CHAPTER VII – CONTROL AND MANAGEMENT OF CORPORATION

B. Who Exercises Corporate Powers

1. BOARD OF DIRECTORS OR TRUSTEES

1. Ramirez vs Orientalist Co. (1918)

Facts:
Orientalist Company was engaged in the business of maintaining and conducting a theatre in the city of
Manila for the exhibition of cinematographic films. engaged in the business of marketing films for a
manufacturer or manufacturers, there engaged in the production or distribution of cinematographic material. In
this enterprise the plaintiff was represented in the city of Manila by his son, Jose Ramirez. The directors of the
Orientalist Company became apprised of the fact that the plaintiff in Paris had control of the agencies for two
different marks of films, namely, the “Eclair Films” and the “Milano Films;” and negotiations were begun with
said officials of the Orientalist Company by Jose Ramirez, as agent of the plaintiff. The defendant Ramon J.
Fernandez, one of the directors of the Orientalist Company and also its treasure, was chiefly active in this
matter. Ramon J. Fernandez had an informal conference with all the members of the company’s board of
directors except one, and with approval of those with whom he had communicated, addressed a letter to Jose
Ramirez, in Manila, accepting the offer contained in the memorandum the exclusive agency of the Eclair  films
and Milano films. In due time the films began to arrive in Manila, it appears that the Orientalist Company was
without funds to meet these obligations. Action was instituted by the plaintiff to Orientalist Company, and
Ramon J. Fernandez for sum of money.

Issue:
WON the Orientalist Co. is liable for the acts of its treasurer, Fernandez?

Held:
Yes. It will be observed that Ramon J. Fernandez was the particular officer and member of the board of
directors who was most active in the effort to secure the films for the corporation. The negotiations were
conducted by him with the knowledge and consent of other members of the board; and the contract was made
with their prior approval. In the light of all the circumstances of the case, we are of the opinion that the
contracts in question were thus inferentially approved by the company’s board of directors and that the
company is bound unless the subsequent failure of the stockholders to approve said contracts had the effect of
abrogating the liability thus created.
2. Lopez v. Ericta
June 29, 1972

SUMMARY: UP President appointed Blanco as dean ad interim of the College of Education. The BOR did not
want to approve her appointment, so a committee studied the proposal. The committee wanted to reject her
appointment in a face-saving manner; so it recommended that the BOR ask the UP President to convince
Blanco to withdraw. However, when the matter was submitted for approval via voting, the committee withdrew
such recommendation. The final result was that the matter of appointment was left undecided, but the votes
showed 5 in favor, 3, against, and 4 abstentions [not enough for a majority of the 12-member BOR]. Blanco
filed a petition for certiorari to compel the BOR and the President to appoint her, on the ground that the 4
abstentions should be deemed YES votes. CFI sided with her. On appeal by the UP officials, SC reversed,
finding that the circumstances of the voting do not support Blanco’s assertion. In fact the abstaining Regents
wanted to reject her appointment but merely wanted to do it with delicadeza.

DOCTRINE: [A]n abstention is counted as an affirmative vote insofar as it may be construed as an

acquiescence in the action of those who vote affirmatively. This manner of counting is based on what is deemed
to be a presumption as to the intent of the one abstaining, to acquiesce in the action of those who vote
affirmatively. However, this is only a prima facie presumption, which can be overturned by clear evidence to
the contrary. It is pertinent, therefore, to inquire into the facts and circumstances which attended the voting in
order to determine whether or not such a construction would govern. [From Karichi notes: Abstentions should
now be counted separately. They are votes in themselves. DLC: Court has no business construing the intent or
effect of abstentions, i.e., the case is wrong.]

NATURE: Petition for certiorari.

FACTS
 The case arose from a dispute over the appointment of the Dean of the UP College of Education (UP
Educ).

 CHARACTERS:
o UP President Salvador Lopez (PRES. LOPEZ), also a member of the Board of Regents
Page 1 of 59
 o The Board of Regents (BOR) – 12 members
 Education Secretary Onofre D. CORPUZ, Ex Officio Chairman
 Sen. Eva Estrada KALAW
 Rep. Aguedo AGBAYANI [also Transpo book author]
 Director of Public Schools Liceria SORIANO
 Regent Eduardo ESCOBAR
 Regent Pio PEDROSA
 Regent Tomas FONACIER
 Regent Ambrosio TANGCO
 Regent Leonides VIRATA [not the VSB guy]
 Regent Abel SILVA
 Regent Fernando BARICAN
o Dr. Consuelo BLANCO – faculty member of UP Educ
o Oseas DEL ROSARIO – another faculty member of UP Educ
o JUDGE Vicente ERICTA of the Rizal CFI (QC) [future SC Justice].

 Apr. 27, 1970 – Pres. Lopez appointed Blanco as dean ad interim of UP Educ, effective May 1, 1970
until April 30, 1971, unless sooner terminated and subject to the approval of the Board of Regents
(BOR) and to pertinent University regulations.
 May 1, 1970 – Blanco assumed office pursuant to the appointment.
 May 26, 1970 – The BOR met and Pres. Lopez submitted for its reconsideration the ad interim
appointment of Blanco.

o The BOR voted to defer action on the matter, in view of a petition addressed to the BOR by UP
Educ faculty and alumni, opposing the appointment of Blanco, as noted by Regent Kalaw.
o The matter was referred for further study to the Committee on Personnel, composed of Regents
Tangco (Chairman), Pedrosa, and Soriano.
o On the same day, Lopez extended another ad interim appointment to Blanco, subject to the same
conditions as the first appointment.

 July 9, 1970 – On the next BOR meeting, the matter of Dr. Blanco’s appointment was discussed again.
o The Personnel Committee recommended that the BOR ask Lopez to review Blanco’s
appointment to the Deanship of UP Educ in light of the testimonies received and discussions
held during the Committee meetings on June 4 and 11, 1970.
o The documents received by the Personnel Committee were entered into the official record.
o There was uncertainty as to the action that the BOR will take.
o The Personnel Committee’s recommendation was itself ambiguously worded, because the
consensus of the committee was for the BOR to ask Pres. Lopez to discuss with Blanco a
proposal to withdraw her appointment as Dean.
o IN OTHER WORDS: The Committee wanted to reject the appointment but did not want the
record to reflect that Blanco was rejected [more on this later] so nobody is embarrassed.

o Sec. Corpuz took a roll call vote on the appointment of Blanco.

 RESULTS: Regents Fonacier, Escobar, Barican, and Agbayani, plus Pres. Lopez (5) in
favor; Regents Kalaw and Silva, plus Sec. Corpuz against (3); and Regents Tangco,
Leocadio [in substitution of Regent Soriano], Pedrosa, and Virata, abstaining (4). 5 YES;
3 NO; 4 ABSTAIN.

o Based on this voting, and on motion of Regent Agbayani duly seconded, Sec. Corpuz suspended
action on the matter in order to give the BOR more time to consider the appointment.
o No action having been taken on Blanco’s appointment, the same was deemed terminated.

 July 10, 1970 – Blanco wrote the BOR requesting a reconsideration of the interpretation of the 5-3-4
vote on her appointment [in effect she wanted the abstentions to be counted in her favor]
 Aug. 18, 1970 – Blanco wrote Pres. Lopez to protest Del Rosario’s appointment as OIC of UP Educ.
 Receiving no reply, Blanco filed a petition for certiorari and prohibition w/ preliminary injunction with
the Rizal CFI (QC Branch).
 Dec. 3, 1970 – CFI DECISION

o declared Blanco the duly elected dean of UP Educ, entitled to occupy the position from May 1,
1970 to Apr. 30, 1973
o declared the appointment of Del Rosario as OIC null and void
o permanently enjoined Del Rosario from acting as UP Educ Dean and the BOR from appointing
another person to the Deanship of UP Educ

Page 2 of 59
  Jan. 5, 1971 – Lopez, the BOR, and del Rosario filed a petition for review on certiorari to the SC.
 Jan. 11, 1971 – SC issued a writ of preliminary injunction to stop the execution of the CFI decision.

ISSUE (HELD):
W/N the 4 abstentions should be taken as affirmative votes so as to constitute a majority for the approval
of Blanco’s appointment as Dean of UP Educ (NO)

RATIO
 Blanco: The abstentions should be deemed affirmative votes because refusal to vote indicates
acquiescence in the action of those who vote [and eventually win]
 Lopez et.al.: If Blanco’s view is adopted, an absurdity may arise such that a proposal may be approved
with only one vote if the other 11 BOR members abstain.
 SC: A good case can be made for either proposition and American courts have been divided on the
matter. However, the case can be resolved without choosing from the competing legal theories.
 “It should be noted that an abstention, according to the citations of Lopez et.al., is counted as an
affirmative vote insofar as it may be construed as an acquiescence in the action of those who vote
affirmatively. This manner of counting is obviously based on what is deemed to be a presumption as to
the intent of the one abstaining, namely, to acquiesce in the action of those who vote affirmatively, but
which presumption, being merely prima facie, would not hold in the face of clear evidence to the
contrary. It is pertinent, therefore, to inquire into the facts and circumstances which attended the voting
by the members of the BOR on the ad interim appointment of Blanco in order to determine whether or
not such a construction would govern.”

 Applicable provisions
o UP Charter, Sec. 7. A quorum of the Board of Regents shall consist of a majority of all the
members holding office at the time the meeting of the Board is called. All processes against the
Board of Regents shall be served on the president or secretary thereof.
o UP Charter, Sec. 10. The body of instructors of each college shall constitute its faculty, and as
presiding officer of each faculty, there shall be a dean elected from the members of such faculty
by the Board of Regents on nomination by the President of the University.
o Article 78 of the Revised Code of UP: For each college or school there shall be a Dean or
Director who shall be elected by the Board of Regents from the members of the faculty of the
University unit concerned, on nomination by the President of the University.

MINUTES OF THE MEETING SHOW THAT BOR INTENDED TO REJECT BLANCO’S APPOINTMENT

 The Chairman of the Personnel Committee, Regent Tangco, manifested during the July 9 meeting that
“the nomination of Professor Blanco cannot be accepted by the [BOR], but it was felt that it should be
presented in a more diplomatic way to avoid any embarrassment on the part of both the appointee and
the President. And so means were studied as to how it could be done and it was felt that it could be done
in such a way that the appointee could request relief from the appointment, that it would be the best to
save embarrassment all around. And so the final decision was to ask the President to review this matter”
 They intended to do this by asking Pres. Lopez to persuade Blanco to withdraw her appointment or
resign.
 Regent Pedrosa, another member of the Personnel Committee, suggested that the Committee members
inhibit from voting on the matter; and they did.
 Sec. Corpuz stated that if the Board accepts the Committee recommendation, it would also mean the
non-confirmation of Blanco’s ad interim appointment.
 Sec. Corpuz further said: “Regent Tangco, the chairman of [the Personnel Committee], says that this is
merely a polite cover, diplomatic cover, according to Regent Kalaw, for the reaction of the Committee,
and Regent Tangco requests that we act not on the Committee recommendation in this form as
presented in the Agenda but in terms [of the] gentlemen's agreement.”
 But Sec. Corpuz said that they cannot act on the recommendation in the way Regent Tangco wanted
because the BOR cannot act on an unwritten “gentleman’s agreement”. [in effect ayaw ni O.D. Corpuz
na utusan ng BOR si Pres. Lopez na pakiusapan si Dr. Blanco na mag-resign, as Tangco would have it]
 He therefore asked the BOR to vote ONLY on the action to be taken on the Personnel Committee’s
recommendation, unless the Committee agrees to withdraw the recommendation [not on the Blanco
appointment itself; seems that O.D. Corpuz wants the Personnel Committee to make up its mind and do
away with their “face-saving” maneuver. Kung ayaw nyo kay Blanco eh di i-reject natin]
 Regent Tangco agreed and withdrew the recommendation. As a clarification, Regent Silva then stated
that as it stood, the Committee had withdrawn its earlier recommendation and now puts forward a
recommendation of non-confirmation, to which Regent Kalaw agreed. The BOR then voted on the
matter with the above-quoted result of 5-3-4.
 Before casting his vote of abstention, Regent Virata, stated that he was lost [haha] and that he was being
asked to make a decision he was not ready to make.
Page 3 of 59
  Sec. Corpuz declared that the vote was not a majority and that there was no ruling on the counting of
votes and the treatment of the abstention.
 After a 1-minute recess. Sec Corpuz stated that: “There is a motion to suspend action; that is to say, to
suspend the voting of the Board on this matter with the effect, first, to return the case to its original
status to render the case subject to further thinking and second, that the Board has not confirmed the
appointment. The appointment, in other words, will be good from May 26 up to today (July 9).”
 The BOR wanted more time to consider Blanco’s appointment but deemed her ad interim designation
terminated as of July 9. Sec. Corpuz also manifested that the result of the voting should be expunged
from the record. Nobody objected.
 As summarized by the Court: “The Personnel Committee, to which the matter of Dr. Blanco's
appointment had been referred for study, was for recommending that it be rejected; that, however, the
rejection should be done in a diplomatic way "to avoid any embarrassment on the part of both the
appointee and the President;" and that the "final decision" of the committee was to ask the President
of the University to talk to Dr. Blanco "for the appointment to be withdrawn." That decision, as
announced by Regent Tangco, Chairman of the Personnel Committee, was restated and clarified by
Regent Kalaw, and then reiterated first by Regent Tangco and then by the Chairman. On that note
Regent Pedrosa suggested that the members of the Personnel Committee, as well as the President,
should inhibit themselves from voting. When the matter was actually submitted to a vote, however, the
definition of the issue became somewhat equivocal. Regent Tangco announced that the committee was
withdrawing its recommendation, whereupon the Chairman stated that the issue was "to confirm or
not to confirm the ad interim appointment issued to Dr. Blanco." This was then followed by a remark
from Regent Silva that the withdrawal by the committee referred to the recommendation "per se, as it is
written," but that the committee, he thought, was "actually putting a recommendation for
nonconfirmation." Regent Kalaw thereupon expressed her concurrence with Regent Silva's opinion”.
 It is clear from the foregoing that the abstentions cannot be construed as votes for confirmation of
Blanco’s appointment. The Personnel Committee undoubtedly recommended rejection of Blanco’s
appointment. It cannot be said that the members of the Committee abstained because they intended to
acquiesce with the Yes votes. Neither did Regent Virata, who said that he was not ready to make a
decision.
 In the same meeting, the BOR finally decided to cancel the actions taken, including the 5-3-4 vote, and
to return the matter to the status quo, with the understanding that the ad interim appointment had been
terminated.
 “[I]t cannot be seriously argued that the Board had no authority to do what it did: the meeting had not
yet been adjourned; the subject of the deliberations had not yet been closed, and as in the case of any
deliberative body the Board had the right to reconsider its action.” No title to the office of Dean of UP
Educ had yet vested in Blanco at the time of reconsideration.
 Since Blanco did not pray for her ad interim appointment to be upheld up Apr. 30, 1971; and
considering that she was not entitled to the 3-year term provided for by law, she could no longer be
reinstated to the Deanship.
 “Aside from the fact that the point has become moot, since the tenure has expired, it is seriously to be
doubted whether such an appointment is authorized under the law and regulations. It should be noted
that both under the Charter (Sec. 10) and under the Revised Code of the University (Art. 78) the Dean
of a college is elected by the [BOR] on nomination by the [UP President]. In other words the President's
function is only to nominate, not to extend an appointment, even if only ad interim; and the power of the
Board of Regents is not merely to confirm, but to elect or appoint. At any rate the ad interim
appointment extended to Blanco on May 26, 1970, although made effective until April 30, 1971, was
subject to the following condition: "unless sooner terminated and subject to the approval of the Board
of Regents." The Board, as has been shown, not only did not elect Blanco in its meeting of July 9, 1970,
but declared the appointment terminated as of that day.”

Barredo, J., concurring: Pres. Lopez should not have voted, unless there was a tie. Concurs with the deciding
principle of the ponencia but not with its conclusion as to the remarks of Regents Pedrosa and Virata. “It is
indeed regrettable that the action of the board was not as clear and categorical as should be expected of the
Board of Regents of the state university. If such a simple matter as the election of a dean cannot be decided by
the corresponding university authorities in a noncontroversial manner, is there hope that more important and
complicated matters requiring deeper study and consideration and affecting the fundamental policies of the
institution and the various curricula to be adopted can be settled and decided forthrightly and without
equivocation? I am frankly disappointed, being an alumnus of the University, that a thing that should have
been dealt with with no under consideration in mind than the fitness of the candidate had to be treated with
"diplomacy" and halfway propositions, as if there was fear that the outcome would not be considered by all
concerned as fully just and fair. I realize I am not supposed to render judgment here on how the University
should be run or how its officials should conduct themselves, but I feel that it is within the scope of my authority
to express myself on a matter of public interest that had to reach this Court only because simple things have not
been done the simple way.” Concurs in the result in view of the action taken by the Board to deem Blanco’s
appointment terminated as of July 9, 1970.

Page 4 of 59
DISPOSITION: Decision reversed, case dismissed.

3. Zacharyv.Milin
FULL TEXT NI HA?

Docket No. 67, Calendar No. 40,969.

Submitted April 9, 1940.
Decided September 9, 1940. Rehearing denied November 13, 1940. 
Appeal from Wayne; Campbell (Allan), J., deceased, Smith (Frank Day), J., successor. Submitted April 9, 1940.
Docket No. 67, Calendar No. 40,969.) Decided September 9, 1940. Rehearing denied November 13, 1940.
Quo warranto by Theodore Zachary and William N. Phillips to test the right of Charles Milin and Ernest C.
Wunsch to hold office of director in Great Lakes Champagne Wineries, Inc., a Michigan corporation. Judgment
for defendants. Plaintiffs appeal. Affirmed.
Chester P. O'Hara, for plaintiffs.
Fildew DeGree, for defendant Milin.
Miller, Baldwin Boos, for defendant Wunsch.

A true replacement for LexisNexis for only $65/month.

Compare to Lexis

POTTER, J.

This is an information in the nature of quo warranto filed by Theodore Zachary and William N. Phillips
to test the right of Ernest C. Wunsch and Charles Milin to hold, use, exercise and enjoy the office of directors of
the Great Lakes Champagne Wineries, Inc., a Michigan corporation.

The result depends upon the validity of the directors' meeting at the company's laboratory December 8,
1937. If Zachary was legally removed as president of the company, then the trial court should be affirmed. But,
if that meeting be considered as an informal one, not in the nature of a directors' meeting, then the case should
be reversed.

In the absence of statutory authority no decision or act done by any number of the board of directors
while not duly assembled as a board is a valid corporate act. Smith v. Dorn, 96 Cal. 73 ( 30 P. 1024).  To hold
that certain directors could form a quorum by coming upon another in a room, or in the street, and, despite the
protests of that other, could, by merely declaring the body of persons so gathered together to be a meeting,
actually give it that complexion, would be illegal. Harris v. English Canadian Co., 3 West. L. R. (Brit. Col.) 5.
A director of a corporation is not to be trapped into attendance of a meeting against his will. The directors of a
corporation have no authority to act as a board of directors except at a regularly constituted meeting, in the
absence of a consent in writing (Act No. 327, § 13, subd. 4[d], Pub. Acts 1931 [Comp. Laws Supp. 1940, §
10135-13, Stat. Ann. § 21.13]). But if all of the members of the board of directors are present and participate in
the meeting or proceedings, then the meeting may be said to be duly and legally held.

Zachary claims he was not given notice of the meeting of December 8, 1937, and, therefore, its action
was void. On the other hand, the defendants claim that notice was waived by Zachary's appearance at the
meeting.

Section 39 of the general corporation law, Act No. 327, Pub. Acts 1931, as amended by Act No. 194,
Pub. Acts 1935 (Comp. Laws Supp. 1940, § 10135-39, Stat. Ann. § 21.39), provides that shareholders I and
directors' meetings shall be called in the manner provided in the bylaws."

Section 4 of the bylaws provides:

"Special meetings of the board of directors may be held by giving one day's notice thereof to each director, but
no notice shall be necessary as a prerequisite to any meeting of the board at which all directors are present."

All three of the directors were present at the meeting of December 8, 1937. The validity of the meeting
may not be affected by failure to give notice as required by the bylaws, providing the parties  were personally
present. If all of the directors were present at the meeting of December 8, 1937, and understood that the meeting
was to be a directors' meeting, then the action taken is final and may not be avoided by an informality in
connection with its being called.

"Of course if directors are willing to hold a meeting they may do so under any circumstances, but one of them
cannot be made to attend the board or to convert a casual meeting into a board meeting." Barron v. Potter,
(1914) L. R. 1 Ch. Div. 895 (83 L. J. Ch. 646; 110 L. T. 929; 21 Manson, 260).

Page 5 of 59
 In Stobo v. Davis Provision Co., 54 Ill. App. 440, two directors in New York came to Chicago and
walked into the office of the third director who was secretary of the company. They moved to oust the third
director as secretary of the corporation. It was contended that, no notice having been given, it required not only
the third person's physical presence in the room but his assent to the holding of the meeting. The court found
there was no fraud, and stated:

"At the meeting in question, every director was present and participated until such action was proposed as was
distasteful to one, who then withdrew, but the rest, constituting a majority, remained.

"Under such circumstances, to set aside the action of the board, so lawfully convened and acting within its
powers, would be subversive of all lawful control by directors over the affairs of a private corporation."

The record is sharply conflicting as to whether plaintiff Zachary agreed that the meeting of December 8,
1937, in the company's laboratory, was a directors' meeting or whether the defendants then voted to remove him
from office. The testimony consists of the statements of the three directors  themselves. The trial judge found
that Zachary attempted to have Milin ousted as an officer of the company and that Milin then moved, and
Wunsch seconded the motion, to have Zachary ousted as president. Where there is a conflict in the testimony,
this court does not substitute its judgment for the judgment of the trial court on questions of fact unless they
clearly preponderate in the opposite direction.

Coming now to the stockholders' meeting in question (January 17, 1938): Defendants claim they cast
one ballot. There is no question, from the record, but that the defendant Milin voted twice. The minutes of the
stenographer employed by defendants show that after casting his first vote, but before Wunsch had announced
the result of the election, Milin changed his vote to vote cumulatively. A stockholder or member may change
his vote at any time before the vote is finally announced; and before that time it is proper to permit him to
correct his ballot so that it will express his true intention. 5 Fletcher, Cyclopedia Corporations (Perm. Ed.), p.
82; 3 Cook on Corporations (8th Ed.), p. 2111, § 605; 2 Thompson on Corporations (3d Ed.), pp. 402, 405, §§
1011, 1013. The minutes of the meeting show that the result was announced by Zachary before the second
ballot was cast, but that the result was not announced by Wunsch until after the second ballot was cast. The
issue, therefore, is whether Wunsch or Zachary was the chairman of the meeting. If Zachary was chairman, then
it was too late for Milin to withdraw the ballot which he had cast and to vote cumulatively. There was no legal
duty imposed upon Zachary to inform Milin that he was voting cumulatively; and it was no fraud for him when
he stated that cumulative voting was not provided for "in the articles." The trial court said: 

"Fildew inquired of Zachary whether there was anything in the bylaws or articles relating to cumulative voting.
Prior to the effective date of the session laws of 1937, the corporation code of Michigan had provided that
unless there was such a provision cumulative voting should not be in effect. The amendment of 1937 changed
the law and reverted to the rule as it had stood prior to 1931, namely that the right of cumulative voting existed,
whether expressly referred to in the articles or bylaws of a corporation or not. This fact seems to have been
known to Zachary, but to have been overlooked by Fildew. Zachary's reply that no such provision existed was
made with the evident intention of deceiving Milin, and without any announcement as to whether cumulative
voting would be permitted, the two equal stockholders proceeded to vote. Zachary's vote was cumulated for two
directors, himself, and a friend of his by the name of Phillips.

Act No. 350, Pub. Acts 1937 (Comp. Laws Supp. 1940, § 10135-32, Stat. Ann. 1940 Cum. Supp. § 21.32.). —
REPORTER.

Therefore, Zachary's ballot read:

Theodore Zachary ............................3,750 votes.
William N. Phillips .........................3,750 votes.
Milin's vote was written out:
Charles Milin ...............................2,500 votes.
Ernest C. Wunsch ............................2,500 votes.
While the ballots were on the table, but before the announcement of the result, Zachary claimed cumulative
voting was in effect, whereupon Milin, acting on the advice of Fildew, retrieved his ballot, and tendered to
Wunsch a new ballot showing his vote as:
Charles Milin ...............................3,750 votes.
Ernest C. Wunsch ............................3,750 votes.

Upon the effect of this transaction hangs the result of this proceeding.

"It is the opinion of this court, first, that Wunsch was the presiding officer of the meeting.
"Second, that Wunsch never announced the vote until after Milin had cast his second ballot. 
"Third, that it was the right of all the stockholders to have announced at the beginning of the meeting, whether
or not cumulative voting was in effect.

Page 6 of 59
"Fourth, that the attempt of Zachary to obtain an advantage over Milin to which he had no legal right is a course
of conduct to which this court will not lend its approval.

"Fifth, that no election could be declared closed until the presiding officer had so announced.
"Sixth, that the presiding officer's announcement of a tie vote, recognizing the ballot which Milin cast, in
accordance with his right to cumulate, was a valid announcement, and one which should be legally sustained.

"It follows that the petition for a writ of quo warranto should be denied, and judgment herein entered in favor of
the defendants."

Judgment affirmed, with costs.

BUSHNELL, C.J., and SHARPE, CHANDLER, NORTH, McALLISTER, WIEST, and BUTZEL, JJ.,
concurred.

4. Kaplan vs Block
FULL CASE NI SIYA

38262 Record No. 2838.

November 20, 1944.
Present, Holt, Hudgins, Gregory, Browning, Eggleston and Spratley, JJ.

1. MANDAMUS — Definition. — Mandamus is a command issuing from a common law court of competent
jurisdiction.

2. OFFICERS AND AGENTS OF PRIVATE CORPORATIONS — Powers of Directors — In General.

— Directors appoint the agents, direct the business, and govern the policy and plans of the corporation. The
directors elect the officers, and at common law there is no limit to the number of offices which may be held
simultaneously by the same person, provided neither of them is incompatible with any other. They institute,
prosecute, compromise or appeal suits at law and in equity which the corporation brings or has brought against
it.

3. OFFICERS AND AGENTS OF PRIVATE CORPORATIONS — Powers of Directors — In General.

— Directors are the exclusive, executive representatives of the corporation, and are charged with the
administration of its internal affairs and the management and use of its assets.

4. CORPORATIONS — Nature. — Corporations are the creatures of the state, and must comply with the
exactions and regulations it imposes.

5. OFFICERS AND AGENTS OF PRIVATE CORPORATIONS — Powers of Directors — Agreements by

Stockholders Whereby Directors Are Bereft of Power. — An agreement among stockholders whereby the
directors are bereft of their power to discharge an unfaithful employee of the corporation is illegal as against
public policy.

6. OFFICERS AND AGENTS OF PRIVATE CORPORATIONS — Powers of Directors — Revocation by

Stockholders. — The directors are not ordinary agents in the immediate control of the stockholders, but the
powers of boards of directors are, in a very important sense, original and undelegated; the stockholders do not
confer, nor can they revoke, those powers or create a sterilized board of directors. Rather, the directors hold
their 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.

7. CORPORATIONS — General Law as Part of Special Charter. — The provisions of the general law with
regard to corporations organized by virtue thereof are as binding upon it as they would be if written into
a  special charter; and all by-laws which are inconsistent with the charter, of a corporation or with the governing
law are void.

8. OFFICERS AND AGENTS OF PRIVATE CORPORATIONS — Directors — Necessity for. — A private
business corporation without a board of directors is an impossible concept.

9. CORPORATIONS — Nature. — Corporations were invented to circumvent the unity required in

partnerships.

10. CORPORATIONS — Charter, By-Laws and Powers — Construction. — In construing corporate charters,
by-laws and powers granted, their validity is determined not by what has been done under them, but also by
what may be done.

Page 7 of 59
11. OFFICERS AND AGENTS OF PRIVATE CORPORATIONS — Powers of Directors — Cannot Be
Legislated Out of Office. — Limitations may be placed upon the powers of directors but they cannot be
legislated out of office.

12. OFFICERS AND AGENTS OF PRIVATE CORPORATIONS — Powers of Directors — Limitation

Requiring Unanimous Approval of Stockholders — Case at Bar. — In the instant case, a proceeding by
mandamus by a discharged director, secretary and treasurer of a private corporation, the charter of the
corporation provided that no act of the directors should be binding unless ratified by the unanimous vote of the
stockholders and this provision was also contained in the by-laws. Appellee, after due notice, was discharged by
the vote of the directors. He dissented from this action of the board and the lower court issued a writ of
mandamus to admit him to his office as secretary and treasurer of the corporation and deliver to him all proper
books, etc. Appellants contended that the provision of the charter and by-laws requiring ratification of the acts
of the directors by the stockholders was void as contrary to common law, the statutes of Virginia, and the public
policy of the state; that the board of directors possessed the power to remove the secretary and treasurer, and
had validly exercised it, and if the stockholders possessed the power of removal they had exercised it validly.

Held: That the writ of mandamus should not have issued since the provisions of the charter and the by-laws
divested the directors of all powers, and the provision that they should not have power to do anything without
the consent of every stockholder was void.

Error to a judgment of the Circuit Court of Arlington county, awarding a writ of mandamus. Hon. Walter T.
McCarthy, judge presiding.

Reversed and remanded.

The opinion states the case. 

Albert V. Bryan and Alfred A. Hilton, for the plaintiffs in error.

T. Munford Boyd, James H. Simmonds and Nathan Patz, for the defendant in error.

HOLT, J., delivered the opinion of the court.

The Old Dominion Office Building, Incorporated, is a Virginia corporation, chartered in November, 1940, with
its principal office in Arlington county. The names and residences of the officers and directors, who, unless
sooner changed by the stockholders, were for the first year to manage the affairs of the corporation are as
follows:

Harry Kaplan, President and director, Washington, D.C. Emile Beauvais, Vice-president and director,
Washington, D.C. Ellis P. Block, Secretary and director, Washington, D.C. Samuel Goldberg, Treasurer and
director, Washington, D.C.

Its capital stock was divided into classes A and B. Class B consisted of one hundred twenty (120) shares; it had
no voting power but was the only dividend-bearing stock of the corporation. Class A stock consisted of 10
shares with no dividend rights but with sole stock-voting power.
Goldberg seems to have taken no active interest as treasurer and was succeeded by Block, who became treasurer
also. Charges were preferred against him and were heard by the board of directors in January, 1943. After due
notice, he, dissenting, was removed from office and was succeeded by one Willett.

On March 2, 1943, Block filed a petition for mandamus, in which he asked that Kaplan, president of the
corporation, admit him to its office as secretary and treasurer and deliver to him all proper books, papers, etc. 

To that petition Kaplan demurred. This demurrer was overruled. Afterwards Kaplan and Willett both filed
answers, which in turn were stricken out, and thereupon mandamus issued. This writ seems to have been treated
as a proceeding in equity by the court below. In point of fact, it is a command issuing from a common law court
of competent jurisdiction. Board of Supervisors v. Combs, 160 Va. 487, 169 S.E. 589. Its action is based upon
these specific charter and by-law provisions:

Charter provisions:

"Any, matter concerning the administration and management of the affairs of the corporation, and the control or
regulation thereof, which in the due course of the transaction of the business and affairs of the corporation is
determined by the vote of the stockholders entitled to vote by stock, in person or by their proxy shall only be
determined by the unanimous vote of the outstanding stock entitled to vote, nor shall any act of the board of

Page 8 of 59
directors be binding upon the corporation, or the stockholders, unless ratified by the unanimous vote of all the
outstanding stock entitled to vote."

By-law provisions:

"The Class 'A ' common stock shall have the sole voting power, but no act of the stockholders shall be valid or
binding upon the corporation or the stockholders unless such Class 'A ' stock is voted unanimously, nor shall
any act of the board of directors be binding upon the corporation or upon. the stockholders unless the acts of the
board of directors are ratified by all the holders of the outstanding Class 'A ' common stock."

Appellants contend:

"1. The provisions of the charter and by-laws rendering ineffective the removal of the secretary and treasurer,
by the board of directors until ratified by the vote of all of the outstanding voting stock, were void as contrary to
the common  law, the statutes of Virginia and the public policy of the State.

"2. The board of directors possessed the power to remove the secretary and treasurer, and have validly exercised
it; but if only the stockholders possessed the power of removal, they have exercised it validly; and in either
event the propriety of such action was not reviewable by the court."

In Sterling v. Trust Co., 149 Va. 867, 141 S.E. 867, the court said:

"Section 3789 Virginia Code vests all the powers of the corporation in the president and directors as board of
directors, and provides that it may consist of three persons, except common carriers," and that "the board of
directors must direct the business and govern the policy and plans of the corporation." (Court's italics.)

It quoted with approval this from 2 Cook on Corporations (5th Ed.) section 712:

"They (directors) appoint the agents, direct the business, and govern the policy and plans of the corporation.
The directors elect the officers, and in this connection it may be added that at common law there is no limit to
the number of offices which may be held simultaneously by the same person, provided that neither of them is
incompatible with any other. They institute, prosecute, compromise or appeal suits at law and in equity which
the corporation brings or has brought against it."

In Booker v. Young, 12 Gratt. (53 Va.) 303, it was held that the directors of a banking corporation might elect its
president and that a majority of its directors might act, provided there was a quorum present.

Manson v. Curtis, 223 N.Y. 313, 119 N.E. 559, is a case in which all stockholders entered into an argument
which conferred upon the plaintiff, who was himself a stockholder, the exclusive management of the corporate
business and further agreed:

"That any president of the corporation to be thereafter elected should be only a nominal head as president, and
be  no more active in conducting the affairs of the corporation than the then president, Abel I. Culver, had been,
and that such president should not change, alter, molest, or interfere with the plaintiff's methods of managing
the corporate business affairs nor interfere with plaintiff as such general manager for said one year."

The court held this agreement to be unlawful and in the course of its opinion said:

[3, 4] "Directors are the exclusive, executive representatives of the corporation, and are charged with the
administration of its internal affairs and the management and use of its assets. Pollitz v. Wabash R. R. Co., 207
N.Y. 113, 100 N.E. 721. Clearly the law does not permit the stockholders to create a sterilized board of
directors. Corporations are the creatures of the state, and must comply with the exactions and regulations it
imposes."

In Fells v. Katz, 256 N.Y. 67, 175 N.E. 516, we had a corporation whose stock was held by five individuals.
They agreed to elect each of their number as an officer, to hold office for ten years. Fells was elected president
but was later discharged for misconduct. The court in the course of its opinion said:

"An agreement among stockholders whereby the directors are bereft of their power to discharge an unfaithful
employee of the corporation is illegal as against public policy."

In support of its conclusions, Manson v. Curtis, supra, is quoted as follows:

"Clearly the law does not permit the stockholders to create a sterilized board of directors."

Page 9 of 59
In Brindley v. Walker, 221 Pa. 287, 70 A. 794, 23 L.R.A. (N.S.) 1293, it was held that the secretary and
treasurer of a corporation were purely ministerial officers and might be discharged by the directors at their
pleasure.

These decided cases find support in the views of text-writers generally.

"The directors are not ordinary agents in the immediate control of the stockholders, but the powers of boards of
directors are, in a very important sense, original and undelegated;  the stockholders do not confer, nor can they
revoke, those powers or create a sterilized board of directors. Rather, the directors hold their 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." 13 Am. Jur. 907, sec. 947.

" 'It is of the essence of all elections that the will of the majority, properly expressed, shall govern.' And usually
the vote of a majority of those present at a meeting is necessary to elect officers or to decide any question.

"Provided a quorum is present, so that the meeting may be legally held, the vote of a majority of those present is
sufficient to elect directors or other officers, or to decide any question, unless there is some express provision to
the contrary, although they may not be a majority of all the stockholders or members, nor own a majority of the
stock. But a majority of the subscribed capital stock is sometimes required by the statute or charter to constitute
a valid election." 3 Fletcher on Corporations, Vol. 31 p. 2762, sec. 1647.

"The right of the majority to rule in the management of the affairs of a private corporation is fully established.
They may control the company's business, prescribe its general policy, make themselves its agents, and take
reasonable compensation for their services as agents." 2 Cook on Corporations, 6th Ed., p. 1642.

Under general law, directors are charged with the control and management of their corporation. They may
appoint officers and agents and may elect the president when the situation demands it; and as incident to this
power of appointment, they may discharge those appointed. Myers v. United States, 272 U.S. 52, 47 S.Ct. 21, 71
L.Ed. 160. And certainly they may discharge those who proved to be unfaithful.

This chartered power is subject to statute law and to the law of the land.

"The provisions of the general law with regard to corporations organized by virtue thereof are as binding
upon  it as they would be if written into a special charter; and all by-laws which are inconsistent with the charter
of a corporation or with the governing law are void. The principle is fundamental, but a few eases are cited
below which illustrate the strictness with which it is applied." Clark v. Wild, 85 Vt. 212, 81 A. 536, Ann. Cas.
1914C, 661.
Code, section 3789, declares that "there shall be for every corporation a president and directors, who shall be a
board to have all things done that are proper to be done by the corporation, except so far as may be otherwise
provided by any law of this State, or by any by-law or regulation of the stockholders. There shall also be a
Secretary, and there may be also one or more assistant secretaries." And that "the directors, and where it is not
otherwise provided by law, or by a by-law of the corporation, the president also, shall be elected by the
stockholders in meeting. The stockholders in meeting or other appointing power, as the case may be, may
remove any director or other officer elected or appointed by them, * * *."

In the charter is given the names of officers and directors, who, unless sooner changed by the stockholders,
were for the first year to manage the affairs of the corporation. This was a temporary arrangement to continue
until the corporation found itself.

Code, section 3853, provides:

"The business of every corporation organized under the provisions of this chapter shall be managed by a board
of directors of such number, not less than three, as may be prescribed by the certificate of incorporation or the
by-laws of the corporation. They shall hold office, unless sooner removed by the stockholders for the term fixed
by the certificate of incorporation or by-laws and until their successors are respectively elected and qualified,
and a majority of them shall constitute a quorum for the transaction of business."

Code, section 3777, provides that corporations may sue and be sued in any court of law or equity and shall also
have power "to appoint such officers and agents as the business  of the corporation shall, in its opinion, require,
and to fix their compensation."

These are among statutory instances of powers given to stockholders:

See. 3780. To amend charter — by vote of two-thirds of outstanding stock.

Sec. 3781. To increase or decrease the capital — by vote of two-thirds of outstanding stock.

Page 10 of 59
Sec. 3783. To create a bonded indebtedness — by vote of a majority of the outstanding stock.
Sec. 3810. To dissolve corporation — at the instance of a board of directors by a vote of two-thirds of the
outstanding stock.
Sec. 3820a. To dispose of entire assets — by vote of two-thirds of outstanding stock.
None of these can be exercised where unanimity of action is necessary.
Under the charter and by-laws no action of the board of directors which is not approved by the stockholders is
effective; and to make bad matters worse, it must not only be approved by them but must be unanimously
approved by them. For all practical purposes there might as well be no board at all. A private business
corporation without a board of directors is an impossible concept.

Corporations were invented to circumvent the unity required in partnerships. A partner who is unwilling to
consent may withdraw from the partnership and dissolve it. This distinction was pointed out by Chancellor Kent
as early as 1820, where he said in Livingstone v. Lynch, 4 Johns. Ch. 573, that the right of the majority to rule is
one of the chief differences between corporations and partnerships.

In construing corporate charters, by-laws and powers granted, their validity is determined not by what has been
done under them, but also by what may be done. A recalcitrant director who is also a stockholder may embalm
his corporation and hold it helpless; it can do none of those things noted as authorized by general law. It cannot
sue  and it cannot defend a suit. It cannot be dissolved, and it must remain forever in a state of suspended
animation. A treasurer, who chanced to own a share of stock, might pocket its assets and leave his associates
without civil remedy. These regulations, if followed out, violate both common and statute law and arc suicidal
of corporate existence. A board of directors whose every act must be endorsed by every stockholder is no board
at all.

Mr. Block contends that these limitations are lawful and on his behalf we are cited to Farmers' Loan, etc., Co.
v. Pierson, 222 N.Y.S. 532, where it is said:

"* * * If the stockholders by charter or by-laws deem any limitation desirable there seems never to have been
any reason for denying such right to them. But all doubt upon that score is set at rest by the provision of section
10, subdivision 2 of the General Corporation Law: 'The certificate of incorporation * * * may contain any
limitation * * * upon the powers of its directors and stockholders, which does not exempt them from the
performance of any obligation or the performance of any duty imposed by law.' "

To the same effect is Ripin v. United States Woven Label Co., 205 N.Y. 442, 98 N.E. 855. Various limitations
have been sustained.

No one contends that limitations may not be placed upon the power of directors, but they cannot be legislated
out of office.

Union Trust Co. v. Carter, 139 F. 717, placed certain limitations upon the power of stockholders to continue to
January 1, 1910, and in the meantime turned the management of the corporation over to its directors.
Stevens v. Davison, 18 Gratt. (59 Va.) 819, 98 Am. Dec. 692, was a case in which a board of directors was held
to have no authority to lease a railway, and it was held also that a by-law which authorized the directors to alter
existing by-laws did not authorize them to change limitations placed upon their own power. 

Statutes, charters, by-laws, contracts all must pass under this test: Is it lawful to do those things which they
purport to permit?

Right after right is violated. No suit can be brought without a dissenter's consent, nor can two-thirds of
outstanding stockholders elect to go out of business. Instances might be multiplied.
We have been referred to no authority directly in point and that doubtless because it had not heretofore occurred
to any one. To ask that directors be divested of all power and that without the consent of every stockholder no
one should have power to do anything is to ask too much.

Reversed and remanded. 

5. PNB vs CA
“Please refer to previous cases, repeated case nani siya”

2. CORPORATE OFFICERS AND AGENTS

6. Yu Chuck vs Kong Li Po
G.R. No. L-22450. December 3, 1924

Page 11 of 59
Facts:
CC Chen or TC Chen was appointed as general business manager of the newspaper, Kong Li Po. He
entered into a contract with the plaintiffs, Yu Chuck, Mack Yueng and Ding Moon, by which the latter bound
themselves to do the necessary printing for the newspaper for three years. Before the expiration of the contract
of employment , a new manager, Tan Tian Hong, was appointed; Chen left for China and the services of the
plaintiffs were discharged with no special reason. The plaintiffs then filed a complaint against Ko Ling Po. In its
defense, Ko Ling Po claimed that Chen had no authority to enter into contract of employment.

Issue:
WON Chen had authority to bind Ko Ling Po by a contract of employment.

Ruling:
No, the Supreme Court held that Chen had no authority to bind Ko Ling Po by the contract of
employment with the plaintiffs.

It is a general rule that the power to bind a corporation by contract rests in its board of directors or
trustees, but this power may either, expressly or implied, be delegated to other officials or agents of the
corporation. Chen, as general manager of the Kong Li Po, had implied authority to bind the latter by a
reasonable and usual contract of employment only. In the absence of express limitations, a manager has
authority to hire an employee for such a period as is customary or proper under the circumstances, such as for
the year, for the season, or for two seasons. But unless he is either expressly authorized, or held out as having
such authority, he cannot make a contract of employment for a long future period, such as for three years,
although the contract is not rendered invalid by the mere fact that the employment extends beyond the term of
the manager’s own employment. Since the contract entered into with the plaintiffs was unusually long and the
conditions are otherwise onerous to Ko Ling Po that the possibility of the corporation being thrown into
insolvency thereby is expressly contemplated in the same contract, such contract is not within the authority of
Chen and therefore invalid.

7. THE BOARD OF LIQUIDATORS vs. HEIRS OF MAXIMO M. KALAW

14 Aug 1967 ; Sanchez, J.

Parties:
1.Agent – Kalaw, General Manager (GM) of NACOCO
2.Principal – NACOCO
3.3rd Party – Louis Dreyfus & Go. (copra buyer)

Nature: review of lower court decision

Facts:
National Coconut Corp. (NACOCO) used to be an NGO for the coconut industry. Following RA 5,
NACOCO gained the authority to enter into the business of buying-and-selling copra to stabilize the prices of
copra.

From July to October 1947, NACOCO, through its GM Kalaw, entered into 9 contracts of sale of copra,
including the abovementioned third party. The aggregate amount of the copra was 16,500 tons of copra, sold for
$145 to $200 per ton (2.3 to 3M USD).

Unfortunately for NACOCO, the Philippines suffered four (4) typhoons in 1947, adversely affecting our
coconut farmers. By Dec 1947, GM Kalaw already foresaw that NACOCO could not meet its obligations;
hence, he approached NACOCO's Board to discuss with them the 9 contracts of sale of copra. The Board,
however, did not immediately act upon said contracts. It was only in Jan 30, 1948, after President Roxas
recognized Kalaw's efforts, that the Board approved the said contracts.

The unsatisfied buyers threatened suit, but NACOCO was able to reach a settlement with them, except
for one, LOUIS DREYFUS & GO (LDG). The suit was one for specific performance. The parties, however,
were able to reach a settlement, wherein NACOCO paid 1.3M to LDG.

NACOCO subsequently underwent liquidation proceedings pursuant to EO 372, headed by the Board of
Liquidators. This Board, in turn, filed a recovery of money suit against GM Kalaw and directors Juan Bocar,
Casimiro Garcia and Leonor Moll, claiming that the defendants were guilty of negligence with bad faith and
breach of confidence (under then Article 1902, now article 2176 of the Civil Code, i.e. quasi-delict), having
entered into the aforementioned contracts, to the detriment of NACOCO.

Arguments:

Page 12 of 59
NACOCO: Contracts need to be approved by the Board. In 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.

Defenses of Kalaw et al.:

1. Apparent Authority was given to Kalaw
2. Ratification of the contracts

RTC: dismissed complaint

Issue:
WON Kalaw validly entered into said contracts in behalf of NACOCO

Held:
Yes

Ratio: 1) Apparent Authority and 2) Ratification

On the Nature of Kalaw's position as the GM

A rule that has gained acceptance through the years is that a corporate officer "intrusted with the general
management and control of its business, has implied authority to make any contract or do any other act which is
necessary or appropriate to the conduct of the ordinary business of the corporation. As such officer, "he may,
without any special authority from the Board of Directors perform all acts of an ordinary nature, which by usage
or necessity are incident to his office, and may bind the corporation by contracts in matters arising in the usual
course of business.

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.

NACOCO clothed Kalaw with Apparent Authority to enter into said contracts
Basis 1: From 1946 to 1947, there were 60 other contracts of copra sale entered into by Kalaw without the
Board's approval. In fact, by December 1946, Kalaw even received an award or special bonus for introducing
income to NACOCO. There was even a letter from the Board requesting Kalaw to deliver "all copra contracts
signed by him", meaning said contracts of sale were already consummated WITHOUT the Board's approval.

Basis 2: The Brokerage Fee agreements were passed upon by the Board. These agreements were in payment for
the aforementioned copra sales, wherein Smith Bell and Co. served as the broker. Again, these broker fees were
paid AFTER the consummation of the copra sales.

Basis 3: Minutes of the Board Meeting, dated July 1947, reveal that it has become practice within NACOCO to
"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."

Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general
practice, custom, and policy, the general manager may bind the company without formal authorization of the
board of directors. In varying language, existence of such authority is established, by proof of the course of
business, the usage and practices of the company and by the knowledge which the board of directors has, or
must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation.

Contracts were ratified

Even assuming that Kalaw did not have the authority to enter into said contracts, the Board RATIFIED said
contracts on January 30, 1948, through a Board Resolution. This ratification retroacts to the time when the
contracts were perfected, equivalent to a grant of prior authority.

No Bad Faith
No BF could therefore be attributed to Kalaw et al., for, through the Board's own actions, they were led to
believe that they had the authority to enter into said contracts. If any, NACOCO is the one in bad faith. The
Board 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.

Page 13 of 59
8. ZAMBOANGA TRANSPORTATION COMPANY, INC., plaintiff-appellee, 
vs. THE BACHRACH MOTOR CO., INC., defendant-appellant.
G.R. No. L-27694             October 24, 1928

FACTS:
Zamboanga Transportation Co., Inc. (Zamboanga), is managed by a board of directors composed of five
stockholders; Bachrach Motor Co. is a corporation engaged in selling automobiles and their parts. For 10 years,
the two have been dealing with each other. Zamboanga buys trucks, automobiles, repair and accessory parts for
use in the business of transportation in which it is engaged. Payments were made by installments, and
Zamboanga executed several chattel mortgages to secure it. Jose Erquiaga (Erquiaga) was appointed as general
manager in 1924,elected president, and acted as an auditor in 1925. He is also one of the majority stockholders
and has been its attorney and legal adviser.

Zamboanga lacked funds and contacted Mons. Jose Clos, Bishop of Zamboanga and a principal stock
holder of the company, for loans of money. Since, he was leaving for Rome in February 1925 and could not
continue to loan money to Zamboanga, additional agreements were entered between Mons. Clos and the
Bachrach Motor Co., Inc. A new chattel mortgage was executed on by Zamboanga represented by President
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 to Mons. Jose Clos Bishop of
Zamboanga, by the virtue of the deed. President Erquiaga submitted the mortgage deed to the Board of
directors. Upon returning to Zamboanga from Manila, He discussed the mortgage with two board of directors,
who expressed satisfaction. Zamboanga also partially complied with the mortgage contract. Zamboanga paid
Bachrach two times. Bachrach sent a letter cancelling the 2 former chattel mortgage. Bachrach told Erguiaga to
register the cancellation. Erquiaga replied by stating that the last mortgage was not approved by the Board of
Directors. Jose Erquiaga went to E.M. Bachman, president of Bachrach Motor co., to secure his consent to sell
the trucks that were mortgaged. He said this will be used to pay the unpaid debt. Bachrach denied. Erquiaga and
Zamboaga later on discovered that the last mortgage was registered in the register of deed. Zamboanga, then
filed for annulment of the last mortgage because it was registered without their consent. Bachrach, filed a
complaint for Zamboanga to obtain possession of all the chattels. Bchrach won and sold the chattel in a public
auction where they were held the highest bidder.

ISSUE:
W/N the chattel mortgage executed by the president and general manager of the plaintiff corporation, the
Zamboanga Transportation Co., Inc., is valid

RULING:
YES.

While it is true that said last chattel mortgage contract was not approved by the board of directors of the
Zamboanga Transportation 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 Zamboanga Transportation Co., Inc. In truth and in fact
Jose Erquiaga, in his multiple capacity, was and is the factotum of the corporation and may be said to be the
corporation itself.

"Halley First National Bank vs. G. V. B. Min. Co.": Where the chief officers of a corporation are in
reality its owners, holding nearly all of its stock, and are permitted to manage the business by the directors, who
are only interested nominally or to a small extent, and are controlled entirely by the officers, the acts of such
officers are binding on the corporation, which cannot escape liability as to third persons dealing with it in good
faith on the pretense that such acts were ultra vires.

When the president of a corporation, who is one of the principal stockholders and at the same time its
general manager, auditor, attorney or legal adviser, is empowered by its by-laws to enter into chattel mortgage
contracts, subject to the approval of the board of directors, and enters into such contracts with the tacit approval
of two other members of the board of directors, one of whom is also a principal shareholder, both of whom,
together with the president, form a majority, and said corporation takes advantage of the benefits afforded by
said contract, such acts are equivalent to an implied ratification of said contract by the board of directors and
binds the corporation even if not formally approved by said board of directors as required by the by-laws of the
aforesaid corporation.

Page 14 of 59
9. Acuna v. Batac Producers
G.R. No. L-20333             June 30, 1967

Facts:
Plaintiff Emiliano Acuña filed a complaint against the defendant Batac Producers Cooperative
Marketing Association, Inc., (Batac Procoma). The complaint alleged that on or about May 5, 1962 it was
tentatively agreed upon between plaintiff and defendant Leon Q. Verano, as Manager of the defendant Batac
Procoma that the former would seek and obtain the sum of not less, than P20,000.00 to be advanced to the
defendant Batac Procoma to be utilized by it as additional funds for its Virginia tobacco buying operations
during the current redrying season. Emiliano Acuña would be constituted as the corporation's representative in
Manila to assist in handling and facilitating its continuous shipments of tobacco and their delivery to the
redrying plants and in speeding up the prompt payment and collection of all amounts due to the corporation for
such shipments. For his services plaintiff Emiliano Acuña would be paid a remuneration at the rate of P0.50 per
kilo of tobacco. The said tentative agreement was favorably received by the Board of Directors of the defendant
Batac Procoma and unanimously authorized defendant Leon Q. Verano, by a formal resolution, to execute any
agreement with any person or entity, on behalf of the corporation, and defendant Leon Q. Verano was
acceptable to the corporation, except that the remuneration for the plaintiff Emiliano Acuña’s services would
be P0.30 per kilo of tobacco. The formal "Agreement" was executed between plaintiff Emiliano Acuña and
defendant Leon Q. Verano, as Manager of the defendant corporation, duly authorized by its Board of Directors
for such purpose. On the same date, plaintiff gave Emiliano Acuña turned over to the defendant corporation,
thru its treasurer, the sum of P20,000.00. From then on, plaintiff Emiliano Acuña diligently and religiously kept
his part of the "Agreement;" that plaintiff even furnished the defendant corporation, upon request of its Manager
Leon Q. Verano three thousand (3,000) sacks which it utilized in the shipment of its tobacco costing P6,000.00
and that plaintiff Emiliano Acuña had personally advanced out of his own personal funds the total sum of
P5,000.00 with the full knowledge, acquiescence and consent of all the individual defendants.

After the defendant corporation was enabled to replenish its funds with continuous collections from the
PVTA for tobacco delivered due to the help, assistance and intervention of plaintiff Emiliano Acuña, for which
the said corporation collected from the PVTA the total sum of P381,495.00, the "Agreement" was disapproved
by its Board of Directors. Upon the foregoing allegations plaintiff filed a complaint before the court.

The lower court ordered the issuance of a writ of preliminary attachment against the properties of the
defendants and on the following day, after the plaintiff had posted the required bond, the writ was accordingly
issued by the Clerk of Court. The defendants filed a motion to dismiss the complaint on the ground that it stated
no cause of action and to discharge the preliminary attachment on the ground that it was improperly or
irregularly issued. In support of the motion defendants alleged that the contract for services was never perfected
because it was not approved or ratified but was instead disapproved by the Board of Directors of defendant
Batac Procoma, Inc., and that on the basis of plaintiff's pleadings the contract is void and unenforceable.
Defendants further denied the fact that plaintiff had performed his part of the contract, alleging that he had not
in any manner intervened in the delivery and payment of tobacco pertaining to the defendant corporation. The
trial court sustained defendants' motion and states that the complaint states no cause of action and that contract
in question is void ab initio.

Issue:
1. Whether or not the case at bar should be dismissed due to no cause of action?
2. Whether or not the Board of Directors did not allow the contract between them and petitioner Emilio
Acuña.

Held:
1. No, the case at bar should not be dismissed due to no case of action?
2. Yes, the Board of Directors allows the contract between them and petitioner Emilio Acuña?

Ratio:
1. It is a settled principle that when a motion to dismiss is based on the ground that the complaint does not
state a cause of action, the averments in the complaint are deemed hypothetically admitted and the inquiry is
limited to whether or not they make out a case on which relief can be granted. If said motion assails directly or
indirectly the veracity of the allegations, it is improper to grant the motion upon the assumption that the
averments therein are true and those of the complaint are not. The sufficiency of the motion should be tested on
the strength of the allegations of facts contained in the complaint, and no other.
2.
3. A perusal of the complaint reveals that it contains sufficient allegations indicating such approval or at
least subsequent ratification. On the first point we note the following averments, the plaintiff met with each and
all of the individual defendants, who constituted the entire Board of Directors and discussed with them
extensively the tentative agreement and he was made to understand that it was acceptable to them, except as to
plaintiff's remuneration. It was finally agreed between plaintiff and all said Directors that his remuneration
would be P0.30 per kilo of tobacco. After the agreement was formally executed, he was assured by said

Page 15 of 59
Directors that there would be no need of formal approval by the Board. It should be noted in this connection
that although the contract required such approval it did not specify just in what manner the same should be
given.
4.
On the question of ratification the complaint alleges that plaintiff delivered to the defendant corporation the
sum of P20,000.00 as called for in the contract. He rendered the services by furnishing 3,000 sacks at a cost of
P6,000.00 and advanced to it the further sum of P5,000.00 and that he did all of these things with the full
knowledge, acquiescence and consent of each and all of the individual defendants who constitute the Board of
Directors of the defendant corporation. There is abundant authority in support of the proposition that ratification
may be express or implied, and that implied ratification may take diverse forms, such as by silence or
acquiescence, by acts showing approval or adoption of the contract, or by acceptance and retention of benefits
flowing therefrom.

3. BOARD COMMITTEES

10. Hayes vs. Canada, Atlantic & Plant S.S. Co., Limited (1910)
Putnam, Circuit Judge

The corporation sued Hayes, its President and director, for recovery of the salary and other payment/s
paid to the latter arguing that the salary was not legally authorized/established. The salary and payment was
authorized by the executive committee in its meetings. The following matters were also established during the
meetings: the Exec. Comm. (1) removed the Treasurer and appointed a new one; (2) fixed the annual salary of
the members of the Executive Committee; (3) amended the by-laws by giving the President the sole authority to
call a stockholder's meeting and a board of directors meeting; and (4) amended the composition of the
Executive Committee by limiting it to just 2 persons. The Court ruled that these actions were not valid because
if they were, it would put the corporation in a situation wherein only two men, acting in their own pecuniary
interests, would have absorbed the powers of the entire corporation. “Full powers” of the Executive Committee,
as provided for in their by-laws, is not absolute.

DOCTRINE
“Full powers” is not absolute. It is to be understood as limited to those relating to ordinary business transactions
of the corporation.

FACTS
1. Canada, Altlantic & Plant SS Co., Ltd. is a Canadian corporation, and Hayes was a director and the
president thereof.
2. The corporation sued Hayes for the recovery of the money Hayes got as his salary on the ground that no
salary was legally established, and for $506.33 paid to Hayes for rent of a room in Boston, (the purpose of
which is not stated).
3. Subject of this case is the propriety of two executive meetings and the matters discussed and established
therein:
a. Removed the treasurer (Perry) and appointed a new one (Gale);
b. Directed the payment of $506.33 and of a salary to Hayes, even though his salary was never fixed or
authorized;
c. Fixed an annual salary of $1,854.20 for Gale as managing director;
d. Amended the by-laws on the following matters:
i. Special meetings of shareholders can only be called by the Pres;
ii. Meetings of directors can only be called by the Pres; and
iii. Executive Committee is to consist of only one director aside from the Pres.
4. The notice for the meeting was allegedly done in the following manner: two members of the committee
came into the office of the third and said: ‘We are going to have a meeting right away, and the meeting will
come to order. ‘
5. The Circuit Court ruled in favor of the corporation thus this petition by Hayes.
a. Hayes argues that the actions in the meetings were valid and within the authority of the Executive
Committee as provided in Sec. 8 of their by-laws:
i. “The directors shall annually appoint from among themselves two directors, who, with the
president, shall form an executive committee, and said committee shall have full powers of
the board of directors when said board is not in session.”
b. Hayes interprets “full powers” as on with no limitation whatsoever, making their actions in the
meetings valid.

ISSUE with HOLDING

Page 16 of 59
1. W/N the actions were valid, thus barring recovery of the corp. from Hayes – NO
a. All the proceedings in the meetings were in the pecuniary interests of Hayes and Gale, and they were
the only persons who were voting in relation thereto.
b. When these two undertook to amend the by-laws, they proceeded in such a way that, if their actions
had been effectual, the two, acting in their own pecuniary interests, would have absorbed the
entire powers of the corporation.
c. In the absence of any statute, by-law, or practice of a corporation fixing the time or method of
calling meetings of the executive committee or board of directors, a reasonable notice is necessary
to the validity of such meetings.
i. The notice given in this case did not comply with this.
d. It is also intolerable to maintain that “full powers” in the provision for the appointment of the by-
laws is absolute. It is to be understood as restricted to ordinary business transactions of the
corporation.
e. Neither the President nor any director is entitled to compensation for services without some
special provision of statute, or some action of the stockholders or other directors.

DISPOSITIVE PORTION
The judgment of the Circuit Court is affirmed, with interest.

4. STOCKHOLDERS OR MEMBERS

(1) Requirements of stockholders’ or members’ meeting and of voting Notice

11. Board of Directors v Tan Et. Al

FACTS:
 On 17 Jan. 1957 John de Castillo et al., commenced a suit in the CFI of Manila to declare null and
void the election of the members of the board of directors of the SMB Workers Savings and Loan
Association, Inc, and of the members of the Election Committee for the year 1957 held on 11 and
12 of January
 They also asked to compel the board of directors of the association to call for and hold another
election in accordance with its constitution and by- laws and the Corporation Law
 As well as to restrain the defendants who had been illegally elected as members of the board of
directors from exercising the functions of their office
 To order the defendants to pay the plaintiffs attorney's fees and costs of the suit, and to grant them
other just and equitable relief
 CFI held that the election held on 11 and 12 of January was null and void, and ordered the
defendants to call and hold another election in accordance with its constitution, by-laws, and the
Corporation Law
 On Mar. 26 of the same year, the election committee composed of Quintin Tesalona, Manuel
Dumaup and José Capinio Santos set the meeting of the members of the association for 28 March at
5:30 o'clock in the afternoon to elect the new members of the board of directors
 The following day, the plaintiffs filed an ex-parte motion alleging that the election committee was
composed of the same people who conducted the Jan 11 & 12 election which was declared null and
void
 They also alleged that the notice was only sent out 2 days before the date of the election and
this was in violation of their by-laws which provided that notice be sent out 5 days before the
election
 On the same day, the Court rendered judgment calling for the election to be cancelled and
appointing Mr. Candido C. Viernes as representative of the Court and to act as Chairman, and one
representative each from the plaintiffs and defendants, as members

ISSUE(S):
 Did the 2-day notice for the Mar. 28 election violate the by-laws of the corporation

HELD:
 YES. The 2-day notice did violate the by-laws of the corporation, which requires notice to be sent
out 5 days before the election.

RATIO:
Page 17 of 59
  The court held that the notice sent out on Mar. 26 was in violation of the by-laws.
 Section 3, article III, of the constitution and by-laws of the association provides:
o Notice of the time and place of holding of any annual meeting, or any special meeting, of the
members, shall be given either by posting the same in a postage prepaid envelope, addressed to
each member on 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 in person, at least five (5) days
before the date set for such meeting. * * * In lieu of addressing or serving personal notices to
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.

The notice was sent out only 2 days before the date of the election which was a direct violation of the 5 day
notice rule set out in the corporations by-laws.

12. Logan Johnston et.al v. Louis Johnston et.a.l

[G.R. No. DATE] 61 O.G. No.39, 6160 (1965)

FACTS:
 1. Logan Johnston et.al.(Logan) and Louis Johnston et.al. (Louis) are shareholders of a family stock
corporation known as the Johnston Lumber Co., Inc.According to Article II Sec.1 of their by-laws, the
annual meeting of stock holders shall be held in the principal office of the corporation at Zamboanga during
April.Pursuant to the said provision, the annual stockholders meeting for 1963 was scheduled for April
3,1963. The purpose of the meeting was to elect a new set of directors who would choose its new officers.
 April 2, 1963 meeting

 2.When the meeting was called to order by Louis, who was then presiding, requested the corporate
secretary to determine if there existed a quorum. When Logan was called, owner of 305 shares of the total
2,462 shares of the corporation, presented proxies by his mother, Felisa Johnston (owns 320 shares), his
wife Irene Johnston (owns 5 shares) and the duly endorsed certificates of stock of Josephine Solis (305
shares).

 3.Logan requested that Solis' shares be registered and listed in the books of the corporation for voting
purposes. Louis denied his request stating that Logan would not be allowed to vote the shares he acquired
from Solis. Prior to denial of Logan's request, he (Logan) immediately sent for the original owners (heirs of
the late Albert Johnston) to vote in his favor. Louis did not allow Logan to vote the 307 shares of the late
Albert Johnston in his capacity as Administator of the intestate estate of the deceased on the ground that the
administration case had already been terminated. However, Logan contended that the case was not closed
and that his vote is considerd as a guardian of the minor heirs.

 4. When Louis denied his request again, Logan, who now represents 1,242 of the 2,462 shares and his wife,
walked out of the meeting room. However, Louis et.al. remained and carried on with the meeting and
elected themselves directors and officers of the corporation. Logan et.al. did not recognize it because it was
held by minority stockholders.
 On May 29,1963, Logan wrote a letter to the President of the corporation, that a meeting of stockholders be
called pursuant to the provision of its by-laws, "to take up such matter as should have been taken up during
the regular meeting." Louis issued a notice of a special stockholders meeting at the Logan's instance on the
basis of his claim that he represents the majority stocks of the corporation.
 July 20,1963 meeting

 5. During the meeting, Logan moved for the election of a new board of directors claiming that there was no
valid meeting last April 2 because there was no quorum. Louis overruled Logan's motion when Irene duly
seconded it.

 6. Logan then and there nominated his own set of directors, which Louis overruled again.After the votes
were casted, the new board of directors were Logan,Louis, Felisa and Elizabeth Araneta. Immediately after
the election , Logan invited Louis and Elizabeth to attend the board meeting but the latter declined saying
that they do not recognized that body.

 7.Logan et.al. convened as a board and elected a new set of officers.After the election, Logan et.al.made a
demand on Louis et.al. for the turnover of the records and functions of their respective positions but was
again denied by the latter.

Page 18 of 59
Hence, this petition for quo warranto.

ISSUE(S):
1.WON Louis Johnston et.al. were validly elected in the meeting of April 2,1963.
2. WON Logan Johnstin et.al. were duly elected in the meeting of July 20, 1963.

HELD:
1. The CA held that Louis Johnston et.al. were not validly elected and the said meeting was null and void.
2. The CA ruled in favor Logan Johnston et.al. were duly elected and the meeting was valid.

RATIO:
 On the issue of the April 2,1963 meeting
 1. The stockholders who were left behind when Logan et.al. walked out and who carried on with the
meeting reprsented the minorityand did not constitute a quorum as stated in Section 4 of the
corporation's by-laws stating that: "A quorum at any meeting of the stockholders shall consist of a
majority of the voting stock of the company represented in person or by proxy..."
 2. Hence, it is clear that they could not have validly transacted further business much less have elected a
new set of board of directors.
 3. on the matter of Logan's withdrawal did not not nullify the proceedings
 -It is to be noted that even the authority cited by Louis et.al. implies that a stockholder can, for
justifiable reason, break the quorum by withdrawing from the meeting. In the case, Logan withdrew
from the meeting because Louis persistently and without reason overruled him on his request vote the
shares of the Solis family and the minor children of Albert Johnston.
 -That the request for the registration of the stocks of Solis was made before the shareholders met to elect
the directors and officers of the corporation. And the CFI of Zamboanga declared that Logan was still
the administrator of Albert Johnston's estate.
 -Hence, Louis etl.al.'s contention that Logan's withdrawal did not produced the effect of nullifying all
the proceedings cannot be sustained.
 On the issue of the July 20,1963 meeting
 1.The CA held that it as properyly convened because both parties were present.
 2. It must be remembered that Logan held a majority of the stocks when they cast their votes in favor of
their nominees (see no.4 of the facts). And that Louis' inaction when they declined to participate in the
board meeting did not have the effect of invalidating the election.
3. It is admitted that this meeting was called for by Logan in lieu of the last meeting on April 2 and notices were
issued to all stockholders regarding such matter. Besides, all the stockholders were present either in person or
by proxy during the meeting and whatever defect there was in the notice was cured by their presence and
acquiescense.

CASE LAW/ DOCTRINE:

1. It is the essence of all elections that the will of the majority, properly expressed, shall govern. By the weight
of authority, a majority of the votes actually cast will decide, although some of the stockholders or members
who are present may refuse to vote, and, therefore, the majority of the votes cast may be less that a majority of
the persons present or stock represented, this on the theory that those 'who have majority of the stock must be be
held to acquiesce in the result of the votes actually cast.' Nor may the manner the votes were cast be questioned
for "In the absence of mandatory provision to the contrary in the charter of by-laws, the voting at a corporate
meeting may either by ballot, viva voce, or but show of bands."

2.As well said, meetings shall be conducted with fairness and good faith towards all who are entitled to take
part,and in such a way as to enable them to express their vote upon questions coming before the meeting.

3. A notice stating that there would be considered at a special meeting all questions relating to the property,
management and business policy of the corporation and that such action as might be deemed expedient and
necessary in connection therewith would be taken, was sufficient notice that such consideration might involve a
change of officers and directors.

(2) When no meeting called

13. PONCE vs ENCARNACION

FACTS:
Daguhoy Enterprises, Inc., was a duly registered corporation. On April 1951 a meeting was called where
the voluntary dissolution of the corporation and the appointment of Potenciano Gapol as receiver were agreed
upon. Instead of filing a petiton for voluntary dissolution however, the respondent Potenciano Gapol, who is the
largest stockholder of the corporation, changed his mind and filed a complaint to compel the petitioners to
Page 19 of 59
render an accounting of the funds and assets of the corporation, to reimburse it, jointly and severally 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 (the president of the company) to his own use
and benefit. Gapol filed an action with the TC and prayed for an order directing him to a call a meeting of the
stockholders of the corporation and to preside at such meeting in accordance with section 26 of the Corporation
law.

TC granted their petition and gave an order 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 Dagunoy
Enterprises, Inc. and to preside at such meeting by giving proper notice to the stockholders, as required by law
or 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.

The subsequent motions to set aside the order was denied. Thus this is a petition for a writ of certiorari.

ISSUE:
Whether the TC can validly call for a stockholder’s meeting under the Corporation Code

HELD:
YES it can. 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.

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. 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

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. Petitioners claim they were deprived of due process, but 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.

5. INSTANCES WHERE STOCKHOLDERS’ OR MEMBERS’ ACTION IS NECESSARY

(1) Election of directors or trustees

14. 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.

TOPIC: Election of Directors - a. Qualifications of Directors

FACTS:
 Detective & Protective Bureau, Inc. (petitioner) was a corporation duly organized and existing under the
laws of the Philippines.
 Faustino Alberto (private respondent) was managing director of petitioner corporation from 1952 until
Jan. 14, 1946.
 In June 1963, Alberto 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.
 Due to this incident, the stockholders, in a meeting, removed Alberto as managing director and elected
Jose de la Rosa in his stead.
 However, Alberto refused to vacate his office and to deliver the assets and books to de la Rosa and
continued to perform unauthorized acts for and in behalf of the corporation.

Page 20 of 59
  Petitioner corporation contended that 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 has been elected managing director by the Board to succeed him.
 This assertion, however, was disputed by respondent Alberto who stated that de la Rosa could not be
elected managing director because he did not own any stock in the corporation.

ISSUE:
WON Alberto could be compelled to vacate his office and cede the same to de la Rosa? NO!

HELD:
The Court ruled that there is in no showing in the record the 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 Sec. 30 of the Corp. code, which in part provides: “Every Director must own in his own
right at least one share of the capital stock corporation of which he is a Director, which stock shall stand in his
name on the books of the corporation.”

If the managing director-elect (de la Rosa) was not qualified to become managing director, respondent
Fausto Alberto could not be compelled to vacate his office and cede the same to the de la Rosa because the by-
laws of the corporation provides in Art. IV, Sec. 1 that ―Directors shall serve until the election and
qualification of their duly qualified successor.‖

15. Gokongwei vs. SEC Case Digest

Gokongwei vs. Securities and Exchange Commission
[GR L-45911, 11 April 1979]

Facts: 
[SEC Case 1375] On 22 October 1976, John Gokongwei Jr., as stockholder of 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. As a first cause of action, Gokongwei alleged that on 18 September
1976, Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Buñao, Walthrode B.
Conde, Miguel Ortigas, and Antonio Prieto amended by bylaws of the corporation, basing their authority to do
so on a resolution of the stockholders adopted on 13 March 1961, when the outstanding capital stock of the
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
30,127,043, 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, Gokongwei 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, Gokongwei averred that the
membership of the Board of Directors had changed since the authority was given in 1961, there being 6 new
directors. As a fourth cause of action, it was claimed that prior to the questioned amendment, Gokogwei had all
the qualifications to be a director of the corporation, being a substantial stockholder thereof; that as a
stockholder, Gokongwei 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, Soriano, et. al. purposely provided for
Gokongwei's disqualification and deprived him of his vested right as afore-mentioned, hence the amended by-
laws are null and void. 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 the corporation, which was avowed 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 by-laws 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 Soriano, et. al. be made to pay damages, in specified
Page 21 of 59
amounts, to Gokongwei. On 28 October 1976, in connection with the same case, Gokongwei filed with the
Securities and Exchange Commission an "Urgent Motion for Production and Inspection of Documents",
alleging that the Secretary of the corporation refused to allow him to inspect its records despite request made by
Gokongwei for production of certain documents enumerated in the request, and that the 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. 

The motion was opposed by Soriano, et. al. The Corporation, Soriano, et. al. filed their answer, and their
opposition to the petition, respectively. Meanwhile, on 10 December 1976, while the petition was yet to be
heard, the 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 10 February 1977. This prompted
Gokongwei to ask the SEC 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, Soriano, et. al. admitted
the invalidity of the amendments of 18 September 1976. The motion for summary judgment was opposed by
Soriano, et. al. Pending action on the motion, Gokongwei filed an "Urgent Motion for the Issuance of a
Temporary Restraining Order", praying that pending the determination of Gokongwei's application for the
issuance of a preliminary injunction and or Gokongwei's motion for summary judgment, a temporary restraining
order be issued, restraining Soriano, et. al. from holding the special stockholders' meeting as scheduled. This
motion was duly opposed by Soriano, et. al. On 10 February 1977, Cremation issued an order denying the
motion for issuance of temporary restraining order. After receipt of the order of denial, Soriano, et. al.
conducted the special stockholders' meeting wherein the amendments to the by-laws were ratified. On 14
February 1977, Gokongwei filed a consolidated motion for contempt and for nullification of the special
stockholders' meeting. A motion for reconsideration of the order denying Gokongwei's motion for summary
judgment was filed by Gokongwei before the SEC on 10 March 1977. 

[SEC Case 1423] Gokongwei alleged that, having discovered that the 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 SEC, on 20 January 1977, a petition seeking to
have Andres M. Soriano, Jr. and Jose M. Soriano, as well as the corporation declared guilty of such violation,
and ordered to account for such investments and to answer for damages. On 4 February 1977, motions to
dismiss were filed by Soriano, et. al., to which a consolidated motion to strike and to declare Soriano, et. al. in
default and an opposition ad abundantiorem cautelam were filed by Gokongwei. Despite the fact that said
motions were filed as early as 4 February 1977, the Commission acted thereon only on 25 April 1977, when it
denied Soriano, et. al.'s motions 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. Soriano, et. al. issued notices of the annual stockholders'
meeting, including in the Agenda thereof, the "reaffirmation of the authorization to the Board of Directors by
the stockholders at the meeting on 20 March 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 28 April 1977, Gokongwei filed
with the SEC an urgent motion for the issuance of a writ of preliminary injunction to restrain Soriano, et. al.
from taking up Item 6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for
hearing on 3 May 1977, the date set for the second hearing of the case on the merits. The SEC, 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, Gokongwei filed an
urgent manifestation on 3 May 1977, but this notwithstanding, no action has been taken up to the date of the
filing of the instant petition. 

Gokongwei filed a petition for petition for certiorari, mandamus and injunction, with prayer for issuance
of writ of preliminary injunction, with the Supreme Court, alleging that there appears a deliberate and concerted
inability on the part of the SEC to act. 

Issue:
1. Whether the corporation has the power to provide for the (additional) qualifications of its directors. 
2. Whether the disqualification of a competitor from being elected to the Board of Directors is a reasonable
exercise of corporate authority. 
3. Whether the SEC gravely abused its discretion in denying Gokongwei's request for an examination of
the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation. 
4. Whether the SEC gravely abused its discretion in allowing the stockholders of San Miguel Corporation
to ratify the investment of corporate funds in a foreign corporation. 

Held: 

1. It is recognized by all authorities that "every corporation has the inherent power to adopt by-laws 'for its
internal government, and to regulate the conduct and prescribe the rights and duties of its members towards
itself and among themselves in reference to the management of its affairs.'" In this jurisdiction under section 21
of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications, duties and compensation

Page 22 of 59
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." Any person "who buys stock in a
corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that
he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of
incorporation and lawfully enacted by-laws and not forbidden by law." To this extent, therefore, the stockholder
may be considered to have "parted with his personal right or privilege to regulate the disposition of his property
which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his
fellow incorporators. It can not 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."
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
dissenting 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 Gokongwei 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. 

2. 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." "The ordinary
trust relationship of directors of a corporation and stockholders 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." 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 through 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. The doctrine of "corporate
opportunity" 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. 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. The offer and
assurance of Gokongwei 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 involved. Apart from the
impractical results that would ensue from such arrangement, it would be inconsistent with Gokongwei'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. 

3. 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

Page 23 of 59
equitable ownership, a beneficial ownership, or a quasi-ownership. 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. 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. 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." 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. 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.
herein, considering that the foreign subsidiary is wholly owned by 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 owned subsidiary which are in the corporation's possession and control. 

4. 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. As stated by the
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. 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. 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 purported
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.
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 the corporation submitted the assailed investment to the
stockholders for ratification at the annual meeting of 10 May 1977 cannot be construed as an admission that the
corporation had committed an ultra vires act, considering the common practice of corporations of periodically
submitting for the ratification of their stockholders the acts of their directors, officers and managers.

(2) Removal of directors

16. 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.

DOCTRINE: CONTROL AND MANAGEMENT OF CORPORATION

Removal of Directors: 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)

Page 24 of 59
SUMMARY:
Representatives of the voting trust, holding majority of the shares, calls for a shareholders meeting with
the purpose of electing the members of the board of directors notwithstanding the fact that all the positions in
the board are occupied by the members elected in a previous shareholders meeting. A civil action was filed to
enjoin such meeting and the petitioners filed a certiorari proceeding for the issuance of the CFI judge of a
restraining order to enjoin the meeting. SC held that the restraining order was valid because in order to remove
the current members of the BOD, a vote of at least 2/3 of the shareholders is necessary.

FACTS:
Binalbagan Estate, Inc. (BEI), 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 26 Feb 1926, BEI held its General Annual Shareholders Meeting 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.

Heilbronn having the control of the majority of the shares (the case didn’t say how that happened –
maybe he owned several shares plus the shares of the voting trust he was representing to make up the majority –
it’s just an inference) 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.

The current members of the voting trust (petitioners) wanted to oust the current officers/directors of the
corporation, even though it was the previous representative of the voting trust (Heilbronn) who elected them.
Thus, 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."

Respondents Coruna and Ledesma, as director and shareholder of the corporation respectively, filed a
civil action before CFI to enjoin the meeting to be held on Aug. 16, 1926. Respondent judge De La Rosa issued
a restraining order or preliminary injunction to enjoin the meeting which gave rise to the present certiorari
proceeding filed by petitioners.

ISSUE:
Whether or not it was within the judicial powers of Judge De La Rosa to issue the restraining order or
preliminary injunction? (YES)

MAIN ISSUE: W/N the petitioners can hold another shareholders meeting for the election of board of directors
even though no vacancies have occurred to justify such election? (NO)

RULING:
Vacancies in the Board of Directors occur either due to death, resignation, removal, or otherwise. The
law requires that for a director to be removed, a vote of at least two-thirds of the subscribed capital stock is

Page 25 of 59
necessary. In this case, the voting trust only has the majority of the shares. Majority is not equivalent to two-
thirds.

It must be noted that there are no vacancies in the board of directors. Therefore, a call for an election of
the board of directors made by the petitioners is tantamount to an ousting of the current members of the board.
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.

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.

17. ANGELES vs SANTOS

SHORT VERSION: The minority group of the board of directors in Parañaque Rice Mill, Inc. sued the
majority group alleging mismanagement, unauthorized use of funds, and corporate sabotage. They wanted the
corporation be put under receivership and the majority members held liable, then kicked out of the board. The
lower court ruled for the minority group and gave them everything they wanted. Majority members question the
court’s power to terminate them from their positions in the board9among other things). [SEE BOLD PART IN
THE END OF DIGEST FOR SYLLABUS RELEVANT PART]

FACTS:
The Parties are all stockholders and member of the board of directors of the "Parañaque Rice Mill, Inc., a
corp organized or the purpose of operating a rice mil. In 1962, Angeles et al (minority) filed a complaint as
stockholders, for and in behalf of the corporation, against Santos et al (majority) in CFI Rizal. The complaint
alleged that:

 a special meeting was held in Feb. 1932 where the Board formed an investigation committee (headed by the
minority) to look into the losses of the corporation in the year 1931, however, Santos et al denied access to
the properties, books and record of the corporation which were in their possession
 According to the by-laws, said documents should be under the exclusive control and possession of the
secretary-treasurer, not Santos
 Santos had appropriated to his own benefit properties, funds, and income of the corporation in the sum of
P10,000
 he refused to sign over fully paid-up shares of stock to Higinio Angeles so that he can control the affairs of
the corp
 that he refused to hold monthly meetings of the board, even after due request, and
 Santos et al was disposing of the properties and records of the corporation without authority from the board
of directors or the stockholders of the corporation and suspended Jose Lara from the office of general
manager to prevent any interferrence with or examination of his arbitrary acts.

The complaint prayed that:

 Jose Lara be reinstated and appointed as receiver of the properties of the corp
 Santos be ordered to make a detailed accounting of the properties
 He 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
 be ordered to sign the certificate of stock subscribed to and paid by the plaintiff Higinio Angeles, and
Page 26 of 59
 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.

Santos et al filed an answer with general and specific denials and allege that Santos did not sign over the
paid-up shares due to Angeles for 600 shares valued at P15,000, because the board of directors decided to give
Higinio Angeles only 320 shares of stock worth P8,000. It also puts up a counter-claim for malicious
procurement of a receivership along with damages. They also included a cross-complaint against the minority
members based on the alleged failure of the Higinio Angeles to render a report of his administration of the
corporation from February to June 1928, during which time the corporation is alleged to have accrued earnings.

Angeles et al renewed their petition for the appointment of a receiver pendent lite alleging pretty much the
same stuff they did in the complaint and that without the knowledge and consent of the stockholders and of the
board of directors, Santos 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. Santos et al opposed saying that the
court had no jurisdiction over the Parañaque Rice Mill, Inc., because it had not been include as party defendant
and, therefore the court could not properly appoint a receiver of the corporation pendente lite.

Preliminarily, Melchor de Lara was appointed by the court a receiver, then upon opposition by Santos et al,
Benigno Agco took his place. After trial, the court appointed Emilio Figueroa as receiver of the corporation.
Santos et al filed and MR which was denied. After trial, the court ruled in favor of Angeles et al, ordering
Santos to render an accounting and pay whatever may be owing to the corporation, sign over to Angeles the
shares in the amount of 15,000, and that a new set of board of directors be elected in a general meeting.

ISSUE:
WON Parañaque Rice Mill, Inc. was a neccessary party to the case and trial court had jurisdiction to
appoint a receiver. (YES)

WON Santos was liable to render an accounting and to pay whatever may be owing to the corporation
(YES, but later)

WON it was proper for the court to order the removal of Santos et al from their offices as
members of the board of directors of the corporation. (NO)

RATIO:
There is ample evidence showing that Santos et al are guilty of breach of trust as directors of the
corporation. 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 stockholders. 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. 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 stockholders.

The contention of Santos et al 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:

“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.”

The lower court in its decision not only orders 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. 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

Page 27 of 59
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.

The Corporation Law, in section 29 to 34, provide for the election and removal of the directors of
a corporation. It 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 a motion of the directors of a corporation. There are abundant
authorities, however, which hold that if the court has acquired 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. 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.

18. Campbell vs Leow’s Incorporated

Plaintiff = Campbell
respondent = loew’s inc

DOCTRINE: a director sought to be removed for a cause is entitled to an opportunity to be heard before the
stockholders vote.
Stockholders have the power to vote for the removal of a director.

NATURE: decision on plaintiffs request for a preliminary injunction to restrain the holding of a stockholders
meeting from considering certain matters or to prevent the voting of certain proxies.

NOTE: number 8-14 ung related sa directors since eto ung topic sa campos.

FACTS:
Two factions have been fighting for leows control. One faction is lead by joseph Tomlinson (Tomlinson
faction) and the other is headed by leows president, Joseph Vogel (Vogel faction).

At the annual meeting in February, each factions nominated 6 directors and they nominated a 13 th
director or a neutral director. July 17-18, 2 out of 6 Vorgel directors and the 13 th director resigned. A quorum is
seven.

On the 19th of July, Tomlinson faction asked that a meeting be called for July 30 to address the problem
of filling director vacancies. On the eve of this meeting, one of Tomlinson director resigned. This left 5
tomlinson director and 4 vogel directors. Only the 5 tomlinson director attended the meeting. The court ruled in
Tomlinson vs leows inc that the election of 2 directors attended by 5 tomlinson directors was not valid for want
of quorum.

ON july 29, the day before the noticed directors meeting, vogel as president sent out a notice calling a
stockholder’s meeting for September 12 for the following purposes:

1. To fill director vacancies

2. To amend by-laws to increase the number of the board from 13-19; to increase the quorum from 7-10
and to elect six additional directors
3. To remove Stanley Meyer and Joseph Tomlinson as directors and fill such vacancies.
4.
Later, another notice for September 12 was sent as well as a proxy statement went out over the signature of
Joseph R. Vogel as president. It was accompanied by a letter from Vogel soliciting stockholder support for the
matters abovementioned.
Thereafter, plaintiff began this action.

Plaintiff contentions:
1) Plaintiff contends that president had not 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
ANSWER: bylaws: Sec 7 of Article I provides: “special meetings of the stockholders for any purpose
other than those regulated by statute, may be called by the president”. Even though Sec 8(11) of
Article 2 provides that a board may call a special meeting of stockholders for any purpose, still
according to the by-laws of leows, president has the power to state these broad purposes in his call.

Page 28 of 59
2) 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. S 141 (a) which provides:
“the business of every corporation organized under the provision of this chapter shall be managed
by a board of directors except as hereinafter or in its certificate of incorporation otherwise
provided.”
ANSWER: the call of stockholders meeting for the purposes mention would not impinge upon the
power given the directors by the statute. A by law giving the president the power to submit matters for
stockholder action presumably only embraced matters which are appropriate for stockholder action.

3) Plaintiff contends that president has no authority, without board approval to propose an amendment of
the by-laws to enlarge the BOD’s.
ANSWER: the by-law of section 7 which is broad covers this action; hence the president has the power
to do so.
4) Plaintiff contends that the president had no power to call stockholder’s meeting to fill vacancies on the
board.
ANSWER: first of all, the by-laws permit the president to call a meeting for any purpose and therefore
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.
(note: ART V S 2 of the bylaws provide the power of the stockholders to fill vacancies)

5) Plaintiff contends 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. (note: diba sabi sa facts nagschedule na ng meeting ung isang faction, tapos later si president
nag send ng notice of meeting)
ANS: the proxy statement sent out by the president states that the stockholders would ONLY fill the
two vacancies, IF their election by the board was held to be INVALID. (eh invalid ung meeting
nung TOMLINSON FACTION kasi want of quorum hence, the issue is moot)

6) Plaintiff contends that the president had no power to fix the record date for voting purposes.
ANSWER: president had the power to call the meeting for the purpose noticed because it turned out
that the executive committee fixed the record date and PLAINTIFF’s counsel did not attack the action of
the executive committee, in effect, plaintiff abandoned this contention.

7) Plaintiff argues that since Loews by-laws provide that the stockholders may fill “vacancies”, and since
the courts have construed “vacancy” not to embrace “newly created directorships”, the attempt call by
the president for the purpose of filing newly created directorships was invalid.
ANSWER: according to jurisprudence, stockholders of have the right between annual meetings to elect
directors to fill newly created directorships, hence the action of the president is valid.

8) Plaintiff argues that the stockholders of a Delaware Corporation have no power to remove directors from
office even for cause and thus the call for that purpose is invalid.
ANSWER: stockholders have the power to remove a director for a cause. This power must be implied
when we consider that the 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
corporation’s trade secrets to a competitor would be immune from removal by the stockholders.
PLAINTIFF correctly states that there is no provision in our law providing for the removal of directors
by stockholder action. Plaintiff also notes that the Loew’s by-laws provide for the removal of officers
and employees but not directors. But the court considered it pertinent to consider whether the absence
of the power can be said to subject the corporation to the possibility of real damage. Considering
the damage a director might be able to inflict upon his corporation, the court believed that the doubt
must be resolved by construing the statutes and by-laws as leaving untouched the question of director
removal for cause. the court is to conclude on reason that the stockholders have such inherent power.
The stockholders do have the power to remove directors for cause.

9) Plaintiff argues that the removal of Tomlinson and Meyer as directors would violate the right of
minority shareholder to representation on the board and would be contrary to the policy of the Delaware
regarding cumulative voting.
ANSWER: stockholders have the power to remove a director for cause even where there is a provision
for cumulative voting. To remove such power would open the corporation for real damage because
directors are now open to fraudulent transactions and stockholders cannot remove them for any cause.

10) Plaintiff contends 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 contends that a stockholder has no standing to make the contention that the foregoing
requirements have not been met.

Page 29 of 59
 ANSWER: a stockholder has standing for such. 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 judicial established. Court conclude that the plaintiff can raise the issue as to the propriety
of the removal procedure.

11) Plaintiff contention that there must be notice of charges as mentioned above in number 10.
ANSWER: yes, the court agrees with plaintiff that the power of removal cannot be exercised in an
arbitrary manner.

12) Plaintiff asserts that no specific charges have been served upon the two directors sought to be ousted;
notice of special meeting fails to contain a specific statement of the charges; 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.
ANSWER: the proxy statement specifically recites that the two directors are sought to be removed for
the reasons stated in the president’s accompanying letter. The court said that the accompanying letter
was sufficient compliance with the notice requirement.

13) Plaintiff contends that the charges against the two directors do not constitute “cause” as a matter of law.
ANSWER: court first narrated the presidents letter. (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 immediately proceeded upon a planned scheme of harrament; they were rude to the
personnel; Tomlinson sent daily letters to the directors making serious charges directly)
Eto na sagot : a charge that the directors desired to take over control of the corporation is not a reason
for their ouster. However, a charge in calculated plan of harassment to the detriment of corporation is a
valid cause. In so concluding, the court expresses no opinion as to the truth of the charges. Therefore, “a
planned scheme of harassment” as detailed in the letter constitutes a justifiable legal basis for removing
a director.

14) Next issue to consider : whether the directors sought to be removed have been given a reasonable
opportunity to be heard by the stockholders on the charges made
ANSWER: NO, defendant corporation flatly refused to give Tomlinson director of a stockholders’ list.
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 a cause. Also, only the
Vogel accusations accompanied the request for a proxy, thus while the stockholder could for or against
removal, he would be voting with only one viewpoint presented. In sum, 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 for the removal of such
director for cause. corporation has a duty to see that this opportunity was given the two directors
involved.
Therefore, proxy solicited by the Vogel group 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.

(3) Fundamental Changes

Investment in another corporation

19. RAMON DE LA RAMA vs. MA-AO SUGAR CENTRAL CO., INC.

G.R. No. L-17504 & L-17506
February 28, 1969

FACTS:
Plaintiffs are suing as stockholders on their own behalf and for the benefit of the Ma-ao Sugar Central
Co., Inc. The complaint 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.

Page 30 of 59
 The case presented several points of which are the bases for the causes of action; however, I will only
focus on what is relevant to the topic.

After the trial, the lower court held a decision in which not all of plaintiff’s prayers were granted. One
such prayer is to hold the individual defendants liable for their ultra vires act of investing in Philippine Fiber
Processing Co., Inc., a company engaged in the manufacture of sugar bags, the amount of P655,000 in shares of
stock of the defendant corporation by collecting, producing and/or paying to the defendant corporation the
outstanding balance of the amounts so diverted and still unpaid to defendant corporation.

The plaintiffs submitted that the investment of corporate funds of the Ma-ao Sugar Central Co., Inc., in the
Philippine Fiber Processing Co., Inc. was a violation of Sec. 17-½ of the Corporation Law which 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 the
stockholders' meeting called for the purpose.

The lower court held that “the law should be understood to mean as the authorities state, that it is
prohibited to the Corporation to invest in shares of another corporation unless such an investment is
authorized by 2/3 of the voting power of the stockholders, if the purpose of the corporation in which
investment is made is foreign to the purpose of the investing corporation because surely there is more logic
in the stand that if the investment is made in a corporation whose business is important to the investing
corporation and would aid it in its purpose, to require authority of the stockholders would be to unduly curtail
the Power of the Board of Directors; the only trouble here is that the investment was made without any previous
authority of the Board of Directors but was only ratified afterwards; this of course would have the effect of
legalizing the unauthorized act.”

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:

xxxxxxxxx
(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.

ISSUE:
Whether the lower court was correct in ruling in that the investment by the defendants were not in
violation of the law.

HELD:
YES. The SC explained by quoting the explanation of Professor Sulpicio S. Guevara of the University of
the Philippines, College of Law, a well-known authority in commercial law:

“[Sec. 13] 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.

“[Sec. 17-½] 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

Page 31 of 59
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.”

Therefore, the SC agrees with the lower court ruling. The investment by a sugar central in the equity of a
sugar bag manufacturing company falls within the implied powers of the sugar central as part of its primary
purpose and does not need ratification by the stockholders.

20. Gokongwei vs Sec

“Same as above at ani”

C. DEADLOCKS IN CLOSE CORPORATION

1. The proxy device

21. In re Giant Portland Cement Co.

Aug. 18, 1941 | The Chancellor

DOCTRINE: IN THE ELECTION OF DIRECTORS, VOTES MADE BY A PROXY OF THE

RECORD OWNER USING STOCK SOLD WITHIN 20 DAYS OF THE ELECTION IS VALID;
PROVIDED IT IS NOT INJURIOUS TO THE TRANSFEREE OF STOCK.

FACTS:
 The case stems from the results of an election for the Board of Directors of the Giant Portland Cement
Co. held in February 24, 1941. Nine (9) Directors of the Corporation were to be elected, and two tickets
were nominated: “The Management” and “The Opposition”. However, four persons were nominated on
both tickets – resulting in their unquestionable election.
 Petitioners Brown and Murray question the results of the election, filing a case in the Court of Chancery
of Delaware.
 Petitioners contend that the election inspectors were incorrect in counting certain votes for “The
Opposition”· The contention is based on these facts:

o In February 4, 1941 (20 days prior to the Election), in a resolution, the Board of Directors closed
the Stock Transfer Books of the Corporation.
o Sec. 17 of the General Corporation Law, states:

§ (1) “each stockholder, shall at every meeting of the stockholders be entitled to one vote in
person or by proxy for each share of the capital stock”

§ (2) “except where the transfer books of the corporation shall have been closed or a date shall
have been fixed as a record date for the determination of its stockholders entitled to vote xxx no
share of stock shall be voted on at any election for directors which shall have been transferred on
the books of the corporation within twenty days next preceding such election of directors”

§ (4) only such stockholders, as shall be stockholders of record on the date so fixed, shall be
entitled to xxx vote at such meeting.

 Section 17 was also incorporated in the by-laws of the Corporation.

 During this period, no stock was transferred on the corporate records. However, certain shares were sold
by the record owners and the stock certificates were duly assigned and delivered to the purchasers prior
to the stockholders’ meeting. The record owners who sold their shares assigned proxies to vote based on
shares they already sold.
 Of the shares sold within the 20 day period, 5,472 were voted in favor of “The Opposition” while 1,384
shares were voted for “The Management”. In essence, if these votes are not counted – it may affect the
result of the election in favor of “The Management”

ISSUE:
WON certain votes for “The Opposition” should be counted.

Page 32 of 59
HELD:
YES.
 In accordance with the first and second paragraph of Section 17, stock transferred on the books within
20 days prior to stockholders’ meeting for the election of directors are temporarily disfranchised and
cannot be voted either by the transferor or the transferee. However, based on the fourth paragraph of
Section 17, the stockholders of record on the date fixed are the ones entitled to vote.
 The proxies who voted at the stockholders’ meeting were proxies assigned by the record owners, and
NOT the purchasers. As between the transferor (record owner) and the transferee (purchaser), the legal
title of the stock is with the transferee. However, in relation to the corporation, until such transfer of
stock is recorded, the recognized owner is the one on record. The votes of the proxy assigned by the
record owners are, therefore, valid in the elections.
 It is true that the record owner/transferor would be liable to the purchaser/transferee if the votes were
injurious to the latter. However, no evidence was presented that showed the purchasers of the stock
objected to the votes made by the proxies of the record owners. In fact, evidence was presented wherein
the votes casted by the proxies were in accordance with the wishes of the purchasers.
 In any case, absent evidence, consent is presumed.

22. State ex rel. Everett Trust & Savings Bank v. Pacific Waxed Paper Co.
FULL CASE NI SYA HA!

Opinion
No. 29264.
April 16, 1945.

APPEAL AND ERROR — PRESERVATION OF GROUNDS — MATTERS NOT RAISED IN LOWER

COURT — SUFFICIENCY OF COMPLAINT. The rule that questions not raised in the lower court will not be
considered on appeal, is subject to the limitation that, if the question is one whose answer depends upon
whether the complaint states a cause of action and the complaint cannot be amended, then the question may be
raised at any time; and where an option agreement was set up in a complaint, and, under the plaintiff's theory,
the complaint would state a cause of action if the agreement was void, then the question of whether the
agreement was invalid as violating the rule against perpetuities may be raised for the first time on appeal.

PERPETUITIES — NATURE OF RULE AGAINST — VESTED INTERESTS. The rule against perpetuities,
which prohibits the creation of future interests or estates which may not become vested within a life or lives in
being and twenty-one years, applies only to the vesting of future estates or interests and does not apply to vested
ones.

SAME — OPTION AGREEMENTS. The rule against perpetuities was not violated by an option agreement
under which an owner of corporate stock promised that if at any time during the next twenty-five years he
desired to sell his stock, he would give the promisee the first opportunity for a period of fifteen days to purchase
it at such price and upon such terms as the promisor had been offered.

CORPORATIONS — PRINCIPAL AND AGENT — MEMBERS AND STOCKHOLDERS OF

CORPORATION — PROXIES — POWER OF ATTORNEY — REVOCABILITY — POWER COUPLED
WITH INTEREST. A proxy given by a stockholder to vote his stock at a meeting of stockholders of a
corporation is revocable by him even though the proxy by its terms is expressly made irrevocable, except (1)
where the authority or power is coupled with an interest, and (2) where the authority is given as part of a
security or is necessary to effectuate such a security.

PRINCIPAL AND AGENT — POWER OF ATTORNEY — POWER COUPLED WITH INTEREST. A

power coupled with an interest is a power or authority to do an act, accompanied by or connected with an
interest in the subject or thing itself upon which the power is to be exercised, the power and interest being
united in the same person.

SAME — POWER OF ATTORNEY — POWER GIVEN AS SECURITY. Ordinarily, the "security" for which
a power of attorney is given, and which makes it irrevocable under the second exception to the general rule, is
protection to the agent for money advanced or obligations incurred by him for his principal; however, the term
is not always so limited, and whenever the purpose to be served by the exercise of the power is to protect or
further the interest of the agent, the authority given is regarded as a part of a security or something necessary to
effectuate such a security.

CORPORATIONS — PRINCIPAL AND AGENT — PROXIES — REVOCABILITY. On an issue as to

whether a proxy to vote corporate stock was revocable by the owner's executor, held that, under the facts in the
Page 33 of 59
case, the authority conferred by the proxy was coupled with an interest and was given as part of a security and
was necessary to effectuate such security, and therefore the proxy was not revocable.

CONTRACTS — REQUISITES AND VALIDITY — CONSIDERATION — MUTUAL PROMISES. Mutual

promises by parties to a contract constitute a valid consideration.

CORPORATIONS — LIMITATION ON USE OF PROXIES — STATUTORY PROVISIONS — TIME OF

TAKING EFFECT. Rem. Rev. Stat. (Sup.), § 3803-28(4), limiting the time within which proxies may be voted,
does not apply to a proxy agreement which was made prior to the effective date of the act. 

SAME — DISSOLUTION — EFFECT AS TO OUTSTANDING CONTRACTS. When a corporation is

voluntarily dissolved, it remains bound by its outstanding executory contracts.
See 41 Am. Jur. 73.

Appeal from a judgment of the superior court for King county, Findley, J., entered October 2, 1943, upon
findings, dismissing an action in mandamus, after a trial on the merits. Affirmed.
O.D. Anderson, for appellant.

Falknor, Emory Howe, for respondents.

GRADY, J.

This action was brought by the state of Washington on relation of Everett Trust Savings Bank, as
executor of the estate of Alvah H.B. Jordan, to secure a writ of mandamus commanding the Pacific Waxed
Paper Company, a corporation, and its president and secretary, to transfer on its books certain shares of its
corporate stock formerly owned by the Paine-Mitchell Co., a dissolved corporation, and to issue to the executor
shares in lieu thereof, free of the limitations and restrictions which had been attached to the stock owned by it,
and to recognize the right of the executor to vote the stock at all meetings of the stockholders of the corporation.
An alternative writ of mandamus was issued by the superior court, to which return was made by the defendant
by an answer to the petition. A trial was had before the court, at the close of which findings of fact and
conclusions of law were made, and based thereon a judgment was entered dismissing the action. The court
denied a motion for a new trial. The relator has taken an appeal from the judgment.

In this opinion, we shall refer to the executor of the Jordan estate as appellant, the Pacific Waxed Paper
Company as respondent, and the various interested individuals by their surnames.

The factual situation, so far as is necessary for a consideration of the legal questions presented, is as
follows:

On July 20, 1931, Jordan was the owner of all of the capital stock of the Paine-Mitchell Co. except a few
qualifying shares, and owned one preferred share of the respondent.  At this time, Engle was the owner of
preferred and common stock of respondent, which stockholdings had increased by December 11, 1942. On July
20, 1931, Paine-Mitchell Co. was the owner of common stock of respondent. All of the stock had voting power.
The combined shares of Engle and Paine-Mitchell Co. were more than a majority of all of the issued stock.

On July 20, 1931, Engle and Paine-Mitchell Co. entered into a written agreement by which each party
gave to the other a promise that, before he sold or caused to be transferred any part or portion of the stock then
owned and held by him, he would notify the other party in writing of his intention to sell such stock or to cause
the same to be transferred; also in the notice he would state the amount he had been offered for the stock and the
price, terms, and conditions of the proposed sale, and for a period of fifteen days the other party could have the
exclusive right and option to purchase the stock proposed to be sold for the price and upon the terms and
conditions stated in the notice. The agreement provided that it should remain in force for a period of twenty-five
years from its date.

On March 24, 1932, Engle, Paine-Mitchell Co., and Jordan entered into a written agreement in which
they recited their respective stockholdings in respondent and that the fact Jordan owned all of the stock of
Paine-Mitchell Co. except qualifying shares constituted him the directing and managing executive of that
corporation. The contract also recited that the assured continuation of the present co-operation between the
parties thereto in the conduct of the business of the respondent and of its present policies resulting therefrom
even after the death of either Engle or Jordan would be of inestimable value not only to the stockholdings of the
parties and to the credit and financial position of respondent, but also to the interests of the minority
stockholders.

Based upon this background, the parties then agreed that, in the event of the death of Engle, if Paine-
Mitchell Co. was then the owner of any of the stock of respondent it  should be entitled to vote any stock owned
by Engle in respondent at all meetings of stockholders of respondent for so long a time as Paine-Mitchell Co.
continued to be the owner of the stock in respondent it owned at the time of the death of Engle. It was also
Page 34 of 59
agreed that, to fully effectuate the objects and purposes of the agreement, it should be deemed to be and should
be the irrevocable proxy of Engle's heirs and legal representative to Paine-Mitchell Co., with full power of
substitution to vote the Engle stock at all the meetings of stockholders of respondent.

The contract also provided, in the event of the death of Jordan, that Engle should have the same voting
right as to the stock of respondent owned by Paine-Mitchell Co. and Jordan, or either of them, and contained a
similar irrevocable proxy provision in favor of Engle binding upon the successors, heirs, and legal
representatives, respectively, of Paine-Mitchell Co. and Jordan. It was expressly provided that the contract
should not in any way affect the one of July 20, 1931, between Engle and Paine-Mitchell Co.

On May 31, 1942, Jordan died testate. In his will he named appellant as executor, and it was appointed
as such when the will was admitted to probate. The executor caused the Paine-Mitchell Co. to be voluntarily
dissolved, and as a result the stock owned by it in respondent was transferred to appellant. The appellant sought
to vote the stock at a meeting of the stockholders of respondent on February 26, 1943, but was denied the right
to do so because of the proxy held by Engle.

The ultimate question to be decided is whether the proxy to vote the stock of respondent owned by
Paine-Mitchell Co. and Jordan was revocable.

The appellant also raises the questions whether the option agreement was a violation of the rule against
perpetuities and whether the voluntary dissolution of Paine-Mitchell Co. automatically revoked the proxy.

[1] Upon the question of whether the option agreement was invalid because it violated the rule against
perpetuities, respondent asserts that it was not raised in the court below.  We have held many times that
questions not raised in the court below will not be considered on appeal. We do not wish to depart from that
rule, but it has its limitations. If the question is one that upon its answer depends whether the complaint states a
cause of action and the complaint cannot be amended, then it may be raised at any time. Fick v. Jones, 185 Wn.
365, 55 P.2d 334. In the case at bar, the complaint set up the option agreement. If for any reason it was a void
agreement, on appellant's theory the complaint would state a cause of action because the agency created by the
proxy agreement was revocable. The theory presented by respondent on this branch of the case was that the
option agreement created an interest in the subject matter of the agency of Engle to vote the stock and the proxy
was irrevocable. Any reason to the contrary would support the complaint, and it may be urged at any time on
the same principle that any question affecting the statement of a cause of action in a complaint, when it is
incapable of amendment, may be urged at any time. We shall therefore consider the question as it is now
presented.

[2] We have adopted the statement of the rule against perpetuities as set forth in 21 R.C.L. 282 in Denny v.
Hyland, 162 Wn. 68, 297 P. 1083, as follows:
"`The rule against perpetuities is usually stated as prohibiting the creation of future interests or estates which by
possibility may not become vested within a life or lives in being and twenty-one years, together with the period
of gestation when the inclusion of the latter is necessary to cover cases of posthumous birth,'"

and stated:

"The rule, however, applies only to the vesting of future estates, and does not apply to vested estates.
The rule has reference to the time within which the title vests and has nothing to do with the postponement of
the enjoyment."

[3] The option agreement did not create a future estate or interest to become vested at some future time. It was a
promise by an owner of stock in a corporation that if at any time during the next twenty-five years he desired to
sell his stock, he would give the promisee the first opportunity  for a period of fifteen days to purchase it at such
price and upon such terms and conditions as the promisor had been offered. It was in effect a promise to give an
option in the event the promisor desired to sell his stock. When an attempt is made to apply the above rule to
this situation, it becomes apparent that it was not violated by the option agreement.

[4] The general rule is that a proxy given by a stockholder to vote his corporate stock at a meeting of
stockholders of a corporation is revocable by him even though the proxy by its terms is expressly made
irrevocable.

Exceptions to this rule, as well as the general rule, are set forth in Arcweld Mfg. Co. v. Burney, 12
Wn.2d 212, 121 P.2d 350; 2 Am. Jur. 61; 5 Fletcher, Cyclopedia Corporations (Perm. ed.) 187; 2 Thompson on
Corporations (3rd ed.) 356; 2 C.J.S. 1153 and 1159.
The exceptions are: (1) Where the authority or power is coupled with an interest; (2) where the authority is
given as part of a security or is necessary to effectuate such a security.

[5, 6] In the Arcweld case, in defining "power coupled with an interest," we said:

Page 35 of 59
"A `power coupled with an interest' is a power or authority to do an act, accompanied by or connected with an
interest in the subject or thing itself upon which the power is to be exercised, the power and interest being
united in the same person."

With reference to the second exception we said:

"The second exception to the general rule that a principal may revoke the power at will arises where the
authority is given as part of a security or is necessary to effectuate such security. In such cases the `interest' of
the agent is something more than an interest in being permitted to exercise the power, yet something less than
an estate in the subject matter or thing upon which the power is to be exercised. The purpose of the power of
attorney in such cases is ordinarily to afford to the agent protection for money advanced or obligations incurred
by him."

It will be observed that, as to the first exception, we did not limit the "interest" to the thing itself upon
which the  power is to be exercised, but we also included the subject upon which the power is to be exercised.
In many cases they are the same, but in other instances they may be different. Many of the cases under the facts
before the court lay down the broad rule that the "interest" referred to must be in the thing itself, and if applied
literally to the case before us it would mean that, in order to come within the exception, it would be necessary
that Engle have some kind of a title to or estate in the shares or certificates of stock; but according to the
interpretation we have given the exception, it is sufficient that the proxy holder have an "interest" in the subject
matter upon which the power is to be exercised. The "thing itself" may refer to the tangible shares or certificates
of stock, but the "subject" or "subject matters" may refer to the intangible voting right and the incidental control
of the corporation. Ordinarily, the purpose of a power of attorney under the second exception is to afford the
agent protection for money advanced or obligations incurred by him for his principal, but the term "security"
has not always been so limited by the courts. The word "security" as used in this connection is somewhat
elastic, and cases we later cite disclose that, whenever the purpose to be served by the exercise of the power is
to protect or further the interest of the proxy holder, the authority given is regarded as a part of a security or
something necessary to effectuate such a security.
It is clear from the proxy agreement and the facts of this case that the parties intended that the Paine-Mitchell
Co. stock should be used in conjunction with the stock owned by Engle so that the policies of the respondent
could be thus controlled. This is apparent from the fact that it was agreed the proxy should exist and continue
until such time as Engle should sell or dispose of the stock owned by him at the time of the death of Jordan. The
control of the affairs of the corporation was of much importance to Engle. By such control, his own stock
interest in the corporation was made more secure. To effectuate this purpose, the parties had executed the option
agreement, and in the proxy agreement it was provided the mutual proxy should be "in  the event and under the
conditions and for the period stated" an irrevocable proxy of the respective parties and their successors, heirs,
and legal representatives. This was a much broader and more far reaching arrangement than will be found in the
ordinary proxy given to vote stock at a stockholders' meeting, at which the proxy holder does no more than act
as the agent of the owner of the stock for a specific purpose.

In the situation we have before us, Engle was more than a mere agent. In voting the stock, he served
purposes of his own in maintaining control of the corporation by the choice of directors and the determination
of its policies and business affairs. This voting of the stock for these purposes was the subject matter of the
agency. Engle acquired an interest in the subject matter of the power given to him, and this interest was coupled
with such power. The power to vote the stock was necessary in order to make Engle's control of the corporation
secure. The interest of Engle was something more than merely being permitted to vote the stock. It is true that
Engle was not given any title to the certificates of stock themselves nor any lien upon them, but they were not
the subject matter of the agency or power given. The certificates represented and were evidence of the right of
the owner of the stock to be paid dividends, to share in the property of the corporation upon its dissolution, and
the right to vote at meetings of stockholders. The proxy gave this latter right to Engle. The mutual arrangement
as a whole created something like a community of interest in the stockholdings of the parties, having for its
purpose the use of their stock as a unit, and the effect of which was to give both parties an interest in the voting
of the stock, although the power to vote was to be exercised by Engle after the death of Jordan or by the Paine-
Mitchell Co. after the death of Engle. The power was coupled with an interest, and by the entire arrangement
between the parties the power was intended to be and became a security to effectuate the main purpose of the
agency. 

We have not been able to follow respondent all of the way in its contention that the option agreement
created an interest in the subject matter of the power conferred. Irrespective of any recital in the agreement, the
parties did no more than promise to give to each other an option to purchase in the event either had a proposal to
buy his or its stock; but we do think the option agreement must be considered with the proxy agreement in
determining the intention of the parties and whether Engle had an irrevocable proxy.

The cases to which our attention has been called, and those we have found, are not of much aid because
their factual situations are so different from the facts of this case. Those we cite are only for the purpose of
demonstrating that there has been a recognition of the view that a proxy to vote stock may be given, and in the

Page 36 of 59
exercise of the power a purpose is served that is beneficial not only to the donor of the power but also to the
proxy holder, the corporation, and the other stockholders, and that in order to effectuate a general purpose and
plan the proxy would have to be irrevocable. The court in each of those cases reached the conclusion that the
proxy was irrevocable because the particular agreement that was made not only created a power, but it also gave
the proxy holder a necessary interest in its subject matter. Other reasons assigned were that the proxy holder
held and exercised the power to secure and make possible the furtherance and the protection of his own
interests; also that the power was based upon a valid consideration moving from the proxy holder to the one
who gave the proxy to him.

The best approach to the general question we have been able to find is what was said by the court
in Lane Mtg. Co. v. Crenshaw, 93 Cal.App. 411, 269 P. 672, as follows:

"It is most difficult to frame an all-embracing definition of a power coupled with an interest. Most of the
authorities on the subject seem to concede that such a power is recognized by the law, and when found to exist
in any given case it is not revocable at the will of the principal and even survives his death. The question ever
present is as to when  such a power exists, and what conditions must be shown to manifest its existence. Many
of the authorities approach the subject as though it were a thesis, and treat it in such an academic way as to be
confusing. Much is said concerning what is not a power coupled with an interest, with little attempt at exactness
concerning what actually constitutes the same. Some confusion arises in applying the doctrine of the older cases
for the reason that the law of agency has, like other legal doctrines, undergone some change throughout the
years. This is particularly so with reference to the limitations of certain powers of agency and the erstwhile
presumptions attaching. Likewise certain terms current years ago at the present writing convey meanings
entirely different from the then general acceptation."

In the Lane case, the agent, in acting as such, was in a position to protect a subleasehold interest held by
it, in that its authority to manage the whole building enabled it to keep the lease in good standing and thus
protect its sublease of a part of the building from danger of loss if the lease was forfeited for breach of its terms.
The court decided that, as the power granted the agent furnished the means of preserving its subleasehold
interest, it was a power coupled with an interest and not revocable by the donor. The following cases are to the
same effect: Hey v. Dolphin, 92 Hun (99 N.Y.) 230, 36 N.Y. Supp. 627; Smith v. San Francisco N.P.R. Co., 115
Cal. 584, 47 P. 582, 56 Am. St. 119; 35 L.R.A. 309; Chapman v. Bates, 61 N.J. Eq. 658, 47 A. 638, 88 Am. St.
459.

[7] We think the principles of law as pronounced in Arcweld Mfg. Co. v. Burney, 12 Wn.2d 212, 121 P.2d 350,
and the foregoing cases, when applied to the facts of this case, compel the conclusion that Engle had a power
coupled with an interest and that the authority was given to him as part of a security and was necessary to
effectuate such security, and therefore the proxy was not revocable by appellant.

[8] The respondent contends that the proxy agreement was irrevocable for the additional reason that it was
supported by a valid consideration, in that the parties to it made mutual promises to each other. The appellant
argues  that mutual promises do not constitute a valid consideration to support a proxy agreement. The
authorities cited by appellant, in support of his position, related to voting trusts. There were no mutual promises
between the trustee who did the voting and the parties who authorized him to vote. This factor is sufficient to
distinguish those authorities from the case before us. It is an elementary rule that mutual promises by parties to
a contract constitute a valid consideration, but this does not solve the problem. When it is said that an agency is
irrevocable, it may be meant that there exists no legal right to revoke, or that the principal is without the power
to revoke.

The authority to act for a principal may be taken away and the agent may have no recourse; but a
contract between a principal and an agent may be such that, although the authority to represent the principal
may be terminated, such act would be a breach of contract and the agent be entitled to recover any damage
sustained, or the agency may be of such a character that the power to terminate the authority to act for the
principal does not exist. This subject is very well covered by what is said in 2 C.J.S. 1164:

"Where an authority or power is conferred upon the agent for a valuable consideration, it may not be
lawfully revoked, without cause, by the act of the principal alone, in the absence of a stipulation that it shall be
revocable, whether or not expressed to be irrevocable; but the additional qualification has been added that a
covenant against revocation must be supported by an independent consideration, and the fact alone that the
agent transacted his principal's business so as to entitle him to compensation out of the proceeds is not in itself
such a consideration from the agent as will preclude a revocation of the authority by the principal. Where,
however, a principal granted to the agent an exclusive authority to sell, it was held that the agent's agreement to
pay his accounts and faithfully perform was a sufficient consideration for the principal's implied agreement not
to revoke.

"Although there are statements in the cases to the effect that an authority granted for a valuable
consideration takes away both the right and the power of the principal to revoke the agency and creates a power

Page 37 of 59
coupled with an interest,  it would seem that these statements mean no more than that as between the principal
and agent there is no right to revoke the agency . . . or else such statements are made with reference to a state of
facts showing that the power was actually coupled with an interest . . . or that such power was given as a
security . .. which circumstances are referred to as the consideration for the power."

In view of the reasons upon which we have based our conclusions in the case, we deem it unnecessary to
decide whether the proxy agreement was supported by such a consideration as would make it irrevocable in the
sense that the principal did not have the power of revocation; but this element has been taken into consideration
by us in reaching our conclusions.

[9] The appellant contends that the proxy in question is in violation of that part of Rem. Rev. Stat. (Sup.), §
3803-28 (4) [P.P.C. § 449-3]:

"The validity of every unrevoked proxy shall cease eleven months after the date of its execution unless
some other definite period of validity shall be expressly provided therein, but in no event shall a proxy, unless
coupled with interest, be voted on after three years from the date of its execution."

This statute cannot be held to apply to the proxy agreement now under consideration because it was
made March 24, 1932, and the statute did not go into effect until June, 1933. The section of the corporation act
of 1933 (Rem. Rev. Stat. (Sup.), § 3803-61 [P.P.C. § 441-25]), providing that it shall be applicable to any
existing corporations formed under incorporation laws of the state, does not apply to contracts entered into
before the effective date of the act, and this is made apparent by Rem. Rev. Stat. (Sup.), § 3803-63 [P.P.C. §
441-29], which provides that the corporation act shall not impair or affect any act done or right accruing,
accrued, or acquired prior to the time of its effective date, but that the same might be enjoyed, asserted, or
enforced as fully and to the same extent as if the act had not been passed.  [10] The voluntary dissolution of the
Paine-Mitchell Co. did not affect the proxy agreement so far as the rights of Engle were concerned. The rule
seems to be that, when a corporation is dissolved by its voluntary act, the corporation remains bound by its
outstanding executory contracts. Mayflower Realty v. Security Savings Loan Society, 192 Wn. 129, 72 P.2d
1038; 75 P.2d 579.

The option and proxy agreements were both based upon a valid consideration. The proxy agreement
provided that the proxy should be irrevocable. The agreements did not violate any rule of public policy. Their
purposes were lawful and beneficial to the parties to them, and no sufficient reason has been given why the
intention of the parties, as expressed in them, should not be carried out.

The judgment is affirmed.

BEALS, C.J., MILLARD, STEINERT, and JEFFERS, JJ., concur.

23. ALEJANDRINO V. DE LEON

SUMMARY. Parties are stockholders of PASUDECO. A meeting was held to elect a new board and
9 respondents were voted, each with more than 19K votes, with respondent Jose de Leon getting 19,907 votes,
while pet Alejandrino got only 14K votes. However, 6k shares held by Alejandrino given to him by 18
stockholders were not accepted by the chairman and the secretary for registration and election, reasoning that
the 18 SHs previously executed pledges in favor of Pambul Inc., whereby they granted the pledgee the right to
vote the shares. Alejandrino alleged that Pambul was an alter ego of Pasudeco and its principal SH de Leon, that
Pambul was organized pursuant to a resolution of Pasudeco SHs as a financing corporation, that the SHs of
Pasudeco automatically became SHs of Pambul, that Pambul offered Pasudeco SHs loans with lenient terms,
and that as a result of the irrevocable proxies in the pledge agreements, only 2 families with only 30% of
Pasudeco outstanding capital stock have monopolized the directorship. He asserts that the act of pledging such
shares to Pambul, a corporation created as a financing corporation that takes shares as collateral, is void because
such act is contrary to good morals and public policy. The Court held that it is not, as there is no showing that
pledging shares and irrevocable proxies are acts that a shareholder could not and should not do. It is also not a
case of bribery, as the loan agreement is not imbued with public interest.

DOCTRINE. The allegations of monopoly positions in a corporation, without any allegation of fraud or
irregularity resulting therefrom to the prejudice of any stockholder, are not actionable per se. If proxies were
given in consideration of pledge, in good faith without fraudulent intent, it cannot be deemed immoral just
because it offers a temptation to abuse power and to oppress minority SHs.

FACTS
 Quo warranto to annul the election of all or any one of the respondents as directors of Pampanga Sugar
Development Co. or PASUDECO and to declare petitioner Alejandrino as director.
 Parties are stockholders of PASUDECO, with petitioner owning 112 shares (par value of P30 each).
Page 38 of 59
  A meeting was held to elect a new board and the 9 respondents were voted, each with more than 19K
votes, with Jose de Leon getting 19,907 votes, while petitioner Alejandrino got only 14K votes.
 Alejandrino contests the action of the Chairman and Secretary of the BOD because they refused to
register the 6084 shares held by petitioner, given to him by 18 SHs. The Chair and Secretary assert that
the 18 SHs previously executed pledges in favor of Pambul Inc., whereby they granted the pledgee the
right to vote the shares.
 He alleged that Pambul was an alter ego of PASUDECO. Pambul Inc was organized by the controlling
SHs of PASUDECO as a financing corporation. The setup is that the SHs of PASUDECO automatically
became SHs of Pambul.
 According to Alejandrino, Pambul is being used as a scheme to perpetuate the monopoly of the
directorship and executive positions of Pampanga sugar by loaning money to its SHs at as low a rate of
interest as 7% per annum on the security of their shares of stock, the amount of the loans being as high
as 90% of the par value of the shares, thereby inducing the SHs to avail themselves of the loan and
thereby enabling the management of Pampanga Sugar through Pambul to secure sufficient proxies for
their purpose
 As a result the pledgors- stockholders could do nothing even if they should make use of their right to
vote when and if the management should commit corporate abuses, excesses, and mistakes.
 Petitioner further alleges that irrevocable proxies are contrary to good morals and public policy and thus
void.
ISSUES:
1. WON the irrevocable proxies were contrary to good morals or public policy and are therefore VOID --
NO.

RATIO:
First, Petitioner did not adduce evidence to prove that irrevocable proxies were contrary to good morals
or public policy. The right of a SH to vote is inherent in ownership, and if the owner can dispose of the property
itself, it is apparent that he can dispose the right to manage it.

Second, there are no allegations that the proxies were procured thru error, deceit, fraud or intimidation.
The circumstances of the case are not sufficient in law to vitiate or invalidate the proxies. The desire and design
of a majority of stockholders of a private corporation to control management and operation is legitimate per se.
The allegations of monopoly positions in a corporation, without any allegation of fraud or irregularity
resulting therefrom to the prejudice of any stockholder, are not actionable per se.

The SH owning 30% of the outstanding stock of a corporation cannot secure its control without the
willingness, adherence, cooperation, or support of other SHs. Assuming that the two families owning 30% of
the capital stock have been able to procure such support by organizing Pambul for the purposes above indicated,
it would be admitted that the organization of Pambul was accomplished by vote of the majority and not of only
30% of capital stock of Pampanga Sugar.

It cannot be assumed that the meeting in which the organization of Pambul was agreed upon the SHs
other than the two families referred to were deprived of their vote by means of the proxies now assailed,
because said proxies could not have existed before Pambul was organized. Even now the SHs of Pambul are
also the SHs of Pampanga Sugar, the former cannot be said to be under the control of the said two families
because the latter are not alleged from the facts. In other words, Pambul SHs are free to vote their stock and
elect the directors they want; and the board of directors of Pambul is at liberty to change any or all of the
conditions of the contract of pledge in question.

Even assuming that respondent de Leon controls Pampanga Sugar, it would not necessarily follow
that he or the company also hold voting proxies on the shares of stock of Pambul. Therefore the SHs of
Pambul are free to vote their shares at the election of its directors. It is thus clear that if the alleged minority
SHs of Pampanga Sugar cannot or do not elect even one candidate to represent them in its BOD, nothing
appears to prevent them from doing so except their own volition. Nobody forces them to pledge their stock to
Pambul. They must either be satisfied with the management or indifferent with regard to voting. Only
Alejandrino, as one of the minority SHs, owning 112 shares, has come before the court to assail the contracts of
pledged entered into by 18 other SHs and in which he is not even a party.

Third, Petitioner alleged that terms of loans were way of bribing SHs to vote for management. But to
vote at stockholders meeting is not like a political franchise. It is an exercise of the right of ownership
involving no public interest. It can no more be called bribery than the payment by the purchaser of the price of
goods he bought.

Fourth, it is admitted that the pledge and transfer of the stock itself was perfectly lawful and
unobjectionable; but it is contended that the transfer of the right to vote is contrary to good morals and public
policy. If proxies were given in consideration of pledge, in good faith without fraudulent intent, it cannot
be deemed immoral just because it offers a temptation to abuse power and to oppress minority SHs. No
Page 39 of 59
SH is compelled to borrow money from and pledge his shares to Pambul. The benefits are mutual. So long as
management acts honestly, no one can question their acts, which are purely intra vires.

24. Campbell vs Leow’s Inc

“Same as above case ata”

25. Rosenfeld v. Fairchild Engine & Airplane Corporation

Citation. Rosenfeld v. Fairchild Engine & Airplane Corp., 201 Misc. 616, 112 N.Y.S.2d 55, 1952 N.Y. Misc.
LEXIS 2602 (N.Y. Sup. Ct. 1952)

Brief Fact Summary. Plaintiff, William Rosenfeld, filed a shareholder’s derivative action against Defendant
corporation, Fairchild Engine & Airplane Corp. and its directors, after Defendants spent Fairchild’s funds on
proxy solicitation.

Synopsis of Rule of Law. A corporation’s directors may spend the corporation’s money for proxy solicitation
in a bona fide policy contest provided that the amount is reasonable.

Facts. 
The old board of directors and the new board spent over $120,000 each in soliciting proxies for a
shareholder vote for new directors. After the new board won, they authorized Fairchild to reimburse the old
board for most of their expenses, and they voted to have Fairchild reimburse their own expenses. Plaintiff did
not allege any fraudulent behavior, and agreed that the expenses were reasonable, but nonetheless not legal.

Issue. 
The issue is whether directors can use the company treasury to fund the solicitation of proxies.

Held. 
The Court of Appeals of New York held that when there is a good faith dispute concerning a significant
policy, the directors should be able to use corporate resources to fund proxy solicitations to ensure that the
upcoming vote receives the attention that it is due. In a situation such as the case at bar, the expenses were
reasonable and did go to a reasonable dispute between to factions.

Dissent. The dissent believed that the burden should be on Defendants to prove that their expenses were
legitimate.

Concurrence. The concurring opinion believed the holding was correct, but only because Plaintiff failed top
offer proof that the expenses were illegitimate. The concurring opinion believed that there possibly could have
been expenses in this case that solicited proxies for the benefit of only one side, and they did not want to allow a
system where one side can solicit solely for their benefit on the company’s dime.

Discussion. A majority supported Defendants, but there was no majority as far as the reasoning behind that
holding. The dissent does believe, like the majority opinion, that the expenses should be reasonable, but they
came to a different conclusion when they applied it to the facts of the case. The dissent certainly differs from
the concurring opinion that put the onus on Plaintiff to prove the unreasonableness of the expenses.

26. Duffy v. Loft Inc., 17 Del. Ch. 140 (Del. Ch. 1930)
FULL CASE SAD NI SIYA

The argument has reduced the questions involved in this cause to two in number.

1. The first question is whether the meeting which convened on March 19th was an invalid one because
of the fact that Mr. Miller, the incumbent president of the corporation, was not allowed to preside after the
meeting was convened. A stenographic report of the meeting was made and the stenographer’s transcript of his
notes is conceded by both factions to be as faithful an account of what transpired as it was possible for any
person to get in the midst of the confusion that was at times prevalent. The rival factions had been engaged,
prior to the meeting, in a rather strenuous campaign for proxies and as soon as the meeting started, that
Page 40 of 59
happened which so often happens on such occasions, namely, the spirit of contest which the proxy campaign
had engendered began to show itself. The president, Mr. Miller, at the hour of twelve, the time designated in the
call for the convening of the meeting, appeared and commenced to address the gathering of from 250 to 300
people there assembled. He did not get far before he was asked to proceed in accordance with the by-laws. He
replied that he had not yet called the meeting. There then followed a great amount of discussion and argument.
Whether the president formally opened the meeting or not, is of no moment, for stockholders were present in re-
sponse to the call and the president as a matter of fact made rulings from the chair. Of course it was not in the
power of the president to prevent the meeting by refusing or neglecting to formally announce its opening.

The first controversy that engaged the attention of the meeting presented the question of who should
preside. The president insisted that under the by-laws he was the only one entitled to preside. Stockholders on
the floor moved that a chairman be selected by the meeting. The president ruled the motion out of order and
insisted that the first thing to be done was to call the roll to see if enough stock was present either in person or
by proxy to constitute a quorum. For page after page of the stenographic report the discussion of this question
continued. Nominations were made for chairman, the president at one point stating that a “Mr. Sawyer has been
nominated over here.” There were several nominations, but the president would not put them to a vote. Finally a
Mr. Donald arose from the floor and asked all that were in favor of the nominee, Dr. Sullivan, to stand.
Practically all present stood up. Some time thereafter Dr. Sullivan took the chair and Mr. Miller, with some of
his following, left and went to their offices at the other end of the room, taking a stock list certified by the
transfer agent with them. Mr. Miller at all times refused to recognize the right of the meeting to choose a
chairman and repeatedly declared all attempts to elect one to be out of order on the ground that under the by-
laws he as president was entitled to preside.

Was he right in this contention? It is necessary at this point to refer to the by-laws. They provide, in one
place that “the president shall preside at all meetings of the stockholders, unless the stockholders shall appoint a
chairman, who may be the president.” Another by-law provides for the order of business at a stockholders’
meeting as follows:

(1) Call to order;

(2) Election of a chairman, if necessary;
(3) Presentation of proofs of the due calling of the meeting, etc.;
(4) Presentation and examination of proxies;
(5) Reading of prior minutes;
(6) Reports of officers;
(7) Election of directors, when that is the purpose of the meeting;
(8) Unfinished business;
(9) New business;
(10) Adjournment.

Mr. Miller evidently noticing the phrase in the second order of business “if necessary,” took the position
that the election of a chairman was not necessary and therefore all motions looking to such election were out of
order. This position was untenable. The language of the by-law first above quoted giving the right to preside
shows this to be so. It imposes a limitation on his right which is — “unless the stockholders shall appoint a
chairman.” The presence of the president ready and willing to preside cannot be said to oust the stockholders of
their right to choose a chairman on any such theory that the president’s presence makes such choice
unnecessary, for the plain reason, if no other, that the by-law proceeds expressly to say that the stockholders
may choose the president himself as chairman, a thing which if done bespeaks his presence, and therefore
negatives the idea that his absence is a prerequisite to the right of the stockholders to elect. The by-law that
deals with the order of business —“election of a chairman, if necessary” — must be construed in harmony with
the other by-law giving the stockholders the right to choose a chairman. It can be so construed by holding the
necessity of an election of a chairman to arise when a stockholder moves to choose one. The president was in
error, therefore, when he repeatedly refused the demand of the stockholders that the meeting elect a chairman.

A chairman was elected in the manner above stated. In view of the president’s refusal to put the motion,
and of his dis7 regard of the overrulings of his decisions on appeals, the stockholders could resort to no other
course than they did, namely, vote on the motion when put to them by one of their fellows. They did so and I
can find no legal objection to their course in that regard.

But, assuming that the stockholders had the right to choose a chairman, yet it is argued the choice they
made was by a viva voce vote and under the by-laws it should have been by a vote of shares and by ballot. The
by-laws contain a provision which answers this argument. It is as follows:

“The vote in election of directors, and, upon demand of a stockholder present in person or by proxy, the
vote on any question, shall be by a stock vote and by ballot.” '

Page 41 of 59
 This by-law clearly implies that upon all votés other than upon directors, the vote shall not be a stock
vote unless a demand is made by a stockholder for such a vote. In view of the particular language of the by-law
it is not necessary to refer to the contention that the Guth faction puts forth to the effect that, under general law,
votes directed to such a question as the chairmanship of the meeting are to be taken viva voce and not by shares.

The language of the by-law in this case is such as to differentiate the case from Proctor Coal Co., et al.,
v. Finley, 98 Ky. 405, 33 S. W. 188, 190, which is relied on so confidently by the solicitors for the Miller
faction, for in the cited case the by-laws provided that “at stockholders’ meetings, each stockholder shall cast
one vote for each share of stock owned by him,” and there was no language from which an exception to the
method of voting by shares was inferable as here.

The question arises then, was a demand for a stock vote made so as to render a viva voce vote on the
chairmanship improper under the by-law. A careful reading of the minutes of the meeting fails to show such a
demand. It is true that there were repeated demands by the president for a call of the roll. But his demands in
this regard were always for the purpose of seeing whether a quorum was present. He never demanded a stock
vote on the question of chairman. Such a demand would have been inconsistent with his oft-asserted position
that it was out of order to elect a chairman. His demand for a roll call for quorum purposes was a demand that
would have been proper under the fourth order of business (supra), an order of business that came after the
election of a chairman. This fact was pointed out to him in response to his insistence upon a roll call. I repeat
that he never demanded that the vote upon the chairmanship should be by stock. Neither did any one else.

Dr. Sullivan’s choice as chairman was therefore not in violation of the by-laws.

This conclusion makes it unnecessary to consider whether, if the chairman had been elected in violation
of the by-laws, the subsequent proceedings of the meeting under his chairmanship would have been null and
void, a question which was argued.

2. The next question is whether or not a quorum was present for the transaction of business. If none was
present, the attempted election of directors was a vain proceeding. The question of whether a quorum was
present is admitted to turn on whether or not 232,840 shares for which the Miller committee held proxies can be
properly counted as present. If they were, a quorum was present; otherwise there was no quorum.

Proxies for those shares ran in favor of “Alfred R. Miller, Charles R. Stevenson and/or Edward Gray,
Jr.,” and appointed these gentlemen the “true and lawful attorney or attorneys, agent or agents, and proxy or
proxies of the undersigned, with power of substitution, for, and in the name, place and stead of the undersigned
to attend the annual meeting of the stockholders * * * and then and there to vote all stock held or owned by the
undersigned * * * to represent and to vote all shares of stock of the undersigned, according to the number of
votes which the undersigned would be entitled to cast if personally present. * * * ”

The proxies held by the Miller committee were never presented to the meeting. The record fails to show
where they were at the time of the meeting. They are now in this court, however, having been produced in
response to an order in that behalf, so that there can be no doubt upon the fact that 232,840 shares of stock had
designated the three gentlemen known as the Miller committee to attend the meeting as their agents and to vote
thereat.

Furthermore, the designated agents were in fact present at the meeting. Two of them, Messrs. Miller and
Gray, were stockholders of record. Mr. Stevenson, however, was not. Unless therefore he was there in his
representative capacity as a member of the proxy committee, he had no right to be present. He took an active
part in the events of the day. So did Mr. Gray; and of course Mr. Miller in a much larger degree. Mr. Miller at
one stage of the proceedings stated that he was representing a great many stockholders, by which statement it is
to be inferred that he was representing stock for which he was one of the three proxies.

The proxies which the Miller committee gathered were obtained from stockholders as the result of
solicitation by correspondence and otherwise. It was the manifest intent and desire of the stockholders who gave
the proxies to have their designated agents or attomeys-in-fact attend the meeting and vote in their behalf. In so
far as the stockholders could, without personal attendance, accomplish their presence at the meeting, they are to
be thought of as having intended to do so when they gave their proxies. It is furthermore to be assumed that they
thought the persons who had solicited from them the right to act as agents in their behalf would, when the
agency was conferred, be duly accepted and the duties inherent in the relationship be duly performed.

I take it, however, that it cannot be held that the stockholders who gave proxies notwithstanding the
assumption of an intent on their part that the proxies would be acted-upon, by the mere entertaining of such an
intent can permanently fasten the relationship of agency upon those named in the proxies so that the latter
cannot refuse to act. An agent can always abandon his agency at the expense of assuming the risk of liability if
the circumstances are such that the law attaches liability.

Page 42 of 59
 And so in this case, the Miller committee was free, if it saw fit, to abandon the agency and fail to act
under it, notwithstanding it had solicited the relationship and the principals had sought to confer it. But it would
seem to be reasonable to say that where an agency of the present sort has been sought, and freely conferred,
strict and exacting proof of its assumption in action ought not to be required; or, conversely, relatively slight
circumstances ought to justify the conclusion that a solicited agency when granted was assumed and acted on
when the occasion for its exercise and the agent is present participating in some way in the business with which
the proposed agency is concerned.

In making these remarks I am speaking only of the particular sort of agency we are here dealing with,
viz., an agency commonly called a proxy. The paper writing which we call a proxy is nothing more than
evidence of a relationship. It is not the relationship. It simply testifies that A. has constituted B. his agent to act
for him in a vicarious capacity. The producing of the proxy is not the creation oi the agency. It is only proof of
it to the satisfaction of others. So in this case the failure of the Miller faction to produce and file their proxies
did not of itself destroy their attorneyship. Their omission in this regard simply amounted to this, that they did
not show to the meeting the documentary evidence of their authority. The proxies, however, evidencing the
extent of their authority are now in this court and it appears that as a matter of fact they had been constituted the
spokesmen for 232,840 shares. This is a fact and failure to show the written evidence of it at the meeting,
cannot destroy it as a fact.

The statute of this State under which the corporation was created provides that directors shall be elected
at an annual meeting of stockholders. The duty to hold such a meeting and to elect directors thereat is one that is
laid by the statute. So important is the direction that this duty be performed that in some instances courts have
brushed aside all strictness and technicality of view in the interest either of securing a statutorily commanded
election or, if one has been sought to be held, of sustaining its results. In the case for instance of In re Cedar
Grove Cemetery Co., 61 N. J. Law, 422, 39 A. 1024, the court found the result of an election by assembling the
polls of two rival meetings and ascertaining from the combination of both who had received a majority of votes.
And in Lutz v. Webster, 249 Pa. 226, 94 A. 834, an election was ordered in face of the fact that four-fifths of
the outstanding stock was necessary for a quorum and the holder of more than one-fifth was defeating a quorum
by absenting himself as he had been doing for three years. This individual was as stated by the court setting up
the by-laws to defeat what the law required — the holding of an annual meeting. An election was ordered to
proceed regardless of the by-law provision touching a quorum. The same solicitude in behalf of the statute’s
provision directing an election of directors at the meeting designated for that purpose, underlies the ruling that
where once a quorum is present it cannot be broken by withdrawals. Hexter v. Columbia Baking Co., 16 Del.
Ch. 263, 145 A. 115, applies the principle to a situation of that sort.

Reasonable rules ought to prevail in aid of the accomplishment of the statute’s purposes, and a certain
degree of liberality in favor of a meeting ought to prevail. To take any other view would be to encourage the
prolongation of internal strife between rival factions and keep the corporation’s affairs in such a state of
confusion and turmoil that the business which it was organized to conduct would inevitably suffer to the
damage of its stockholders. Where an extensive campaign has been carried on by rival groups for the votes of
stockholders and the arguments pro and con have been made, the parties interested should submit to a count and
let the majority prevail. If such a course is not pursued, if, after the contest has been waged, one side defeats a
decision by mere tactical maneuvers, the whole business must be gone through with again with its consequences
of expense and disturbance. And in many instances the situation will simply be one where the side that appears
to have lost will resort to schemes in order to create an opportunity for a second try in the hope that perhaps
better success might be had the next time. Thus the corporation’s affairs, their peaceful and undisturbed
administration will be subordinated to the factional interests of rival contenders.

In light of the foregoing, it appears to me that in passing upon questions of this kind, the court should
indulge in every reasonable intendment in favor of the conclusiveness of the meeting. With this attitude of
mind, I am of the opinion that under the evidence the meeting in question should be regarded as one that started
off with a quorum present. That means that the shares for which Mr. Miller and his associates held proxies were
present. The proxies were sohcited on the theory that the shares represented by them would be represented at
the meeting and the agents designated to represent them were in fact present having a great deal to say. One of
these agents, unless he was present and acting in a representative capacity was an intruder, and another one of
them specifically admitted he was representing a great many shares. The absence or failure to show the written
evidence of their authority, as already stated, cannot destroy the fact of its existence. The evidence of it is before
the court in the shape of the proxies themselves. The agents named in them disagreed with the method of
procedure and after having made their contentions and suffered defeat, walked out. They were not justified in
the position they had taken. Had they been the owners of the stock represented by their proxies, under the ruling
in Hexter v. Columbia Baking Co., supra, their withdrawal would not have the effect of breaking the quorum.
The fact that they were not the owners but only the representatives of the owners does not, under the
circumstances shown, make any difference in the result. As they had the power and did take their principals into
the meeting, so they could not take them out of the meeting, just as the principals could not have legally taken
themselves out if they had been personally present and had done what their representatives did.

Page 43 of 59
 If it be suggested that Miller and Gray, two members of the Miller proxy committee, were stockholders
in their own right and that if it is proper to count them as present for quorum purposes, they should be so
counted only in their individual stockholder capacities and not in their representative capacities, the question
arises why so — why not on the other hand reject their role of individuals and accept their role as agents? I
think they must be regarded as present in both capacities. Miller as much as said so and the third associate not
being a stockholder of record, necessarily was there in a representative capacity. It would be unreasonable to
say that even if Miller and Stevenson were present as proxies or agents, Gray, their minority associate, was not.

It being agreed that if the shares represented by the Miller committee can be counted as present for
quorum purposes, the Guth directors were elected, it is unnecessary for me to proceed with an analysis of the
vote.

Order accordingly.

2. Voting Trust

27. ABERCROMBIE v. DAVIES

SUMMARY: Plaintiff and defendant corporate shareholders combined to form an oil company. Defendants,
controlling 54% of the voting stock, entered into an agreement to vote their stock as a block. The agreement
provided that (1) each of the corporate shareholders would appoint agents to vote its stock, (2) the stock
certificates would be placed in escrow, (3) an arbitrator would be consulted if seven of the eight agents could
not agree, (4) the agents could be removed at any time by the corporate principals without cause, and (5) any
seven of the eight could withdraw the stock from escrow and place it in a voting trust. Plaintiffs, as minority
stockholders, brought an action for a declaratory judgment that the agreement of defendants was invalid. The
TC upheld the agreement in part. On appeal the Delaware Court, held reversed. The agreement is a voting trust.
Voting trusts must be set up in accordance with the Delaware voting trust statute, which requires, inter alia, that
the stock transfer be noted on the books of the corporation and that a copy of the agreement be filed at the
corporation’s principal office. Since defendants’ voting trust did not meet these requirements, it is in invalid.
HELD: The Supreme Court invalidated it. The Court did not purport to invalidate all voting agreements that did
not comply with the voting trust statute. Indeed, the court seemed to recognize that if the agreement were not a
voting trust in form or effect, the statute would not be applicable. Hence, the finding of invalidity in this case
rested upon the court’s determination that the defendants’ agreement was a voting trust. But it was held to be
invalid.

DOCTRINE: Obviously, as a pooling agreement in substance and purpose approaches more and more nearly
the substance and purpose of the statute, there comes a point at which, if the statute is not complied with, the
agreement is illegal. A pooling agreement may not escape the statutory controls by calling the trustees agents
and giving to the stockholders receipts instead of voting trust certificates. If this were not so, stockholders
could, through the device of an agreement such as the one before us, accept for themselves the chief benefits of
the statute: unified voting control through fiduciaries for an appreciable period of time; and escape its burdens:
the requirements for making an open record of the matter, and the limitations in respect of time. 

FACTS:
 American Independent Oil Company is a Delaware corporation.
o The organizers were:
 The organizers subscribed in varying proportions to American’s original issue of stock.
o Additional stock was later issued, and there are now 150,000 shares.
 The organization agreement provided that the Board of Directors of American Oil should consist of one
director for each 5,000 shares held, and that the directors should be elected by cumulative voting.
o In effect, stockholder has been permitted to name the director or directors to represent on the
board his or its interests.
 Davies represents his own interest and is president of the corporation.
 At all times, the number of directors has been 15.
o No one stockholder holds a majority of stock, and no one stockholder is represented by more
than 4 directors.
o Obviously, smooth functioning of such a board was dependent either upon substantial harmony
among the interests represented on it or upon an effective coalition of the interests of a majority.

 March 30 1950: 6 of the stockholders took steps to form such a coalition.

o An agreement was executed between: 8 individuals, also designated as “Agents” and the 6
stockholders – Davies, Ashland, Globe, Lario, Hancock, and Signal.
o These stockholders hold about 54 ½ % of the shares. They are represented on the board by 8 of
the 15 directors.
Page 44 of 59
 o The Agents named in the agreement were at the time the 8 directors representing these 6
stockholders.

 The obvious purpose of the agreement was to achieve effective control of the board and thus control of
corporate policy.
o The motive for the agreement, according to the defendants, was to prevent acquisition of control
by Phillips, which was the largest single stockholder, holding about one-third of the stock.

 The Agents' Agreement is an unusual one. In effect, it transfers voting control of the stock of the six
stockholders to the eight Agents for a period of ten years (subject to termination by seven of the
Agents).
o The Agents are to be, as far as possible, identical with the directors.
o The agreement of seven of the eight is required to vote the stock and elaborate provisions are
added for the choice of an arbitrator to resolve disagreements. Somewhat similar provisions
attempt to control the action of the directors.
o A more detailed examination of the agreement will later be made. At the moment we note that
the majority of the board secured by this agreement (eight of the fifteen) comprised Davies, the
two Signal directors, the two Hancock directors, the director representing Globe and Lario, and
the two Ashland directors.

 The effective control thus sought to be achieved apparently lasted until December 9, 1954.
o On that date a meeting of the Board of Directors was held in Chicago.
o A resolution was adopted calling a special meeting of the board for December 16, to consider
and take action upon certain amendments to the by-laws and other matters. This resolution was
adopted by a vote of nine to six.

 This majority consisted of Abercrombie, the four Phillips directors, the Sunray director, the Deep Rock
director, and the two Ashland directors.
o The minority consisted of Davies and the Globe, Lario, Hancock and Signal directors.

 In the meantime, the suit below was filed by Abercromie, Phillips and Sunray against the other
shareholders and the agents.
 6 of the Agents appeared and answered.
 The Chancellor made the following rules of law:
(1) Certain provisions of the Agents' Agreement attempting to control directorate action are invalid
on their face
(2) The agreement is not a voting trust;
(3) The provisions respecting stockholder action are severable from the illegal provisions, and
constitute a valid stockholders' pooling agreement.

THE AGENTS’ AGREEMENT:

 Par (1): "Upon the signing of this Agreement, or as soon thereafter as it may be possible for them to do
so, by those whose certificates may be pledged or deposited, as hereinafter referred to, the Shareholders
will deliver to the Agents the certificate or certificates representing all the shares of American
Independent Oil Company now owned or controlled by them, said certificates to be endorsed in blank or
attached to a stock power endorsed in blank. Said Agents will give to each depositing Shareholder a
proper receipt for all certificates so delivered."
o The certificates and stock powers are to be deposited in escrow in a bank or trust company,
subject to withdrawal at any time by any seven of the agents.

 Par (2):  Sets forth a method of dealing with a possible increase in the number of Agents "(or in case a
Voting Trust shall have been created, the number of Trustees)".

 Par (3): “During the term of this Agreement the Agents or their successors shall have the sole and
exclusive voting power of the stock subject to this Agreement.
o The Shareholders shall deliver to the Agents and shall keep in effect during the life of this
Agreement proxies giving said Agents or their successors jointly and each of them severally,
with full power of substitution to any or all of them, the power to vote the stock at all regular and
special meetings of the stockholders and to vote for, do or assent or consent to any act or
proceeding which the Shareholders of said corporation might or could vote for, do or assent or
consent to.”
o The vote of the Agents shall always be exercised as a unit, on any matter on which a vote of the
stockholders is called for, as any seven of said Agents shall direct and determine.
o If any seven Agents fail to agree on any such matter, then the question in disagreement shall be
submitted for arbitration to some disinterested person (i. e., one having no financial interest in
Page 45 of 59
 American Independent Oil Company), chosen by the affirmative vote of seven of the Agents, as
sole arbitrator.
o In the event a Voting Trust is established as provided in Paragraph 7 hereof, the provisions of the
two preceding subparagraphs shall remain in effect, substituting the words "Trustee" or
"Trustees" for the words "Agent" or "Agents" wherever those words occur in said two
subparagraphs.

 Par (4): Provides for filling a vacancy in the position of Agent.

o As to the corporate shareholders, the successor is to be named by the shareholder that the Agent
was representing.
o As to Davies, his successor is to be named by the majority of the remaining Agents. Each
corporate shareholder has the right to remove its Agent or Agents at any time without cause.

 Par (6): Except as herein otherwise provided, the proxies to be given hereunder shall not be revoked and
the powers herein delegated to said Agents shall be irrevocable during a period of ten years from and
after the date of said Agreement. This Agreement, however, shall terminate if any seven of the Agents
hereunder declare in writing that the Agreement is terminated. 
o Upon the termination of said Agreement the certificates representing all of the shares so held
under this Agreement and then remaining in escrow or in the hands of said Agents or their
successors shall be returned or assigned to the parties then entitled thereto, upon surrender to said
Agents of the receipts given for said certificates.

 Par (7): A ny seven of said Agents may at any time withdraw said stock certificates from escrow and
transfer said stock to the persons then acting as Agents, as trustees to be held under a voting trust. 
o The parties do hereby constitute any one of said Agents their attorney in fact to execute said
voting trust agreement for them and in their names, in the event any of them should be unable, or
should fail or refuse to sign said voting trust agreement upon the written request of seven of said
Agents.

Plaintiff’s assertion:
 The agreement is invalid on its face.
 In substance, though no tin form, it is a voting trust, but this voting trust is VOID because it does not
comply with the provisions of our voting trust statute.

Defendant’s assertion:
 It is NOT and was not intended to be a voting trust, and is a mere pooling agreement of the kind
recognized as legal in Delaware.

ISSUE: WON there was a voting trust. (YES)

 Corollary Issue: Was it legal? (NO)

RATIO:
 When we apply these tests to the Agents' Agreement we find:
(1) that the voting rights of the pooled stock have been divorced from the beneficial ownership,
which is retained by the stockholders;
(2) that the voting rights have been transferred to fiduciaries denominated Agents;
(3) that the transfer of such rights is, through the medium of irrevocable proxies, effective for a
period of ten years;
(4) that all voting rights in respect of all the stock are pooled in the Agents as a group, through the
device of proxies running to the agents jointly and severally, and no stockholder retains the right
to vote his or its shares; AND
(5) that on its face the agreement has for its principal object voting control of American.

 These elements, under our decisions, are the elements of a voting trust.
 ANOTHER SIGNIFICANT CIRCUMSTANCE: Paragraph 7 of the Agents' Agreement gives any seven
of the eight agents the power to withdraw the stock from escrow and to transform the Agreement into a
formal voting trust.
o Any one of the agents is authorized to sign the voting trust agreement for any shareholder who
fails to do so upon the request of any seven of the agents.
o A form of a voting trust agreement is attached as an exhibit to the Agents' Agreement.
o A comparison of this form with the provisions of the Agents' Agreement shows that upon the
execution of the Voting Trust Agreement the scheme of control functions just as it functions
under the Agents' Agreement. 

Page 46 of 59
  Thus the only significant changes made in transforming the Agents' Agreement into a Voting Trust
Agreement are the provisions formalizing the trust, viz.:
(1) the Agents become Trustees a change of name and nothing more;
(2) the stock with irrevocable stock powers running to the Agents becomes stock registered in their
names as Trustees; and
(3) voting trust certificates instead of receipts are issued to the stockholders.
 To sum up: the substance of the voting trust already existed; the transformation added only the
special mechanics that the statute requires.

ON THE ALLEGED NON-COMPLIANCE WITH DELAWARE LAW

 The provisions of the statute that were not complied with are the requirement that the shares be
transferred on the books and the requirement that a copy of the agreement shall be filed in the
corporation's principal office in Delaware.
 The effect was to create a secret voting trust.
o The provision respecting the filing of a copy in the principal office in Delaware “to open to the
inspection of any stockholder * * * or any beneficiary of the trust" is a provision obviously for
the benefit of all stockholders and of all beneficiaries of the trust, who are entitled to know
where voting control of a corporation resides.
o  And the provision for transfer of the stock on the corporate books necessarily serves, though
perhaps only incidentally, a similar purpose with respect to the officers and directors. If the
validity of a stockholders' pooling agreement of the kind here presented were to be sustained, the
way is clear for the creation of secret voting trusts. The statute clearly forbids them.
 The failure to transfer the stock on the books is not a sufficient reason in this case for holding the
Agents' Agreement not a voting trust.
o It is an indication that the parties did not intend to create a voting trust; but that subjective
intention is unimportant.
o The stock here was endorsed in blank and delivered to the agents for deposit in escrow with
irrevocable proxies.
o Transfer of the stock on the books is not essential to effect an irrevocable transfer of voting
rights to fiduciaries, divorced from the other attributes of the stock, in order to secure
voting control, as the Agents' Agreement demonstrates.
o It is such a transfer that is the characteristic feature of a voting trust.

 The fact that the Agents are subject to control by their respective principals does not prevent the
agreement from constituting a voting trust.
o The stock is voted by the Agents as a group. No one stockholder retains complete control over
the voting of its stock. It cannot vote its own stock directly; all it can do is to direct its Agent
how to vote on a decision to be made by the Agents as a group.
o The stock of any corporate stockholder may at any time be voted against its will by the vote of
the seven other agents.
o The control of the agents rests upon the provisions that they are severally chosen by the
respective stockholders and each may be removed and replaced by the stockholder he represents.
 Such a provision is not inconsistent with a voting trust.
o And the alleged continuing control of the Agent by the stockholder clearly would not exist in the
event of the death, removal or resignation of Davies in his capacity of Agent.
 In that case his successor, whether Agent or Trustee, is named by a majority of the
remaining Agents or Trustees, as the case may be, and his estate has no control whatever
over the Agent so named.

 Defendants: It is merely a pooling agreement. A pooling agreement may assume any form without
running afoul of the voting trust statute.

 Supreme Court: WRONG. If we understand defendant’s argument, a pooling agreement may, through
the medium of fiduciaries with exclusive voting powers, awfully accomplish substantially the same
purposes as a voting trust and thus avoid compliance with the law. → OF COURSE NOT
o Obviously, as a pooling agreement in substance and purpose approaches more and more nearly
the substance and purpose of the statute, there comes a point at which, if the statute is not
complied with, the agreement is illegal.
o A pooling agreement may not escape the statutory controls by calling the trustees agents and
giving to the stockholders receipts instead of voting trust certificates.
o If this were not so, stockholders could, through the device of an agreement such as the one
before us, accept for themselves the chief benefits of the statute: unified voting control through
fiduciaries for an appreciable period of time; and escape its burdens: the requirements for making
an open record of the matter, and the limitations in respect of time.

Page 47 of 59
  For the foregoing reasons, we are compelled to disagree with the holding of the Chancellor upon the
question discussed. We are of opinion that the Agents' Agreement is void as an illegal voting trust.

DISPOSITION: REMANDED to Court of Chancery of New Castle County.

28. Everett vs. Asia Banking

G.R. No. L-25241; November 3, 1926

FACTS:
Teal & Company is indebted to HW Peabody & Co. for P300K for tractors, plows, and parts delivered,
of which it has paid P150K. Asia Banking Corp held drafts accepted by Teal under the HW Peabody’s
guarantee. Tractors were returned to HW Peabody due to its being unsellable due to financial and agricultural
depression in the RP. Teal ordered another lot of tractors from Smith Kirkpatrick, but shipment was delayed
until the rescission of the credit of Teal with Asia Bank. Yet Smith still delivered the order, and Teal at the
request and advice of the Bank accepted the drafts and stored the same. Asia Banking persuaded Teal, Peabody,
and Smith Kirkpatrick to enter into a “creditor’s agreement” wherein it was mutually agreed that neither of the
parties should take action to collect its debts from Teal for 2 years. Teal soon became indebted to Asia Bank for
P750,000, secured by mortgage. The Bank then suggested that, for the mutual protection of Teal and itself, it
was advisable that the Bank should temporarily obtain control of the management and affairs of the company.

To this end, it was necessary for the stockholders to place their shares in a voting trust to be held by the
Bank, and then the Bank would finance Teal under its own supervision. The Teal stockholders were thus
induced to enter into the Voting Trust Agreement, with the purpose that the agreement will be intended for the
protection of all parties from outside creditors. Shortly after the execution and delivery of the voting trust and
the MOA, Mullen as GM of the Bank, caused the displacement and removal stockholder representatives in the
Board and the substitution in their place of the Bank’s employees or representatives. The new Board, who have
not purchased any share of stock of Teal, proceeded to remove the Corporate Secretary, discharge all the old
managers and displace them with creatures of their own choosing whose interest consisted wholly in pleasing
themselves and the Bank, and who were wholly foreign to the stockholders.

ISSUE:
WON the action should have been brought by Teal and Co., and not the majority stockholders thereof.

HELD:
NO. Teal and Co., including its Board, was already under the control of Asia Banking. Thus, it would
have been useless to ask the Board to institute the present suit, and the law does not require litigants to perform
useless acts. The court held that the stockholders could bring the said action (in the nature of a derivative suit)
on behalf of Teal and Co.

When the Board of Directors in a Corporation is under the complete control of the principal defendants
in the case and it is obvious that a demand upon the board of directors to institute an action and prosecute the
same effectively would be useless, the action may be brought by one or more of the stockholders without such
demand. The Court however, did not rule on the propriety or impropriety of the Voting Trust Agreement
between the Bank and the Company.

NOTE: However, it may be inferred that the stockholders may bring suit against the trustees if the voting trust
agreement is being used by the said Trustees to perpetuate fraud against the corporation, as is present in this
case. The stockholders would still have legal standing to institute the suit in behalf of the corporation for acts
done by the trustees to defraud the corporation, when the said trustees already have control of the Board of the
said corporation. A derivative suit is still proper.

29. Mackin vs. Nicollet Hotel

SUMMARY: Defendant Nicollet Hotel was to build a new hotel in the state of Minneapolis. To raise funds, it
would apply for loan and sell preferred stocks. The granting of loan and the issuance of license to sell preferred
stocks were subject to a condition that a voting trust agreement would be executed wherein all the common
stocks of Nicollet Hotel would be deposited in three voting trustees who in turn, would manage the hotel
company. The voting trust agreement was executed and the trustees now had the responsibility to fully carry out
and perform the terms and conditions in the trust agreement. Plaintiffs Mackin and Cooper, owners of some of
the shares of stock deposited to the trustees, were claiming that the trustees mismanaged the company and that
the trust agreement was void by reason of public policy – that the beneficial ownership of the shares is in the
original stockholders while the voting right is with the trustees. The Court held that voting trust agreements are

Page 48 of 59
not illegal per se. The validity of a trust agreement is dependent upon the legality of its purpose or object, not
the form of the agreement.

FACTS
Defendant Nicollet Hotel, Incorporated was a Delaware corporation, organized by a group of men
interested in the commercial welfare of Minneapolis for the purpose of adding to the hotel accommodations of
that city. Defendant company was to build a new Nicollet Hotel on a land in which Glen S. Dixson had a
leasehold right. In exchange of Dixson’s leasehold right, Nicollet Hotel would give him 2,500 shares of its
common stock.

The hotel to be built would cost about $3,000,000. Such amount was planned to be raised by selling
$1,800,000 of first mortgage bonds and $1,250,000 worth of preferred stock.

PROCURING OF LOAN: In February 1923, Nicollet Hotel applied for a loan of $1,800,000 to be
secured by first mortgage bonds and a trust deed covering the hotel property with three trust companies from
Minneapolis: the Minnesota Loan & Trust Company, the Minneapolis Trust Company, and the Wells-Dickey
Trust Company. This loan application would be accepted on the condition that “the borrower [Nicollet Hotel]
agrees that a voting trust agreement covering all of the common stock of the borrower will be executed…”

ISSUANCE OF PREFERRED STOCKS: Also in February 1923, Nicollet Hotel applied with the State
Securities Commission of Minnesota for a license to sell its preferred stock. This application contained a
condition that “the common stock of the corporation is to be trusted with three trustees for a period of 10
years…” In the same month, the commission issued to Nicollet Hotel the license to sell its preferred stocks.

EXECUTION OF THE VOTING TRUST AGREEMENT: In compliance with the conditions set in the
loan application and the issuance of license to sell the preferred stocks, in March 1923, a voting trust agreement
was made by Nicollet Hotel with A.E. Zonne, Glen S. Dixson, and Joseph Chapman as voting trustees. A
portion of the recitals of the said voting trust agreement states 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.”

The trust agreement provided that the trust would continue for ten years or until all outstanding preferred
stocks shall be retired.

The common stock owners deposited their shares upon the execution of the trust agreement: Dixson –
2,500 shares, Haglin & Sons Company – 1,600 shares, and Holabird & Roach – 400 shares. That constituted all
the common stocks of Nicollet Hotel. On the other hand, the preferred stocks worth $1,250,000 were also sold
and the $1.8M loan was also granted by the Minnesota Loan & Trust Company.

Article IV of the trust deed states that the three voting trustees (Zonne, Dixson, and Chapman) would
cause said voting trusting agreement to be fully carried out and performed, in accordance with the terms thereof.

Plaintiff Mackin and Cooper were the owners of trust certificates representing 80 and 1,520 common
shares, respectively, which were held by the defendant trustees (Zonne, Dixson, and Chapman). Their claim
was that the voting trust was void and that the trustees and the directors appointed by the latter have
mismanaged the company and have caused large losses. The plaintiffs also contended that during stockholder’s
meetings, the trustees would exercise the voting rights of the common stock. They also alleged that they had
been denied the right to inspect the books.

[SIDE ISSUE]
What laws would apply in the present case, that of Delaware or that of Minnesota?

None. At the time of the commencement of the action, neither of the two states had statute upon the
subject of voting trust agreements in corporate management.

It is to be noted that the defendant Nicollet Hotel was organized under the laws of Delaware, while its
principal business is conducted and the transactions challenged by plaintiffs Mackin and Cooper took place in
the state of Minnesota. The determination of which state law would apply would matter if it were alleged at the
time of the commencement of action that there was a statute in either of the state on voting trust agreements. In
this case, however, no statute of such nature was found in both states.

The counsel for the plaintiffs Mackin and Cooper alleged that after the commencement of the present
action, the state of Delawate passed a law authorizing voting trust agreements. The counsel was suggesting that
prior to Delaware’s passing of such law, the established rule of that state was that the voting trust agreements
were illegal.

Page 49 of 59
 The Court would not accept this reasoning because legislation must be considered as addressed to the
future and not to the past.

[SIDE ISSUE]
W/N the trust agreement was violative of the Minnesota statute in relation to a stockholder voting his
stock by proxy

NO.

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."

However, Nicollet Hotel’s by-laws provides that: "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."

The by-laws of Nicollet Hotel provides for a longer period of appointment of proxy which is allowed in
the Minnesota statute.

[MAIN ISSUE]
W/N the trust agreement is valid

YES.

[It is the contention of the trust certificate holders that this voting trust agreement, in reliance upon
which the preferred stock and bonds of this corporation were sold, is void, as against public policy, because it
separates the voting power from the owners of the beneficial interest in the common stock, takes away from the
common stock holders their duties and responsibilities to the corporation, and puts them in the hands of men
who may or may not have a financial interest in the corporation.]

The Court held that voting trust agreements are not illegal per se. It is saying that the validity of a trust
agreement is dependent upon the legality of its purpose or object, not the form of the agreement. The Court also
noted that where the trust is voluntarily created as a condition precedent to a loan to protect those who have
furnished the money that has put the life into a corporation, the courts should not seek further for a
consideration.

The Court stated that the following circumstances would generally render a trust agreement valid and
binding: 1. If based upon a sufficient consideration; 2. If they do not contravene public policy or a positive
prohibitory statute; and 3. If they do not sound in fraud or wrong against the stockholders.

In the present case, there is no want of consideration or fraud alleged or shown. The voting power in the
three trustees is coupled with an interest because one of the trustees (Dixson) is a substantial owner of common
stock of the corporation, and all are charged with the duty of protecting and conserving the property for the
benefit of those who became purchasers of preferred stock and bonds upon the strength of the trust agreement
itself. And the purpose of the agreement was and is legitimate and wholesome. The plan was originally
conceived as a matter of civic pride by enterprising citizens of Minneapolis to have an outstanding hostelry
commensurate with the generally progressive character of the city.

Moreover, it would be a manifest injustice to the large number of holders of bonds and preferred stocks
to adjudge and hold illegal a trust agreement upon the strength of which they had invested their money in the
enterprise.
FALLO

For the reasons stated, the decree of the trial court should be and is affirmed.

NOTES:

Voting trust agreement - A contractual agreement in which shareholders with voting rights transfer their
shares to a trustee, in return for a voting trust certificate. This gives the voting trustees temporary control of the
corporation.

The purpose of such arrangement is to control the voting of the shares and to empower the trustee to
vote the shares. The original stockholder retains a beneficial interest in the stock, and usually the trust
agreement requires all dividends and distributions to be paid to the equitable owners.
Page 50 of 59
30. NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION VS. AQUINO
(G.R. No. L-34192, June 30, 1988)

DOCTRINE: A voting trust agreement, confers to the trustee only voting rights, separated from the other rights
of a stockholder over his shares.

FACTS
 Batjak (Basic Agricultural Traders Jointly Administered Kasamahan) manufactures coconut oil and
copra cake for export. In 1965, their financial condition deteriorated to the point of bankruptcy.

 Batjak mortgaged its three coco-processing mills to several private banks. In need of additional
operating capital, Batjak applied to PNB for additional financial assistance.

 PNB’s Board of Directors approved the request, one of the conditions is:
o That a voting trust agreement for five years over 60% of the outstanding paid up and subscribed
shares shall be executed by Batjak’s stockholders in favor of NIDC.
Note: NIDC was a wholly-owned PNB subsidiary, it’s the reason why they’re part of this case.

 Forced by the insolvency of Batjak, PNB instituted extrajudicial foreclosure proceedings against the
three oil mills of Batjak. PNB bought the two mills at auction and the third was bought by NIDC. PNB
transferred the two mills to NIDC. Hence, NIDC now owned all three mills.

 Three years later, Batjak sent a letter to NIDC asking if they would like to renew the Voting Trust
Agreement between them. Batjak sent another letter a month after stating that they safely assume NIDC
was no longer interested in renewal of the agreement.

 Batjak then requested the turn-over and transfer of all Batjak assets, properties, management, and
operations. NIDC replied and refused to comply with Batjak’s demands.
Note: Batjak clearly wanted the three mills returned, stating as basis the fact that the voting trust
agreement ended, so NIDC must return Batjak’s assets.

LOWER COURT
 Batjak filed an exparte motion for mandamus, to return the three mills, and the CFI judge issued a
restraining order preventing NIDC from doing anything to the three mills. Hence this petition.

ISSUE
WON Batjak has a right to recover the three mills from NIDC because their Voting Trust Agreement
had expired? NO.

HELD
 The SC ruled in favor of NIDC.

 It is clear that the mortgages over the three mills were foreclosed by PNB, NIDC acquired the mills, and
Batjak failed to exercise its right of redemption. Thus, the mills rightfully belong to NIDC.

 What was assigned to NIDC was ONLY the power to vote the shares of stock of the stockholders of
Batjak, representing 60% of Batjak’s OCS. Nowhere in the agreement is mention made of any transfer
of Batjak’s assets to NIDC.
Note: NIDC was a mere trustee, who only acquired voting rights.

 The acquisition by PNB-NIDC of the properties was not made under the capacity of a trustee but as a
foreclosing creditor for the purpose of recovering on a just and valid obligation of Batjak.

PETITION GRANTED

3. Pooling and voting agreements

31. Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling

Page 51 of 59
Brief Fact Summary. Plaintiff, Edith Ringling, brought an action to enforce a stock pooling agreement she had
with one of the Defendants, Aubrey Haley.

Synopsis of Rule of Law. Shareholders can agree to pool their votes and have a third party intercede when
there is any disagreement as to how to vote.

Facts. 
Plaintiff and Haley each owned 315 out of 1000 shares of Defendant company, Ringling Brothers-
Barnum & Bailey Combined Shows, with the remaining 370 shares owned by another defendant, John Ringling
North. The company’s board was comprised of seven members, and if each shareholder voted independently the
most likely outcome would be for each shareholder electing two board members with North selecting the extra
member. However, in 1941 Plaintiff and Healey contracted to pool their votes, wherein each selected two
members and then used their remaining votes to select a fifth member of their choosing. The contract called for
an arbitrator, Karl Loos, to resolve any disputes. The contract was terminated a year later with the parties still
bound by the arbitrator provision that called for Loos to help decide how to vote. In 1946, Haley could not
attend the meeting and sent her husband in her place, and instead of following Loos’ advice he chose to move
for adjournment. Plaintiff and Defendant voted their shares, and Plaintiff brought this action to force Healey to
vote according to Loos’ decision. Healey argued that the agreement between her and Plaintiff was invalid as it
took the voting power away from the shareholders and gave it to a third party (Loos).

Issue. 
The issue is whether the agreement between Healey and Plaintiff to pool their votes was valid.

Held. 
The court held that it no other shareholder’s rights were violated and public policy was not violated, as
the result of a pooling agreement. Shareholders should be allowed to benefit as they see fit from their voting
rights, and this often means banding together to strengthen their position. However, the court decided not to
invalidate the voting and held that the members that were voted in by Healey and North would remain.
Discussion. The court treats shareholder voting rights as a form of property rights.
32. Buck Retail Stores v Harkert

FACTS:
 Walter Harkert was the sole owner of chain of restaurants of hamburger stands, his finances were
low and so he engaged in the selling of fixtures and entering into agreements to buy the fixtures and
equipment back at the end of 5 years for a higher price, payment to be made in monthly installments
for a period of 5 years
 Harkert then became acquainted with Earl Buck who he entered into 4 purchase and resale
agreements with
 Harkert Houses was incorporated with the expectation that Buck would be interested in advancing
more money for his interests and the new corporation’s
 Sometime in 1937, Harkert and Buck entered into a Stockholders Control Agreement, this contract
provided that Buck would cancel Harkert’s debt ($55, 650) in exchange for 40% of stocks in
Harkert Houses, and although Buck only holds 40% of the stocks – he may nominate 2 out of the 4
Board of Directors of the Corporation
 Because of Buck’s financial support, Harkert Houses survived
 Harkert now does not want to honor the contract because he contends that voting for the Board of
Directors should be based on the shares owned in the corporation and not based on the Stockholders
Control Agreement
 Harkert contends that the agreement is in violation of Art. XII, Sec. 5 of the Constitution which
provides:
o “The Legislature shall provide by law that in all 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;”
 Two decrees (judgments) were rendered after trial on the issues presented
o 1ST DECREE: The Stockholders Control Agreement was valid, and Harkert is restrained
from violating the agreement
o 2ND DECREE: Same as 1st decree, the agreement was valid and Harkert is ordered to pay
$33, 612
Harkert is now appealing before the Court
ISSUE(S):
 Is the Stockholders Control Agreement valid?

Page 52 of 59
HELD:
 YES. The Court held that the Stockholders Agreement is valid.

RATIO:

 Although the constitutional provision provides that directors may not be elected in any other manner,
the Court held that the Stockholders Control Agreement did not ipso fact change the manner of election
prescribed by the Constitution
 It was held that the purpose of Article XII, section 5, of the Constitution is to secure to minority
stockholders a voice in the management of the affairs of the corporation in proportion to the number of
their share
 It was also held that the Constitutional provision’s purpose was to provide for cumulative voting in the
accomplishment of which it was necessary to fix the voting power of the shares of stocks
 The Court finds nothing in the section which changes the then existing rights of a stockholder to contract
with another stockholder with reference to how he should vote his stock
 Quoted from the decision:

“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.”

33. Sensabaugh v. Polson Plywood Co.

FULL CASE SAD NI SYA SORRY KAAYO

Leo SENSABAUGH, Plaintiff and Respondent, v. POLSON PLYWOOD COMPANY, a corporation, Will
Tiddy, H.H. Mees, George Kern, John Bird and Ed Funke, Directors thereof, Defendants and Appellants.
No. 10004.

Supreme Court of Montana.

Submitted June 10, 1959.
Decided July 30, 1959.
Rehearing Denied September 1, 1959.
*1065 Rankin & Acher, Helena, Doyle & Heinz, Polson, for appellants. Arthur P. Acher, Helena, and Stanley
M. Doyle, Polson, argued orally.
Hamman & Gottwig, Polson, Smith, Boone & Rimel, Missoula, for respondent. F.N. Hamman and Donald E.
Gottwig, Polson, argued orally.
HARRISON, Chief Justice.

This is an action brought by a stockholder of defendant corporation to have an election of defendant's

directors declared null and void and a new election ordered to be held.

The facts appear to be that from the date of incorporation of the defendant, Polson Plywood Company,
hereinafter referred to as the Company, until April 21, 1956, plaintiff was a member of its board of directors and
president. At a directors' meeting on March 7, 1956, a motion was adopted to appoint a committee to formulate
amended by-laws for the Company. Such a committee was appointed by plaintiff and it drafted amended by-
laws, including an amendment of Article III, Section 6 of the by-laws to change it to read as follows:

"Section 6. Every stockholder shall have the right to vote, in person or by proxy, for the number of
shares of stock owned by him, for as many persons as there are directors or managers to be elected."

After due notice, the annual meeting of the Company was held on April 21, 1956, at which meeting the
amended by-laws were presented, including the proposed amendment of Article III, Section 6, above quoted.
The amended by-laws were adopted by unanimous vote of the stockholders present in person or by proxy,
including the plaintiff. Plaintiff, along with the other directors of the Company, executed a "Certificate of
Adoption" of the amended by-laws.

Page 53 of 59
 At the annual stockholders' meeting in 1957, a resolution was duly adopted by the stockholders
approving the minutes of the April 21, 1956, meeting, and the action of the stockholders in approving the
amended by-laws adopted on April 21, 1956, was thereby ratified.

At the annual meeting of the stockholders of the Company held on April 19, 1958, after seven
candidates had been nominated for directors but before balloting, the president of the meeting ruled that the
stockholders would not be allowed to vote cumulatively, over the protests of the plaintiff. Certain ballots were
nevertheless purportedly voted cumulatively, but were counted as straight ballots. Other stockholders wanted to
vote cumulatively but did not do so by reason of the ruling of the president. On April 22, 1958, this action was
filed.

The case was tried before the court without a jury and the district court found as a matter of law that the
right to vote cumulatively is a right guaranteed by the Constitution of Montana, Art. XV, section 4, and section
15-405, R.C.M. 1947, and that such right cannot be abridged by a corporate by-law or resolution of the
stockholders or by a ruling of the president; that even if the by-laws were treated as a contract between *1066
the stockholders and between corporation and stockholders that it was against public policy and void; that the
election of directors was void and a new election was ordered to be held at which stockholders could cumulate
their votes. Judgment was entered ordering a new election and defendants forthwith appealed.

There are but two issues in this appeal. First, may a corporation by a by-law deny the right of cumulative
voting? Second, is a stockholder's contract to refrain from cumulative voting against public policy and void?

As to the first proposition, section 4, Article XV, Montana Constitution provides:

"The legislative assembly shall provide by law that in all elections for directors or trustees of
incorporated companies, every stockholder shall have the right to vote in person or by proxy the number of
shares of stock owned by him for as many persons as there are directors or trustees 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 of stock shall equal, or to distribute them, on the same principle, among as many candidates as he shall
think fit, and such directors or trustees shall not be elected in any other manner."

R.C.M. 1947, section 15-405, provides:

"All elections must be by ballot, and every stockholder shall have the right to vote in person or by proxy
the number of shares standing in his name, as provided in section 15-504 of this code, for as many persons as
there are directors 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 of stock shall equal, or to distribute them on the same
principle among as many candidates as he shall think fit. In corporations having no capital stock, each member
of the corporation may cast as many votes for one director as there are directors to be elected, or may distribute
the same among any or all of the candidates. In either case the directors receiving the highest number of votes
shall be declared elected."

Nebraska has a constitutional provision similar to ours and the interpretation thereof was recently before
their Supreme Court in the case of E.K. Buck Retail Stores v. Harkert, 157 Neb. 867, 62 N.W.2d 288, 294, 45
A.L.R. (2d) 774. That court stated:

"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. * * *

"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

Page 54 of 59
vote *1067 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."

We agree with the reasoning of that court and hold that a corporation may not deprive a stockholder of
the right of cumulative voting by any act on its part.

Turning to the second proposition, with regard to a stockholder's right to contract. This issue was before
the Supreme Court of Nebraska in the E.K. Buck Retail Stores v. Harkert case, supra, and in such opinion the
cases cited to us by appellants and respondent are considered and discussed. It would unnecessarily extend this
opinion to quote that entire discussion herein, but that court said:

"But such provision [Constitutional provision providing for cumulative voting] 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 stockholders to
contract with other stockholders with respect to such right."

Quoting from State ex rel. Frank v. Swanger, 190 Mo. 561, 89 S.W. 872, 876, 2 L.R.A., N.S., 121, the
Nebraska Court said:

"`A construction has nowhere been given to section 6, art. 12 [similar to sec. 4, art. XV, Mont. Const.],
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'."

We agree with their conclusion. This answers the question as to whether the constitutional provision, in
expressing public policy, forbids stockholders to contract among themselves with respect to voting their stock.
Here appellant contends that the by-law which does not provide for cumulative voting, which we have
heretofore declared invalid as a by-law, is enforceable as such a contract and that plaintiff is bound thereby.
However, it must at all times be borne in mind the difference between stockholders' contracts between
themselves without the realm of the corporate structure and those carried on or attempted within. Here we have
the majority of the stockholders, including plaintiff herein, in 1956 desiring to bind themselves from cumulative
voting. If their purpose at that time was, as appears from the record, for the good of the corporation and
themselves as stockholders, they could have easily entered into a valid contract between themselves to that end.
As was expressed in the E.K. Buck Retail Stores v. Harkert case, supra, the Constitutional provision involved
here was not designed as a restriction on the rights of stockholders to make their contracts which violate no rule
of the common law, and which affect no rights, except their own. Here the stockholders did not do so without
the realm of the corporate structure but carried it within, by amending the by-law. By such a method the
majority attempted to bind all stockholders, including those not represented at the meeting when the by-law was
amended.

*1068 It must further be remembered in this connection that the matter of initiating the move to dispense
with cumulative voting did not arise among stockholders as such in the first instance. It made its appearance at a
meeting of the board of directors on March 7, 1956, when a motion was presented to appoint a committee to
prepare amended by-laws, and the committee for that purpose was appointed by the president of the
corporation, and it drafted the by-law in question here. In other words the entire matter was handled within the
corporate structure from its inception to its conclusion. To enforce this by-law, invalid as a by-law, as a
contract, will amount to a deprivation of the right secured by section 4, Article XV, Mont. Const., the right of a
minority of stockholders to secure a greater representation in the management of the corporate business through
the exercise of cumulative voting.

From what we have said herein there existed no binding contract at the time of the annual meeting on
April 19, 1958, and the plaintiff's protest should have been sustained.
For these reasons the judgment of the district court is affirmed.

MR. JUSTICE CASTLES, concurs.

MR. JUSTICE ADAIR:

I concur in the result but not in all that is said in the foregoing majority opinion.

Page 55 of 59
MR. JUSTICE ANGSTMAN: (concurring in part and dissenting in part).

I concur in what is said in the foregoing opinion so far as it holds that a corporation may not, by its act, deprive
a stockholder of the right of cumulative voting and so far as it holds that a stockholder may make a contract
whereby he surrenders the right to cumulative voting.

I disagree with that part of the majority opinion which holds that such an agreement may not be expressed in the
form of a by-law to which the stockholder assented. I know of no rule of law which prescribes any particular
form that such a contract must take.

I concede that the by-law, in question here, is not binding on a dissenting stockholder, but I think it binds those
who assented to it since it has the effect of an agreement surrendering the right of cumulative voting.

MR. JUSTICE BOTTOMLY: (concurring in part and dissenting in part).

The plaintiff is a stockholder of defendant, which is a domestic corporation, being incorporated under the laws
of Montana.

I agree with the majority opinion insofar as it affirms the judgment entered by the district court. I also agree that
such a corporation may not by a by-law deny the right of cumulative voting by any stockholder. This right is
established by section 4 of Article XV of the Montana Constitution, made mandatory and prohibitory by section
29, Article III thereof, and made operative by R.C.M. 1947, Chapter 4 of Title 15. These laws provide and
establish the public policy of Montana until altered or changed by the sovereign people of this state. It is my
opinion that any contract between stockholders for the election of directors or trustees of such a corporation
other than prescribed by the Constitution is void and courts have no power or authority than has an individual or
a combination of stockholders to ignore, set aside or disrupt this established public policy of the state.

Any contract between stockholders of a domestic corporation, in regard to the election of a trustee or director or
directors of such corporation contrary to the mandatory and prohibitory provisions of the Montana Constitution
would be void as being ultra vires and are contrary to the constitutionally established public policy. In my
estimation, the written opinion of District Judge William F. Shallenberger, dated August 25, 1958, and filed
August 26, 1958, and set forth on pages 28 to and including page 32 of the transcript in this appeal, *1069
correctly states the applicable law in this case on both points, with which I fully agree.

We should remember that our State Constitution has many exacting provisions not found in any other State
Constitution, and if they are to be changed, the same should be referred to the people for their consideration;
courts have no power or authority to change such plain provisions. Our Legislature has declared that "Law is a
solemn expression of the will of the supreme power of the state." R.C.M. 1947, section 12-101.
"The will of the supreme power is expressed:

"1. By the constitution;

"2. By statutes." R.C.M. 1947, section 12-102.
The supreme power and sovereignty of the state resides in the people of the State of Montana. R.C.M. 1947,
section 83-101.

It is my opinion that the Supreme Court of Colorado, in People ex rel. Arkansas Valley Sugar Beet & Irrigated
Land Co. v. Burke, 72 Colo. 486, 212 P. 837, 841, 30 A.L.R. 1085, reached the right conclusion in regard to
contracts entered into between stockholders of domestic corporations, to control the election of directors
thereof, in holding that such contracts were absolutely void as against the public policy applicable thereto which
had been established by the Colorado Legislature.

The Colorado court said in the above decision that "The language [of the law] 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. * * * If
a contract * * * may accomplish this result, upon the same principle it may take away from every stockholder
his right to nominate or elect any of the * * * directors * * * Upon the plainest principle of justice and law, a
contract having such effect is so manifestly unfair to the majority of the stockholders, and, being so plainly
contrary to the letter and spirit of a positive and affirmative statute, and the public policy thereby declared, that
a court, which sits to administer justice, ought not to sanction or uphold it, but should unhesitatingly declare it
void per se." Emphasis supplied.
The above-quoted parts of the opinion of the Supreme Court of Colorado were quoted by the district court in his
well reasoned and written opinion, hereinabove referred to.

I am somewhat appalled by the majority opinion which, for its principal authority, adopts the reasoning of the
Nebraska Court in the case of E.K. Buck Retail Stores v. Harkert, 157 Neb. 867, 62 N.W.2d 288, 295, 45
A.L.R. (2d) 774, in which opinion, the Nebraska court in commenting on the contention therein made, that the

Page 56 of 59
contract there being litigated, was valid as it had been entered into by stockholders outside the corporate
structure stated: "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 * * *" Emphasis supplied.

I do not think much comment is necessary on the foregoing, as R.C.M. 1947, section 12-104, provides that in
this state "there is no common law in any case where the law is declared by the code or the statute." Emphasis
supplied.

This court also has held repeatedly, and which needs no citation, that the Federal Constitution and the
Constitution of Montana are the supreme law of the state and any statute impinging on the mandatory *1070
and prohibitory terms of our Constitution are invalid, unenforceable and void.

The foregoing is my conception of our established law on the subject of election of directors or trustees of
domestic corporations.

34. McQuade v. Stoneham

Brief Fact Summary. Plaintiff, Francis McQuade, brought this action against Defendants, Charles Stoneham et
al., to be reinstated as the treasurer of the National Exhibition Company (NEC).

Synopsis of Rule of Law. Shareholders can not form an agreement to control the decisions traditionally vested
in the judgment of the directors of a company.

Facts.
In 1919, Plaintiff and Defendant John McGraw each purchased 70 shares of NEC stock from the
majority 1,306 shares that Stoneham owned. NEC was the company that owned the New York Giants. At the
time of purchase, the parties agreed to do everything in their power to keep Stoneham as president, McGraw as
vice-president and Plaintiff as treasurer. Plaintiff and Stoneham had a number of conflicts concerning the
operations of NEC, and in 1928, the 7-member board of directors of NEC voted in a new treasurer (McGraw
and Stoneham abstained from the vote). Plaintiff was not removed for any misconduct or ineptitude, but rather
for his conflicts with Stoneham. Plaintiff brought this action to be reinstated as treasurer, and he cited the
agreement that he entered with McGraw and Stoneham that provided for each of them to use their “best
endeavors” to keep each other in their respective positions. Defendant argued that the agreement was invalid
because it granted authority to shareho
lders for a decision that is normally left to the judgment of directors. The lower court moved to reinstate
Plaintiff.

Issue. 
The issue is whether the shareholder agreement between Plaintiff and Defendants to use their best
efforts to keep each of the parties in their respective positions is valid.

Held. 
The Court of Appeals of New York held that the shareholder contract to keep the parties in their
positions within NEC was invalid as a matter of public policy. Shareholders should not be able to usurp the
decision-making normally left to the directors, and directors should be beholden to the corporation and not the
shareholders. Although the evidence indicated that Stoneham may have exercised bad faith in that Plaintiff was
competent in his position and was ousted over personal disagreements, the director’s intentions are irrelevant
because the court does not want to put directors in a position wherein they would have to defend future
decisions. Plaintiff was also ineligible for employment with NEC because he was a City Magistrate.
Concurrence. The concurring opinion agreed that the reinstatement should be denied, but only because Plaintiff
was a City Magistrate. The contract, however, was valid because Stoneham as a majority owner could elect the
directors who elect the treasurer and was not therefore taking away any powers from the directors that he
already really had.

Discussion. The court affirms the validity of shareholders to agree to pool their votes, but they decline to allow
them to use their voting power but not pool the director’s powers.

35. Clark v. Dodge

Page 57 of 59
Brief Fact Summary. Plaintiff, David Clark, and Defendant, John Dodge, are the lone shareholders of
Defendant corporations. Plaintiff brought this action to be reinstated as a director of one of the Defendant
companies pursuant to an agreement between the parties.

Synopsis of Rule of Law. An agreement between shareholders, wherein the shareholders entering the
agreement are the only shareholders of the company, is valid even if the agreement contemplates controlling
management decisions.

Facts. 
Defendant companies, Bell & Company, Inc. and Hollings-Smith Company, Inc., were co-owned by
Plaintiff (25% of shares) and Defendant (the remaining 75% of shares). The companies manufactured medicine,
the formulae that were known only by Plaintiff. Plaintiff entered into an agreement with Defendant wherein
Plaintiff agreed to disclose the formulae to the son of Defendant in return for a promise that Defendant would
keep Plaintiff as a director and would be entitled to 25% of all net income providing that Plaintiff was
competent in his position. Afterwards, Defendant did not vote Plaintiff in as director, stopped delivering 25% of
the income to Plaintiff. Plaintiff sought reinstatement and money owed from the stopping of payments and
money wasted by Defendant. Defendant countered, citing McQuade v. Stoneham (263 N. Y. 323), that the
agreement was invalid because it required Defendant as a shareholder to usurp the directors’ judgment.

Issue. 
The issue is whether the agreement between Plaintiff and Defendant was invalid as an over-reaching
agreement between shareholders to control powers of the directors.

Held. 
The Court of Appeals of New York held that the agreement was not invalid. The McQuade court
invalidated a similar agreement because it affected the rights of others that were not part of the agreement, and
therefore it fell under the public policy argument. In this case, the only shareholders were Defendant and
Plaintiff, and therefore the agreement between the two did not have any, or at least negligible, consequences on
the public.

Discussion. The court distinguished McQuade, noting that McQuade will be controlling when there agreements
are between shareholders who do not have 100% ownership of a company. In this case it would be against
public policy to allow Defendant to simply cite McQuade to avoid his obligation to pay 25% of net income to
Plaintiff who already disclosed a trade secret to Defendant.

36. Benintendi v. Kenton Hotel

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. 

Page 58 of 59
(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. 

Page 59 of 59