot be construed as an admission that
respondent corporation had committed an ultra vires act, considering
the common practice of corporations of periodically submitting for the
gratification of their stockholders the acts of their directors, officers and
managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays
that petitioner be allowed to examine the books and records of San
Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent
San Miguel Corporation, six (6) Justices, namely, Justices Barredo,
Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to
sustain the validity per se of the amended by-laws in question and to
dismiss the petition without prejudice to the question of the actual
disqualification of petitioner John Gokongwei, Jr. to run and if elected
to sit as director of respondent San Miguel Corporation being decided,
after a new and proper hearing by the Board of Directors of said
corporation, whose decision shall be appealable to the respondent
Securities and Exchange Commission deliberating and acting en
banc and ultimately to this Court. Unless disqualified in the manner
herein provided, the prohibition in the afore-mentioned amended by-
laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando,
voted to declare the issue on the validity of the foreign investment of
respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the
amended by-laws, pending hearing by this Court on the applicability of
section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject
amendment to the by-laws but otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr.,
Fernandez and Guerrero filed a separate opinion, wherein they voted
against the validity of the questioned amended bylaws and that this
question should properly be resolved first by the SEC as the agency of
primary jurisdiction. They concur in the result that petitioner may be
allowed to run for and sit as director of respondent SMC in the
scheduled May 6, 1979 election and subsequent elections until
disqualified after proper hearing by the respondent's Board of Directors
and petitioner's disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby
rendered GRANTING the petition by allowing petitioner to examine the
books and records of San Miguel International, Inc. as specified in the
petition. The petition, insofar as it assails the validity of the amended
by- laws and the ratification of the foreign investment of respondent
corporation, for lack of necessary votes, is hereby DISMISSED. No
costs.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.
Aquino, and Melencio Herrera JJ., took no part.
G.R. No. L-25241 November 3, 1926
HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and
GEORGE W. ROBINSON, plaintiffs-appellants,
vs.
THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN,
ERIC BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and
CHARLES D. MACINTOSH, defendants-appellees.
Thomas Cary Welch for appellants.
Gibbs and McDonough for appellees.
OSTRAND, J.:
This is an appeal from a decision of the Court of First Instance of
Manila, sustaining a demurrer to the complaint. The plaintiffs declined
to amend and judgment was rendered dismissing the case. The
complaint in question reads as follows:
The above named plaintiffs, by Thomas Cary Welch, their attorney,
complain of the above-named defendants and for cause of action
against them allege:
1st. That at al times in this complaint mentioned the plaintiffs Harrie S.
Everett, Ellis H. Teal and George W. Robinson were and now are
residents of the City of Manila, Philippine Islands. That the plaintiff Carl
G. Clifford was formerly a resident of said City of Manila and now is the
resident of the City of Washington, District of Columbia.
2nd. That at all times in this complaint mentioned the defendant the
Asia Banking Corporation hereinafter called "the Bank", was and now
is a foreign banking corporation duly licensed to transact banking
business in the Philippine Islands, having, its principal office and place
of business at Manila aforesaid and that said Asia Banking Corporation
never has been empowered by law or licensed to do any business
other than commercial banking in the Philippine Islands. That the
defendants Nicholas E. Mullen, Alfred F. Kelly, John W. Mears, and
Charles D. Macintosh were residents of said City of Manila and were
officers, agents and employees of the said Asia Banking Corporation,
the said Mullen being the General Manager thereof in said City; That:
the defendant Eric Barclay is a now a resident of Los Angeles,
California, and the defendant Mcintosh is also residing in the United
States, his exact residence being unknown.
3rd. That at all times in this complaint mentioned Teal and Company
hereinafter called the Company, was and now is a domestic
corporation duly incorporated under the laws of the Philippine Islands
and having its principal office and place of business at Manila
aforesaid. That during said times the plaintiffs Everett, Clifford, Teal
and Robinson were the principal stockholders in the Company owning
a total of 4,478 shares therein and that the defendant Barclay was the
only other stockholder, owning one share thereof.
4th. That in the year 1921, the said Teal and Company has become
indebted to the firm of H. W. Peabody and Company in about the sum
of P300,000, being for tractors, plows and parts which had been
ordered and delivered, the Bank and other banks in Manila held drafts
accepted by the Company under said H. W. Peabody and Company's
guarantee. That said tractors having become unsailable by reason of
the financial and agricultural depression that had overtaken the
Islands, the said tractors were all returned to the said H. W. Peabody
and Company and as these plaintiffs are informed and verily believes
were by it returned to the United States, and while the events herein
set forth were taking place the Company made payments on its
indebtedness through the Bank to H. W. Peabody and Company,
amounting to the sum of at least P150,000. that at about the same time
the Company had ordered another lot of tractors, etc., from a business
house in the United States, known as Smith, Kirkpatrick and Co., under
a commercial letter of credit which the Company had from the Bank in
New York City, but that shipment of such tractors had been delayed
until the credit had been rescinded by the Bank and that upon such
rescission Smith, Kirkpatrick and Co., had been advised by telegraph
that the order was cancelled and not to ship the tractors. That
nevertheless and contrary to such advise the said Smith, Kirkpatrick
and Co. did ship the tractors doing so under D/A drafts therefor and
that when said tractors arrived in Manila and in order, if possible to
save Smith, Kirkpatrick and Co. from additional loss, the Company at
the request and on the advice of the said Bank accepted the drafts and
stored the same in a warehouse in Manila rented by it and gave
receipts therefor.
5th. That thereafter and on or about March 1921, the Bank persuaded
the Company and the said H. W. Peabody and Co. and Smith,
Kirkpatrick and Co. to enter into a so called "creditors agreement" with
itself, wherein it was mutually agreed that neither of the parties should
take action to collect its debts from the Company for the term of two
years after the date thereof. That these plaintiffs have no copy of said
agreement but beg leave to refer to the original of same, in possession
of the Bank, for greater certainty.
6th. That the business of said Company consisted mainly in the
merchandising of automobiles, trucks, tractors, spare parts and
accessories therefor, and the repairing thereof. That on the 29th day of
December, 1922, said company was solvent and in the enjoyment of a
large, growing, and lucrative business and in the possession of a
valuable reputation and good-will. That since its, organization in May,
1919, it had done its banking business and financing almost
exclusively thru and with the Bank and by reason of such continued
relations the officers of the Company had acquired trust and
confidence in the integrity and good intentions of the said bank and its
officers and the other defendants in their friendliness to themselves
and the Company.
7th. That on said 29th day of December, 1922, the said Company was
indebted to the Bank in about the sum of P750,000, which said sum
was secured by mortgage on its personal property and the
improvements upon the real estate occupied by it, which real estate
was held under a ninety-nine years lease upon very favorable terms
and which lease was a valuable asset and constantly increasing in
value, and that the said Bank held acceptances, warehouse receipts or
pledges for such other indebtedness, as was not covered by the last
mentioned mortgage, which said security was ample to cover the
amount of the indebtedness.
8th. That toward the end of the year 1922, the Bank, through its
manager the defendant Mullen represented to the Company and its
managers that for the protection both of the Bank and the Company it
was advisable for them both that the Bank should temporarily obtain
control of the management and affairs of the Company in order that the
affairs of the Company could be conducted by the Bank without
interference or hindrance from outside, and to this end that it would be
necessary for the stockholders in the Company to place their shares
therein in a Voting Trust to be held by the Bank would then finance the
Company under its own supervision and that if and when the same
were successful and in position to resume independent operation the
said trust would be terminated and the stock returned to its true
owners, and further represented that in case at any time the Bank
decided to discontinue operation under the said trust that then the
stock also would be so returned.
9th. That it was further represented by the Bank and the said Mullen
that in order to protect the mutual interests of the Bank and the
Company it was necessary to carry into effect the said proposed voting
trust without the knowledge of the creditors above named and thereby
place the Bank in an advantageous position with regard to them. That
relying upon the previous friendly relations between the bank and the
Company and between the individual defendants and these plaintiffs
and relying upon the promise and representations of the defendants,
these plaintiffs were induced to sign and did sign and deliver to the
Bank simultaneously a so-called "Voting Trust Agreement," executed
by the plaintiff stockholders and a Memorandum of Agreement
executed by the Company, both dated and executed and delivered the
29th day of December, 1922, the two forming one document and a
copy of which is hereto attached and marked Exhibit A.
10th. That by reason of the facts above set forth and of their reliance
upon the good faith and good-will of the defendants these plaintiffs
were induced to sign the "Memorandum of Agreement," and "Voting
Trust Agreement," Exhibit A, understanding from the defendant that the
same were intended for the protection of all parties thereto from
outside creditors, but that they were not intended to be enforced
according to the letter thereof, and that they did not contain the true
agreement between the Bank and the Company which was to finance
the Company without interference from the above named creditors, to
hold the voting trust as a protection to the bank as against the said
creditors and for its own advances, and the further agreement that in
case in the Bank did not operate under the said voting trust because of
the disapproval by its New York headquarters of such action, or for any
other cause, the said trust would be cancelled and the stock in and
control of the Company returned to its true owners.
11th. That shortly subsequent to the execution and delivery of the
voting trust and memorandum of agreement hereinabove described, in
violation of the obligations and duties imposed by law upon the trustee
and in pursuance of a scheme to defraud these plaintiffs hereinbelow
more fully set forth, the said voting trustee, the defendant Mullen,
caused and procured, by virtue of the powers delegated in the said
voting trust, the displacement and removal from the Board of Directors
of the Company of each and every person who was at the time of the
execution of the said voting trust a stockholder in the Company and the
substitution in their places as such directors, of the above named
persons defendant, or of other persons at the time employees and
servants of the Bank, that thereafter and at no subsequent time did the
said trustee allow or permit to act as a Director of the Company any
person who was in fact a stockholder in the Company; that no one of
the so-called directors so placed in ostensible office, at any time has
ever purchased from any stockholder of the Company a single share of
the capital stock thereof, or paid to any stockholder or the Company
any money or consideration whatsoever for the stock by virtue of the
assumed ownership of which he has assumed to be a director of the
Company and that at all time since, the Company has been exclusively
controlled and managed by the said defendants none of whom had any
legal or equitable right to a voice in the control or management thereof.
12th. That in pursuance of the above-mentioned and hereinafter
described scheme to defraud these plaintiffs, the new so-called
directors proceeded to remove from office the Secretary of the
Company, and to discharge from employment all of the old responsible
managers and foremen in the office and shops who were total to the
Company and to these plaintiffs as the strockholders thereof and to
displace them substitute for them creatures of their own choosing
whose interest consisted wholly in pleasing themselves and the Bank,
and who were wholly foreign to the stockholders, these plaintiffs who
were and are the real owners of the Company. That thereafter said
defendants conducted the business of the Company without consulting
the stockholders thereof and denied to the stockholders any
knowledge or information as to their actions, or the business of the
Company, and at all times thereafter carried on the business and
management in all respects as if they and the Bank were the real
stockholders and owners thereof and in utter and entire disregard of
the rights and interests of these plaintiffs who were and are the real
owners. That the said individual defendants, as such pretended
stockholders and directors as aforesaid, from time to time gave new
mortgages upon the properties of the Company to the Bank as if from
time to time required and without regard to the interest of the Company
and looking solely to the advantage of the Bank whose employees and
henchmen all of them were and are.
13th. That after excluding the real owners from voice in the
management or knowledge of the affairs of the Company, the said
individual defendants and or the Bank by agreement among
themselves or because the individual defendants as employees were
coerced by the Bank, the said defendants gave pledges and
mortgages from the Company to the Bank and entered into contracts
as directed by the Bank, and permitted the Bank to foreclose the same
and to sell the property of the Company at such times and in such
manners as to be solely to the interests of the Bank of themselves, and
wholly without regard to the best interests of the Company itself in
disregard to the duties and obligations of a trustee, and permitted the
Bank to bring suits or suits against the Company, in which the
Company was not represented by anyone having its interest at heart
and in which by reason of the above set forth relation of the Company
to the Bank, the Bank in truth occupied the position of both plaintiff and
defendant and tricked and deluded the courts into giving judgments in
which the rights of the real parties were concealed and unknown to the
courts.
14th. That on or about the 18th day of August, 1923, in order more
effectually to plunder the Company and to defraud these plaintiffs the
said defendants, Mullen, Barclay, Mears and Mcintosh, made,
executed and filed in the Bureau of Commerce and Industry of the
Philippine Islands, articles of incorporation of a corporation called the
"Philippine Motors Corporation," having its principal office in the City of
Manila, a capital stock of P25,000, of which the sum of P5,000, was
alleged to have been subscribed and paid as follows: the defendant
Barclay P200, defendant Mears P1,200, defendant Kelly P1,200,
defendant Mcintosh P1,200, defendant Mullen P1,200, the treasurer
thereof being the defendant Mears. And these plaintiffs beg leave to
refer to the original articles of Incorporation on file in the said Bureau
for greater certainty.
That at the time of such incorporation each and every one of the last
above named defendants was an officer or employee of the defendant
Bank. That these plaintiffs have nor information nor means of obtaining
information as to whether the money alleged to have been described
by them for their shares of stock was of their personal funds and
property or whether it was money furnished them by the Bank of
purpose moneys such incorporation was a fraud upon these plaintiffs
for the reason that it was intended for the sole purpose of taking over
the assets of the Company and said defendants were enabled to
effectuate such intent by reason of their positions as officers and
employees of the Bank and because each and every one of them were
nominally and de facto directors of the Company, by reason of their
appointments as such by the defendant Mullen, the Voting Trustee,
under the Voting Trust hereinabove set forth, of which facts each and
every one of said defendant incorporators were at the time fully
informed as these plaintiffs verily believe.
15th. That after the incorporation described in the last preceding
paragraph the said Bank turned over to the Philippine Motors
Corporation all of the business and assets of the company of every
name nature and description and with the connivance and consent of
the individual defendants acting in their double capacity as directors of
both corporations, permitted and assisted the said Philippine Motors
Corporation to enter and possess itself of the premises and good will of
the Company and to continue and carry on the business for the sole
benefit of the new corporation and to collect the debts owing to the
Company and convert the advantages, profits and proceeds thereof to
itself. And that at all times since the said Philippine Motors Corporation
has continued to conduct and advantage itself of the business of the
Company to the disregard of and detriment to the rights of these
plaintiffs and to their damage.
16th. That these plaintiffs, by reason of the facts hereinabove set forth
were and are ignorant of the exact relations that have existed and do
exist between the Bank and the said Philippine Motors Corporation, or
between the Bank and the individual defendants as ostensible
stockholders thereof and that the Bank has prevented these plaintiffs
from obtaining any such information by refusing after demand to return
to these plaintiffs their stock in the Company or to dissolve the Voting
Trust or in any wise to allow them to regain control of what is left of the
Company or its records and has endeavored to forestall and prevent
any action toward regaining such control or enforcement of their rights
by bringing suit against one of the principal stockholders in the
Company, the plaintiff Everett, based on an alteration and falsification
of the books of the Company and by threat of proceedings against
another principal stockholder in the Company, the plaintiff Clifford, to
collect a large sum of money as and for an alleged non payment of a
subscription to the stock of the Company, which the records of the
Company plainly show does not exist and has no foundation in equity
or in law.
That by the reason of ignorance, so generated and maintained, of facts
wholly within the knowledge of defendants and concealed from these
plaintiffs, they are unable to allege positively and therefore must
charge as they do charge in the alternative;
(a) That the said Philippine Motors Corporation is a fictitious entity
brought into semblance of being by the Bank through the control of its
employees the above named individual defendants acting as
pretended incorporators, stockholders and directors, when in truth and
in fact the said individuals had and have no personal property interest
therein, and that in case of foregoing is found to be the fact the said
Philippine Motors Corporations never obtained and has now no legal
existence for the reason that it was and is the Bank itself operating
under a disguise and because said Bank, under its license to do
business in the Philippine Islands, is without power or authority to
engage in the business assumed by the Philippine Motors Corporation,
and because said corporation so pretendedly created by the Bank is in
violation of its duties and obligations assumed by it as Trustee of the
stockholders of the Company, Or
(b) That in case the individual defendants as individuals created the
said, the Philippine Motors Corporation, and the same is the property
of themselves as stockholders and bona fide investors of their own
money in the stock of the same, then such creation and all subsequent
operations of the said Corporation were a fraud upon these plaintiffs
because such incorporation and subsequent acts of the Corporation
were caused and procured by said individual defendants the defendant
Mullen being the voting trustee of the Company and at the same time
being the Manager in the Philippine Islands of the Bank, and by virtue
of the power so focused and concentrated in himself together with the
powers of the others individual defendants as agents and employees
of the Bank, and simultaneously as officers and directors of the
Company enabled the said individual defendants to take advantage of
their position in respect to the Company and the Bank and to sue the
same to the defraudation of these plaintiffs.
17th. That the return to the above named individual plaintiffs by the
Trustee of the stock in the Company, transferred to it by said Voting
Trust Agreement, has been demanded and refused.
18th. That by reason of the facts above alleged these plaintiffs have
been kept and are in ignorance of accurate knowledge of the actions of
the defendants and of the amount of damage thereby caused these
plaintiffs and represent to the court what accurate information can only
be obtained by a discovery by the defendants and each of them of all
and every fact relevant to this cause.
19th. That these plaintiffs are credibly informed and verily believe that
the defendants are now confabulating among themselves further to
conceal the facts and to damage these plaintiffs by a sale of the
Philippine Motors Corporation and all its assets tangible and intangible
to a new purchaser, in which new purchaser the said defendants will
have interests, and that in case such sale should be made it will
damage these plaintiffs in a manner for which there is no adequate
remedy and will cause and produce a multiplicity of actions.
Wherefore these plaintiffs demand the decrees and judgment of this
court:
1st. Enjoining and restraining the defendants and each of them from
transferring the corporation called Philippine Motors Corporation or any
of the capital stock therein to any person or corporation during the
pendency of this action.
2nd. Ordering the said defendants at once to cancel the said Voting
trust and to return to these plaintiffs their shares of the stock of Teal
and Company, taken under said trust and to return to them all the
books and records of every kind and nature of said Teal and Company,
and to regain to these defendants their pretended positions in and
control of Teal and Company.
3rd. Decreeing that the defendants and each of them make full and
true discovery of all the facts in relation to the formation, incorporation,
and ownership of the Philippine Motors Corporation and of all dealings
and transactions between the defendant Asia Banking Corporation and
said Philippine Motors Corporation to the end that the court and these
plaintiffs shall have information whether said Philippine Motors
Corporation is in fact the Asia Banking Corporation operating under a
disguise or is the creation of the individual defendants availing
themselves of their connections with and positions in the said Bank in
order to take advantage of these plaintiffs and of Teal and Company.
4th. Decreeing that the said defendants make discovery of all and
every one of their acts and transactions with respect to Teal and
Company since the same was taken by them adding and including a
full and true discovery of all sales of the property of Teal and Company
of every kind and nature with the full and true consideration received in
every case, the amount received from any compromise entered into by
them in the name of Teal and Company and the true consideration
therefor.
5th. In case it be found that the said Philippine Motors Corporations is
in fact the Asia Banking Corporation that a decree be entered ordering
the said Bank immediately to dissolve the same and to account to
these plaintiffs for all profits made thereby since its organization.
6th. For judgment against said defendants jointly and severally for the
damages caused by their acts aforesaid which the plaintiffs charged to
be not less than P500,000.
7th. For such other or further relief, or both, in the premises as to this
court may seem just and equitable.
To this complaint the defendants demurred on the grounds (1) that it is
ambiguous, unintelligible and uncertain; (2) that the plaintiffs have not
the legal capacity to bring this action; (3) that the complaint does not
state facts sufficient to constitute a cause of action, and (4) that there
is a defect or misjoinder of parties defendant.
The court below sustained the demurrer on all four grounds and held
that the complaint, especially in its paragraphs 4 and 5, is ambiguous,
confusing, unintelligible and vague; that Teal and Company should
have been joined as a party plaintiff; that, as far as the Philippine
Motors Corporation is concerned, the plaintiffs, not being stockholders
in that corporation, had no legal right to proceed against it in this case;
and that the court could not be called upon to act as investigator of the
facts referred to in paragraphs 3 and 4 of the complaint, but that such
investigations fall within the duty of the interested party, the Attorney-
General, the Insular Auditor or the Insular Treasurer.
I
If this were an ordinary action at law, the ruling of the court below
would be correct in most respects; it must be conceded that the
complaint violates at least three of the four principal rules as to the
manner or stating facts in complaints in such actions. It suffers from
duplicity, the facts are not stated with certainty, and the statement is
sometimes indirect and partly in the alternative.lawphil.net
But we are not here dealing with a complaint in an action at law; this is
in effect a bill of discovery and the proceeding is primarily one for
equitable relief, though it may eventually develop into an action at law.
In such proceedings considerable latitude in the manner of stating
facts in the pleadings is allowed. The minute and varied statements of
the probative facts, the charge to anticipate a defense, and the
interrogatories, become necessary in the equity practice, because bills
are for discovery as well as for relief, and in order to search the
conscience of the defendant, he is treated, in the pleading, somewhat
as though placed upon the stand and examined as an unwilling
witness. (Bliss on Code Pleading, 3rd edition, section 319.)
Counsel for the defendants argue that there is no express provision in
the Code of Civil Procedure for a proceeding such as the present, and
that, therefore, proceedings for discovery must be considered limited to
the taking of depositions under subsection 1 of section 355 of the Code
and the compulsory attendance of witnesses by means of subpoena.
But, upon a moment's reflection, it becomes evident that the means of
discovery suggested by counsel are not always available or adequate.
Before they can be utilized there must be an action pending, or, in
other words, a complaint must have been filed and summons served
upon the defendants. Now, there are cases where facts, essential to
the plaintiffs cause of action, are within the knowledge of the
defendants, but of which the plaintiff is so imperfectly informed that he
cannot state them with certainty, even on information and belief. He
may, however, known that one out of two or more sets of facts is true
without knowing which of them is true. In such circumstances the
plaintiff cannot, of course, state any of the facts with certainty and it
stands to reason that he cannot be required to plead with certainty
facts which he does not definitely believe to be true. But the facts being
essential to this cause of action, he must state them in one form or the Court within ten days from the return of the record to the Court of
another and cannot very well file his complaint before so doing. And if First Instance. So ordered.
he cannot file his complaint, he cannot, as we have already stated,
avail himself of the remedy, provided for in subsection 1 of section 355, Avanceña, C. J., Street, Villamor, Johns, Romualdez and Villa-Real,
supra. It seems clear that, in such a case, the proper procedure is for JJ., concur.
the plaintiff to state the facts within his knowledge with certainty, but to
plead in the alternative the, to him, doubtful facts, which are wholly
within the defendant's knowledge and call upon the defendant to make
a full disclosure of these facts. That is exactly what the plaintiffs have
done in the present case, and bearing in mind the purpose of the
action, their complaint seems sufficiently intelligible and free from 25 F.2d 783 (1928)
ambiguity.
MACKIN et al.
The fact that there is no special express provision in the Code of Civil v.
Procedure for bills of discovery of this character does not necessarily NICOLLET HOTEL, Inc., et al.
signify that the remedy does not exist in this jurisdiction. The maxim of
equity that "Equity will not permit a wrong without a remedy" still holds No. 7661.
good, and our liberal Code of Civil Procedure is, if properly interpreted,
sufficiently broad and flexible to enable the courts to apply all Circuit Court of Appeals, Eighth Circuit.
necessary remedies, both legal and equitable.
April 16, 1928.
II
*784 Hubert M. Harvey, of St. Paul, Minn. (M. H. Boutelle, of
Invoking the well-known rule that shareholders cannot ordinarily sue in Minneapolis, Minn., on the brief), for appellants.
equity to redress wrongs done to the corporation, but that the action
J. B. Faegre, of Minneapolis, Minn. (Cobb, Wheelwright, Hoke &
must be brought by the Board of Directors, the appellees argue — and
Benson, of Minneapolis, Minn., on the brief), for appellees.
the court below held — that the corporation Teal and Company is a
necessary party plaintiff and that the plaintiff stockholders, not having
Before LEWIS and KENYON, Circuit Judges, and KENNEDY, District
made any demand on the Board to bring the action, are not the proper
Judge.
parties plaintiff. But, like most rules, the rule in question has its
exceptions. It is alleged in the complaint and, consequently, admitted
KENNEDY, District Judge.
through the demurrer that the corporation Teal and Company is under
the complete control of the principal defendants in the case, and, in
This is a suit in equity, instituted in the court below, wherein Daniel
these circumstances, it is obvious that a demand upon the Board of
Mackin was plaintiff and one Cooper was an intervening plaintiff, in
Directors to institute an action and prosecute the same effectively
which the principal relief sought was to secure a decree setting aside
would have been useless, and the law does not require litigants to
and declaring to be void and of no force and effect a voting trust
perform useless acts. (Exchange bank of Wewoka vs. Bailey, 29 Okla.,
agreement incident to the financing, erection, ownership, management,
246; Fleming and Hewins vs. Black Warrior Copper Co., 15 Ariz., 1;
and control of a hotel property in the city of Minneapolis by the
Wickersham vs. Crittenden, 106 Cal., 329; Glenn vs. Kittaning Brewing
defendant corporation through the individual defendants, by virtue of
Co., 259 Pa., 510; Hawes vs.Contra Costa Water Company, 104 U. S.,
the exercise of their powers under such trust agreement.
450.)
At the conclusion of the final hearing in the court below, the court found
III
generally for the defendants, appellees here, dismissed the bill of
complaint with prejudice at the cost of plaintiff and the intervener, and
The conclusion of the court below that the plaintiffs, not being
plaintiffs bring the cause here by appeal.
stockholders in the Philippine Motors Corporation, had no legal right to
proceed against that corporation in the manner suggested in the
The trial judge filed a written memorandum in which is embodied what
complaint evidently rest upon a misconception of the character of the
purports to be a statement of the facts, followed by a brief analysis of
action. In this proceeding it was necessary for the plaintiffs to set forth
the issues. As this statement is adopted by the appellees and is not
in full the history of the various transactions which eventually led to the
challenged by the appellants, it is safe to accept it as a proper basis for
alleged loss of their property and, in making a full disclosure,
the disposition of the matters presented upon the appeal. It is as
references to the Philippine Motors Corporation appear to have been
follows:
inevitable. It is to be noted that the plaintiffs seek no judgment against
the corporation itself at this stage of the proceedings.
"The defendant Glen S. Dixson was the owner of a leasehold interest
in a tract of land in the city of Minneapolis, Minn., upon which stood
IV
what was known as the old Nicollet Hotel. The Nicollet Hotel,
Incorporated, a Delaware corporation, was organized at the instance of
The court below also erred in holding that the investigation of the
a group of men interested in the commercial welfare of Minneapolis, for
transaction referred to in the complaint is not within the province of the
the purpose of adding to the hotel accommodations of that city.
courts, but should be conducted by some other agency. That
Arrangements were made to have Dixson take 2,500 shares of
discovery, such as that demanded in the present action, is one of the
common stock for his lease and to erect a new Nicollet Hotel upon this
functions of a court of equity is so well established as to require no
property. The cost of the hotel was to be about $3,000,000, to be
discussion.
raised by the sale of $1,800,000 of first mortgage bonds and
$1,250,000 of preferred stock. On February 6, 1923, the Minnesota
In our opinion the plaintiffs state a good cause of action for equitable
Loan & Trust Company, the Minneapolis Trust Company, and the
relief and their complaint is not in any respect fatally defective. The
Wells-Dickey Trust Company, all of Minneapolis, accepted the
judgment of the court below is therefore reversed, the defendants
application of the Nicollet Hotel, Incorporated, for a loan of $1,800,000,
demurrer is overruled, and it is ordered that the return of the record to
to be secured by first mortgage bonds and a trust deed covering the
hotel property. In the application for the loan, the following statement
was made:
"`The borrower agrees that a voting trust agreement covering all of the
common stock of the borrower will be executed in the form and on the
terms and conditions satisfactory to you, and your acceptance of this
application is conditional upon the execution of such agreement.'
"On February 8, 1923, application to the State Securities Commission
of Minnesota for a license to sell its preferred stock was made by the
corporation, which application contained the following language:
"`The common stock of the corporation is to be trusted with three
trustees for a period of ten years for the protection of the preferred
stockholders' and further recited that the preferred stock is `* * * fully
safeguarded through the immediate deposit of all common stock under
a ten-year voting trust.'
"On February 15, 1923, the commission issued a license to the
corporation to sell its preferred stock, subject to the condition that the
common stock be trusteed.
"On March 3, 1923, a voting trust agreement was made with A. E.
Zonne, Glen S. Dixson, and Joseph Chapman, as voting trustees,
which contained the following recitals:
"`Whereas, the said corporation desires to erect upon the said
premises hereinbefore described a new hotel building and is in need of
funds for such purpose, and for the purpose of raising part of the
necessary funds to build and equip said hotel building, proposes to
issue and sell bonds in the amount of one million eight hundred
thousand dollars ($1,800,000) secured by mortgage or trust deed on
the property of said first party, and also to sell one million two hundred
fifty thousand dollars ($1,250,000) par value of its preferred capital
stock; and
"`Whereas, for the purpose of inducing third parties to subscribe for
and purchase the preferred capital stock of said corporation, and to
purchase such bonds, the undersigned stockholders have offered to
transfer their shares of common stock in said corporation to said
parties of the second part as voting trustees under the terms
hereinafter set forth.'
"The consideration for the voting trust is stated in the instrument as
follows:
"`In consideration of the premises, and the benefits to be derived by
the undersigned stockholders in said corporation from the purchase by
third persons of the preferred *785 stock of said corporation and of
said bonds of said corporation. * * *'
"The voting trust agreement provided that the common stock should be
assigned to Zonne, Dixson, and Chapman as trustees; that they should
issue trustees' certificates therefor, which might be sold on condition
that the purchasers or assignees accepted the provisions of the voting
trust. It also provided, among other things, that, should a vacancy
occur in the office of the first trustee, it should be filled by a selection,
made by a majority of the three trust companies which underwrote the
bond issue, from the board of directors of the Nicollet Hotel,
Incorporated, or, if none were willing to act, then from the residents of
the city of Minneapolis; that, if a vacancy should occur in the office of
the second trustee, it should be filled by a trustee selected by the
holders of the voting trust certificates representing a majority of the
common stock; and that, in case of a vacancy in the office of the third
trustee, it should be filled by the Minnesota Loan & Trust Company,
trustee for the bondholders, from the present board of directors, or, if
none should be willing to act, then from the residents of the city of
Minneapolis.
"It was also provided that a majority of the holders of the preferred
stock of the Nicollet Hotel, Incorporated, might remove the first trustee
and appoint a new trustee, but that such trustee must be selected from
the present board of directors, but, if none residing in Hennepin county
were willing to act, from the residents of the city of Minneapolis, that
the Minnesota Loan & Trust Company, trustee for the bondholders,
might remove the second trustee and appoint a new trustee, from the
present board of directors, or, if none were willing to act, then from the
residents of Minneapolis, and that the holders of voting trust
certificates representing a majority of the common stock might remove
the second trustee and appoint a new trustee in his place.
"Under the trust agreement, the trust shall continue for ten years or
until all outstanding preferred stock shall be retired, and, if it shall not
be retired before the expiration of ten years, then the trust shall be
continued in two-year periods for an additional term of ten years;
provided that any holder of a trust certificate may, upon notice before
the end of the ten-year period, or before the end of any two-year
period, withdraw his shares of common stock at the end of the period
in which such notice shall have been given, and provided further that
the holders of trust certificates representing one-half of the common
stock may, upon notice, cause the expiration of the trust at the end of
the ten-year or any two-year period.
"The trustees are required to select themselves as directors and to re-
elect the present board of directors so long as the trustees or a
majority of them believe them to be suitable.
"Mr. Dixson executed the trust agreement on March 3, 1923, and
deposited his 2,500 shares of common stock. Shortly thereafter Haglin
& Sons Company and Holabird & Roach, the other common
stockholders, likewise executed the agreement and deposited the
1,600 shares and 400 shares which they owned. That constituted all
the common stock of the corporation. The $1,250,000 of preferred
stock was sold and is outstanding. In July, 1923, the trust deed to the
Minnesota Loan & Trust Company of Minneapolis, securing the
$1,800,000 of bonds, was delivered and the money paid to the
corporation. All the bonds are issued and outstanding.
"Article IV of the trust deed is as follows:
"`The holders of the common stock of the company have heretofore
entered into a voting trust agreement, dated the third day of March,
1923, with A. E. Zonne, Glen S. Dixson and Joseph Chapman, as
voting trustees, and the company covenants and agrees that it will
cause said voting trust agreement to be fully carried out and
performed, in accordance with the terms thereof and will cause the
same to remain in full force and effect until all of the bonds secured
hereby have been paid.'
"It is provided that, if default shall be made in any covenant or
condition of the trust deed, or if a receiver shall be appointed for the
corporation, the deed may be foreclosed.
"The hotel was built with the funds procured from the sale of these
bonds and preferred stock, and has been operated under the direction
of a board of directors elected by the voting trustees, pursuant to the
trust agreement.
"The plaintiff, Mackin, and Cooper, the intervener, are the owners of
trust certificates representing 80 shares and 1,520 shares,
respectively, of the common stock held by the defendant trustees.
Their claim is that the voting trust is void, that the trustees and those
appointed by them have mismanaged the company and have caused
large losses; that, in the event of a stockholders' meeting, the trustees
will vote the common stock; and that the plaintiff has been denied the
right to inspect the books. To put it briefly, they say that they are
denied their rights as common *786 stockholders, because of this trust
agreement, that they do not approve of the management, and they ask
this court to declare the agreement void and to appoint a receiver until
they and the rest of the beneficial owners of the common stock can
organize and elect a board of directors of their own to take over and
manage the hotel property."
While points other than the validity of the trust agreement were raised
upon the hearing by defendants and are reiterated here, the court
below decided the case upon the merits as to the principal issue, which
issue is accepted and defined by counsel for appellants on page 1 of
their brief in the following language:
"The action involves only one issue; namely, the validity of a voting
trust executed on the 3d day of March, 1923, whereby the stockholders
of the no par value common stock of the Nicollet Hotel, Incorporated, a
corporation created and existing under the laws of the state of
Delaware, agreed that said stock should be voted by three designated
trustees for at least a period of ten years."
We shall first direct our effort to ascertaining whether or not the ruling
and decision of the trial court upon this principal issue was correct.
In the first instance, it is to be noted that the defendant corporation is
one organized and existing under and by virtue of the laws of the state
of Delaware, while its principal business is conducted and the
transactions herein challenged took place in the state of Minnesota.
The question as to whether the transaction should be ruled by the laws
of Delaware or by the laws of Minnesota might be of importance if it
were disclosed that either state at the time of the commencement of
the action had any statute upon the subject of voting trust agreements
in corporate management. Counsel seem to be in agreement,
however, that no statute of this nature is to be found among the laws of
either state at the time the transactions took place, or plaintiffs' bill of
complaint was filed, but that the state of Delaware subsequent to the
commencement of this suit passed a law authorizing voting trust
agreements. In this respect, however, we cannot accept the
suggestion of counsel for appellants as sound, that, because Delaware
has since passed a law expressly authorizing voting trust agreements,
as a corollary it should be held that previous to such a law it must be
accepted as an established rule of that state that they were theretofore
illegal. Legislation must be considered as addressed to the future and
not to the past. Union Pacific R. Co. v. Laramie Stockyards Co., 231
U.S. 190, 34 S. Ct. 101, 58 L. Ed. 179.
Appellants also raise the point that the trust agreement here
challenged is violative of the Minnesota statute with relation to a
stockholder voting his stock by proxy, because of the time limit placed
upon such right. Section 7461 of the Minnesota General Statutes 1923
provides:
"Unless otherwise provided in the certificate or by-laws, at every
meeting each stockholder or member, resident or non-resident, shall
be entitled to one vote in person, or by proxy made within one year or
other times specially limited by law, for each share or other lawful unit
of representation held by him in his individual, corporate, or
representative capacity."
This objection is clearly met by the by-laws of the defendant
corporation in "otherwise providing" as follows:
"At each meeting of the stockholders every stockholder having the right
to vote shall be entitled to vote in person, or by proxy appointed by an
instrument in writing subscribed by such stockholder and bearing a
date not more than three years prior to said meeting, unless said
instrument provides for a longer period."
This brings us to the exact point of considering the validity of the voting
trust agreement. An examination of the authorities discloses that there
has been a gradual modification of the views of both courts and text-
writers upon this subject in modern times. The old theory which
seemed to dominate the earlier writers, to the effect that every
stockholder in a corporation is entitled to have the benefit of the
judgment of every other stockholder in the selection of a board of
directors, has necessarily been rendered obsolete because of our
modern business being conducted by large corporations with
thousands of stockholders located in all parts of the country. Manifestly
a meeting of the stockholders of such corporate organizations would
be not only impracticable but impossible. Upon this subject of change
in the policy of the courts in the light of the development of the
business of the country, a fair expression will be found in the case of
Carnagie Trust Co. v. Ins. Co., 111 Va. 1, 20, 68 S.E. 412, 418, 31 L.
R. A. (N. S.) 1186, at page 1195, 21 Ann. Cas. 1287, where the court
says:
"It is impossible to discuss all the cases cited. Some of them are
decided upon considerations as to the nature of irrevocable proxies;
others turn upon the statute law of the state in which they are
rendered; very *787 many rest upon the fraudulent or otherwise
objectionable character of the object to be obtained; while others, it
must be admitted, condemn a trust such as that under consideration as
being contrary to public policy, and for that cause null and void. In
considering the cases, however, and the text writers who have
commented upon them, it is impossible not to be impressed with the
change of opinion which has taken place with respect to the true
nature of such contracts. In the early stages of the development of this
idea, there was a strong sentiment against them, which found
expression in the opinions of judges, and in the not always temperate
language of distinguished commentators upon the law; but experience
has demonstrated their usefulness, and the hostility evinced toward
them has by degrees diminished.
"This change of opinion appears nowhere more strikingly than in the
very valuable work of Thompson on Corporations. In his first edition he
places trust certificates beyond the pale of the law, and declares that
they should not be regarded as lawful instruments of commerce, but be
treated as `something in the nature of counterfeit money, as securities
which have been issued in violation of law and in contravention of the
public right.' (Volume 5, 6414.) The second edition (which is not yet
completed) in § 893, on Voting or Pooling Trusts, uses the following
language: `The fact that the earlier cases were practically unanimous
in holding these pooling or voting trusts illegal, and that some law
writers and perhaps some courts have broadly stated that all such
contracts are void, must, in the light of subsequent cases, and the
advancement and development of corporation law, be regarded as an
application of a principle to all cases, which was intended to fit but one.
Under the recent and advanced decisions, it may be asserted as the
present prevailing doctrine that a pooling trust created by a deposit of
stock certificates with a trustee for a specified period of time, with the
authority to vote the same for the benefit of the owners and to the best
interests of the corporation, and without an absolute separation of the
voting power from the ownership of the stock, by an agreement which
is not a restraint of the alienation of property, nor in restraint of trade,
not against public policy, and not a fraud upon other stockholders, is
legal.'"
It would unduly lengthen this opinion to quote from authorities, but the
following state and federal decisions themselves containing many
additional citations, would seem to generally sustain the validity of
agreements of this character: Moses v. Scott, 84 Ala. 608, 4 So. 742;
Weber v. Mining Co., 14 Idaho, 404, 94 P. 441; Gray v. Bloomington R.
Co., 120 Ill. App. 159; Brightman v. Bates, 175 Mass. 105, 55 N.E.
809; Chapman v. Bates, 61 N. J. Eq. 658, 47 A. 638, 88 Am. St. Rep.
459; Manson v. Curtis, 223 N.Y. 313, 119 N.E. 559, Ann. Cas. 1918E,
947; White v. Snell, 35 Utah, 434, 100 P. 927; Thompson-Starrett Co.
v. Granite Co., 86 Vt. 282, 84 A. 1017; Clark v. Foster, 98 Wash. 241,
167 P. 908; Ziegler v. Railway Co. (C. C.) 69 F. 176; Borland v. Prindle
Co. (C. C.) 144 F. 713; In re C. W. Bartleson Co. (D. C.) 275 F. 390;
Boyer v. Nesbit, 227 Pa. 398, 76 A. 103, 136 Am. St. Rep. 890.
G.R. No. L-34192 June 30, 1988
While these cases and others are based upon different facts and
involve varying situations, they seem altogether to sustain the NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION,
conclusion that voting trust agreements are not illegal per se. EUSEBIO VILLATUYA MARIO Y. CONSING and ROBERTO S.
Undoubtedly many of such agreements have at times been held invalid BENEDICTO, petitioners,
by the courts, but these holdings have generally been based upon a vs.
variety of invalidating circumstances, such as want of consideration, HON. BENJAMIN AQUINO, in his official capacity as Presiding
the voting power not being coupled with an interest, fraud, or having an Judge of Branch VIII of the Court of First Instance of Rizal,
illegal or improper purpose. The facts in the case at bar fail to disclose BATJAK INC., GRACIANO A. GARCIA and MARCELINO
any of these elements. There is no want of consideration or fraud CALINAWAN JR., respondents.
alleged or shown. The voting power in the three trustees is coupled
with an interest because one of the trustees is a substantial owner of G.R. No. L-34213 June 30, 1988
common stock of the corporation, and all are charged with the duty of
protecting and conserving the property for the benefit of those who PHILIPPINE NATIONAL BANK, petitioner,
became purchasers of preferred stock and bonds upon the strength of vs.
the trust agreement itself. And the purpose of the agreement was and HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge
is legitimate and wholesome. The plan was originally conceived as a of the Court of First Instance of Rizal, Branch VIII and BATJAK
matter of civic pride by enterprising citizens of Minneapolis to have an INCORPORATED, respondents.
outstanding hostelry commensurate with the generally progressive
character of the city. To make this possible, it involved the matter of Cruz, Palafox, Alfonso and Associates for petitioner NIDC in G.R. No.
inviting combinations of capital in substantial amounts. This co- 34192.
operation could only be secured by having those who invested their
money assured of the fact that there would be a continuity of The Chief Legal Counsel for petitioner PNB in G.R. No. 34213.
management during a period of years until the new enterprise would
have an opportunity to justify a successful financial future. This feature Reyes and Sundiam Law Office for respondent Batjak, Inc.
of adequate financing was covered by the trust agreement controlling
Duran, Chuanico Oebanda, Benemerito & Associates for private
the voting power of the common stock over a period of years under
respondents in G.R. Nos. 34192 & 34213.
certain circumstances and conditions, and the securities and stock
were sold to the public upon the basis of this representation. *788 All
Tolentino, Garcia, Cruz & Reyes for movant in G.R. No. L-34192.
other things aside, it would be a manifest injustice to the large number
of holders of bonds and preferred stocks, not parties to this suit, to
adjudge and hold illegal a trust agreement upon the strength of which
they had invested their money in the enterprise. A consideration of this
PADILLA, J.:
phase of the question alone should sustain the trust agreement here.
In Clark v. Foster, supra, the court says:
These two (2) separate petitions for certiorari and prohibition, with
preliminary injunction, seek to annul and set aside the orders of
"It may be said, finally, that voting trust agreements are valid and
respondent judge, dated 16 August 1971 and 30 September 1971, in
binding, if based upon a sufficient consideration, if they do not
Civil Case No. 14452 of the Court of First Instance of Rizal, entitled
contravene public policy or a positive prohibitory statute, and if they do
Batjak Inc. vs. NIDC et al." The order of 16 August 1971 1 granted the
not sound in fraud or wrong against the stockholders. Wherefore, the
alternative petition of private respondent Batjak, Inc. Batjak for short)
object and not the form of the agreement furnishes the test, and where
for the appointment of receiver and denied petitioners' motion to
the trust is voluntarily created as a condition precedent to a loan to
dismiss the complaint of said private respondent. The order dated 30
protect those who have furnished the money that has put the life into a
September 1971 2 denied petitioners' motion for reconsideration of the
corporation, the courts should not seek further for a consideration."
order dated 16 August 1971.
Not only for the reasons stated, but it appears that both the plaintiff and
The herein petitions likewise seek to prohibit the respondent judge
intervener here became purchasers of the trust certificates after the
from hearing and/or conducting any further proceedings in Civil Case
creation of the trust agreement and thereby presumably had full
No. 14452 of said court.
knowledge of the limitation of their rights which went with such
holdings at the time of purchase. Under these circumstances, their
Batjak, (Basic Agricultural Traders Jointly Administered Kasamahan) is
equities would at least appear to be inferior to those innocent
a Filipino-American corporation organized under the laws of the
purchasers of preferred stock and bonds whose purchases were made
Philippines, primarily engaged in the manufacture of coconut oil and
because of the agreement.
copra cake for export. In 1965, Batjak's financial condition deteriorated
to the point of bankruptcy. As of that year, Batjak's indebtedness to
For the reasons stated, the decree of the trial court should be and is
some private banks and to the Philippine National Bank (PNB)
affirmed.
amounted to P11,915,000.00, shown as follows:
KENYON, Circuit Judge (concurring).
Republic Bank P 2,324,000.00
I concur in the affirmance of this case solely on the ground that plaintiff
Philippine Commercial and
and intervener are not in position to question the legality of the voting
trust, as they purchased the trust certificates with full knowledge of the
Industrial Bank 1,346,000.00
trust agreement and therefore of the limitation of their rights.
Manila Banking Corporation 2,000,000.00

Manufacturers Bank 440,000.00

Hongkong and Shanghai
Banking Corporation 250,000.00
Foreign Export Advances
(against immediate shipment) 555,000.00
PNB export advance line
(against immediate shipment) 5,000,000.00
TOTAL 11,915,000.00
As security for the payment of its obligations and advances against
shipments, Batjak mortgaged its three (3) coco-processing oil mills in
Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte
to Manila Banking Corporation (Manila Bank), Republic Bank (RB), and
Philippine Commercial and Industrial Bank (PCIB), respectively. In
need for additional operating capital to place the three (3) coco-
processing mills at their optimum capacity and maximum efficiency and
to settle, pay or otherwise liquidate pending financial obligations with
the different private banks, Batjak applied to PNB for additional
financial assistance. On 5 October 1965, a Financial Agreement was
submitted by PNB to Batjak for acceptance. The Financial Agreement
reads:
PHILIPPINE NATIONAL BANK
Manila, Philippines
International Department
October 5, 1965
BATJAK, INCORPORATED
3rd Floor, G. Puyat Bldg.
Escolta, Manila
Attn.: Mr. CIRIACO B. MENDOZA
Vice-President & General Manager
Gentlemen:
We are pleased to advise that our Board of Directors approved for you
the following:
1) That NIDC shall invest P6,722,500.00 in the form of preferred
shares of stocks at 9% cumulative, participating and convertible within
5 years at par into common stocks to liquidate your accounts with the
Republic Bank, Manufacturers Bank & Trust Company and the PCIB
which, however, shall be applied to the latter three (3) banks accounts
with the Loans & Discounts Dept. NIDC shall match your P 10 million
subscription by an additional investment of P3,277,500 within a period
of one to two years at NIDC's option;
2) That NIDC will guaranty for five (5) years your account with the
Manila Banking Corporation;
3) That the above banks (Republic Bank, PCIB, MBTC and Manila
Banking Corp.) shall release in favor of PNB the first and any mortgage
they hold on your properties;
4) That you shall exercise (execute) a first mortgage on all your
properties located at Sasa, Davao City; Jimenez, Misamis Occidental;
and Tanauan, Leyte and assign leasehold rights on the property on
which your plant at Sasa, Davao City is erected in favor of PNB;
5) That a voting trust agreement for five (5) years over 60% of the
oustanding paid up and subscribed shares shall be executed by your
stockholders in favor of NIDC;
6) That this accomodation shall be secured by the joint and several
signatures of officers and directors;
7) That the number of the Board of Directors shall be increased to
seven (7), three (3) from your firm and the other four (4) from the PNB-
NIDC;
8) That a comptroller, at your expense, shall be appointed by PNB-
NIDC to supervise the financial management of your firm;
9) That the past due accounts of P 5 million with the International
Department of the PNB shall be transferred to the Loans & Discount
Department and to be treated as a Demand Loan;
10) That any excess of NIDC investment as required in Condition 1
after payment of the obligations to three (3) Banks (RB, MBTC, &
PCIB) shall be applied to reduce the above Demand Loan of P 5
million;
11) That we shall grant you an export advance of P3 million to be used
for copra purchases, subject to the following conditions:
a) That the line shall expire on September 30, 1966 but revocable at
the Bank(s) option;
b) That drawings against the line shall be allowed only when an
irrevocable export L/C for coconut products has been established or
assigned in your favor and you shall assign to us all proceeds of
negotiations to be received from your letters of credit;
c) That drawings against the line be limited to 60% of the peso value of
the export letters of credit computed at P3.50 per $1.00 but total
drawings shall not in any event exceed P3,000,000.00;
d) That release or releases against the line shall be covered by
promissory note or notes for 90 days but not beyond the expiry dates
of the coveting L/C and proceeds of said L/C shall first be applied to
the correspondent drawings on the line;
e) That drawings against the line shall be charged interest at the rate
of 9% per annum and subject to 1/2% penalty charge on all drawings
not paid or extended on maturity date; and
f) That within 90 days from date of release against the line, you shall
negotiate with us on equivalent amount in export bills, otherwise, the
line shag be temporarily suspended until the outstanding export
advance is fully liquidated.
We are writing the National Investment & Development Corporation,
the Republic Bank, the Philippine Commercial & Industrial Bank and
the Manufacturers Bank & Trust Company and the Manila Banking
Corporation regarding the above.
In connection with the above, kindly submit to us two (2) copies of your
board resolution certified to under oath by your corporate secretary
accepting the conditions enumerated above authorizing the above
transactions and the officer or officers to sign on behalf of the
corporation.
Thank you.
Very truly yours,
(SGD.) JOSE B. SAMSON 3
The terms and conditions of the Financial Agreement were duly
accepted by Batjak. Under said Agreement, NIDC would, as it actually
did, invest P6,722,500.00 in Batjak in the form of preferred shares of
stock convertible within five (5) years at par into common stock, to
liquidate Batjak's obligations to Republic Bank (RB), Manufacturers
Bank and Trust Company (MBTC) and Philippine Commercial &
Industrial Bank (PCIB), and the balance of the investment was to be
applied to Batjak's past due account of P 5 million with the PNB.
Upon receiving payment, RB, PCIB, and MBTC released in favor of
PNB the first and any mortgages they held on the properties of Batjak.
As agreed, PNB also granted Batjak an export-advance line of P 3
million, later increased to P 5million, and a standby letter of credit
facility in the amount of P5,850,000.00. As of 29 September 1966, the
financial accomodation that had been extended by PNB to Batjak
amounted to a total of P 14,207,859.51.
As likewise agreed, Batjak executed a first mortgage in favor of PNB
on all its properties located at Jimenez, Misamis Occidental and
Tanauan, Leyte. Batjak's plant in Sasa, Davao City was mortgaged to
the Manila Bank which, in 1967, instituted foreclosure proceedings
against the same but which were aborted by the payment by Batjak of
the sum of P2,400,000.00 to Manila Bank, and which amount was
advanced to Batjak by NIDC, a wholly-owned subsidiary of PNB. To
secure the advance, Batjak mortgaged the oil mill in Sasa, Davao City
to NIDC. 4
Next, a Voting Trust Agreement was executed on 26 October 1965 in
favor of NIDC by the stockholders representing 60% of the outstanding
paid-up and subscribed shares of Batjak. This agreement was for a
period of five (5) years and, upon its expiration, was to be subject to
negotiation between the parties. The voting Trust Agreement reads:
VOTING TRUST AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT made and executed by the undersigned
stockholders of BATJAK, INC., a corporation duly organized and
existing under the laws of the Philippines, whose names are
hereinbelow subscribed hereinafter caged the SUBSCRIBERS, and
the NATIONAL INVESTMENT AND DEVELOPMENT
CORPORATION, hereinafter referred to as the trustee.
WITNESSETH:
WHEREAS, the SUBSCRIBERS are owners respectively of the capital
stock of the BATJAK, INC. (hereinafter called the CORPORATION) in
the amounts represented by the number of shares set fort opposite
their respective names hereunder;
AND WHEREAS, with a view or establishing a safe and competent
management to operate the corporation for the best interest of all the
stockholders thereof, and as mutually agreed between the
SUBSCRIBERS and the TRUSTEE, this Voting Trust Agreement has
been executed under the following terms and conditions.
NOW THEREFORE, the undersigned stockholders, in consideration of
the premises and of the mutual covenants and agreements herein
contained and to carry out the foregoing purposes in order to vest in
the TRUSTEE the voting rights of the shares of stock held by the
undersigned in the CORPORATION as hereinafter stated it is mutually
agreed as follows:
1. PERIOD OF DESIGNATION — For a period of five (5) years from
and after date hereof, without power of revocation on the part of the
SUBSCRIBERS, the TRUSTEE designated in the manner herein
provided is hereby made, constituted and appointed as a VOTING
TRUSTEE to act for and in the name of the SUBSCRIBERS, it being
understood, however, that this Voting Trust Agreement shall, upon its
expiration be subject to a re-negotiation between the parties, as may
be warranted by the balance and attending circumstance of the loan
investment of the TRUSTEE or otherwise in the CORPORATION.
2. ASSIGNMENT OF STOCK CERTIFICATES UPON ISSUANCE —
The undersigned stockholders hereby transfer and assign their
common shares to the capital stock of the CORPORATION to the
extent shown hereunder:
JAMES A. KEISTER 21,500 shares
JOHNNY LIEUSON 20,300 shares
CBM FINANCE & INVESTMENT
CORP. (C.B. Mendoza, Pres.) 5,000 shares
ALEJANDRO G. BELTRAN 4,000 shares
ESPERANZA A. ZAMORA 3,000 shares
CIRIACO B. MENDOZA 2,000 shares
FIDELA DE GUZMAN 2,000 shares
LLOYD D. COMBS 2,000 shares
RENATO B. BEJAR 200 shares
TOTAL 60,000 shares
to the TRUSTEE by virtue of the provisions hereof and do hereby
authorize the Secretary of the CORPORATION to issue the
corresponding certificate directly in the name of the TRUSTEE and on
which certificates it shall appear that they have been issued pursuant
to this Voting Trust Agreement and the said TRUSTEE shall hold in
escrow all such certificates during the term of the Agreement. In turn,
the TRUSTEE shall deliver to the undersigned stockholders the
corresponding Voting Trust certificates provided for in Sec. 36 of Act
No. 1459.
3. VOTING POWER OF TRUSTEE — The TRUSTEE and its
successors in trust, if anym shall have the power and it shall be its duty
to vote the shares of the undersigned subject hereof and covered by
this Agreement at all annual, adjourned and special meetings of the
CORPORATION on all questions, motions, resolutions and matters
including the election of directors and such matters on which the
stockholders, by virtue of the by-laws of the CORPORATION and of
the existing legislations are entitled to vote, which may be voted upon
at any and all said meetings and shall also have the power to execute
and acknowledge any agreements or documents that may be
necessary in its opinion to express the consent or assent of all or any
of the stockholders of the CORPORATION with respect to any matter
or thing to which any consent or assent of the stockholders may be
necessary, proper or convenient.
4. FILING of AGREEMENT — An executed copy of this Agreement
shall be filed with the CORPORATION at its office in the City of Manila
wherever it may be transfered therefrom and shall constitute
irrevocable authority and absolute direction of the officers of the
CORPORATION whose duty is to sign and deliver stock certificates to
make delivery only to said voting trustee of the shares and certificates
of stock subject to the provisions of this Agreement as aforesaid. Such
copy of this Agreement shall at all times be open to inspection by any By: (SGD) C.B. MENDOZA
stockholder, as provided by law.
President
5. DIVIDEND — the full and absolute beneficial interest in the shares
subject of this Agreement shall remain with the stockholders executing ESPERANZA A. ZAMORA (SGD) ALEJANDRO G. BELTRAN
the same and any all dividends which may be declared by the
CORPORATION shall belong and be paid to them exclusively in By: (SGD) MARIANO ZAMORA Stockholder
accordance with their stockholdings after deducting therefrom or
applying the same to whatever liabilities the stockholders may have in ESPERANZA A. ZAMORA
favor of the TRUSTEE by virtue of any Agreement or Contract that
may have been or will be executed by and between the TRUSTEE and (SGD) FIDELA DE GUZMAN (SGD) CIRIACO B. MENDOZA
the CORPORATION or between the former and the undersigned
stockholders. Stockholder Stockholder

6 COMPENSATION; IMMUNITY — The TRUSTEE or its successor in (SGD) RENATO B. BEJAR (SGD) LLOYD D. COMBS
trust shall not receive any compensation for its serviceexcept perhaps
that which the CORPORATION may grant to the TRUSTEE's Stockholder Stockholder
authorized representative, if any. Expenses costs, champs, and other
NATIONAL INVESTMENT AND
liabilities incurred in the carrying out of the but herein established or by
reason thereof, shall be paid for with the funds of the CORPORATION.
DEVELOPMENT CORPORATION
The TRUSTEE or any of its duly authorized representative shall incur
no liability by reason of any error of law or of any matter or thing done
By:
or omitted under this Agreement, except for his own individual
malfeasance.
(SGD) IGNACIO DEBUQUE JR.
7. REPRESENTATION — The TRUSTEE, being a corporation and a
Vice-President 5
juridical person shall accomplish the foregoing objectives and perform
its functions under this Agreement as well as enjoy and exercise the
In July 1967, forced by the insolvency of Batjak, PNB instituted
powers, privileges, rights and interests herein established through its
extrajudicial foreclosure proceedings against the oil mills of Batjak
duly authorized and accredited re resentatives . p with full authority
located in Tanauan, Leyte and Jimenez, Misamis Occidental. The
under the specific appointment or designation or Proxy.
properties were sold to PNB as the highest bidder. One year
thereafter, or in September 1968, final Certificates of Sale were issued
8. IRREVOCABILITY — This Agreement shall during its 5-year term or
by the provincial sheriffs of Leyte 6 and Misamis Occidental 7 for the
any extension thereof be binding upon and inure to the benefit of the
two (2) oil mills in Tanauan and Jimenez in favor of PNB, after Batjak
undersigned stockholders and their respective legal representatives,
failed to exercise its right to redeem the foreclosed properties within
pledges, transferees, and/or assigns and shall be irrevocable during
the allowable one year period of redemption. Subsequently, PNB
the said terms and/or its extension pursuant to the provisions of
transferred the ownership of the two (2) oil mills to NIDC which, as
paragraph 1 hereof. It is hereby understood and the undersigned
aforestated, was a wholly-owned PNB subsidiary.
stockholders have bound as they hereby bind themselves to make a
condition of every pledge, transfer of assignment of their interests in
As regards the oil mill located at Sasa, Davao City, the same was
the CORPORATION that the interests and participation so pledged,
similarly foreclosed extrajudicial by NIDC. It was sold to NIDC as the
transferred or assigned is evidenced by annotations in the certificates
highest bidder. After Batjak failed to redeem the property, NIDC
of stocks or in the books of the corporation, shall be subject to this
consolidated its ownership of the oil mill. 8
Agreement and the same shall be binding upon the pledgees,
transferees and assigns while the trust herein created still subsists. Three (3) years thereafter, or on 31 August 1970, Batjak represented
by majority stockholders, through Atty. Amado Duran, legal counsel of
9. TERMINATION — Upon termination of this Agreement as heretofore
private respondent Batjak, wrote a letter to NIDC inquiring if the latter
provided, the certificates delivered to the TRUSTEE by virtue hereof
was still interested in negotiating the renewal of the Voting Trust
shall be returned and delivered to the undersigned stockholders as the
Agreement. 9 On 22 September 1970, legal counsel of Batjak wrote
absolute owners thereof, upon surrender of their respective voting trust
another letter to NIDC informing the latter that Batjak would now safely
certificates, and the duties of the TRUSTEE shall cease and terminate.
assume that NIDC was no longer interested in the renewal of said
Voting Trust Agreement and, in view thereof, requested for the turn-
10. ACCEPTANCE OF TRUST — The TRUSTEE hereby accepts the
over and transfer of all Batjak assets, properties, management and
trust created by this Agreement under the signature of its duly
operations. 10
authorized representative affixed hereinbelow and agrees to perform
the same in accordance with the term/s hereof.
On 23 September 1970, legal counsel of Batjak sent stin another letter
to NIDC, this time asking for a complete accounting of the assets,
IN WITNTESS HEREOF, the undersigned stockholders and the
properties, management and operation of Batjak, preparatory to their
TRUSTEE by its representatives, have hereunto affixed their
turn-over and transfer to the stockholders of Batjak. 11
signatures this 26 day of October, 1965 in the City of Manila,
Philippines.
NIDC replied, confirming the fact that it had no intention whatsoever to
comply with the demands of Batjak. 12
(SGD) JAMES A. KEISER (SGD) JOHNNY LIEUSON
On 24 February 1971, Batjak filed before the Court of First Instance of
Stockholder Stockholder
Rizal a special civil action for mandamus with preliminary injunction
against herein petitioners docketed as Civil Case No. 14452. 13
CBM FINANCE & INVESTMENT CORPORATION
On 14 April 1971, in said Civil Case No. 14452, Batjak filed an
urgent ex parte motion for the issuance of a writ of preliminary
prohibitory and mandatory injunction. 14 On the same day, respondent
judge issued a restraining order "prohibiting defendants (herein
petitioners) from removing any record, books, commercial papers or
cash, and leasing, renting out, disposing of or otherwise transferring
any or all of the properties, machineries, raw materials and finished
products and/or by-products thereof now in the factory sites of the
three (3) modem coco milling plants situated in Jimenez, Misamis
Occidental, Sasa, Davao City, and Tanauan, Leyte." 15
The order of 14 April 1971 was subsequently amended by respondent
judge upon an ex parte motion of private respondent Batjak so as to
include the premises of NIDC in Makati and those of PNB in Manila, as
among the premises which private respondent Batjak was authorized
to enter in order to conduct an inventory.
On 24 April 1971, NIDC and PNB filed an opposition to the ex
parte application for the issuance of a writ of preliminary prohibitory
and mandatory injunction and a motion to set aside restraining order.
Before the court could act on the said motion, private respondent
Batjak filed on 3 May 1971 a petition for receivership as alternative to
writ of preliminary prohibitory and mandatory injunction. 16 This was
opposed by PNB and NIDC . 17
On 8 May 1971., NIDC and PNB filed a motion to dismiss Batjak's
complaints. 18
On 16 August 1971, respondent judge issued the now assailed order
denying petitioners' motion to dismiss and appointing a set of three (3)
receivers. 19 NIDC moved for reconsideration of the aforesaid
order. 20 On 30 September 1971, respondent judge denied the motion
for reconsideration. 21
Hence, these two (2) petitions, which have been consolidated, as they
involve a resolution of the same issues. In their manifestation with
motion for early decision, dated 25 August 1986, private respondent,
Batjak contends that the NIDC has already been abolished or
scrapped by its parent company, the PNB.
After a careful study and examination of the records of the case, the
Court finds and holds for the petitioners.
1. On the denial of petitioners' motion to dismiss.
As a general rule, an order denying a motion to quash or to dismiss is
interlocutory and cannot be the subject of a petition for certiorari. The
remedy of the aggrieved party in a denied motion to dismiss is to file
an answer and interpose, as defense or defenses, the objection or
objections raised by him in said motion to dismiss, then proceed to trial
and, in case of adverse decision, to elevate the entire case by appeal
in due course. However, under certain situations, recourse to the
extraordinary legal remedies of certiorari, prohibition and mandamus to
question the denial of a motion to dismiss or quash is considered
proper, in the interest of more enlightened and substantial justice. As
the court said in Pineda and Ampil Manufacturing Co. vs. Bartolome,
95 Phil. 930,938
For analogous reasons it may be said that the petition for certiorari
interposed by the accused against the order of the court a quo denying
the motion to quash may be entertained, not only because it was
rendered in a criminal case, but because it was rendered, as claimed,
with grave abuse of discretion, as found by the Court of Appeals. ..
and reiterated in Mead v. Argel 22 citing Yap v. Lutero (105 Phil. 1307):
However, were we to require adherence to this pretense, the case at
bar would have to be dismissed and petitioner required to go through
the inconvenience, not to say the mental agony and torture, of
submitting himself to trial on the merits in Case No. 166443, apart from
the expenses incidental thereto, despite the fact that his trial and
conviction therein would violate one of this [sic] constitutional rights,
and that, an appeal to this Court, we would, therefore, have to set
aside the judgment of conviction of the lower court. This would,
obviously, be most unfair and unjust. Under the circumstances
obtaining the present case, the flaw in the procedure followed by
petitioner herein may be overlooked, in the interest of a more
enlightened and substantial justice.
Thus, where there is patent grave abuse of discretion, in denying the
motion to dismiss, as in the present case, this Court may entertain the
petition for certiorari interposed by the party against whom the said
order is issued.
In their motion to dismiss Batjaks complaint, in Civil Case No. 14452,
NIDC and PNB raised common grounds for its allowance, to wit:
1. This Honorable Court (the trial court) has no jurisdiction over the
subject of the action or suit;
2. The venue is improperly laid; and
3. Plaintiff has no legal capacity to sue.
In addition, PNB contended that the complaint states no cause of
action (Rule 16, Sec. 1, Par. a, c, d & g, Rules of Court).
Anent the first ground, it is a well-settled rule that the jurisdiction of a
Court of First Instance to issue a writ of preliminary or permanent
injunction is confined within the boundaries of the province where the
land in controversy is situated. 23 The petition for mandamus of Batjak
prayed that NIDC and PNB be ordered to surrender, relinquish and
turnover to Batjak the assets, management and operation of Batjak
particularly the three (3) oil mills located in Sasa, Davao City, Jimenez,
Misamis Occidental and Tanauan, Leyte.
Clearly, what Batjak asked of respondent court was the exercise of
power or authority outside its jurisdiction.
On the matter of proper venue, Batjak's complaint should have been
filed in the provinces where said oil mills are located. Under Rule 4,
Sec. 2, paragraph A of the Rules of Court, "actions affecting title to, or
for recovery of possession, or for partition or condemnation of, or
foreclosure of mortgage on, real property, shall be commenced and
tried in the province where the property or any part thereof lies."
In support of the third ground of their motion to dismiss, PNB and NIDC
contend that Batjak's complaint for mandamus is based on its claim or
right to recovery of possession of the three (3) oil mills, on the ground
of an alleged breach of fiduciary relationship. Noteworthy is the fact
that, in the Voting Trust Agreement, the parties thereto were NIDC and
certain stockholders of Batjak. Batjak itself was not a signatory thereto.
Under Sec. 2, Rule 3 of the Rules of Court, every action must be
prosecuted and defended in the name of the real party in interest.
Applying the rule in the present case, the action should have been filed
by the stockholders of Batjak, who executed the Voting Trust
Agreement with NIDC, and not by Batjak itself which is not a party to
said agreement, and therefore, not the real party in interest in the suit
to enforce the same.
In addition, PNB claims that Batjak has no cause of action and prays
that the petition for mandamus be dismissed. A careful reading of the
Voting Trust Agreement shows that PNB was really not a party thereto.
Hence, mandamus will not lie against PNB.
Moreover, the action instituted by Batjak before the respondent court
was a special civil action for mandamus with prayer for preliminary
mandatory injunction. Generally, mandamus is not a writ of right and its
allowance or refusal is a matter of discretion to be exercised on
equitable principles and in accordance with well-settled rules of law,
and that it should never be used to effectuate an injustice, but only to
prevent a failure of justice. 24 The writ does not issue as a matter of
course. It will issue only where there is a clear legal right sought to be
enforced. It will not issue to enforce a doubtful right. A clear legal right
within the meaning of Sec. 3, Rule 65 of the Rules of Court means a
right clearly founded in or granted by law, a right which is enforceable
as a matter of law.
Applying the above-cited principles of law in the present case, the
Court finds no clear right in Batjak to be entitled to the writ prayed for.
It should be noted that the petition for mandamus filed by it prayed that
NIDC and PNB be ordered to surrender, relinquish and turn-over to
Batjak the assets, management, and operation of Batjak particularly
the three (3) oil mills and to make the order permanent, after trial, and
ordering NIDC and PNB to submit a complete accounting of the
assets, management and operation of Batjak from 1965. In effect, what
Batjak seeks to recover is title to, or possession of, real property (the
three (3) oil mills which really made up the assets of Batjak) but which
the records show already belong to NIDC. It is not disputed that the
mortgages on the three (3) oil mills were foreclosed by PNB and NIDC
and acquired by them as the highest bidder in the appropriate
foreclosure sales. Ownership thereto was subsequently consolidated
by PNB and NIDC, after Batjak failed to exercise its right of
redemption. The three (3) oil mills are now titled in the name of NIDC.
From the foregoing, it is evident that Batjak had no clear right to be
entitled to the writ prayed for. In Lamb vs. Philippines (22 Phil. 456)
citing the case of Gonzales V. Salazar vs. The Board of Pharmacy, 20
Phil. 367, the Court said that the writ of mandamus will not issue to
give to the applicant anything to which he is not entitled by law.
2. On the appointment of receiver.
A receiver of real or personal property, which is the subject of the
action, may be appointed by the court when it appears from the
pleadings that the party applying for the appointment of receiver has
an interest in said property. 25The right, interest, or claim in property, to
entitle one to a receiver over it, must be present and existing.
As borne out by the records of the case, PNB acquired ownership of
two (2) of the three (3) oil mills by virtue of mortgage foreclosure sales.
NIDC acquired ownership of the third oil mill also under a mortgage
foreclosure sale. Certificates of title were issued to PNB and NIDC
after the lapse of the one (1) year redemption period. Subsequently,
PNB transferred the ownership of the two (2) oil mills to NIDC. There
can be no doubt, therefore, that NIDC not only has possession of, but
also title to the three (3) oil mills formerly owned by Batjak. The interest
of Batjak over the three (3) oil mills ceased upon the issuance of the
certificates of title to PNB and NIDC confirming their ownership over
the said properties. More so, where Batjak does not impugn the validity
of the foreclosure proceedings. Neither Batjak nor its stockholders
have instituted any legal proceedings to annul the mortgage
foreclosure aforementioned.
Batjak premises its right to the possession of the three (3) off mills on
the Voting Trust Agreement, claiming that under said agreement, NIDC
was constituted as trustee of the assets, management and operations
of Batjak, that due to the expiration of the Voting Trust Agreement, on
26 October 1970, NIDC should tum over the assets of the three (3) oil
mills to Batjak. The relevant provisions of the Voting Trust Agreement,
particularly paragraph 4 & No. 1 thereof, are hereby reproduced:
NOW THEREFORE, the undersigned stockholders, in consideration of
the premises and of the mutual covenants and agreements herein
contained and to carry out the foregoing purposes in order to vest in
the TRUSTEE the voting right.8 of the shares of stock held by the
undersigned in the CORPORATION as hereinafter stated it is mutually
agreed as follows:
1. PERIOD OF DESIGNATION — For a period of five (5) years from
and after date hereof, without power of revocation on the part of the
SUBSCRIBERS, the TRUSTEE designated in the manner herein
provided is hereby made, constituted and appointed as a VOTING
TRUSTEE to act for and in the name of the SUBSCRIBERS, it being
understood, however, that this Voting Trust Agreement shall, upon its
expiration be subject to a re-negotiation between the parties, as may
be warranted by the balance and attending circumstance of the loan
investment of the TRUSTEE or otherwise in the CORPORATION.
and No. 3 thereof reads:
3. VOTING POWER OF TRUSTEE — The TRUSTEE and its
successors in trust, if any, shall have the power and it shall be its duty
to vote the shares of the undersigned subject hereof and covered by
this Agreement at all annual, adjourned and special meetings of the
CORPORATION on all questions, motions, resolutions and matters
including the election of directors and all such matters on which the
stockholders, by virtue of the by-laws of the CORPORATION and of
the existing legislations are entitled to vote, which may be voted upon
at any and all said meetings and shall also have the power to execute
and acknowledge any agreements or documents that may be
necessary in its opinion to express the consent or assent of all or any
of the stockholders of the CORPORATION with respect to any matter
or thing to which any consent or assent of the stockholders may be
necessary, proper or convenient.
From the foregoing provisions, it is clear that what was assigned to
NIDC was the power to vote the shares of stock of the stockholders of
Batjak, representing 60% of Batjak's outstanding shares, and who are
the signatories to the agreement. The power entrusted to NIDC also
included the authority to execute any agreement or document that may
be necessary to express the consent or assent to any matter, by the
stockholders. Nowhere in the said provisions or in any other part of the
Voting Trust Agreement is mention made of any transfer or assignment
to NIDC of Batjak's assets, operations, and management. NIDC was
constituted as trustee only of the voting rights of 60% of the paid-up
and outstanding shares of stock in Batjak. This is confirmed by
paragraph No. 9 of the Voting Trust Agreement, thus:
9. TERMINATION — Upon termination of this Agreement as heretofore
provided, the certificates delivered to the TRUSTEE by virtue hereof
shall be returned and delivered to the undersigned stockholders as the
absolute owners thereof, upon surrender of their respective voting trust
certificates, and the duties of the TRUSTEE shall cease and
terminate.-
Under the aforecited provision, what was to be returned by NIDC as
trustee to Batjak's stockholders, upon the termination of the
agreement, are the certificates of shares of stock belonging to Batjak's
stockholders, not the properties or assets of Batjak itself which were
never delivered, in the first place to NIDC, under the terms of said
Voting Trust Agreement.
In any event, a voting trust transfers only voting or other rights
pertaining to the shares subject of the agreement or control over the
stock. The law on the matter is Section 59, Paragraph 1 of the
Corporation Code (BP 68) which provides:
Sec. 59. Voting Trusts — One or more stockholders of a stock
corporation may create a voting trust for the purpose of confering upon
a trustee or trusties the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any one time: ... 26
The acquisition by PNB-NIDC of the properties in question was not
made or effected under the capacity of a trustee but as a foreclosing
creditor for the purpose of recovering on a just and valid obligation of
Batjak.
Moreover, the prevention of imminent danger to property is the guiding
principle that governs courts in the matter of appointing receivers.
Under Sec. 1 (b), Rule 59 of the Rules of Court, it is necessary in
granting the relief of receivership that the property or fired be in danger
of loss, removal or material injury.
In the case at bar, Batjak in its petition for receivership, or in its
amended petition therefor, failed to present any evidence, to establish
the requisite condition that the property is in danger of being lost,
removed or materially injured unless a receiver is appointed to guard
and preserve it.
WHEREFORE, the petitions are GRANTED. The orders of the
respondent judge, dated 16 August 1971 and 30 September 1971, are
hereby ANNULLED and SET ASIDE. The respondent judge and/or his
successors are ordered to desist from hearing and/or conducting any
further proceedings in Civil Case No. 14452, except to dismiss the
same. With costs against private respondents.
SO ORDERED.
62 N.W.2d 288 (1954)
157 Neb. 867
E. K. BUCK RETAIL STORES et al. v. HARKERT et al.
No. 33356.
Supreme Court of Nebraska.
January 15, 1954.
*292 Hotz & Hotz, Robert M. Kane, William F. Dalton, Omaha, for
appellants.
Kennedy, Holland, DeLacy & Svoboda, Omaha, for appellees.
Before SIMMONS, C. J., and CARTER, MESSMORE, YEAGER,
CHAPPELL, WENKE, and BOSLAUGH, JJ.
CARTER, Justice.
This is a suit for a declaratory judgment brought by E. K. Buck Retail
Stores, a corporation, and Earl K. Buck against Walter E. Harkert and
Mercedes C. Harkert, and Harkert Houses, a corporation, to test the
validity of a corporation control agreement entered into by the parties
in their capacities as stockholders in Harkert Houses. The trial court
disposed of the issues raised by holding two separate trials and
entering two decrees. The first decree was entered on October 29,
1951, in which it was determined that the agreement was in all
respects valid, the defendants, Harkert were restrained from violating
said agreement, the defendants Harkert were ordered to perform in
accordance with the terms of the agreement, the prayer of the plaintiffs
for a declaration that the corporate election of January 16, 1950, was
invalid was denied, and all claims of the defendants, including those for
damages, were denied. A second agreement between the parties
bearing date of July 7, 1938, similar in nature, was also held valid. The
court granted permission to plaintiffs to seek further relief in damages
based on the judgment and decree, and retained jurisdiction of the
case for this purpose. The second decree was entered on January 14,
1953, in which it was determined that plaintiffs were entitled to
judgment against the defendants Harkert in the amount of $33,612 and
that defendants' motions for judgment notwithstanding the findings of
the court should be overruled. On February 3, 1953, all motions for a
new trial were severally overruled. This was a final order as to the
decree of October 29, 1951, and that of January 14, 1953. The
defendants Harkert have appealed from this order. In order to simplify
the disposition of the issues we shall deal first with those involved in
the first trial which resulted in the decree of October 29, 1951.
The record shows that Walter E. Harkert, hereafter referred to as
Harkert, was on and before the latter part of 1937 the sole owner of a
chain of restaurants or hamburger stands. His finances became
impaired in the period prior thereto to the extent that he was compelled
to seek financial aid from sources other than banking institutions. He
engaged in a plan of selling the fixtures and equipment at a designated
eating house or stand to the investor for cash and entering into an
agreement to buy the fixtures and equipment back at the end of 5
years for a higher price, payment to be made in monthly installments
over the 5-year period. Several of these sale and repurchase
agreements had been entered into before Harkert became acquainted
with Earl K. Buck, hereafter referred to as Buck. Harkert and Buck
became acquainted, with the result that Buck entered into four
purchase and resale agreements with Harkert prior to the incorporation
of the Harkert restaurants. In the latter part of 1937 Harkert was
desirous of improving his financial structure, and broached the subject
to Buck. Buck advised Harkert to consult with Buck's lawyer with
reference to the matter. The incorporation of the *293 Harkert interests
under the name of Harkert Houses resulted, undoubtedly with the
expectation that Buck would be interested in advancing more money in
the furtherance of his interests and those of the new corporation. An
auditor calculated the net worth of the business as this time to be
$47,504.38. This figure was admittedly arrived at by not treating the
payments on repurchase agreements, which became due more than 1
year thereafter, as a liability in his calculation of the net worth of
Harkert. These deferred payments amounted to $41,042 and, if
deducted as a liability, would have fixed Harkert's net worth at
$6,462.38, exclusive of good will and the value of the business as a
going concern. All of this Buck knew and no contention is made that he
was misled thereby.
From this point on we shall refer to the E. K. Buck Retail Stores, Buck,
and Devor, as Buck, their interests being identical so far as this
litigation is concerned. The evidence shows that Harkert at this time
was obligated on repurchase agreements and other forms of
indebtedness in the sum of $44,750 to persons other than Buck.
Harkert was indebted to Buck in the gross face amount of $55,650. An
agreement was made whereby Buck would cancel this gross amount
of $55,650 and pay $53,625 in cash into the business for which he was
to receive as a consideration therefor 40 percent of the stock of
Harkert Houses and equal representation on the board of directors of
the corporation. Figuring the gross amount of the indebtedness of
Harkert to Buck at its then present value, it appears that Buck actually
invested a total of $90,725 in Harkert Houses. The evidence shows
that Buck paid in the $53,625, $44,750 of which was used to pay the
assumed obligations of Harkert by Harkert Houses, and $8,875 was
paid to Harkert as a part of the stock transaction, all with the full
knowledge of Buck.
As hereinbefore indicated, Buck and those for whom he acted were to
receive 40 percent of the stock of the company and equal control on
the board of directors of the Harkert Houses. The pertinent part of the
contract so providing states: "That the number of the members of the
Board of Directors of Harkert Houses be reduced from five, as it now
is, to the number of four, and that the said four members of the new
Board shall consist of said Walter E. Harkert, Mercedes C. Harkert, his
wife, Earl K. Buck and Rodney B. Devor, and that the number of
members of said Board of Directors shall be maintained at four in
number, of which at all times two thereof shall be such persons as
shall be nominated or designated by the said Walter E. Harkert or his
heirs, representatives or legatees, and the other two thereof shall be
such persons as shall be nominated or designated by the said party of
the second part. And it is further mutually agreed between the parties
that at all stockholders' meetings of the said Harkert Houses held for
the purpose of election of directors or director (in case of vacancy on
the Board of Directors), that all of the said shares of stock of parties of
the first part and also of party of the second part and also any
additional shares of stock of the Harkert Houses which may be
subsequently acquired by the said parties or either of them, shall be
voted in such manner and for such person or persons as will keep and
maintain the Board of Directors four in number, of which two thereof
shall be such persons as shall be nominated or designated by said
Walter E. Harkert or his heirs, representatives or legatees, and two
thereof shall be such persons as shall be nominated or designated by
the said party of the second part."
It is contended by the defendants that the foregoing portion of the
agreement violates Article XII, section 5, of the Constitution, and
section 21-135, R.S.1943, and, in addition thereto, contravenes the
public policy of the state and is void for that reason. It will be noted that
the statute was enacted pursuant to the mentioned constitutional
provision and that the two are similar insofar as their substance is
concerned. They will therefore be considered together.
The pertinent part of Article XII, section 5, of the Constitution, is as
follows: "The Legislature shall provide by law that in all *294 elections
for directors or managers of incorporated companies every stockholder
shall have the right to vote in person or proxy for the number of shares
owned by him, for as many persons as there are directors or managers
to be elected or to cumulate said shares and give one candidate as
many votes as the number of directors multiplied by the number of his
shares shall equal, or to distribute them upon the same principle
among as many candidates as he shall think fit, and such directors or
managers shall not be elected in any other manner; * * *."
The contract here involved was entered into on May 23, 1938, by
Walter E. Harkert and Mercedes C. Harkert as parties of the first part
and the E. K. Buck Retail Stores as the party of the second part. On
the date of the agreement Harkert was the owner of 2,637 shares of
stock in Harkert Houses and Mercedes C. Harkert was the owner of
300 shares. The E. K. Buck Retail Stores became the owner of 1,198
shares on the day the contract was made and Buck and Rodney P.
Devor became the owners of one share each. Harkert retained 1,437
shares and Mercedes C. Harkert retained 300 shares. There were a
number of shares of stock held by persons not signatory to the
agreement after the completion of the stock transaction. The contract
was between the parties as stockholders. They involved no action on
the part of the corporation. So far as the record shows, the board of
directors, officers, or stockholders as such had no knowledge of the
transaction. The E. K. Buck Retail Stores was a corporation operating
a chain of shoe stores and was not, consequently, a competitor of
Harkert Houses in the restaurant business.
In considering the meaning of Article XII, section 5, of the Constitution,
and section 21-135, R.S.1943, it is proper to consider the evil and
mischief attempted to be remedied, the objects sought to be
accomplished, the scope of the remedy its terms apply, and give it
such an interpretation as appears best calculated to effectuate the
design of the constitutional and legislative provisions. It is clear to us
that the purpose of the constitutional provision and statute enacted
pursuant thereto was to provide for cumulative voting in the election of
directors or managers of incorporated companies in order to secure to
minority stockholders a greater representation in the management of
the corporation's business. In order to do this it was necessary that the
law state the number of votes to which each stockholder was entitled
and to insure against an involuntary loss of the right conferred. In the
accomplishment of the latter, the Constitution provides that "such
directors or managers shall not be elected in any other manner". The
latter prohibition, as we view it, operates to prevent a corporation by its
articles of incorporation, by-laws, or any act of its directors or
stockholders from depriving a stockholder of the right to vote his stock
in the manner specified in the Constitution and statute. But such
provision does not purport to limit the right of the stockholder to
contract with reference to his stock. It grants him a right or privilege
which he may or may not exercise as he sees fit, but it is one of which
the corporation or any agency thereof cannot deprive him. Neither the
constitutional provision nor the statute purports to limit the right of the
stockholder to contract with other stockholders with respect to such
right. The nature of the right granted by the Constitution and statute
appears to have been concisely stated in Tomlin v. The Farmers' &
Merchants' Bank, 52 Mo.App. 430, wherein the court said: "The right is
one guaranteed by the law, constitutional and statutory, it is personal
to the stockholder, it can be exercised or not by such stockholder as he
may himself elect. * * * It, therefore, cannot be taken from him by a
resolution or by-law adopted by a majority of shareholders."
In State ex rel. Frank v. Swanger, 190 Mo. 561, 89 S.W. 872, 876, 2
L.R.A.,N.S., 121, the court in dealing with a similar provision said: "The
object and purposes of this provision in our Constitution is well
understood, and has been judicially expounded on several occasions.
Its purpose *295 was to introduce the principle of cumulative system of
voting in elections of stockholders so as to secure to the minority of
stockholders a voice in the management of the affairs of the company
in proportion to the number of their shares, * * *. A construction has
nowhere been given to section 6, art. 12, within our knowledge or
research, so as to constitute it a prohibition or restriction on the right of
stockholders to make their contracts which violate no rule of the
common law, and which affect no rights, except their own."
The result necessarily hinges upon the meaning to be given to the
words "and such directors or managers shall not be elected in any
other manner". It will be noted that Article XII, section 5, of the
Constitution provides that every stockholder shall have the right to vote
in person or proxy for directors or managers on a stock ownership
basis for as many as there are directors to be elected, and he may
cumulate his vote and distribute it among the candidates as he sees fit.
Then follows the provision that directors shall be elected in no other
manner.
We think the meaning of the constitutional provision is clear. Its
purpose is to provide for cumulative voting in the accomplishment of
which it was necessary to fix the voting power of the shares of stock. In
many states cumulative voting is permissive,it could be properly
included in the articles of incorporation, or not, as the incorporators
might determine. The clause "and such directors or managers shall not
be elected in any other manner" was placed in Article XII, section 5, of
the Constitution, to make it mandatory that every corporation within the
purview of the constitutional provision should permit cumulative voting.
It is contended that the provision intended much more than that from
its plain, unambiguous language, that it meant also that any agreement
between stockholders, even though accompanied by a valuable
consideration, was voided by the provision that such directors shall not
be elected in any other manner. We point out that the elections of
directors after the agreement of May 23, 1938, were held in
accordance with the method prescribed in Article XII, section 5, of the
Constitution. For that matter, the elections held after the breach of the
agreement likewise were held in the manner prescribed. It will be noted
that each share of stock was given one vote, the right to cumulate was
not denied and, for aught the record shows, the voting power of the
stock was in no way reduced. It is asserted, however, that an
agreement between stockholders as to how stock shall be voted at the
election of directors ipso facto changes the manner of election
prescribed by the Constitution. To so hold would have the effect of
invalidating existing statutes relating to voting trusts and all other forms
of voting combines by a majority of the stock to control the
management of the corporation, which were recognized at common
law. The Constitution so construed would be superior to any statute in
conflict therewith. We do not think the framers of the Constitution had
any such intention and, if they had, adequate language could easily
have been found to have expressly so provided. It was clearly the
purpose of Article XII, section 5, of the Constitution, to secure to
minority stockholders a voice in the management of the affairs of the
corporation in proportion to the number of their shares. We can find
nothing in this section which purports to change the then existing rights
of a stockholder to contract with another stockholder with reference to
how he should vote his stock.
Elaborate briefs have been filed by the parties dealing with the issues
of this case. To discuss all of the cases cited and the distinctions
drawn by the parties would unduly extend this opinion. On the
constitutional issue, however, the defendants rely mainly upon two
cases upon which we will venture to comment. These cases are
People ex rel. Arkansas Valley Sugar Beet & Irrigated Land Co. v.
Burke, 72 Colo. 486, 212 P. 837, 30 A.L.R. 1085, and Brooks v. State
ex rel. Richards, 3 Boyce, Del., 1, 79 A. 790, 51 L.R.A.,N.S., 1126.
*296 In the Burke case it appears that the water storage company,
desiring to build an irrigating and storage system of its own, entered
into an agreement with the receiver of the old canal company for the
joint use of a part of its existing canal. A new canal company was
organized and the old canal company stockholders were to receive
stock in the new company. For the purpose of giving representation to
the storage company, in the problems involved in maintaining and
operating that part of the canal jointly used, the contract for the joint
use of the canal provided also that the stockholders of the new canal
company would annually vote for and elect as two of its five directors
two stockholders of their own number to be designated by the storage
company. The two corporations were rival and competitive companies
whose rights and interests were antagonistic and adverse to the rights
and interests of their own corporation. The right of the storage
company was not contingent on its being a stockholder. It appears
plain to us that the receiver was acting for the corporation and all of the
stockholders thereof. If this be true, the provision for the election of the
two stockholders nominated by the storage company to be directors
constituted a corporate limitation on the power of stockholders to vote
cumulatively or otherwise for all directors to be elected. Such a holding
would, of course, be in line with our interpretation of Article XII, section
5, of the Nebraska Constitution,the constitutional provision of the
Colorado Constitution being identical with ours for all practical
purposes. In the decision, however, the Colorado court went further
and held that the words [72 Colo. 486, 212 P. 841] "And such directors,
trustees or managers shall not be elected in any other way" meant
more than the establishment of a cumulative method of voting. The
court said: "The language is plain and unambiguous. It is not
susceptible of construction. It interprets itself. It is an absolute,
unequivocal command that the directors shall not be elected in any
other way than the way or ways which the section itself specifically
provides. The sentence was not intended to establish cumulative
voting. That object had been accomplished by previous provisions of
the section. The inhibition is no more applicable or appropriate to
cumulative voting than to voting by a stockholder of all his shares for
as many directors as are to be elected; that is, two methods of
votingcumulative and noncumulativeare provided, and the nominating
and electing by either method is the same." The court held the contract
viod on its face for the reasons set out in the opinion at considerable
length. The court did not say, as the defendants here contend, that all
agreements between stockholders relating to the voting of stock were
void. It did say: "Such being our conclusion, it is unnecessary to
determine whether all separations of voting power from beneficial
ownership, all irrevocable powers of attorney for the voting of the
stock, or all voting trust agreements, are invalid." We think that the
Colorado court meant that the canal company violated the
constitutional provision when it attempted to limit the right of its
stockholders to elect its directors, by the cumulative method or
otherwise, when it contracted with reference thereto with the storage
company in the manner in which it did. But it was not a case where two
stockholders contracted for a consideration with reference to the voting
of their stock. If the holding of the Colorado court has the effect that the
defendants claim for it, we have no hesitancy in saying that it is not
sustained by the better reasoning.
In the Brooks case the Delaware court was called upon to determine
the right of the owners of preferred shares of stock to vote at the
election of directors. The constitutional provision was similar to Article
XII, section 5, of the Nebraska Constitution. The articles of
incorporation of the company involved purported to deprive the owners
of preferred stock of the right to vote for directors. A statute enacted
subsequent to the adoption of the *297 constitutional provision
authorized such a provision in the articles of incorporation. The court
held that the holders of the preferred stock were entitled to vote their
stock under the constitutional provision. It will be noted that the
prohibition of the constitutional provision operated against the
corporation providing restrictive methods of electing directors. We find
nothing in the opinion touching upon the right of stockholders to
contract with each other with reference to how they will vote their
stock. We think the defendants claim too much for the Burke and
Brooks cases.
It is next contended that the agreement of May 23, 1938, was void as
being against public policy. It is claimed that the public policy of this
state is derived from Article XII, section 5, of the Constitution, and the
implementing statute to which we have referred. Our discussion of the
validity of the agreement as the constitutional provision relates to it
tends to dissolve this issue. If, as we have said, control agreements
between stockholders are not ipso facto void because of the
constitutional provision, certainly no public policy can be gleaned
therefrom which would void the agreement. No other source of public
policy is asserted other than the constitutional provision and the
implementing statute. We desire to make it clear, however, that in
holding that the constitutional provision does not of itself void stock
control agreements between stockholders, it does not mean that all
such agreements are valid. The validity of the contract under the law,
after determining the irrelevancy of the constitutional provision, will be
subsequently dealt with herein.
Under the statutory law of this state, a corporation is to be managed by
a board of directors elected by the stockholders. Section 21-111,
R.S.1943. The contract here involved does not violate that provision.
The stockholders elect the directors by the terms of the contract, and
the power of the directors to manage Harkert Houses is not infringed.
"It is not in violation of any rule or principle of law nor contrary to public
policy for stockholders who own a majority of the stock of a corporation
to cause its affairs to be managed in such way as they may think best
calculated to further the ends of the corporation, and it is not against
public policy or unlawful per se for stockholders to agree or combine
for the election of directors or other officers, so as to secure or retain
control of the corporation, at least where the object is to carry out a
particular policy with a view to promote the best interests of all of the
stockholders, and the agreement is fair to all the stockholders alike,
and to the corporation. It is `the general inherent right, resulting from
the ownership of stock in a corporation, to exercise the elective power
such ownership confers, and to exercise it wisely or unwisely, alone, or
pursuant to an agreement with other stockholders.' * * * Accordingly, it
has been held that stockholders who own a majority of the stock of a
corporation may elect themselves directors or appoint themselves its
agents, or form and carry into effect policies of management as freely
as if the business were their own, and so long as they act honestly,
and do not devote the corporate assets or business to their own private
gain or to the prejudice of other stockholders, no one can question
their acts, which are purely intra vires. * * * If a control and voting
agreement among stockholders aims at security of control without
fraud on the corporation or others and does not sever stock ownership
from stock control, it is not illegal. * * * In like manner a contract by the
owners of more than one-half of the shares of stock of a corporation to
elect the directors of the corporation so as to secure the management
of its property, to ballot among themselves for directors and officers if
they could not agree, to cast their vote as a unit as the majority should
decide, so as to control the election, and not to buy or sell stock except
for their joint benefit, is not dishonest, violative of the rights of others,
or in contravention of public policy, so long as no fraud is committed or
wrong done to other stockholders. * * * Hostility towards such
agreements and combinations *298 seems to be lessening, or perhaps
is becoming more discriminating between good and bad ends. Such
agreements are distinct from voting trusts, and are not controlled by
the same principles. The stockholders necessarily combine in the
majority which passes the vote, whether they do so by previous
agreement or not; and doing it by previous agreement is not of itself
invalid. According to the weight of authority, the validity and legality of
such combinations and agreements depend rather upon the objects
thereby sought to be attained and the acts which are done under them,
and the other circumstances, and an agreement may be a valid control
agreement but invalid because of some other cause or effect. * * * The
consideration for a voting agreement may consist in the purchase of
stock on the faith of the promise of others to enter into the agreement."
5 Fletcher, Cyclopedia Corporations, § 2064, p. 249. This, we think,
states the general law dealing with the subject of stockholders control
agreements.
The evidence discloses that prior to the agreement of May 23, 1938,
the defendants Harkert were financially involved to the extent that
financial assistance was desired, if not necessary. Harkert had sold all
of his restaurants for cash and taken back repurchase agreements
calling for large monthly payments over a 5-year period. There were
other obligations that had to be met. He approached Buck for the
purpose of interesting him in providing fresh money for the business.
Buck demanded that Harkert's business be incorporated as one
condition precedent to financial aid by him. The business was
incorporated and the issuance of 4,000 shares of stock at the par value
of $100 per share authorized. Buck offered to cancel Harkert's
obligations to him and pay $53,625 into the business in consideration
of the transfer of 50 percent of the stock to him. Harkert was unwilling
to sell 50 percent of the stock on this basis and offered Buck 40
percent of the stock and 50 percent of the control of the business. This
arrangement was agreed upon. We point out that the written
agreement provided that the board of directors was to be reduced from
five to four in number and maintained at that number. This portion of
the contract in itself prevented Harkert from electing more than two
directors if Buck exercised the right to cumulate his vote. But the
agreement went further and provided that each should vote for the two
nominees of the other for directors so long as Buck was a stockholder.
The evidence is clear that Buck cancelled the indebtedness of Harkert
Houses to him and paid the $53,625 in cash on the strength of the
control agreement. Without it he would not have agreed to the terms
offered. We point out, also, that the agreement in no manner attempted
to control the action of directors after they were elected. The claim that
the agreement sterilized the board of directors is based on the
assumption that the directors nominated by Buck would always vote
together. This is probably a practical result, although not one dictated
by the agreement. Our statute requires a corporation to have a board
of directors of three or more. Section 21-111, R.S.1943. In other
words, a board containing an even number of directors is authorized by
statute. It would not be unusual for such a board to split evenly on
some matters pertaining to corporate policy and thereby create a
situation similar to the one before us. Such a situation, in itself, cannot
be said to be illegal. The question before us is whether the contract
makes it unlawful because of its terms.
It is the contention of the defendants that although a stockholder may
vote as he pleases, public policy forbids the enforcement of a contract
by which a stockholder undertakes to bargain away his right to vote for
directors according to his best judgment, and in the interest of the
corporation. They contend that he has no right to disable himself by
contract from performing this duty. Defendants cite the following cases
in support of this proposition: Haldeman v. Haldeman, 176 Ky. 635,
197 S.W. 376; Jackson v. Hooper, 76 N.J.Eq. 592, 75 A. 568, 27
L.R.A.,N.S., 658; Nickolopoulos v. Sarantis, 102 N.J.Eq. 585, 141 A.
792; Manson v. Curtis, 223 N.Y. 313, 119 N.E. 559, Ann.Cas.1918E
247; *299 Benintendi v. Kenton Hotel, Inc., 294 N.Y. 112, 60 N.E.2d
829, 159 A.L.R. 280; Seitz v. Michel, 148 Minn. 80, 181 N.W. 102, 12
A.L.R. 1060; and Smith v. California Thorn Cordage, Inc., 129 Cal.
App. 93, 18 P.2d 393.
The plaintiffs assert that no public policy is violated in the making of an
agreement between a majority and a minority stockholder to cause the
voting rights in the corporation to be equal when it is beneficial to the
corporation for the purpose of bringing fresh money into the business
and injures no one except the majority stockholder in voluntarily giving
up a part of his voting rights. The following cases are cited in support
of this statement: Trefethen v. Amazeen, 93 N.H. 110, 36 A.2d 266;
Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling, 29
Del.Ch. 610, 53 A.2d 441; Thompson v. J. D. Thompson Carnation
Co., 279 Ill. 54, 116 N.E. 648, Ann.Cas.1917E, 591; Bator v. United
Sausage Co., 138 Conn. 18, 81 A.2d 442; Hart v. Bell, 222 Minn. 69,
23 N.W.2d 375, 24 N.W.2d 41; Wabash Ry. Co. v. American
Refrigerator Transit Co., 8 Cir., 7 F.2d 335, certiorari denied 270 U.S.
643, 46 S. Ct. 208, 70 L. Ed. 776; and Hocking Valley Ry. Co. v.
Toledo Terminal R. R. Co., 99 Ohio St. 35, 122 N.E. 35.
An individual discussion of each case cited by the parties is not
practical. There are certain fundamentals pertaining to corporate
control running through all the cases cited upon which there can be
little or no dispute. Among them are the following: A corporation is a
creature of the Legislature, and statutes and applicable law prevail
over private agreements between stockholders. The property of a
corporation belongs to the stockholders, but the possession and
management thereof is in the hands of the directors. An agreement
purporting to control the actions of directors after they are elected, in
handling the ordinary business of the corporation, is ordinarily void. A
partnership may not disguise itself as a corporation and any agreement
purporting to do so is, generally speaking, void. The law imposes the
business management of the corporation on its directors, who
represent all the stockholders and creditors, and they cannot enter into
agreements among themselves or with stockholders by which they
purport to abdicate their independent judgment. Stockholders are
powerless in this state to alter or reduce the voting power of any share
of stock. As a general rule, stockholders cannot act in relation to the
ordinary business of the corporation, nor control the judgment of
directors in the performance of their duties. A board of directors acts
through its majority and an agreement providing otherwise violates the
intendments of the statutes. The separation of voting rights from stock
ownership is frowned upon and will be sustained only when authorized
by law, or when it is free from fraud of any kind. Many of the cases
cited by the defendants involve one or more violations of the foregoing
and do not decide the issue under discussion. It must be conceded,
however, that the position of defendants does have support in the
authorities cited by them.
But we think the correct rule is that stockholders control agreements
are valid where it is for the benefit of the corporation, where it works no
fraud upon creditors or other stockholders, and where it violates no
statute or recognized public policy. "The propriety of the object
validates the means, and must affirmatively appear." Cone v. Russell &
Mason, 48 N.J.Eq. 208, 21 A. 847, 850.
It is not here established that the contract worked a fraud upon the
corporation, creditors, stockholders, or any other person.
Consequently, the following cases sustain the validity of the contract
on the point under discussion.
Trefethen v. Amazeen, supra [93 N.H. 110, 36 A.2d 267], is a case in
which the agreement between stockholders was for the purpose of
securing additional working capital for the corporation and provided
that the majority stockholder would waive his right to vote certain
shares so long as either of the other two contracting stockholders *300
would own stock in the corporation, so that these two would be able to
vote at least 50 percent of the voting stock. The case is very similar on
its facts to the case at bar. The court in sustaining the agreement said:
"The validity of a contract between stockholders is to be determined by
the effects of its provisions. In Bowditch v. Jackson Co., 76 N.H. 351,
82 A. 1014, L.R.A.1917A, 1174, this Court upheld a stockholders'
agreement for a voting trust applying as a test the conclusions that
there was no wrong to the corporation, no special benefit to the parties
to the contract and no turning over of management to strangers. The
Court did not leave out of consideration other stockholders individually
and creditors. * * * If we apply the above suggested tests to this
agreement, it is clear that it is valid. Holden received no special benefit;
his only benefit was the general one of all stockholders derived from a
corporation with greater working capital. There was no injury to
corporation, stockholders or creditors from the addition of new funds.
The only detriment was to the parties to the contract and such as they
themselves contemplated in the making of it, namely, the paying out of
money by two of the parties and the loss of voting rights agreed to by
the third party. There was no transfer of control of corporate
management, whether for good or ill, to outsiders. The contract merely
called for less voting power on the part of an assenting stockholder
and relatively greater voting power on the part of other stockholders for
a definite period. The effect of this upon other interests no one can
say. `It is not in violation of any rule or principle of law nor contrary to
public policy for stockholders who own a majority of the stock of a
corporation to cause its affairs to be managed in such a way as they
may think best calculated to further the ends of the corporation, * * *.' A
stockholders' agreement reasonably intended to be beneficial to a
corporation and injurious to no one save for the contemplated
detriment to the contracting parties is valid. Violation of the present
agreement by the defendant trustee would cause irreparable injury to
the plaintiff and he is without adequate remedy at law."
In Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling, supra
[29 Del.Ch. 610, 53 A.2d 447], the court had before it the question of
the validity of an agreement between two stockholders to vote together
for a certain slate of directors. For 3 years the two stockholders voted
together and elected five of seven directors. The third stockholder by
cumulating his vote elected the other two. The two contracting
stockholders, Edith Ringling and Aubrey Ringling Haley, each owned
315 shares of stock and the third stockholder, John Ringling North,
owned 370 shares. At the 1946 annual stockholders meeting Mrs.
Haley voted contrary to the agreement and maintained that the
agreement was invalid, or at least revocable. Her contention was
based on the proposition that there can be no agreement, or any
device whatsoever, by which the voting power of stock of a Delaware
corporation may be irrevocably separated from the ownership of the
stock except by an agreement which complied with section 18 of the
Corporation Law (voting trust statute), and except by a proxy coupled
with an interest. It was conceded that the voting trust statute was
without application. In holding the agreement valid the court said: "But
the statute does not purport to deal with agreements whereby
shareholders attempt to bind each other as to how they shall vote their
shares. Various forms of such pooling agreements, as they are
sometimes called, have been held valid and have been distinguished
from voting trusts. * * * We think the particular agreement before us
does not violate Section 18 or constitute an attempted evasion of its
requirements, and is not illegal for any other reason. Generally
speaking, a shareholder may exercise wide liberality of judgment in the
matter of voting, and it is not objectionable that his motives may be for
personal profit, or determined by whims or caprice, so long as he
violates no duty owed his fellow shareholders. * * * The ownership
*301 of voting stock imposes no legal duty to vote at all. A group of
shareholders may, without impropriety, vote their respective shares so
as to obtain advantages of concerted action. They may lawfully
contract with each other to vote in the future in such way as they, or a
majority of their group, from time to time determine. * * * Reasonable
provisions for cases of failure of the group to reach a determination
because of an even division in their ranks seem unobjectionable. The
provision here for submission to the arbitrator is plainly designed as a
deadlock-breaking measure, and the arbitrator's decision cannot be
enforced unless at least one of the parties (entitled to cast one-half of
their combined votes) is willing that it be enforced. We find the
provision reasonable. It does not appear that the agreement enables
the parties to take any unlawful advantage of the outside shareholder,
or of any other person. It offends no rule of law or public policy of this
state of which we are aware."
In Thompson v. J. D. Thompson Carnation Co., supra [279 Ill. 54, 116
N.E. 649], an agreement was entered into between stockholders to
vote their stock for each for directors and for no other person. The
Illinois court in upholding the agreement said: "It does not divest, or
attempt to divest, J. M. Thompson of his control or ownership of his
stock, or his right to vote the same, except that by the first clause it is
provided that the parties to the same shall vote their stock for each
other for directors and for no other person or persons. Contracts of this
character, by which the owners of a majority of the stock in a
corporation agree to vote for certain persons for directors so as to
secure to themselves the control and management of the corporation,
are not illegal or void so long as no fraud is committed on the
corporation or wrong done to the other stockholders. * * * We held in
the case cited that the owners of stock might lawfully contract with
each other not to buy or sell stock except for their joint benefit, and that
such contracts are not dishonest, violative of the rights of others, or in
contravention of the public policy of this state. So far as the evidence
shows, no fraud was practiced or intended to be practiced by the
contract in question, and in our opinion, in so far as its validity is
assailed on these grounds, it must be sustained as a valid exercise of
the right of contract."
In Hart v. Bell, supra [222 Minn. 69, 23 N.W.2d 377], the court said:
"Romig and C. W. Hart requested Bell to lend additional money to
Sports Afield, but he flatly refused unless he were permitted to acquire
enough common stock to give him absolute and permanent control. * *
* The trial court by its findings, which are all reasonably sustained by
the evidence, determined all these issues in favor of defendants, and
specifically found that Bell had, in all his corporate activities and
transactions, acted in good faith and to the best advantage and interest
of Sports Afield and its stockholders. * * * It is not the province of
courts to emasculate the liberty of contract by enabling parties to
escape their contractual obligations on the pretext of public policy
unless the preservation of the public welfare imperatively so demands.
* * * `the power of courts to declare a contract void for being in
contravention of sound public policy is a very delicate and undefined
power, and, like the power to declare a statute unconstitutional, should
be exercised only in cases free from doubt.' Cole v. Brown-Hurley
Hardware Co., 139 Iowa 487, 491, 117 N.W. 746, 748, 18 L.R.A.,N.S.,
1161, 16 Ann.Cas. 846. Quoted with approval in Hollister v. Ulvi, 199
Minn. 269, 280, 271 N.W. 493, 498, 499. * * * The practical conduct of
a modern business corporation compels a frank recognition that `an
agreement by a number of stockholders to combine their votes in order
to effectuate a particular policy is not of itself unlawful in the absence
of evidence of an intent to defraud the other stockholders or to secure
a private benefit at the expense of the corporation or the other
stockholders.' 66 U.S.L.Rev. (1932), pp. 562, 566. Illegality per se is no
longer the inevitable consequence of every agreement *302 by a
majority of the stockholders without regard to its purpose or effect."
The case of Manson v. Curtis, supra [223 N.Y. 313, 119 N.E. 561],
cited by the defendants, is a leading case on the subject before us. In
that case the agreement between stockholders was held to be void
because it operated to force an abdication by the directors of the
control of the business affairs of the corporation. But it does not hold
that stock control agreements are void per se as is evidenced by the
following from the opinion of the court in that case: "It is not illegal or
against public policy for two or more stockholders owning the majority
of the shares of stock to unite upon a course of corporate policy or
action, or upon the officers whom they will elect. An ordinary
agreement, among a minority in number, but a majority in shares, for
the purpose of obtaining control of the corporation by the election of
particular persons as directors is not illegal. Shareholders have the
right to combine their interests and voting powers to secure such
control of the corporation and the adoption of and adhesion by it to a
specific policy and course of business. Agreements upon a sufficient
consideration between them, of such intendment and effect, are valid
and binding, if they do not contravene any express charter or statutory
provision or contemplate any fraud, oppression, or wrong against other
stockholders or other illegal object."
In a similar case the court said in In re Feinson's Estate, 196 Misc.
590, 92 N.Y.S.2d 87, 90: "It is now well established that stockholders
of a corporation may validly agree to elect specified persons as
directors. Clark v. Dodge, 269 N.Y. 410, 199 N.E. 641; Kassel v.
Empire Tinware Co., 178 App.Div. 176, 164 N.Y.S. 1033; Matter of
Block's Will, 186 Misc. 945, 949, 60 N.Y.S.2d 639, 642. Moreover, the
complete owners of a corporation may, by agreement among
themselves, control the exercise of power and discretion by the
directors of the corporation, provided that the interests of creditors of
the corporation are not prejudiced and the public policy of the State is
not offended. * * * Even though a contract might impinge somewhat
upon the provisions of section 27, General Corporation Law, there is
no reason for holding it illegal if the enforcement of it `damages
nobodynot even, in any perceptible degree, the public.' Clark v. Dodge,
supra, 269 N.Y. page 415, 199 N.E. page 642."
We conclude that stockholders control agreements are not invalid per
se. If they are based on a sufficient consideration between the
contracting stockholders they are valid and binding if they do not
contravene any express constitutional or statutory provision or
contemplate any fraud, oppression, or wrong against creditors or other
stockholders, or other illegal object. Where such a situation appears it
is not illegal or against public policy for two or more stockholders
owning the majority of the shares of stock to unite upon a course of
corporate policy, or upon the officers, including directors, whom they
will elect.
The defendants contend, however, that even if the stock control
agreements are generally valid under circumstances here shown, the
one at bar is invalid for the reason that the agreement which provides
that two of a total of four directors shall be nominated by the owners of
40 percent of the stock and elected by the contracting stockholders so
long as the contracting party (Buck) shall be a stockholder, is void as
being against public policy. While the cases heretofore cited indicate
that such a provision in the agreement does not invalidate the contract
under the circumstances, additional cases are cited on this specific
point. That there is a division of authority on this point cannot be
questioned. We point out once more that the agreement does not
place Buck, the owner of 40 percent of the stock, in control of the
corporation. It does give him a veto power over questions of corporate
policy. It is plain that Buck would not have cancelled the gross
indebtedness of $55,650 and paid in the $53,625 in fresh money
without the stock control agreement being made. It must be assumed
that the purpose of the agreement *303 was to prevent the corporation
from getting into financial distress by a continuance of the corporate
policy which brought about the necessity for its reorganization at the
time Buck became a stockholder. It appears plain that Buck was
insistent upon the corporation not spreading itself too thin in the
enlargement of its business. The difficulties of Harkert and Buck arose
after 11 years of successful operations on the very policy which Buck
sought to have maintained when he brought the gross amount of
$109,275 into the business by the purchase of 40 percent of the stock.
Defendants rely upon Morel v. Hoge, 130 Ga. 625, 61 S.E. 487, 16
L.R.A.,N.S., 1136; Odman v. Oleson, 319 Mass. 24, 64 N.E.2d 439;
Luthy v. Ream, 270 Ill. 170, 110 N.E. 373, Ann.Cas.1917B, 368; and
cases of similar import to support their position. We think the more
reasonable and more modern rule is to the contrary.
Stockholders control agreements which purport to supersede the
powers of the directors of a corporation in handling its ordinary
business affairs are held ordinarily to be in violation of statutes placing
the power of management in the directors. The creation of a dummy
board of directors, or, in the language of some of the cases, a sterilized
board of directors, by a stockholder control agreement, is usually held
to be void. But the mere fact that a board of directors of four members
is created with the understanding that each shall nominate two, is not
of itself unlawful. The validity of such a contract is determined by the
nature of the restrictions placed upon the board in carrying out their
duty to exercise their best judgment in managing the affairs of the
corporation. Where the control agreement leaves the directors free to
act after being selected, we fail to see where there is a violation of any
law or established rule of public policy. The mere fact that a board is
created which may split evenly on a matter of corporate policy is not a
basis for voiding the contract. In the instant case the directors were
free to manage the ordinary business affairs of the corporation without
contractual restraint. It is not a dummy or sterilized board within the
ordinary meaning of those terms. The following from Clark v. Dodge,
269 N.Y. 410, 199 N.E. 641, 643, seems to state the applicable rule:
"Except for the broad dicta in the McQuade opinion [McQuade v.
Stoneham, 263 N.Y. 323, 189 N.E. 234], we think there can be no
doubt that the agreement here in question was legal and that the
complaint states a cause of action. There was no attempt to sterilize
the board of directors, as in the Manson and McQuade cases. The only
restrictions on Dodge were (a) that as a stockholder he should vote for
Clark as a directora perfectly legal contract; (b) that as director he
should continue Clark as general manager, so long as he proved
faithful, efficient, and competentan agreement which could harm
nobody; (c) that Clark should always receive as salary or dividends
one-fourth of the `net income.' For the purposes of this motion, it is
only just to construe that phrase as meaning whatever was left for
distribution after the directors had in good faith set aside whatever they
deemed wise; (d) that no salaries to other officers should be paid,
unreasonable in amount or incommensurate with services rendereda
beneficial and not a harmful agreement. If there was any invasion of
the powers of the directorate under that agreement, it is so slight as to
be negligible; and certainly there is no damage suffered by or
threatened to anybody. The broad statements in the McQuade opinion,
applicable to the facts there, should be confined to those facts."
Defendants next assert that the control agreement is void because of
the provision that Harkert be retained as president for an indefinite
period at a fixed salary. On this question the authorities again appear
to be in conflict, depending in most cases on the nature of the
agreement. But we do not feel that we are called upon to decide it in
this case. The defendant Harkert for some 11 years participated in
carrying out this part of the agreement by accepting the benefits it gave
him. It was a provision for the benefit of Harkert and not of Buck. After
reaping the benefits for 11 years he now seeks to invalidate the *304
agreement because of the alleged invalidity of a provision made for his
benefit. This he cannot do. It hardly requires a citation of authority to
hold that one who has received the benefit of the provision for a period
of 11 years may not now question the validity of the provision as a
basis for invalidating the control agreement to which he is a voluntary
party. He is estopped from questioning its validity. Under such
circumstances there is no merit to the defendants' contention on this
point.
It is also contended that the control agreement is void because it was
to remain in effect so long as Buck retained any stock in the
corporation. We think not. The purpose of the agreement was to give
Buck such protection against mismanagement as to induce him to
bring needed money into the corporation. It is reasonable that such
protection should be afforded so long as he is a stockholder. It is not a
contract which binds the parties in perpetuity, as defendants allege. It
is definite as to the term of its existence. The rule was correctly applied
in Trefethen v. Amazeen, supra [93 N.H. 110, 36 A.2d 267], wherein
the court said: "Briefly, the present stockholders' agreement was for
the purpose of securing additional working capital for the corporation
and provided that Mr. Holden would waive his right to vote certain
shares so long as either of the other two contracting stockholders
should own stock in the company, so that these two would be able to
vote at least 50% of the voting stock. * * * The contract merely called
for less voting power on the part of an assenting stockholder and
relatively greater voting power on the part of other stockholders for a
definite period."
It is urged that the sale and repurchase agreements made by Harkert
and Buck prior to 1938 were usurious. We do not deem it necessary to
determine that question because of the nature of the consideration
recited in the stockholders control agreement. The agreement in part
provided: "That, whereas, said party of the second part has this day
purchased from Harkert Houses, a corporation of Douglas County,
Nebraska, and Walter E. Harkert, President of said corporation, 1200
shares of stock of said Harkert Houses of the par value of $120,000 as
evidenced by Certificate No. 39 for 1198 shares issued to the party of
the second part and one share issued to Earl K. Buck, President of
party of the second part, and one share issued to Rodney B. Devor,
Treasurer of party of the second part, and has paid therefor the sum of
$53,625 in cash and has canceled and satisfied notes of said Harkert
Houses, maker, and of said Walter E. Harkert, maker, which have
heretofore been assumed by the said Harkert Houses, in the total
gross face sum of $55,650; * * *." No attempt was made to calculate
the net amount due Buck from Harkert Houses in the contract, nor to
fix the actual value of the stock sold to Buck. The stated consideration
was that Buck would pay $53,625 in cash and cancel the indebtedness
of Harkert Houses to him in the "total gross face sum of $55,650."
Whatsoever the net amount of the total gross face sum of $55,650 may
have been, played no part in the transaction. As a matter of law, the
consideration fixed by the agreement is controlling and the net amount
due is immaterial to the issue. Defendants are in no position to assert
that the "deals" made prior to the incorporation of Harkert Houses were
usurious.
We conclude that the stockholders control agreements were valid
under the circumstances here shown and that the declaratory
judgment entered on October 29, 1951, was correct in so holding.
In its decree of October 29, 1951, the trial court, after holding that there
was a breach of a valid contract on the part of the defendants,
authorized the plaintiffs to institute ancillary proceedings to recover
such damages, if any, resulting from the breach of contract.
Jurisdiction to entertain such further application and to render complete
relief in damages was therein specifically retained.
Plaintiffs thereafter filed a supplemental petition setting forth the
damages they are alleged to have sustained. The nature of *305 such
damages are summarized in plaintiffs' brief and for the purposes of the
question to be considered, they will be accepted. It is claimed that the
following items would not have been expended if the stockholders
control agreement had not been breached by Harkert and his
associates and, plaintiffs being the owners of 40 percent of the stock of
the corporation are entitled to a personal judgment for 40 percent of
the losses sustained. The items of damage, briefly stated, are:
Attorney fees paid by the corporation in this litigation, $4,000;
accountant fees paid by the corporation in this suit, $930.25; excessive
expenditures at the Athletic Club location, $18,085.32; excessive
salary paid to Fitzgerald, Schwentker, and Clara Harkert, $5,264.52;
proceeds of corporate bonds used in purchase of Farnam Street
building, $25,000; proceeds of corporate bonds used in establishment
of the restaurant in Lincoln, $37,000; expenditure of corporate earnings
in paying off the mortgage on the Farnam Street building, $25,000;
expenditure of corporate funds on Lincoln restaurant over and above
that derived from the sale of bonds, $15,639.60; and rent paid on
location leased and not used by the corporation, from June to
December 1951, $2,100. The total of these items is $133,019.69, 40
percent of which is $53,207.87 for which plaintiffs sought judgment. In
addition to the foregoing, defendants are charged with waste and
mismanagement of the corporate business, thereby causing the net
profit for the first 6 months in 1951 to be only $25,009 as against
$41,766.04 and $47,519.73 for the same periods in 1950 and 1949,
respectively. The defendant Walter E. Harkert is charged with using
funds of the corporation in the amount of $2,185 for the purchase of an
automobile for his own use and in making loans of corporate funds to
his friends and relatives in the amount of $2,890 which have been
outstanding and unpaid for 2 years. Plaintiffs allege that they have
been damaged by the breach of the stockholders control agreement on
the part of the defendants in an amount not less that $100,000. A trial
was had on the issues thus presented which resulted in the decree of
January 14, 1953, awarding plaintiffs a judgment against the
defendants Harkert in the amount of $33,612.
The defendants assert that plaintiffs had no personal cause of action
against the defendants Harkert and that the damages alleged, if
proved, run in favor of the corporation. In other words, the contention
of the defendants is that any action to recover the damages alleged
must be brought in the name of the corporation, either by the
corporation itself or, upon its refusal or failure to do so, by a
stockholder in a representative action. The plaintiffs contend that the
action is personal to them because of the stockholders control
agreement which was entered into between E. K. Buck Retail Stores
and the defendants Harkert, personally, as stockholders.
The general rule is stated in Ruplinger v. Ruplinger, 154 Neb. 394, 48
N.W.2d 73, 75, as follows: "A stockholder may not bring an action in
his own name to recover for wrongs done to the corporation or its
property. Such a cause of action is in the corporation and not the
stockholders. The right of a stockholder to sue is derivative in its nature
and can be brought only in a representative capacity for the
corporation."
We point out that every item of damage claimed, if the defendants are
liable therefor, is a wrong committed against the corporation or its
property. The damages alleged either deplete corporate funds, convert
property of the corporation into unauthorized investments, or tend,
because of inept management, to reduce the value of the stock of all
stockholders. Such damages ordinarily fall within the general rule and
create a cause of action on the part of the corporation or a
representative suit by a stockholder. It is the contention of the plaintiffs
that the stockholders control agreement calls for a different result in the
present cause that raises the precise question to be decided.
In Smith v. Bramwell, 146 Or. 611, 31 P.2d 647, 648, the court after
recognizing the general rule stated: "Appellant recognizes the rule as
above stated, but asserts *306 that it has no application to the
particular facts involved in this case. Plaintiff contends that his action is
based upon a violation of the voting trust agreement and that, by virtue
of such contractual relationship, he may maintain the action in his own
behalf even though there was a direct damage to the corporation. * * *
We cannot agree that the instant action is predicated upon a breach of
the voting trust agreement. Some of the defendants were not parties to
this trust agreement. When confronted at the commencement of the
trial by the objection to the introduction of any testimony for the reason
that the complaint failed to allege a cause of action, the plaintiff
undertook to bring himself within the exception to the general rule,
relative to actions by stockholders against officers of a corporation, by
showing a contractual relationship under the voting trust agreement.
But, as we have endeavored to show, a breach of this voting
agreement did not confer upon the plaintiff a right to an individual and
direct action, as distinguished from a derivative one, as any loss
sustained by plaintiff by reason of the breach was, under the facts
alleged, common to all stockholders."
In Green v. Victor Talking Machine Co., 2 Cir., 24 F.2d 378, 382, 59
A.L.R. 1091, the court said: "Nor does the allegation of a contractual
duty to plaintiff's testator aid her. If it be assumed that the allegations of
the complaint are sufficient to charge a contractual duty owing by
defendant to the Pearsall Company, despite the indefiniteness of the
terms of such a contract, and despite the fact that it was made with a
shareholder, not with the corporation, nevertheless a breach of that
duty would give a right of action to the corporation, not to its
shareholders."
To like effect is Wells v. Dane, 101 Me. 67, 63 A. 324, 325, which
states: "The plaintiff was not the corporation, notwithstanding he
owned and controlled a majority of its stock. He did not own or control
its property or make or cancel its contracts with the defendant Dane. *
* * He was injured the same as every other shareholder because of
and through the injury to the corporation property and rights. There
was no special injury to the plaintiff different from that to all other
shareholders, nor were his individual rights injured outside of the injury
suffered by the collective entity, the corporation. `A shareholder cannot
sue individually for damages caused by wrongful acts impairing the
value of his shares through an invasion of the corporate or collective
rights.' Morawetz, Pri.Corp. § 236a. In such cases, if the regular
officers of the corporation are unable or unwilling to take the necessary
steps to protect the corporate property and interests, a shareholder
may proceed in equity on behalf of himself and other stockholders and
the company. At law, however, the corporation itself representing all
those rights can alone recover for such injury. Any other rule would
admit of as many suits against the wrongdoer as there were
stockholders in the corporation. * * * There may be cases of injuries to
the individual rights of the shareholder where he, and not the
corporation, must seek redress; such, for instance, as the levying of an
unlawful tax on shares held by the individual stockholder, mutilation or
destruction of his certificate, or circulating false and scandalous
reports, or issuing spurious certificates thus creating uncertainty as to
the title or validity of existing shares. In all such cases, however, the
wrongful act affects the shares directly. They are readily distinguished
from the case at bar where the plaintiff claims his shares were
depreciated by wrongful acts making possible the issue of 600 shares
of stock without payment therefor. Such a wrong being primarily
against the corporation, the redress for it must be sought by the
corporation."
Other cases to the same effect are: Commonwealth of Massachusetts
v. Davis, 140 Tex. 398, 168 S.W.2d 216; Coronado Development
Corp. v. Millikin, 175 Misc. 1, 22 N.Y.S.2d 670; and Liken v. Shaffer,
D.C., 64 F. Supp. 432.
The plaintiffs rely upon the case of Ritchie v. McMullen, 6 Cir., 79 F.
522, 533, wherein the court said: "But we are of *307 opinion that this
principle has no application where the wrongful acts are not only
wrongs against the corporation, but are also violations by the
wrongdoer of a duty arising from contract or otherwise, and owing
directly by him to the stockholders." Other cases cited are: In re
Auditore's Will, 249 N.Y. 335, 164 N.E. 242, 62 A.L.R. 551; R. G. Dun
& Co. v. Shipp, 127 Tex. 80, 91 S.W.2d 330; Meyerson v. Franklin
Knitting Mills, 185 App.Div. 458, 172 N.Y.S. 773; and Keating v.
Hammerstein, 125 Misc. 334, 209 N.Y.S. 769.
It is true that the line drawn by the cases determining when a
stockholder may or may not sue in person is not too well defined. At
least the reasoning contained in them does not uniformly point to the
same result. The better rule seems to be that a stockholder may sue
personally, as distinguished by suit in a representative capacity, when
he has sustained a loss separate and distinct from that of other
stockholders. The entry of the parties into the stockholders control
agreement did not operate to confer upon plaintiffs the right to an
individual direct action that did not exist before. We point out that the
control agreement is upheld on the theory that it was for the benefit of
the corporation and all stockholders alike. If it had operated to bestow
special privileges upon one or both of the stockholders at the expense
of stockholders not a party to the agreement, the validity of the
agreement would appear doubtful. Plaintiffs assert no cause of action
peculiarly their own as distinguished from other stockholders. The
control agreement purports only to establish a business policy for the
corporation, the continuance of which is assured by the contractual
right of Buck to nominate two of the directors. The plaintiffs, therefore,
find themselves in a situation where they must choose between two
courses of action,sustain the control agreement and seek their remedy
for damages by a representative suit or, on the other hand, assert
special rights appurtenant to their shares of stock and have no cause
of action at all for damages resulting to all stockholders. Plaintiffs
clearly chose the wrong remedy under the facts presented.
To hold that plaintiffs could sue personally in the present case would
authorize a suit by each stockholder and result in a multiplicity of suits.
The damages alleged are to the corporation which is owned by all the
stockholders. It follows that a right of a stockholder to sue under the
facts pleaded is derivative only. The recovery, if any, would be in favor
of the corporation and, indirectly to all stockholders. The supplemental
petition sets forth the damages alleged to be due to the breach of the
control agreement by the defendants. Plaintiffs pray that 40 percent
thereof, based on their ownership of 40 percent of the stock of the
corporation, indicating that plaintiffs recognize that the damages
resulted to all stockholders, shall be awarded to them personally. In
other words, for a direct injury to the stock of a stockholder, not
common to all stockholders as such, plaintiffs may pursue a personal
action. The plaintiffs do not come within this rule in the case at bar.
When the injury is to the collective rights of stockholders and the
corporate property has been augmented by restitution, the plaintiffs,
who have suffered as one of these, will be fully indemnified. If a
stockholder is permitted to bring an action personally to recover his
proportionate share of the damages suffered by the corporation, a
subsequent recovery by or for the corporation would be equivalent to a
double recovery by him. To permit such an action by the stockholder
individually could possibly injure the rights of creditors and taxing
authorities. The reasoning of the cases that a stockholder cannot sue
personally for damages where only his derivative or corporate rights
have been infringed, appears unassailable. We hold, for the reasons
stated, that plaintiffs have neither alleged nor proved any right to
damages for which they could sue personally in their capacity as
stockholders. The judgment in the amount of $33,612, bearing date of
January 14, 1953, is therefore reversed and the *308 pleading
designated as an ancillary and supplemental petition is dismissed.
For the reasons herein stated, the decree of October 29, 1951, is
affirmed, and the decree of January 14, 1953, is reversed and the
pleading designated an ancillary and supplemental petition is
dismissed.
Affirmed in Part, and in Part Reversed and Dismissed.

David H. Clark, Appellant,
v as he should be "faithful, efficient and competent;" (c) should during his
John L. Dodge et al., Respondents.
Court of Appeals of New York
Argued December 12, 1935
Decided January 8, 1936
269 NY 410
CITE TITLE AS: Clark v Dodge
[*412] OPINION OF THE COURT
CROUCH, J.
The action is for the specific performance of a contract between the
plaintiff Clark and the defendant Dodge, relating to the affairs of the
two defendant corporations. To the complaint a joint answer by the
three defendants was interposed, consisting of denials and a separate
defense and counterclaim. To the separate defense and counterclaim
a reply was made. The defendant then moved under rule 112 of the
Rules of Civil Practice, and under sections 476, 96 and 279 of the Civil
Practice Act, to dismiss the complaint. The motion was made "on the
pleadings in this action and the admissions of the plaintiff" in two
affidavits submitted [*413] by him on a prior motion in the action. The
alleged admissions are equivocal at best, and clearly were not
"intended to be treated as a part of a pleading or made to avoid some
question arising on the pleadings." (Lloyd v. R. S. M. Corporation, 251
N. Y. 318, 320.) We shall deal, therefore, with the questions here
presented in the light of the facts most favorable to plaintiff appearing
in the pleadings only.
Those facts, briefly stated, are as follows: The two corporate
defendants are New Jersey corporations manufacturing medicinal
preparations by secret formulae. The main office, factory and assets of
both corporations are located in the State of New York. In 1921, and at
all times since, Clark owned twenty-five per cent and Dodge seventy-
five per cent of the stock of each corporation. Dodge took no active
part in the business, although he was a director and, through
ownership of their qualifying shares, controlled the other directors of
both corporations. He was the president of Bell & Company, Inc., and
nominally general manager of Hollings-Smith Company, Inc. The
plaintiff Clark was a director and held the offices of treasurer and
general manager of Bell & Company, Inc., and also had charge of the
major portion of the business of Hollings-Smith Company, Inc. The
formulæ and methods of manufacture of the medicinal preparations
were known to him alone. Under date of February 15, 1921, Dodge
and Clark, the sole owners of the stock of both corporations, entered
into a written agreement under seal, which after reciting the stock
ownership of both parties, the desire of Dodge that Clark should
continue in the efficient management and control of the business of
Bell & Company, Inc., so long as he should "remain faithful, efficient
and competent to so manage and control the said business;" and his
further desire that Clark should not be the sole custodian of a specified
formula but should share his knowledge thereof and of the method of
manufacture with a son of Dodge, provided, [*414] in substance, as
follows: That Dodge during his lifetime and, after his death, a trustee to
be appointed by his will, would so vote his stock and so vote as a
director that the plaintiff (a) should continue to be a director of Bell &
Company, Inc. and (b) should continue as its general manager so long
life receive one-fourth of the net income of the corporations either by
way of salary or dividends; and (d) that no unreasonable or
incommensurate salaries should be paid to other officers or agents
which would so reduce the net income as materially to affect Clark's
profits. Clark on his part agreed to disclose the specified formula to the
son and to instruct him in the details and methods of manufacture; and
further, at the end of his life to bequeath his stock — if no issue
survived him — to the wife and children of Dodge.
It was further provided that the provisions in regard to the division of
net profits and the regulation of salaries should also apply to the
Hollings-Smith Company.
The complaint alleges due performance of the contract by Clark and
breach thereof by Dodge in that he has failed to use his stock control
to continue Clark as a director and as general manager, and has
prevented Clark from receiving his proportion of the income, while
taking his own, by causing the employment of incompetent persons at
excessive salaries, and otherwise.
The relief sought is reinstatement as director and general manager and
an accounting by Dodge and by the corporations for waste and for the
proportion of net income due plaintiff, with an injunction against further
violations.
The only question which need be discussed is whether the contract is
illegal as against public policy within the decision in McQuade v.
Stoneham (263 N. Y. 323), upon the authority of which the complaint
was dismissed by the Appellate Division.
"The business of a corporation shall be managed by its [*415] board of
directors." (General Corporation Law [Cons. Laws, ch. 23], § 27.) That
is the statutory norm. Are we committed by the McQuade case to the
doctrine that there may be no variation, however slight or innocuous,
from that norm, where salaries or policies or the retention of individuals
in office are concerned? There is ample authority supporting that
doctrine (e. g., West v. Camden, 135 U. S. 507; Jackson v. Hooper, 76
N. J. Eq. 592). But cf. Salomon v. Salomon & Co. ([1897] A. C. 22, 44),
and something may be said for it, since it furnishes a simple, if
arbitrary, test. Apart from its practical administrative convenience, the
reasons upon which it is said to rest are more or less nebulous. Public
policy, the intention of the Legislature, detriment to the corporation, are
phrases which in this connection mean little. Possible harm to bona
fide purchasers of stock or to creditors or to stockholding minorities
have more substance; but such harms are absent in many instances. If
the enforcement of a particular contract damages nobody — not even,
in any perceptible degree, the public — one sees no reason for holding
it illegal, even though it impinges slightly upon the broad provision of
section 27. Damage suffered or threatened is a logical and practical
test, and has come to be the one generally adopted by the courts. (See
28 Columbia Law Review, 366, 372.) Where the directors are the sole
stockholders, there seems to be no objection to enforcing an
agreement among them to vote for certain people as officers. There is
no direct decision to that effect in this court, yet there are strong
indications that such a rule has long been recognized. The opinion
in Manson v. Curtis (223 N. Y. 313, 325) closed its discussion by
saying: "The rule that all the stockholders by their universal consent
may do as they choose with the corporate concerns and assets,
provided the interests of creditors are not affected, because they are
the complete owners of the corporation, cannot be invoked here." That
was because all the stockholders were not parties to the
agreement [*416] there in question. So, where the public was not
affected, "the parties in interest, might, by their original agreement of Gottschalk v. Avalon Realty Co., 23 N.W.2d 606 (Wis. 1946)
incorporation, limit their respective rights and powers," even where
there was a conflicting statutory standard. (Ripin v. U. S. Woven Label Wisconsin Supreme Court
Co., 205 N. Y. 442, 448.) "Such corporations were little more (though
not quite the same as) than chartered partnerships." (Id. p. 447.) Filed: May 23rd, 1946
In Lorillard v. Clyde (86 N. Y. 384) and again in Drucklieb v.
Harris (209 N. Y. 211), where the questioned agreements were Precedential Status: Precedential
entered into by all the stockholders of small corporations about to be
organized, the fact that the agreements conflicted to some extent with Citations: 23 N.W.2d 606, 249 Wis. 78
the statutory duty of the directors to manage the corporate affairs was
thought not to render the agreements illegal as against public policy, Docket Number: Unknown
though it was said they might not be binding upon the directors of the
corporation when organized. (Cf. LEHMAN, J., dissenting opinion in Author: James Ward Rector
the McQuade case.) The rule recognized in Manson v. Curtis, and
quoted above, was thus stated by BLACKMAR, J., in Kassel v. Empire
Tinware Co. (178 App. Div. 176, 180): "As the parties to the action are *
Motion for rehearing denied, with $25 costs, on September 28,
the complete owners of the corporation, there is no reason why the
1946. *Page 79 Action commenced November 1, 1944, by Sophie
exercise of the power and discretion of the directors cannot be
Gottschalk, Irving Muskat, and Belle B. Ruppa against Avalon Realty
controlled by valid agreement between themselves, provided that the
Company, its officers and directors, and Avalon *Page 80 Theatre
interests of creditors are not affected."
Company for an injunction against the sale of the Realty Company's
property and for certain other relief. Thereafter the remaining plaintiffs
Fells v. Katz (256 N. Y. 67), where all the stockholders were parties to
intervened. Abbie R. Silliman, sole holder of the common stock, cross-
the agreement, is no authority to the contrary. The decision there
complained against her codefendant officers and directors, demanding
merely construed the agreement and found that plaintiff had breached
that sale of the property without her consent be enjoined. By
it, thereby justifying his removal. "The agreement of the stockholders to
agreement the parties deferred trial of the causes of action other than
continue a man in the directorate must be construed as an obligation to
retain him only so long as he keeps the agreement on his part faithfully that relating to the injunction against the sale of corporate property.
to act as a trustee for the stockholders" (p. 72). Indeed, the case may From an interlocutory judgment enjoining the sale of the corporate
property until authorized by the stockholders, the defendants appeal.
be regarded as applying the test of damage above referred to. Any
other construction would have caused damage to the corporation and
The Avalon Realty Company was organized in 1928 for the purpose,
its stockholders and would have been illegal.
among other things, of "buying, selling, developing, exchanging and
[*417] Except for the broad dicta in the McQuade opinion, we think dealing in all kinds of real property . . . and personal property." It
constructed a building containing apartments, stores, and a moving-
there can be no doubt that the agreement here in question was legal
picture theater. The building was leased to the Avalon Theatre
and that the complaint states a cause of action. There was no attempt
Company and other tenants. The Realty Company became financially
to sterilize the board of directors, as in
embarrassed and in 1936, after defaulting under a first-mortgage bond
the Manson and McQuade cases. The only restrictions on Dodge were
issue, was reorganized in the United States district court for the
(a) that as a stockholder he should vote for Clark as a director — a
perfectly legal contract; (b) that as director he should continue Clark as Eastern district of Wisconsin under sec. 77B of the Bankruptcy Act, as
amended. Under the reorganization each first-mortgage bondholder
general manager, so long as he proved faithful, efficient and
received a new five per cent first-mortgage bond in the amount of one
competent — an agreement which could harm nobody; (c) that Clark
half of the principal of his old bond. He received first preferred stock for
should always receive as salary or dividends one-fourth of the "net
the balance of the principal plus interest due on his old bond. General
income." For the purposes of this motion, it is only just to construe that
creditors received second preferred stock. The ownership of the
phrase as meaning whatever was left for distribution after the directors
had in good faith set aside whatever they deemed wise; (d) that no common stock was not changed, but it was placed in a voting trust
composed of four members, three of whom were to be elected by the
salaries to other officers should be paid, unreasonable in amount or
bondholders, and one by the holders of the common stock. A vacancy
incommensurate with services rendered — a beneficial and not a
in the position of trustee representing the common stock was to be
harmful agreement.
filled by the holders of such stock and a vacancy in the position of a
If there was any invasion of the powers of the directorate under that trustee representing the bondholders was to be filled by the remaining
agreement, it is so slight as to be negligible; and certainly there is no trustees. *Page 81 The voting trust was to remain in effect as long as
damage suffered by or threatened to anybody. The broad statements any of the new bonds or first preferred stock was outstanding. It was
in the McQuade opinion, applicable to the facts there, should be stipulated in the articles that —
confined to those facts.
"First preferred stock shall have the right to vote whenever default shall
The judgment of the Appellate Division should be reversed and the exist in the payment of dividends for any year after July 1, 1951.
order of the Special Term affirmed, with costs in this court and in the
"Second preferred stock shall be entitled to a preference as to
Appellate Division.
dividends and division of assets over the common stock of the
CRANE, Ch. J., LEHMAN, O'BRIEN, HUBBS, LOUGHRAN and company. . . . Said stock shall have the right to vote after default in the
FINCH, JJ., concur. payment of dividends for any two years after July 1, 1951."

Judgment accordingly. The voting trustees, without objection, exercised the sole right to vote
at all stockholders' meetings until the commencement of this
proceeding. At the annual stockholders' meeting on January 22, 1945,
it was determined to offer the corporate' property for sale. Thereafter
the property was sold subject to a temporary restraining order which
had been entered in the interim. The offer to purchase was accepted
by the voting trustees voting the common stock and their action was
ratified by the directors. Sec. 182.15 (1), Stats., provides that each
stockholder of a corporation shall be entitled to one vote for each share
of stock "Unless a provision to the contrary is inserted in the articles of
incorporation and recited in each certificate for any share of stock
issued by the corporation." Sec. 182.13 specifies that a corporation
may in its articles authorize preferred stock and that it may provide "for
denying or restricting the voting power of such preferred stock." It is
required that the preferred stock certificates shall state all privileges
accorded to and restrictions imposed upon such stock.
The first question is whether the provisions authorizing the holders of
the first and second preferred stock to vote whenever default should
exist in the payment of dividends after July 1, 1951, as specified,
constitute a denial of the right to vote prior to that time. If they do, they
constitute a provision "to the contrary" within the meaning of sec.
182.15 (1), Stats., and a denial of voting power within sec. 182.13. If
they do not, there is no such denial or provision, "to the contrary," and
both the first and second preferred stockholders may vote in the
transaction of corporate business.
We are of the view that the corporate articles deny to the first and
second preferred stockholders the right to vote prior to the happening
of the specified contingencies. The provision that such stock may vote
upon the happening of such contingencies clearly implies that it may
not until the contingencies occur. Any other interpretation of the
language would render it superfluous and without meaning. We would
not be justified in disregarding it. Bank of Cashton v. LaCrosse C. S. T.
M. I. Co. (1934) 216 Wis. 513,257 N.W. 451; Restatement, Contracts,
sec. 236 (a). The contention that the denial of the right to vote was not
intended to become operative until July 1, 1951, and that thereafter the
right should exist only upon the specified defaults is not, in our opinion,
a permissible construction of the language employed. *Page 83 As we
see it, we have the choice of disregarding the language entirely or
construing it as denying the right to vote until the happening of the
specified contingencies.
The respondents argue that preferred stock is entitled to vote unless
the right is expressly denied, and that it is not expressly denied by the
language in question. Support for this position is found in 18 C.J.S.,
Corporations, p. 1243, in Cook, Corporations (7th ed.), p. 777, and in
some cases cited to the text of those works. However, with one
exception, none of the authorities deals with the situation here present,
that is, the language required in order to deny the right to vote. The
exception is Rice Hutchins, Inc., v. TriplexShoe Co. (1929) 16 Del. Ch.
298, 313, 147 A. 317, in which it was clearly indicated that the right
may be denied by implication, such as by a provision that "The sole
voting power shall reside in the holders of the common stock." The
instances in which the question has arisen are cases where an
express denial has been made, and it has been held that such a denial
may be made.
It seems to us that such a denial may exist expressly or by necessary
implication. A denial may exist under an express provision even though
the denial may not be express. Such is the situation in this case. We
agree that unless a denial is clearly manifested, it should not be given
effect, but where, as here, it is clear, it should be given effect even
though it is not express.
It is said that in Casper v. Kalt-Zimmers Mfg. Co. (1915)159 Wis.
517, 149 N.W. 754, 150 N.W. 1101, we held a corporate charter to be
a legislative act which cannot be reformed or amended by the courts
and that a denial of voting rights to preferred stock will require the
insertion of language which is not present. This is but another way of
saying that meaning cannot exist by implication.
It is suggested that the contingencies upon which the first and second
preferred stock may vote are not clear. Assuming *Page 84 this to be
so, that problem can be met when it arises. It does not constitute
cause for saying that the language should be disregarded.
The second question is whether the directors or the voting trustees are
entitled to sell the corporate property. As a general rule, in the absence
of statute, a corporation cannot dispose of all its property without the
unanimous consent of its stockholders entitled to vote, although there
are certain exceptions which we do not find it necessary to discuss.
The rule is subject to change by statute, 13 Fletcher, Cyc. Corp. (perm.
ed.) secs. 5797, 5798, and has been changed in this state. Sec.
180.11, Stats., provides in part:
"(2) Transfers of property. Every corporation may, by a vote of a
majority of the stock entitled to vote, sell and convey or authorize to be
conveyed, all or any portion of the property owned by it, or mortgage or
lease any such property whenever it shall be necessary for its
business or the protection or benefit of its property.
"(3) Same; exceptions. But any corporation organized to deal in real
property or in fixtures, improvements or chattels real, or to mortgage,
pledge or dispose of the same in any manner whatsoever, may sell,
mortgage, pledge or otherwise dispose of the same by instruments
executed in the manner provided by section 235.19 or in such manner
as shall be provided in the articles of incorporation, without further
authorization by the members of any such corporation."
Sub. (2) has been construed to authorize the ordinary business
corporation to dispose of its entire property by a vote of the majority of
the stock entitled to vote.McDermott v.O'Neil Oil Co. (1930) 200 Wis.
423, 228 N.W. 481; ConsolidatedWater Power Co. v. Nash (1901), 109
Wis. 490,85 N.W. 485. The language "whenever it shall be necessary
for its business or the protection or benefit of its property" refers to the
mortgage or leasing of the corporate property and not to its sale. Prior
to 1927 the portion dealing with the mortgaging or leasing of property
was set off by a semi-colon *Page 85 instead of by a comma. The
semicolon was removed in the 1927 revision. Ch. 534, Laws of 1927.
In the light of this history a sale of corporate property is not limited to
the ordinary transaction of corporate business.
Sec. 180.11 (3), Stats., constitutes an exception to the provisions of
sub. (2) and is limited to corporations organized to deal in real
property. The Avalon Realty Company is such a corporation. Sub. (2)
provides for a sale of the entire corporate property, and there is no
valid reason why sub. (3) should be limited to anything less. We are
therefore of the opinion that the directors and officers of a real-estate
corporation are entitled to dispose of all its property in the absence of a
restriction on their authority in the corporate articles. There is no such
restriction in this case.
This disposition of the case renders it unnecessary to discuss in detail
the question whether under the voting trust the trustees may dispose of
all the corporate property. We are of the view that they may. The trust
agreement provides that the trustees may vote upon any and all
questions which may arise at corporate meetings as fully and with the
same effect as could the common stockholders. It may be that there is
an implied denial of such power in the ordinary voting trust. Re
Application of Bacon; (1941), 287 N.Y. 1,38 N.E.2d 105. However, it
must be borne in mind that the original first preferred stockholders of
the Avalon Realty Company became such for the purpose of salvaging
their investments. The voting trust was intended to protect them in the
conduct of corporate affairs since they alone had any considerable
equity in the corporate assets prior to the reorganization. Ownership of
a portion of the first preferred stock has been separated from the
ownership of the original and substituted bonds, but a considerable
portion of the first preferred is still identified with such bond ownership.
Bearing in mind the predominant interest of this latter group in the
corporate assets, the purpose of their membership in the *Page
86 company and the purpose of the voting trust, it seems to us we
ought not to imply any limitation in the language of the trust agreement
that would deny them the authority as voting trustees to dispose of the
corporate property at such time as they might deem it advantageous to
their interests.
It is stipulated that no question exists in the case with respect to the
fairness of the terms of sale of the property. However, the dismissal of
the complaint with respect to enjoining such sale should be without
prejudice to the right of the respondents to raise that objection if the
circumstances warrant.
By the Court. — Judgment reversed, with directions to dismiss the
complaint as to the amended third cause of action.
41 F.2d 588 (1930)
SHERMAN & ELLIS, Inc.,
v.
INDIANA MUTUAL CASUALTY CO. et al.
No. 4186.
Circuit Court of Appeals, Seventh Circuit.
June 30, 1930.
Rehearing Denied August 19, 1930.
*589 John R. Cochran, of Chicago, Ill., for appellant.
William H. Thompson and Charles O. Roemler, both of Indianapolis,
Ind., for appellees.
Before ALSCHULER, EVANS, and PAGE, Circuit Judges.
EVANS, Circuit Judge.
This appeal is from a decree allowing appellant but a small part of its
asserted claim against the Indiana Mutual Casualty Company, here
called the casualty company. The rejected items are predicated upon
the latter company's breach of its contract as well as for moneys
advanced by appellant in carrying out said contract.
Originally appellant sought specific performance of this contract as well
as an accounting. While the suit was pending, however, a receiver was
appointed for the casualty company upon appellant's motion and upon
the casualty company's consent, and thereafter the relief sought was
limited to an accounting and the recovery of a money decree.
Several issues were referred to a master, who found for appellant as to
certain items aggregating $11,224.94 and against it on other items. His
findings were adopted by the court, and a decree was entered
accordingly.
The casualty company, an Indiana corporation, was organized to take
over the business of an unincorporated association engaged largely in
writing policies covering risks created by the Indiana Workmen's
Compensation Law. It early ratified the agreement here involved with
appellant (an Illinois corporation that transacted a large business in
casualty insurance), by which agreement the management of the
casualty company was conferred upon appellant for a period of twenty
years. The compensation for the services thus rendered was agreed
upon and specifically stated in the agreement. The casualty company
terminated its contract after some difficulties had arisen between
appellant and the Indiana state department and after an unsuccessful
attempt had been made by the state to have a receiver appointed for
the casualty company. This suit to enforce specific performance of the
contract and to recover damages followed.
The agreement between appellant and the casualty company provided:
"That for and during a period of twenty years from the date hereof, it
will supply without compensation other than the payments specified in
Article II, Paragraph First, hereof, the underwriting and executive
management for the Mutual Company in the person of its President,
Frank H. Ellis, or such other of its officers as it may from time to time
designate, who shall be competent to perform the services of chief
executive head and underwriting manager of the Mutual Company, to
the end that the same competent *590 management which the Indiana
Manufacturers Reciprocal Association has enjoyed in the past may
continue uninterrupted for the benefit of the Mutual Company
policyholders.
"* * * That for and during said twenty-year period it will cause to be
elected as its underwriting manager, who shall have general
supervision and charge of the underwriting affairs of the corporation,
such person who shall be an officer of the Management Company as
the Management Company shall from time to time by a writing signed
by not less than a majority of its Board of Directors designate, provided
that if any court of final jurisdiction shall hold that the management
shall prove grossly incompetent or inefficient, then this contract shall
become null and void."
"The Mutual Company covenants and agrees:
"First: That for and during the said twenty year period it shall set aside
for and pay to the Management Company as and when collected by it,
ten (10) per cent of the net earned premium collected from all
policyholders during said period. This covenant is based upon the
assurance of the Management Company that the total Management
expense, inclusive of said ten per cent payments to it, but less claim
expense as the same has been heretofore calculated under the said
power of attorney attached hereto as `Exhibit A' and less expense of
directors shall not exceed thirty (30) per cent of the said net premiums
so collected and if said Management expense during any yearly
accounting period shall exceed such latter percentage, the amounts
payable to the Management Company for any such period shall be
abated by the amount of such excess management cost."
Appellees argue that this agreement is void as against public policy,
and therefore its breach created no liability on the part of appellees.
The statutes applicable are sections 9091-9114, Burns' 1926 Statutes.
The by-laws of the casualty company among other things read:
"All officers shall be elected at the annual meeting of the Board of
Directors upon the affirmative vote of a majority of the total number of
directors.
"The Board of Directors shall have the general control and
management of the business of the corporation. Subject to the
limitations expressed in Article IX, they shall have the power to make
and amend by-laws and make all regulations and take all action
necessary or desirable for the proper transaction and conduct of the
business and affairs of the corporation. They may appoint an executive
committee composed of three or more members of the Board of
Directors and delegate to such Committee such of their own powers as
they may from time to time deem expedient or proper.
"These by-laws may be amended by the Board of Directors at any
regular or special meeting by a two-thirds vote of the entire number of
directors, but no such amendment shall be effective to impair the rights
of any third parties under a theretofore existing contract entered into
with the corporation and which was authorized by the provisions of the
by-laws as in force at the time of the execution of such contract."
The line of demarcation between cases which recognize the right of
officers of a corporation to delegate certain managerial duties to a
stranger and cases which deny such authority is not entirely clear or
easy to follow. That corporations may, at least for a limited period,
delegate to a stranger certain duties usually performed by the officers,
is clear. 2 Thompson on Corporations (2d Ed. § 1200, 3d Ed. § 1300);
Jones v. Williams, 139 Mo. 1, 39 S.W. 486, 40 S. W. 353, 37 L. R. A.
682, 61 Am. St. Rep. 436; Puller v. Royal Casualty Co., 271 Mo. 369,
196 S.W. 755; Lorillard v. Clyde, 86 N.Y. 384; Faulds v. Yates, 57 Ill.
416, 11 Am. Rep. 24; Goetzinger v. Donahue, 138 Wis. 103, 119 N.W.
823.
On the other hand, it is equally well settled that there are duties, the
performance of which may not be indefinitely delegated to outsiders.
State ex rel. Ross v. Anderson, 31 Ind. App. 34, 67 N.E. 207; Shaw v.
Bankers', etc., Ins. Co., 61 Ind. App. 346, 112 N.E. 16; West v.
Camden, 135 U.S. 507, 10 S. Ct. 838, 34 L. Ed. 254; Anglo-American
Land, etc., Co. v. Lombard (C. C. A.) 132 F. 721, 736.
The case of Jones v. Williams, 139 Mo. 1, 39 S.W. 486, 40 S. W. 353,
37 L. R. A. 682, 61 Am. St. Rep. 436, is as strong as any that appellant
has cited, and illustrates, perhaps as well as any, the extent to which
the courts have gone in upholding such delegations of authority. Here
the Board of Directors gave an outsider the position of editor and
manager of a large daily paper for a period of five years, during which
time said outsider was to determine the editorial policy of the paper.
But the facts in that case fall short of those presented in the instant
suit. The period of control there fixed was five years. *591 Here it is
twenty years. There a large part of the board's official duties was
undelegated. Here nothing of importance was left for the board of
directors but the unimportant, the ministerial duties.
It is true the statutes of most of the states authorizing the organization
of corporations are of general application and are easily complied with.
Yet we cannot believe that the requirements therein found or the
official duties therein prescribed are mere formalities or only directory
in character. This is particularly true of insurance companies upon
whose conservative management and financial responsibility a
multitude of policy holders are dependent. The grant of corporate
power by a state is upon the hypothesis that these powers shall be
exercised by the corporation's officers, annually elected, by the
stockholders and not by the officers of another corporation. Anglo-
American Land, etc., Co. v. Lombard, supra.
Reverting to the language of this agreement for a moment, it appears
"that for and during the period of twenty years from the date hereof it"
(appellant) "will supply * * * the underwriting and executive
management * * * in the person of its president, Frank H. Ellis, or such
other officer as it may from time to time designate," and that "during
said twenty-year period" the casualty company shall elect the officer
furnished by appellant for its underwriting manager who "shall have
general supervision and charge of the underwriting affairs of the
corporation."
Such an agreement negatives the thought that appellant was merely
the soliciting agent of the casualty company. It contemplated the
substitution of appellant for the officers of the casualty company. What
was the casualty company's business? To write casualty insurance
and adjust the losses growing out of such insurance. If there existed a
conflict of opinion between the board and appellant, whose voice under
this contract would control? Obviously, appellant's. The length of time
during which the agreement was to operate likewise indicated that not
only managerial powers were delegated, but the entire policy of the
casualty company business was to be fixed and determined by
appellant. No other conclusion can be drawn from this agreement and
the evidence than that the casualty company was to be merely an
instrumentality through which appellant was to conduct a casualty
insurance business in the state of Indiana. The agreement which
accomplished this result transcends the spirit and theory upon which
corporate franchises are based, and is void.
Estoppel. Appellant contends that, even though the contract be void,
the casualty company is estopped to assert such invalidity. Little need
be said respecting this contention. The law is clear, we think, that a
corporation which makes a contract void because the corporation
making it was without authority so to do, because against public policy,
is never estopped to assert its invalidity. The reason for its invalidity
was known to both parties when the contract was executed. 7 R. C. L.
530; Board, etc., v. Lafayette Railroad Co., 50 Ind. 112; Central
Transportation Co. v. Pullman's Car Co., 139 U.S. 24, 59, 60, 11 S. Ct.
478, 35 L. Ed. 55.
Recovery Under Void Contract. Courts have very generally striven to
do justice between the parties by permitting property or money parted
with, or services rendered on the faith of such unlawful contracts, to be
recovered or compensated for, notwithstanding the invalidity of the
contract. Central Transportation Co. v. Pullman Car Co., supra;
Thomas v. Brownville, etc., Railroad Co., 109 U.S. 522, 3 S. Ct. 315,
27 L. Ed. 1018; Citizens' Cent. National Bank v. Appleton, 216 U.S.
196, 30 S. Ct. 364, 54 L. Ed. 443; Bicknell v. Widner School Township,
73 Ind. 501.
The master recognized this rule, and allowed some five or six items
that aggregated $11,224.94. Appellant contends, however, that to this
sum should have been added eight other items.
Item 1 is a claim of $200,000 which represents the asserted value of
the business transferred to the casualty company by reason of the void
agreement. The annual earned premiums of the reciprocal company
for four and one-half years preceding the transfer to the casualty
company were $376,000. Using the annual earned premiums as the
basis of their estimation, witnesses testified that the business was
worth $200,000.
The master disposed of this contention by finding that such business
belonged to the reciprocal association rather than to appellant. "That
appellant had no proprietary interest therein and no right to sell said
property, assets and business as a going concern * * * that * * * the
condition of the Reciprocal Association was such that the transfer of its
business and assets subject to its liabilities was not of substantial
value to appellant."
*592 These findings are sustained by the evidence. It therefore follows
that appellant is not entitled to recover this item or any part thereof.
The second item deals with the so-called "$25,000 surplus note." This
amount was advanced by appellant when the casualty company was
organized. Before the casualty company could obtain a license to do
business in Indiana, it was required to have $25,000 in its treasury.
Appellant advanced this money on the expectation that it would be
repaid through the operation of the casualty company's business.
To evidence the indebtedness and its terms, appellant took a note
which reads as follows:
"Surplus Note of the Indiana Company "Amount "No. 589 $25,000.00
"Indianapolis Ind. February 1, 1922
"For value received, The Indiana Company, upon demand agrees to
pay, but only out of said Company's surplus earnings, to Sherman &
Ellis, (payee) provided said payee be not in arrears to said Company,
the sum of twenty-five Thousand Dollars, together with interest thereon
at the rate of six per cent per annum. (executed by Indiana Company.)"
Appellees argue that appellant, having accepted the note which
expressly provided for its payment "only out of said company's surplus
earnings," is, as against creditors, at least, required to look to the
"surplus earnings" for payment of this note, and, there being no
earnings, surplus or otherwise, appellant is without recourse.
If this were a suit between two companies only, and no creditor's rights
intervened, appellant's contention would be more persuasive. Even
then the court would be confronted by a record which fails to show the
money was loaned and the note taken in consideration of the
execution of the void agreement. But we can set this objection to one
side and place our conclusion on the ground that the controversy is
really between the creditors of the casualty company on one side and
appellant on the other. This money was advanced to comply with the
Indiana statutes respecting the organization of corporations such as
the casualty company. The $25,000 was to secure policyholders and
creditors. To permit appellant to withdraw this money because
perchance an agreement it obtained from the casualty company was
void, would be to ignore the innocent third parties for whose benefit
and to secure whose claims the money was turned over to the casualty
company.
Item 3. Under the laws of Indiana a surplus of $100,000 was required
before the company could issue policies without contingent liability.
The predecessor company had outstanding liability claims, the exact
amount of which were not known. The insurance department, however,
made an estimate of this sum which exceeded the estimate of
appellant. The latter then paid into the treasury of the casualty
company a sum sufficient to cover the estimate as made by the
insurance department. Subsequently, when the losses were all paid,
the department estimate was found to have exceeded by $5,013.56
the amount actually required to meet these losses. This claim should
be allowed appellant. Its payment was in the first instance in the nature
of an advancement to meet unliquidated claims. When these claims
were all paid, the unused amount should have been returned to
appellant. Interest at 5 per cent. from February 24, 1922 must also be
allowed on this item.
Item 4. When the predecessor company transferred its assets to the
casualty company, an item of $2,158.64 was carried as interest due on
overdue accounts. To meet the demands of the insurance department
appellant paid this sum into the treasury of the casualty company. It
was never repaid. It does not appear that the amount was ever
collected, and therefore we are unable to find any basis for its
allowance.
Item 5. A larger item is that of $25,695.61, which represents the
amount of commissions due appellant from the predecessor company.
Appellant relinquished its claim for this sum in order to reduce the
liabilities of the predecessor company and to enable the casualty
company to show the necessary $100,000 surplus. The same reasons
advanced for the disallowance of item 2 apply to this claim and
necessitates its disallowance.
We have examined items 6, 7, and 8, and, without stating our reasons
in detail, in view of the discussion respecting the foregoing items, we
express our accord with the district court that they should be
disallowed.
The master set forth in detail the reasons for their disallowance. The
evidence sustains the master's findings.
The decree is modified by inserting the sum of $16,238.50 in place of
$11,224.94. To this sum interest should be added from February 24,
1922 at 5 per cent. As thus modified, the decree is affirmed. The costs
in this court will be borne equally.
Benintendi v. Kenton Hotel
Posted on April 10, 2014 | Business Law | Tags: Business Law
Case Briefs
FACTS: The sole SH’s of Kenton Hotel, Inc. (Dondero, owner of 2/3’s
of the stock, and Benintendi, owner of 1/3.) Dondero and Benintendi
agreed to and adopted certain bylaws providing (1) SH action on any
corp. matter required unanimous action by all SH’s, (2) election of
directors required unanimous SH vote, (3) action by directors required
unanimous vote of all the directors, and (4) any amendment of bylaws
required unanimous vote by all the SH’s. Benintendi brought this
action to have the bylaws declared valid and to enjoin Dondero from
taking any action contra to these bylaws. Special Term and the
Appellate Division held bylaws No. 1 and No. 2 invalid, and bylaws No.
3 and No.4 valid.
ISSUE: Is a bylaw valid where it requires unanimous vote by (1) all
SH’s on any action they take, (2) all SH’s in electing directors, (3) all
directors on any action before the board, and (4) all SH’s in amending
a bylaw?
HOLDING: (1) No, a bylaw provision requiring unanimous SH
approval on resolutions or any other action is obnoxious to the
statutory scheme of stock corp. management. When SH’s combine to
require unanimous vote on all corp. matters, the minority gains an
absolute veto power over the majority, thus destroying representative
corp. gov’t. (2) No, NY law is that a nominee for director is elected by
receipt of a plurality of the votes. And even though SH voting
agreements to vote for certain persons as directors is allowed, a
requirement that no election of directors is allowed unless all votes are
cast for the same nominees will not be upheld. (3) No, the common-
law rule was that only a majority of directors is needed for a
quorum. NY Corp law, §27, modifies the common law rule, allowing a
corp. to fix its own quorum for directors’ meetings at any number not
less than 1/3 nor more than a majority. The votes of the majority are
binding. (4) Yes, a bylaw requiring unanimity of action by all SH’s to
amend bylaws is against neither public policy nor NY statutory law.
They went too far – What’s wrong w/the unanimous vote
requirement? If only 2, and one says yes and one no – nothing
happens. If you can’t agree, nothing gets done.
G.R. No. L-19441 March 27, 1923
FUA CUN (alias Tua Cun), plaintiff-appellee,
vs.
RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the
City of Manila, and the CHINA BANKING
CORPORATION, defendants-appellants.
Araneta and Zaragoza for appellants.
Canillas and Cardenas for appellee.
OSTRAND, J.:
It appears from the evidence that on August 26, 1920, one Chua Soco
subscribed for five hundred shares of stock of the defendant Banking
Corporation at a par value of P100 per share, paying the sum of
P25,000, one-half of the subscription price, in cash, for which a receipt
was issued in the following terms:
This is to certify, That Chua Soco, a subscriber for five hundred shares
of the capital stock of the China Banking Corporation at its par value of
P100 per share, has paid into the Treasury of the Corporation, on
account of said subscription and in accordance with its terms, the sum
of twenty-five thousand pesos (P25,000), Philippine currency.
Upon receipt of the balance of said subscription in accordance with the
terms of the calls of the Board of Directors, and surrender of this
certificate, duly executed certificates for said five hundred shares of
stock will be issued to the order of the subscriber.
It is expressly understood that the total number of shares specified in
this receipt is subject to sale by the China Banking Corporation for the
payment of any unpaid subscriptions, should the subscriber fail to pay
the whole or any part of the balance of his subscription upon 30 days'
notice issued therefor by the Board of Directors.
Witness our official signatures at Manila, P. I., this 25th day of August,
1920.
(Sgd.) MERVIN WEBSTER
Cashier
(Sgd.) DEE C. CHUAN
President
On May 18, 1921, Chua Soco executed a promissory note in favor of
the plaintiff Fua Cun for the sum of P25,000 payable in ninety days and
drawing interest at the rate of 1 per cent per month, securing the note
with a chattel mortgage on the shares of stock subscribed for by Chua
Soco, who also endorsed the receipt above mentioned and delivered it
to the mortgagee. The plaintiff thereupon took the receipt to the
manager of the defendant Bank and informed him of the transaction
with Chua Soco, but was told to await action upon the matter by the
Board of Directors.
In the meantime Chua Soco appears to have become indebted to the
China Banking Corporation in the sum of P37,731.68 for dishonored
acceptances of commercial paper and in an action brought against him
to recover this amount, Chua Soco's interest in the five hundred shares
subscribed for was attached and the receipt seized by the sheriff. The
attachment was levied after the defendant bank had received notice of
the facts that the receipt had been endorsed over to the plaintiff.
Fua Cun thereupon brought the present action maintaining that by
virtue of the payment of the one-half of the subscription price of five
hundred shares Chua Soco in effect became the owner of two hundred
and fifty shares and praying that his, the plaintiff's, lien on said shares,
by virtue of the chattel mortgage, be declared to hold priority over the
claim of the defendant Banking Corporation; that the defendants be
ordered to deliver the receipt in question to him; and that he be
awarded the sum of P5,000 in damages for wrongful attachment.
The trial court rendered judgment in favor of the plaintiff declaring that
Chua Soco, through the payment of the P25,000, acquired the right to
two hundred and fifty shares fully paid up, upon which shares the
plaintiff holds a lien superior to that of the defendant Banking
Corporation and ordering that the receipt be returned to said plaintiff.
From this judgment the defendants appeal.
Though the court below erred in holding that Chua Soco, by paying
one-half of the subscription price of five hundred shares, in effect
became the owner of two hundred and fifty shares, the judgment
appealed from is in the main correct.
The claim of the defendant Banking Corporation upon which it brought
the action in which the writ of attachment was issued, was for the non-
payment of drafts accepted by Chua Soco and had no direct
connection with the shares of stock in question. At common law a
corporation has no lien upon the shares of stockholders for any
indebtedness to the corporation (Jones on Liens, 3d ed., sec. 375) and
our attention has not been called to any statute creating such lien here.
On the contrary, section 120 of the Corporation Act provides that "no
bank organized under this Act shall make any loan or discount on the
security of the shares of its own capital stock, nor be the purchaser or
holder of any such shares, unless such security or purchase shall be
necessary to prevent loss upon a debt previously contracted in good
faith, and stock so purchased or acquired shall, within six months from
the time of its purchase, be sold or disposed of at public or private
sale, or, in default thereof, a receiver may be appointed to close up the
business of the bank in accordance with law."
Section 35 of the United States National Banking Act of 1864 contains
a similar provision and it has been held in various decisions of the
United States Supreme Court that a bank organized under that Act can
have no lien on its own stock for the indebtedness of the stockholders
even when the by-laws provide that the shares shall be transferable
only on the books of the corporation and that no such transfer shall be
made if the holder of the shares is indebted to the corporation. (Jones
on Liens, 3d ed., sec. 384; First National Bank of South
Bend vs. Lanier and Handy, 11 Wall., 369; Bullard vs. National Eagle
Bank, 18 Wall., 589; First National Bank of Xenia vs. Stewart and
McMillan, 107 U.S., 676.) The reasons for this doctrine are obvious; if
banking corporations were given a lien on their own stock for the
indebtedness of the stockholders, the prohibition against granting
loans or discounts upon the security of the stock would become largely
ineffective.
Turning now to the rights of the plaintiff in the stock in question, it is
argued that the interest held by Chua Soco was merely an equity
which could not be made the subject of a chattel mortgage. Though the
courts have uniformly held that chattel mortgages on shares of stock
and other choses in action are valid as between the parties, there is
still much to be said in favor of the defendants' contention that the
chattel mortgage here in question would not prevail over liens of third
parties without notice; an equity in shares of stock is of such an
intangible character that it is somewhat difficult to see how it can be
treated as a chattel and mortgaged in such a manner that the
recording of the mortgage will furnish constructive notice to third
parties. As said by the court in the case of Spalding vs. Paine's Adm'r.
(81 Ky., 416), in regard to a chattel mortgage of shares of stock:
These certificates of stock are in the pockets of the owner, and go with
him where he may happen to locate, as choses in action, or evidence
of his right, without any means on the part of those with whom he
proposes to deal on the faith of such a security of ascertaining whether
or not this stock is in pledge or mortgaged to others. He finds the name
of the owner on the books of the company as a subscriber of paid-up
stock, amounting to 180 shares, with the certificates in his possession,
pays for these certificates their full value, and has the transfer to him
made on the books of the company, thereby obtaining a perfect title.
What other inquiry is he to make, so as to make his investment certain
and secure? Where is he to look, in order to ascertain whether or not
this stock has been mortgaged? The chief office of the company may
be at one place to-day and at another tomorrow. The owner may have
no fixed or permanent abode, and with his notes in one pocket and his
certificates of stock in the other — the one evidencing the extent of his
interest in the stock of the corporation, the other his right to money
owing him by his debtor, we are asked to say that the mortgage is
effectual as to the one and inoperative as to the other.
But a determination of this question is not essential in the present
case. There can be no doubt that an equity in shares of stock may be
assigned and that the assignment is valid as between the parties and Dominador C. Ungson, Brigido G. Estrada, Manuel L. Fernandez,
as to persons to whom notice is brought home. Such an assignment Benedicto C. Yuson and Bernardo Acena.
exists here, though it was made for the purpose of securing a debt.
The endorsement to the plaintiff of the receipt above mentioned reads: In Civil Case G.R. No. L-16237 (CFI No. 13212), Marvin O. Rose filed
the complaint against the same defendants.
For value received, I assign all my rights in these shares in favor of Mr.
Tua Cun. In Civil Case G.R. No. L-16238 (CFI No. 13340), Baltazar and Rose
filed their complaint against Bernardo Acena alone.
Manila, P. I., May 18, 1921.
The Lingayen Gulf Electric Power Co., Inc., hereinafter referred to as
(Sgd.) CHUA SOCO Corporation, was doing business in the Philippines, with principal
offices at Lingayen, Pangasinan, and with an authorized capital stock
This endorsement was accompanied by the delivery of the receipt to of P300.000.00 divided into 3,000 shares of voting stock at P100.00
the plaintiff and further strengthened by the execution of the chattel par value, per share. Plaintiffs Baltazar and Rose were among the
mortgage, which mortgage, at least, operated as a conditional incorporators, having subscribed to 600 and 400 shares of the capital
equitable assignment. stock, or a total par value of P60,000.00 and P40.000.00, respectively.
It is alleged that it has always been the practice and procedure of the
As against the rights of the plaintiff the defendant bank had, as we Corporation to issue certificates of stock to its individual subscribers for
have seen, no lien unless by virtue of the attachment. But the unpaid shares of stock. Of the 600 shares of capital stock subscribed
attachment was levied after the bank had received notice of the by Baltazar, he had fully paid 535 shares of stock, and the Corporation
assignment of Chua Soco's interests to the plaintiff and was therefore issued to him several fully paid up and non-assessable certificates of
subject to the rights of the latter. It follows that as against these rights stock, corresponding to the 535 shares. After having made transfers to
the defendant bank holds no lien whatever. third persons and acquired new ones, Baltazar had to his credit, on the
filing of the complaint 341 shares fully paid and non-assessable. He
As we have already stated, the court erred in holding the plaintiff as the had also 65 shares with par value of P6,500.00, for which no certificate
owner of two hundred and fifty shares of stock; "the plaintiff's rights was issued to him. Of the 400 shares of stock subscribed by Rose, he
consist in an equity in five hundred shares and upon payment of the had 375 shares of fully paid stock, duly covered by certificates of stock
unpaid portion of the subscription price he becomes entitled to the issued to him.
issuance of certificate for said five hundred shares in his favor."
The respondents Ungson, Estrada, Fernandez and Yuson were small
The judgment appealed from is modified accordingly, and in all other stockholders of the Corporation, all holding a total number of fully paid-
respects it is affirmed, with the costs against the appellants Banking up shares of stock, of not more than 100 shares, with a par value of
Corporation. So ordered. P10,000.00 and the defendant Acena, was likewise an incorporator
and stockholder, holding 600 shares of stock, for which certificate of
G.R. No. L-16236 June 30, 1965 stock were issued to him and as such, was the largest individual
stockholder thereof. Defendants Ungson, Estrada, Fernandez and
IRINEO S. BALTAZAR, plaintiff-appellee, Yuzon, constituted the majority of the holdover seven-member Board
vs. of Directors of the Corporation, in 1955, two (2) of said defendants
LINGAYEN GULF ELECTRIC POWER, CO., INC., DOMINADOR C. having been elected as members of the Board in the annual
UNGSON, BRIGIDO G. ESTRADA, MANUEL L. FERNANDEZ, stockholders' meeting held in May 1954, largely on the vote of their co-
BENEDICTO C. YUSON and BERNARDO ACENA, defendants- defendant Acena, while the other two (2) were elected mainly on the
appellants. vote of the plaintiffs and their group of stockholders. Let the first group
be called the Ungson groupand the second, the Baltazar group.
-----------------------------
The date of the annual stockholders' meeting of the Corporation had
G.R. No. L-16237 June 30, 1965 been fixed, under its by-laws, on the first Tuesday of February of every
year, but for one reason or another, the meeting was to be held on
MARVIN O. ROSE, plaintiff-appellee,
May 1, 1955, principally for the purpose of electing new officers and
vs.
Board of Directors for the calendar year 1955. In connection with said
LINGAYEN GULF ELECTRIC CO., INC., DOMINADOR, C. UNGSON,
meeting since January 1, 1955, there was a realignment effected, and
BRIGIDO G. ESTRADA, MANTEL L. FERNANDEZ, BENEDICTO C.
the fight for control of the management and property of the corporation
YUSON and BERNARDO C. ACENA, defendants-appellants.
was close and keen. The total number of fully paid-up shares held by
stockholders of one group, was almost equal the number of fully paid-
-----------------------------
up shares held by the other group.
G.R. No. L-16238 June 30, 1965.
The Ungson group (specially defendant Acena), which had been in
complete control of the management and property of the Corporation
IRINEO S. BALTAZAR and MARVIN O. ROSE, plaintiffs-appellees,
since January 1, 1955, in order to continue retaining such control, over
vs.
the objection oil three majority members of the Board, in the regular
BERNARDO ACENA, defendant-appellant.
meeting of the Board of Directors, held on January 30, 1955, passed
three (3) resolutions (Exhs. A, B, C).
Primicias and Del Castillo for plaintiffs-appellees.
Manuel L. Fernandez and Brigido G. Estrada for and in their own
Resolution No. 2 (Exh. A), declared all watered stocks issued to
behalf as defendants-appellants.
Acena, Baltazar, Rose and Jubenville, "of no value and consequently
cancelled from the books of the Corporation.
PAREDES, J.:
Resolution No. 3 (Exh. B) resolved that "... all unpaid subscriptions
In Civil Case G.R. No. L-16236 (CFI No. 13211), Irineo S. Baltazar,
should bear interest annually from the year of subscription on the basis
filed the complaint against Lingayen Gulf Electric Power Co., Inc.,
of quarterly payment, and any or all payments already made on said
unpaid subscriptions should be credited to pay interest first, then the
capital debt after all interest is fully paid.
All shares of stock issued to and in favor of any stockholder or
stockholders of the Lingayen Gulf Electric Power Co., Inc., on account
of payments on unpaid subscriptions without the interest thereon —
accrued and collectible having been fully paid from the date of
subscription as required by the Corporation Law, shall be declared of
no value and cancelled from its books, and if the payments already
made exceeded the interest accrued and collectible by virtue of the
provision of law and the previous resolution of its board of directors,
the excess should be applied to the payment of the unpaid
subscription. For this purpose, the accountant of the corporation is
directed to make and report the proper computation of the interest.
Resolution No. 4 (Exh. C) resolved that "any and all shares of stock of
the Lingayen Gulf Electric Power Co., Inc., issued as fully paid-up to
stockholders whose subscription to a number of shares have been
declared delinquent with the accrued interest on the unpaid thereof per
Resolution No. 42, S. 1954, of the Board of Directors which has been
duly published in the "Manila Chronicle," are hereby incapacitated to
utilize or avail of the voting power until such delinquency with the
accrued interest is fully paid up as indicated in Resolution No. 3, S.
1955.
On the authority of these resolutions, the Ungson group was
threatening and procuring to expel and oust the plaintiffs and their
companion stockholders, for the ultimate purpose of depriving them of
their right to vote in the said annual stockholders' meeting scheduled
for May 1, 1955.
In their complaint, Baltazar and Rose prayed that a writ of preliminary
injunction be issued against the defendants, enjoining them to desist
and refrain from carrying out the objects and purposes of the three
resolutions aforestated, and commanding them to allow plaintiffs and
companions to vote in the stockholders' meeting, on May 1, 1955, their
fully paid up shares of stocks, as evidenced by stock certificates issued
to them and outstanding on the stock book of the defendant
Corporation, on or before January 30, 1955, to declare said three
resolutions illegal and invalid, and to pay plaintiffs the sum of
P10,000.00 each, as damages. On April 29, 1955, the trial court, after
due hearing, issued Preliminary Injunction, as prayed for.
The defendants, in their answers, allege that during the years that
plaintiffs and their allies were in control of the Corporation, no serious
effort was attempted to retrieve it from its financial collapse, caused by
accumulated indebtedness and by poor and inefficient management,
resulting in losses of big sums of money from vicious manipulation of
funds, nepotism, unconscionable grant of big salaries and allowances,
illegal payments, unaccounted funds of Caltex business and sales
department store, etc.; that during the time the management was in the
hands of plaintiffs (Rose, as manager); attempts were made to release
themselves from liability of their unpaid subscriptions; that the three
resolutions were merely functional instruments to bolster the faith in
the assets of the defendant Corporation and did not deprive the
plaintiffs of their property without due process of law; that the issuance
of a writ of injunction for the purpose of arresting the holding of the
election of the Board, was beyond the jurisdiction of the court. They set
up counterclaims. They prayed that the resolutions be declared legal
and valid, thus invalidating the "watered stocks" of plaintiffs, if not paid,
and disqualifying the delinquent subscribers, among whom were the
plaintiffs, from voting totally or partially, their subscriptions; to order
plaintiffs to pay the defendant Corporation first, the interest due and
payable quarterly at 6% per annum from January 11, 1946 to
December 31, 1954, on their liability under their delinquent
subscriptions, out of the installment made therein; to pay defendant
entity damages under the counterclaims and expenses for the
enforcement of the collection; and that after complete payment of the
interests and the balance of their unpaid subscriptions, the defendant
Corporation should issue the shares of stock to plaintiffs for their full
subscription. Plaintiffs filed their answer to defendants' counterclaims,
with counterclaims against defendants. On August 8, 1955, the lower
court issued an order dismissing plaintiffs' counterclaims against
Acena, Ungson and Fernandez "without prejudice to filing the proper
separate actions therefor by the parties." Consequently, and as
heretofore mentioned, Baltazar and Rose filed Case No. 13340
(supra).
The following tentative amicable settlement, dated September 13,
1958, formulated and entered into by some of the parties and their
respective attorneys, before presiding Judge Jesus P. Morfe, in the
three cases, was submitted:
1. As to the so-called water stocks P30,000.00 each of the holders of
said stock, namely, Irineo Baltazar, Marvin Rose, and Bernardo Acena,
will return to the corporation P3,500 each of said stocks, thereby
retaining P6,500 worth of stocks to be considered as valid for each
under this compromise;
2. With respect to Dr. Bernardo Acena, of the certificates of stock
allegedly representing, his profit, he will return to the corporation
P3,500 of said share of stock and retain P7,500 worth thereof ;
3. With respect to the interest on unpaid balance of subscription it is
agreed that the subscribers with unpaid subscription be given the
opportunity to pay in two installments, the first installment to cover one-
half of the unpaid balance to be paid in three months, and the second
installment will be for the remaining unpaid half payable in another
three months, from the time of the approval of this agreements, with
the understanding that those who comply with this arrangement will not
pay interest on the balance of their subscription, for the date of
incorporation up to the grant of franchise on February 24, 1948, which
shall be deemed as condoned, and from 1948 they will pay only as
interest 3% compounded annually, it being understood that failure of
any subscriber to pay any of the installment here provided will subject
the stockholders concerned to the provision of the corporation law of
the payment of 6% interest compounded quarterly.
4. All claims and counterclaims other than those covered by the
preceding paragraph of stipulation will be deemed dismissed without
prejudice, in all these three cases;
5. All the resolutions of the Board and the stockholders involved in
these instant cases will be deemed modified in accordance with this
agreement.
On February 20, 1959, the lower court rendered a decision, approving
the agreement and requiring the parties to comply with the same, and
dissolved the writ of preliminary injunction, with costs. The pertinent
portions of the decision are:
In view of the agreement of the parties transcribed above, this Court is
called upon to decide whether or not any of the agreements of the
parties as above transcribed is contrary to law or public policy. First, as
regards pars. 1 and 2, of said agreement, the legal capacity of the
parties to sue and be sued carries with it the power to enter into an
amicable settlement of pending litigations and to expressly or impliedly
make admissions of facts; and they could, therefore, agree and
recognize as fully paid for and valid the shares of stocks mentioned in
said paragraphs of their agreement, which agreement must be held
valid and binding among the parties, and even as against their persons
who have no proof that said agreement was entered into in fraud of
creditors.
The next question for decision is whether or not a corporation may
validly condone interest on unpaid subscriptions to its capital stock.
The fact that our Corporation Law authorizes provisions in the by-laws
of a corporation different from that set out in Sec. 37 of said law, shows
that the provision of said law is to interest of unpaid stock subscriptions
is merely directory, so that a corporation may fix a different interest
rate, or condone the payment of interest altogether if such condonation
would, as in the instant cases, serve as inducement for early payment
of stock subscriptions. The condonation and reduction of interest
agreed upon in par. 3 of the aforequoted agreement is, therefore, valid
in the absence of proof that said agreement was entered into in fraud
of creditors.
In connection with par. 5 of the aforequoted agreement, in relation to
par. 3 thereof, this, Court is of the opinion, and so holds, that the
periods of time allowed for making payments under par. 3 of said
agreement, must be counted from date of receipt of a copy of this
decision by counsel of the parties, this decision constituting the final
approval of said agreement, and as to stockholders who are not parties
to these cases, from date of notice of the said time extension. The
extension of time to pay, as granted in par. 3 of the repealing previous
declaration of delinquency of the corresponding shares of stock, and
all subscribed shares of stock, except those ordered to be returned as
provided in pars. 1 and 2 of said agreement, will therefore be entitled
to vote until once again declared delinquent after the expiration of the
periods of time set out in par. 3 of said agreement.
Defendants on March 14, 1959 filed a motion for reconsideration,
alleging that the decision was partly against the spirit and intention of
the parties to the agreement and portions of the decision, carried
"prejudicial eventualities," and asking that the same be amended in the
sense that "the payment of obligations of delinquent incorporators has
been reduced by the agreement as stated in paragraphs 3 and 5" of
said agreement; that delinquent stocks cannot be voted until fully paid
in accordance with the agreement and that if the plaintiffs in the above
entitled cases could not pay in full their obligations within the periods
stated in the agreement, the resolutions of delinquency would
automatically stand.
On March 18, 1959, plaintiffs, in cases Nos. 13211 and 13212, filed a
petition for immediate execution and for preliminary injunction
and/or mandamus, praying that a writ be issued, ordering the
defendants, as controlling majority of hold-over board of directors, to
hold immediately the long delayed stockholders' meeting, and to allow
the plaintiffs and all the stockholders, with still unpaid subscriptions, to
vote all their stocks and subscriptions at said stockholders' meeting, as
directed in the decision.
On March 25, 1959, the Court issued an amending decision, pertinent
portions of which are hereunder reproduced —
... . After hearing the parties in extensive oral argument, this Court
agrees with the defendants that par. 5 of the compromise agreement of
the parties, dated September 13, 1958, contemplates a modification
and not a repeal of the resolutions of the Board of Directors and of the
Stockholders referred to in said agreement. The question is, therefore,
to what extent has said resolutions been modified? Considering that
the primary intention of each of said resolutions was to effect an early
collection of unpaid balance of stock subscriptions and interest
thereon, and the moving consideration for a compromise settlement of
the instant cases is likewise the early collection of the obligations of
stockholders of the defendant corporation, the extension of time to pay,
as granted in par. 3 of said agreement, was clearly intended to cover
not only the accrued interest but also the unpaid stock subscription of
the stockholders, for to hold otherwise would be to defeat the primary
purpose of early collection of said obligations. Considering the same
paramount intention of said resolution, and of the aforesaid
compromise agreement, it likewise follows that the extension of time to
pay and the reduction of interest embodied in the said agreement must
apply to all stockholders similarly situated.
Regarding the right to vote, this Court likewise agrees with the defends
its that the facts considered during the negotiations for settlement
effected by the parties in the Chambers of the presiding judge do not
warrant repeal of the declaration of delinquency and complete
restoration of voting rights until full payment of the unpaid stock
subscriptions and interest within the time and to the extent mentioned
in par. 3 of the aforesaid compromise agreement. To rule otherwise
would be to encourage non-payment of the balance of stock
subscriptions and thus defeat the paramount intention of the
compromise agreement. Stated differently, this Court now holds that
the extension of time to pay, as granted in par. 3 of the aforesaid
compromise agreement, has the effect of lifting the previous
declaration of delinquency effective as of full payment of the balance of
said stock subscriptions and interest within the periods of time
mentioned in par. 3 of said compromise agreement.
In view of the uncertainty brought about by the motion for
reconsideration and the motion for execution aforementioned, it would
be unjust to count the periods of time mentioned in the aforesaid
compromise agreement from the date of receipt of the original decision
of this Court in these cases. The extension of time to pay should,
therefore, be counted from receipt by counsel for the parties of a copy
of this amending decision, and from receipt by the other stockholders
of notice of said extension of time; and the injunction in the instant
case should be deemed in force for the duration of said extension of
time to pay.
WHEREFORE, the decision of this Court rendered in these cases on
February 20, 1959 is hereby modified in the manner set out above,
maintaining said decision in all other respects.
On April 4, 1959 , plaintiffs filed a motion for reconsideration and/or
new trial, praying that the amending decision dated March 25, 1959, be
reconsidered and/or further clarified. On July 16, 1959, the trial
court reversed its amending decision in an order, the relevant parts
thereof follow:
WHEREFORE, by way of amendment to both the original and
amending decisions of this Court in the instant case, this Court hereby
expressly rules that all shares of the capital stock of the defendant
corporation covered by fully paid capital stock shares certificates are
entitled to vote in all meetings of the stockholders of this corporation,
and Resolutions Nos. 2, 3 and 4 (Exhs. C, C-1 and C-2) of defendant's
corporation's Board of Directors are hereby nullified insofar as they are
inconsistent the this ruling.
The extensions of time to pay, referred to in par. 3 of the settlement
agreement of the parties, will start to run from the date of receipt by
counsel for the parties of a copy of this Order, and from receipt by the
other stockholders of notice of said extension of time.
The injunction granted in the instant case is hereby dissolved, and the
injunction bond filed by the plaintiffs is hereby cancelled and released.
Defendants on August 14, 1959 perfected their appeal against the
above ruling, on purely questions of law. Plaintiffs-appellees did not file
any brief, manifesting that they were relying on their arguments
contained in their motion for reconsideration, dated April 4, 1959 filed
with the trial court. (pp. 213 to 218, rec. on appeal) and on the reasons
set forth in the trial court's order, dated July 16, 1959, third decision
(pp. 219 to 230 R.A.).
Pending decision, the parties were required to show cause why the
cases should not be dismissed for having become moot or academic,
in view of the fact that the appellees, taking advantage of the decision
of the trial court, "had paid all other delinquencies and interest
thereon," but the appellants manifested that these cases should be
decided on the issues raised, to determine, once and for all, the voting
rights of the other delinquent subscribers, in the election of the
company's Board of Directors which had been suspended since May 1,
1955, because of the litigation.
The questions posted in the appeal, in view of the above facts would,
therefore, be:
1. If a stockholder, in a stock corporation, subscribes to a certain
number of shares of stock, and he pays only partially, for which he is
issued certificates of stock, is he entitled to vote the latter,
notwithstanding the fact that he has not paid the balance of his
subscription, which has been called for payment or declared
delinquent?
2. If a stockholder subscribes to a certain number of shares of stock
and makes partial payment only and declared delinquent as to the rest,
with interest, should previous payments on account of the capital, be
first applied to interest, thus diminishing the voting power of the shares
of stock already paid? In other words, if the entire subscribed shares of
stock are not paid, will the paid shares of stock be deprived of the right
to vote, until the entire subscribed shares of stock are fully paid,
including interest?
3. Has estoppel or waiver, by virtue of the settlement agreement, set
in?
Defendants-appellants claim that resolution No. 4 (Exh. C-
2), withdrawing or nullifying the voting power of all the aforesaid shares
of stock is valid, notwithstanding the existence of partial payments,
evidenced by certificates duly issued therefor. They invoke the ruling
laid down by the Court in the Fua Cun v. Summers case (44 Phil, 705,
March 27, 1923) pertinent portion of which states:
In the absence of special agreement to the contrary, a subscriber for a
certain number of shares of stock does not, upon payment of one-half
of the subscription price, become entitled to the issuance of certificates
for one-half of the number of shares subscribed for; the subscriber's
right consists only in equity entitling him to a certificate for the total
number of shares subscribed for by him upon payment of the
remaining portion of the subscription price.
The cited case connotes the principle that a partial payment of a
subscription does not entitle the stockholder to a certificate for the total
number of shares subscribed by him; his right consists only in equity to
a certificate of the total number of shares subscribed for, upon
payment of the remaining portion of the subscription price. In other
words, it is contended, as in the present case, that if Baltazar
subscribed to 600 shares of stock in a single subscription, and he
merely paid for 300 shares, for which he was given fully paid
certificates for 300 shares, he cannot vote said 300 shares, in any
meeting of the Corporation, until he shall have paid the remaining 300
shares of stock. The saving clause in the quoted pronouncement, "in
the absence of special agreement to the contrary," reveals that the
doctrine is not mandatory, but merely directory, which is not violative of
law, the rigor of the pronouncement may be relaxed. The plaintiffs-
appellees seem to sustain an adverse concept, postulating that once a
stockholder has subscribed to a certain number of shares, although he
has made partial payments only, but is issued a certificate for the paid-
up shares of stock, he is entitled to vote the whole number of shares
subscribed by him, paid or not, until the said unpaid shares shall have
been called for payment or declared delinquent.
The cases at bar do not come under the aegis of the principle
enunciated in the Fua Cun v. Summers case, because it was the
practice and procedure, since the inception of the corporation, to issue
certificates of stock to its individual subscribers for unpaid shares of
stock and gave voting power to shares of stock fully paid. And even
though no agreement existed, the ruling in said case, does not now
reflect the correct view on the matter, for better than an agreement or
practice, there is the law, which renders the said case of Fua Cun-
Summers, obsolescent.
Section 37 of the Corporation Law, as amended by Act No. 3518,
approved on March 1, 1929, six (6) years after the promulgation of the
Fua-Summers case (decided in 1923), provides:
SEC. 37. ... . No certificate of stock shall be issued to a subscriber as
fully paid up until the full par value thereof, or the full subscription in the
case of no par stock, has been paid by him to the corporation.
Subscribed shares not fully paid up may be voted provided no
subscription is unpaid and delinquent.
The law just quoted was originally section 36 of the Corporation Law of
1906, which reads as follows:
SEC. 36. ... . No certificate of stock shall be issued to a subscriber as
fully paid up until the full par value thereof has been paid by him to the
corporation. Subscribed shares not fully paid up may be voted
provided no subscription is unpaid and delinquent.
As may readily be seen, said Section 37 makes payment of the "par
value" as prerequisite for the issuance of certificates of par value
stocks, and makes payment of the "full subscription" as prerequisite for
the issuance of certificates of no par value stocks. No such distinction
was contained in section 36 of our Corporation Law of 1906,
corresponding to section 37 now. The present law could have simply
provided that no certificate of par value and no par value stock shall be
issued to a subscriber, as fully paid up, until the full subscription has
been paid by him to the corporation, if full payment of
subscription were intended is the criterion in the issuance of
certificates, for both thepar value and no par value stocks. Stated in
another way, the present law requires as a condition before a share
holder can vote his shares, that his full subscription be paid in the case
of no par value stock; and in case of stock corporation with par value,
the stockholder can vote the shares fully paid by him only, irrespective
of the unpaid delinquent shares. As well-observed by the trial court, a
corporation may now, in the absence of provisions in their by-laws to
the contrary, apply payment made by , subscribers-stockholders, either
as: "(a) full payment for the corresponding number of shares of stock,
the par value of each of which is covered by such payment; or (b) as
payment pro-rata to each and all the entire number of shares
subscribed for" (amended decision). In the cases at bar, the defendant-
corporation had chosen to apply payments by its stockholders to
definite shares of the capital stock of the corporation and had fully paid
capital stock shares certificates for said payments; its call for payment
of unpaid subscription and its declaration of delinquency for non-
payment of said call affecting only the remaining number of shares of
its capital stock for which no fully paid capital stock shares certificates
have been issued, "and only these have been legally shorn of their
voting rights by said declaration of delinquency" (amended decision).
The third paragraph of the settlement agreement relates to interest on
the unpaid balance of subscription to the capital stock. The second
paragraph of resolution No. 3 (Exh. C-1), unilaterally declared as of no
value and cancelled all capital stock shares certificates issued as fully
paid up, upon payments made by stockholders, when interests on
unpaid subscription from date of subscription were not previously
and/or then and there paid. Defendants-appellants, invoking Art. 1253
NCC (Art. 1173 of the Old Civil Code) which provides that "if the debt
produces interest, payment of the principal shall not be deemed to
have been made until the interests have been covered," and relying on
an opinion of the Securities and Exchange Commission, claim that said
unilateral nullification and/or cancellation of previously issued capital
stock shares certificates was valid. This provision of law only applies in
the absence of verbal or written agreement, to the contrary (8
Manresa, p. 317); it is likewise merely directory, and not mandatory.
(Art. 1252 NCC). In the present case, the defendant-corporation had
applied the payments made by the stockholders to the full par value of
the shares of stock subscribed by them, instead of the accepted
interest, as shown by the capital stock shares certificate issued for the
payments made, and the stockholders had accepted such certificates
issued for such payments. This being the case, the said application of
payments must be deemed to have been agreed upon by the
Corporation and the stockholders, and the same cannot now be
changed without the consent of the stockholders concerned. The
Corporation Law and the by-laws of the defendant Corporation do not
contain any provision, prohibiting the application of stockholders'
payments to the full par value of a corporation's capital stock, ahead of
the payment of accrued interest for unpaid subscriptions. It would,
therefore, result that a corporation may, upon request of an interested
stockholder, as his option, apply payment by them to the full par value
of shares of capital leaving its collection later of the accrued interest on
unpaid subscriptions, and that once such option has been exercised
and the corresponding stock certificates have been issued, the
corporation cannot, by a unilateral act, legally nullify and cancel the
capital stock certificates so issued.
AQUINO, J:
This is a mandamus case, Teofilo Po as an incorporator subscribed to
eighty shares of Peers Marketing Corporation at one hundred pesos a
share or a total par value of eight thousand pesos. Po paid two
thousand pesos or twenty-five percent of the amount of his
subscription. No certificate of stock was issued to him or, for that
matter, to any incorporator, subscriber or stockholder.
On April 2, 1966 Po sold to Ricardo A. Nava for two thousand pesos
twenty of his eighty shares. In the deed of sale Po represented that he
was "the absolute and registered owner of twenty shares" of Peers
Marketing Corporation.
Nava requested the officers of the corporation to register the sale in
the books of the corporation. The request was denied because Po has
not paid fully the amount of his subscription. Nava was informed that
Po was delinquent in the payment of the balance due on his
subscription and that the corporation had a claim on his entire
subscription of eighty shares which included the twenty shares that
had been sold to Nava.

It is finally argued by defendants-appellants that the plaintiffs-appellees
waived, under the agreement heretofore quoted, the right to enforce
the voting power they were claiming to exercise, and upon the principle
of estoppel, they are now prohibited from insisting on the existence of
such power, ending with the exhortation, that "they should lie upon the
bed they helped built, for a lasting peace in the interest of the
corporation." It should, however, be stated as heretofore exposed, that
certain clauses of the agreement are contrary to law and public policy
and would cause injury to plaintiffs-appellees and other stockholders
similarly situated. Estoppel cannot be predicated on acts which are
prohibited by law or are against public policy (Benguet Cons. Mining
Co. v. Pineda, 52 Off. Gaz. 1961, L-7231, March 28, 1956; Eugenio v.
Perdido L-7083, May 19, 1955; III Rep. of the Philippines Digest, p.
269-270).
WHEREFORE, the order of the trial court of July 16, 1959, (1)
Expressly ruling "that all shares of the capital stocks of the defendant
corporation covered by fully paid capital stock shares of certificates
are entitled to vote in all meetings of the stockholders of this
corporation and resolutions Nos. 2, 3 and 4 (Exhs. C, C-1 and C-2) of
defendant corporation's Board of Directors are hereby nullified insofar
as they are inconsistent with this ruling"; and (2) Dissolving the
injunction granted in the cases and releasing the injunction bond filed
by the plaintiffs-appellees, is correct and the same should be, as it is
hereby affirmed. Costs taxed against the defendants- appellants.
Bengzon , C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon,
Regala and Zaldivar, JJ., concur.
On December 21, 1966 Nava filed this mandamus action in the Court
of First Instance of Negros Occidental, Bacolod City Branch to compel
the corporation and Renato R. Cusi and Amparo Cusi, its executive
vice-president and secretary, respectively, to register the said twenty
shares in Nava's name in the corporation's transfer book.
The respondents in their answer pleaded the defense that no shares of
stock against which the corporation holds an unpaid claim are
transferable in the books of the corporation.
After hearing, the trial court dismissed the petition. Nava appealed on
the ground that the decision "is contrary to law ". His sole assignment
of error is that the trial court erred in applying the ruling in Fua Cun vs.
Summers and China Banking Corporation, 44 Phil. 705 to justify
respondents' refusal in registering the twenty shares in Nava's name in
the books of the corporation.
The rule enunciated in the Fua Cun case is that payment of one-half of
the subscription does not entitle the subscriber to a certificate of stock
for one-half of the number of shares subscribed.
Appellant Nava contends that the Fua Cun case was decided under
section 36 of the Corporation Law which provides that "no certificate of
stock shall be issued to a subscriber as fully paid up until the full par
value thereof has been paid by him to the corporation". Section 36 was
amended by Act No. 3518. It is now section 37. Section 37 provides
that "no certificate of stock shall be issued to a subscriber as fully paid
up until the full par value thereof, or the full subscription in case of no
par stock, has been paid by him to the corporation".

The issue is whether the officers of Peers Marketing Corporation can

G.R. No. L-28120 November 25, 1976
RICARDO A.
vs.
PEERS MARKETING CORPORATION, RENATO R. CUSI and
AMPARO CUSI, respondents-appellees.
Rolando M. Medalla, for appellant.
Jose Y. Montalvo, for appellees.
NAVA, petitioner-appellant.
be compelled by mandamus to enter in its stock and transfer book the
sale made by Po to Nava of the twenty shares forming part of Po's
subscription of eighty shares, with a total par value of P8,000 and for
which Po had paid only P2,000, it being admitted that the corporation
has an unpaid claim of P6,000 as the balance due on Po's subscription
and that the twenty shares are not covered by any stock certificate.
Apparently, no provision of the by-laws of the corporation covers that
situation. The parties did not bother to submit in evidence the by-laws
nor invoke any of its provisions. The corporation can include in its by-
laws rules, not inconsistent with law, governing the transfer of its
shares of stock (Sec. 137 , Act No. 1459; Fleischer vs. Botica Nolasco
Co., 47 Phil. 583, 589).
We hold that the transfer made by Po to Nava is not the "alienation,
sale, or transfer of stock" that is supposed to be recorded in the stock
and transfer book, as contemplated in section 52 of the Corporation
Law.
As a rule, the shares which may be alienated are those which are
covered by certificates of stock, as shown in the following provisions of
the Corporation Law and as intimated in Hager vs. Bryan, 19 Phil. 138
(overruling the decision in Hager vs. Bryan, 21 Phil. 523. See 19 Phil.
616, notes, and Hodges vs. Lezama, 14 SCRA 1030).
SEC. 35. The capital stock of stock corporations shall be divided into
shares for which certificatessigned by the president or the vice-
president, countersigned by the secretary or clerk and sealed with the
seal of the corporation, shall be issued in accordance with the by-laws.
Shares of stock so issued are personal property and may be
transferred by delivery of the certificate indorsed by the owner or his
attorney in fact or other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the, parties,
until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the transaction,
the date of the transfer, the number of the certificate, and the number
of shares transferred.
No share of stock against which the corporation holds any unpaid
claim shall be transferable on the books of the corporation.
SEC. 36. (re voting trust agreement) ...
The certificates of stock so transferred shall be surrendered and
cancelled, and new certificates therefor issued to such person or
persons, or corporation, as such trustee or trustees, in which new
certificates it shall appear that they are issued pursuant to said
agreement.
xxx xxx xxx
(Emphasis supplied).
(In the case of nonstock corporations a membership certificate is
usually issued. Lee E. Won vs. Wack Wack Golf & Country Club, Inc.,
104 Phil. 466; Wack Wack Golf & Country Club, Inc. vs. Won, L-23851,
March 26, 1976, 70 SCRA 165).
As prescribed in section 35, shares of stock may be transferred by
delivery to the transferee of the certificate properly indorsed. "Title may
be vested in the transferee by delivery of the certificate with a written
assignment or indorsement thereof" (18 C.J.S. 928). There should be
compliance with the mode of transfer prescribed by law (18 C.J.S.
930).
The usual practice is for the stockholder to sign the form on the back of
the stock certificate. The certificate may thereafter be transferred from
one person to another. If the holder of the certificate desires to assume
the legal rights of a shareholder to enable him to vote at corporate
elections and to receive dividends, he fills up the blanks in the form by
inserting his own name as transferee. Then he delivers the certificate
to the secretary of the corporation so that the transfer may be entered
in the corporation's books. The certificate is then surrendered and a
new one issued to the transferee. (Hager vs. Bryan, 19 Phil. 138, 143-
4).
That procedure cannot be followed in the instant case because, as
already noted, the twenty shares in question are not covered by any
certificate of stock in Po's name. Moreover, the corporation has a claim
on the said shares for the unpaid balance of Po's subscription. A stock
subscription is a subsisting liability from the time the subscription is
made. The subscriber is as much bound to pay his subscription as he
would be to pay any other debt. The right of the corporation to demand
payment is no less incontestable. (Velasco vs. Poizat, 37 Phil. 802;
Lumanlan vs. Cura, 59 Phil. 746).
A corporation cannot release an original subscriber from paying for his
shares without a valuable consideration (Philippine National Bank vs.
Bitulok Sawmill, Inc.,
L-24177-85, June 29, 1968, 23 SCRA 1366) or without the unanimous
consent of the stockholders (Lingayen Gulf Electric Power Co., Inc. vs.
Baltazar, 93 Phil 404).
Under the facts of this case, there is no clear legal duty on the part of
the officers of the corporation to register the twenty shares in Nava's
name, Hence, there is no cause of action for mandamus.
Nava argues that under section 37 a certificate of stock may be issued
for shares the par value of which have already been paid for although
the entire subscription has not been fully paid. He contends that Peers
Marketing Corporation should issue a certificate of stock for the twenty
shares, notwithstanding that Po had not paid fully his subscription for
the eighty shares, because section 37 requires full payment for the
subscription, as a condition precedent for the issuance of the certificate
of stock, only in the case of no par stock.
Nava relies on Baltazar v Lingayen Gulf Electric Power Co., Inc., L-
16236-38, June 30, 1965, 14 SCRA 522, where it was held that section
37 "requires as a condition before a shareholder can vote his shares
that his full subscription be paid in the case of no par value stock; and
in case of stock corporation with par value, the stockholder can vote
the shares fully paid by him only, irrespective of the unpaid delinquent
shares".
There is no parallelism between this case and the Baltazar case. It is
noteworthy that in the Baltazar case the stockholder, an incorporator,
was the holder of a certificate of stock for the shares the par value of
which had been paid by him. The issue was whether the said shares
had voting rights although the incorporator had not paid fully the total
amount of his subscription. That is not the issue in this case.
In the Baltazar case, it was held that where a stockholder subscribed
to a certain number of shares with par value and he made a partial
payment and was issued a certificate for the shares covered by his
partial payment, he is entitled to vote the said shares, although he has
not paid the balance of his subscription and a call or demand had been
made for the payment of the par value of the delinquent shares.
As already stressed, in this case no stock certificate was issued to Po.
Without stock certificate, which is the evidence of ownership of
corporate stock, the assignment of corporate shares is effective only
between the parties to the transaction (Davis vs. Wachter, 140 So.
361).
The delivery of the stock certificate, which represents the shares to be
alienated , is essential for the protection of both the corporation and its
stockholders (Smallwood vs. Moretti, 128 So. 2d 628).
In view of the foregoing considerations, the trial court's judgment
dismissing the petition for mandamus is affirmed. Costs against the
petitioner-appellant.
SO ORDERED.