Cases for Corporation Law, July 3, 2013

7/27/2019 Cases for Corporation Law, July 3, 2013

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Corp July2 (until page33)

Magsumbol-Montelibano vs Bacolod

FACTS:Appeal on points of law from a judgment of the Court of First Instance of Occidental

Negros, in its Civil Case No. 2603, dismissing plaintiff's complaint that sought to compel

the defendant Milling Company to increase plaintiff's share in the sugar produced from

their cane, from 60% to 62.33%, starting from the 1951-1952 crop year.

It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano,

and the Limited co-partnership Gonzaga and Company, had been and are sugar planters

adhered to the defendant-appellee's sugar central mill under identical milling contracts.

Originally executed in 1919, said contracts were stipulated to be in force for 30 years

starting with the 1920-21 crop, and provided that the resulting product should be

divided in the ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it

was proposed to execute amended milling contracts, increasing the planters' share to60% of the manufactured sugar and resulting molasses, besides other concessions, but

extending the operation of the milling contract from the original 30 years to 45 years. To

this effect, a printed Amended Milling Contract form was drawn up. On August 20, 1936,

the Board of Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a

resolution granting further concessions to the planters over and above those contained

in the printed Amended Milling Contract.

In 1953, the appellants initiated the present action, contending that three Negros sugar

centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production

exceeding one-third of the production of all the sugar central mills in the province, had

already granted increased participation (of 62.5%) to their planters, and that under

paragraph 9 of the resolution of August 20, 1936, heretofore quoted, the appellee had

become obligated to grant similar concessions to the plaintiffs (appellants herein). Theappellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging that

the stipulations contained in the resolution were made without consideration; that the

resolution in question was, therefore, null and void ab initio, being in effect a donation

that was ultra vires and beyond the powers of the corporate directors to adopt.

ISSUE:

W/N the appellee had become obligated to grant similar concessions to the plaintiffs?

HELD:

The court agreed with the appellants.

Much is made of the circumstance that the report submitted by the Board of Directors of

the appellee company in November 19, 1936 (Exhibit 4) only made mention of 90%, the

planters having agreed to the 60-40 sharing of the sugar set forth in the printed"amended milling contracts", and did not make any reference at all to the terms of the

resolution of August 20, 1936. But a reading of this report shows that it was not

intended to inventory all the details of the amended contract; numerous provisions of

the printed terms are alao glossed over. The Directors of the appellee Milling Company

had no reason at the time to call attention to the provisions of the resolution in question,

since it contained mostly modifications in detail of the printed terms, and the only major

change was paragraph 9 heretofore quoted; but when the report was made, that

paragraph was not yet in effect, since it was conditioned on other centrals granting

better concessions to their planters, and that did not happen until after 1950. There was

no reason in 1936 to emphasize a concession that was not yet, and might never be, in

effective operation.


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There can be no doubt that the directors of the appellee company had authority to

modify the proposed terms of the Amended Milling Contract for the purpose of making

its terms more acceptable to the other contracting parties. The rule is that

It is a question, therefore, in each case of the logical relation of the act to the

corporate purpose expressed in the charter. If that act is one which is lawful in

itself, and not otherwise prohibited, is done for the purpose of serving corporateends, and is reasonably tributary to the promotion of those ends, in a

substantial, and not in a remote and fanciful sense, it may fairly be considered

within charter powers. The test to be applied is whether the act in question is in

direct and immediate furtherance of the corporation's business, fairly incident to

the express powers and reasonably necessary to their exercise. If so, the

corporation has the power to do it; otherwise, not.

As the resolution in question was passed in good faith by the board of directors, it is

valid and binding, and whether or not it will cause losses or decrease the profits of the

central, the court has no authority to review them.

They hold such office charged with the duty to act for the corporation according

to their best judgment, and in so doing they cannot be controlled in the

reasonable exercise and performance of such duty. Whether the business of acorporation should be operated at a loss during depression, or close down at a

smaller loss, is a purely business and economic problem to be determined by the

directors of the corporation and not by the court. It is a well-known rule of law

that questions of policy or of management are left solely to the honest decision

of officers and directors of a corporation, and the court is without authority to

substitute its judgment of the board of directors; the board is the business

manager of the corporation, and so long as it acts in good faith its orders are not

reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).

And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian

Philippines, San Carlos and Binalbagan (which produce over one-third of the entire

annual sugar production in Occidental Negros) have granted progressively increasingparticipations to their adhered planter at an average rate of

62.333% for the 1951-52 crop year;

64.2% for 1952-53;

64.3% for 1953-54;

64.5% for 1954-55; and

63.5% for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of

August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.

Perez-PSE vs CA

Tabag-Ong yong vs Tiu

Bisnar-Lipat vs Pacific

Lipat v. Pacific Banking CorporationFacts:

Spouses Alfredo Lipat and Estelita Burgos Lipat (Petitioners) owned Belas ExportTrading (BET) and Mystical Fashions.

BET was a single proprietorship with principal office at No. 814 Aurora Boulevard,Cuba, QC.


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o It was engaged in the manufacture of garments or domestic and foreignconsumption.

Mystical Fashions was based in the US and sells goods imported from the Philippinesthrough BET.

Estelita designated her daughter Teresita Lipat, to manage BET in the Philippineswhile she was managing Mystical Fashions in the US.

To facilitate the convenient operation of BET, Estelita executed a special power ofattorney appointing Teresita as her attorney-in-fact to obtain loans and other creditaccommodations from Pacific Banking Corporation (Respondent), as well as toexecute mortgage contracts to secure the obligations extended by Pacific Bank.

Teresita secured a loan amounting to P538,854 to buy fabrics and as security, a realestate mortgage was executed over the property located at 814 Aurora Boulevard,Cubao, QC.

o Said property was likewise made to secure "other additional or new loans,discounting lines, overdrafts and credit accommodations, of whateveramount, which the Mortgagor and/or Debtor may subsequently obtain fromthe Mortgagee as well as any renewal or extension by the Mortgagor and/orDebtor of the whole or part of said original, additional or new loans,discounting lines, overdrafts and other credit accommodations, including

interest and expenses or other obligations of the Mortgagor and/or Debtorowing to the Mortgagee, whether directly, or indirectly, principal or secondary,as appears in the accounts, books and records of the Mortgagee."

BET was later incorporated into a family corporation named Belas ExportCorporation (BEC).

o Estelita was named president while Teresita became the vice-president andgeneral manager.

The loan was restructured in the name of BEC and subsequent loans were obtained. BEC however, was unable to pay the obligation resulting to the real estate mortgage

being foreclosed and the property sold in public auction where Eugenio D. Trinidadwas the highest bidder.

The Lipat spouses now argue that their mortgaged property should not be madeliable for the subsequent loans incurred by BEC because it was secured by Teresitawithout any authorization or board resolution of BEC.

Issue: Whether the mortgaged property should be liable for the subsequent loans incurred byBEC?

Ruling: Yes.

Firstly, it could not have been possible for BEC to release a board resolution sinceper admissions by both petitioner Estelita Lipat and Alice Burgos, petitioners' rebuttalwitness, no business or stockholder's meetings were conducted nor were thereelection of officers held since its incorporation. In fact, not a single board resolutionwas passed by the corporate board and it was Estelita Lipat and/or Teresita Lipatwho decided business matters.

Secondly, the principle of estoppel precludes petitioners from denying the validity ofthe transactions entered into by Teresita Lipat with Pacific Bank, who in good faith,relied on the authority of the former as manager to act on behalf of petitioner EstelitaLipat and both BET and BEC. While the power and responsibility to decide whetherthe corporation should enter into a contract that will bind the corporation is lodged inits board of directors, subject to the articles of incorporation, by-laws, or relevantprovisions of law, yet, just as a natural person may authorize another to do certainacts for and on his behalf, the board of directors may validly delegate some of itsfunctions and powers to officers, committees, or agents. The authority of suchindividuals to bind the corporation is generally derived from law, corporate by-laws, orauthorization from the board, either expressly or impliedly by habit, custom, oracquiescence in the general course of business. Apparent authority, is derived notmerely from practice. Its existence may be ascertained through (1) the general

manner in which the corporation holds out an officer or agent as having the power toact or, in other words, the apparent authority to act in general, with which it clotheshim; or (2) the acquiescence in his acts of a particular nature, with actual or


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constructive knowledge thereof, whether within or beyond the scope of his ordinarypowers.

In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue of aspecial power of attorney executed by Estelita Lipat. Recall that Teresita Lipat acted as themanager of both BEC and BET and had been deciding business matters in the absence ofEstelita Lipat. Further, the export bills secured by BEC were for the benefit of "Mystical

Fashion" owned by Estelita Lipat. Hence, Pacific Bank cannot be faulted for relying on thesame authority granted to Teresita Lipat by Estelita Lipat by virtue of a special power ofattorney. It is a familiar doctrine that if a corporation knowingly permits one of its officers orany other agent to act within the scope of an apparent authority, it holds him out to the publicas possessing the power to do those acts; thus, the corporation will, as against anyone whohas in good faith dealt with it through such agent, be estopped from denying the agent'sauthority.

Bombales-Woodchild vs Roxas

Doctrines:

The apparent power of an agent is to be determined by the acts of the principal.

Facts:

Roxas Electric and Construction Company Inc (RECCI) owned 2 parcels of land,Lot (B1) and Lot (B2).

RECCIs Board of Directors issued a resolution authorizing the corporationthrough its President, Roberto Roxas, to sell Lot B2 and to sign and execute

the necessary documents4.

Roxas sold B2 to Woodchild Holdings Inc (WHI) through its President, JonathanDy, for P 5M who wanted to build a warehouse in the land.

In the Deed of Absolute Sale, Roxas also granted WHI a right of way overB1 and an option to purchase certain portions thereofin case the need arose

as earlier requested by WHI.

After Roxas died, WHI demanded that RECCI sell a portion of B1 but itrefused claiming it never authorized Roxas to do so.

WHI filed a case for specific performance and damages.o WHIs contended that by allowing Roxas to execute the deed of absolute

sale and failing to disapprove the same, RECCI gave him apparent

authority to grant a right of way and option to buy over B1.

o And that there was an implied ratification on the part of RECCI whenRECCI received the P5M purchase price for B2.

The trial court ruled that RECCI was estopped from disowning the apparentauthority of Roxas under the Resolution of its Board finding WHI in good faith.

The CA reversed claiming that Roxas was merely authorized to sell B2 andtherefore the provisions in the deed of sale of B1 not binding to RECCI.

Issue:

1. W/N RECCI is bound by the provisions in the deed of absolute sale granting beneficial

use and a right of way and option to buy over a portion of B1

Held/Ratio:

1. NO. Contracts entered into by corporate officers beyond the scope of their

authority are unenforceable against the corporation unless ratified by thecorporation, whether expressly or impliedly.


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For the principle of apparent authority to apply, the WHI has burdened to prove

the following:

(a) the acts RECCI justifying belief in the agency by the WHI;

(b) knowledge by RECCI which is sought to be held; and,

(c) reliance thereon by WHI consistent with ordinary care and prudence.

The apparent power of an agent is to be determined by the acts of the principal and not

by the acts of the agent.

There is no evidence of specific acts made by the RECCI showing or indicating that

it had full knowledge of any representations made by Roxas to WHI and that it had

authorized Roxas to grant WHI an option to buy B1, or to create a burden or lien

thereon.

Further, there is no implied ratification on the part of RECCI when RECCI received

the P5M purchase price for B2.

Ratification cannot be inferred from acts that a principal has a right to do

independently of the unauthorized act of the agent. Moreover, if a writing is

required to grant an authority to do a particular act, ratification of that act must

also be in writing.

Hence, Since RECCI had not ratified the unauthorized acts of Roxas, the same are

unenforceable.

Fernandez-Francisco v GSIS

Doctrine

If a private corporation intentionally or negligently clothes its officers or agents withapparent power to perform acts for it, the corporation will be estopped to deny that

such apparent authority is real, as to innocent third persons dealing in good faith with

such officers or agents.

Facts:

Trinidad J. Francisco, in consideration of a loan, mortgaged in favor of the defendant,

Government Service Insurance System a parcel of land with 21 bungalows, known as

Vic-Mari Compound, located at Baesa, Quezon City, payable within ten 10 years in

monthly installments and with interest of 7% per annum compounded monthly.

Sometime in Jan 1959, The System extrajudicially foreclosed the mortgage on the

ground that up to that date the plaintiff-mortgagor was in arrears on her monthly

installments in the amount of P52,000. The System itself was the buyer of the property

in the foreclosure sale.

On February 1959, the plaintiffs father, Atty. Vicente J. Francisco, sent a letter to thegeneral manager of the defendant corporation, Mr. Rodolfo P. Andal. Atty. Francisco in

effect wanted to pay back the arrears on the monthly installments but then instead ofgiving the whole P52,000, he would just first give P30,000 and as for the balance, he


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contracts with the corporation must always be at reasonable terms, otherwise the

contract is void or voidable at the option of the corporation

FACTS:

Alejandro Te is one of the members of the Board of Directors of Prime WhiteCement

1969: Te entered into an agreement with Prime White to be the ExclusiveDistributor of its cement product in Mindanao area for 5 years

The dealership agreement was signed by:o White Cement President Zosimo Falcono White Cement Chairman Justo Trazoo And Mr. Te

The agreed price per bag of cement is P9.70 Te published ad of his being the Exclusive Distributor in Manila Chronicle

Subsequently, the Board imposed more conditions to the Dealership Agreementincluding the price of P13.30 per bag and that the Corp can unilaterally adjustthe price

White Cement made several demands for Te to comply with additionalconditions.

Te refused, White Cement cancelled the Agreement and entered into a newDealership Agreement with Napoleon Co

WON: the "dealership agreement" signed by the President and Chairman of the Board

of petitioner corporation is a valid and enforceable contract? - NO

HELD:

Terms of Dealership Agreement were unreasonable Unfairness of the contract, entered into by the President of the corp. without

authority from BOD void or voidable

This case is an exception to the General Rule that:o the President of the company may bind the corporation by a contract in

the ordinary course of business, provided the same is reasonable under

the circumstances

The above rule is applicable only when 3rd person is an outsider not like Mr. Te

who is a member of the BOD and at the same time its auditor He is a self-dealing director A director of a corporation holds a position of trust and as such, he owes a duty

of loyalty to his corporation. 9 In case his interests conflict with those of the

corporation, he cannot sacrifice the latter to his own advantage and benefit.

Cleto-Yao vs CA

Yao Ka Sin Trading vs Court of Appeals

In 1973, Constancio Maglana, president of Prime White Cement Corporation, sent an

offer letter to Yao Ka Sin Trading. The offer states that Prime White is willing to sell


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45,000 bags of cement at P24.30 per bag. The offer letter was received by Yao Ka Sins

manager, Henry Yao. Yao accepted the letter and pursuant to the letter, he sent a check

in the amount of P243,000.00 equivalent to the value of 10,000 bags of cement.

However, the Board of Directors of Prime White rejected the offer letter sent by Maglanabut it considered Yaos acceptance letter as a new contract offer hence the Board sent a

letter to Yao telling him that Prime White is instead willing to sell only 10,000 bags to

Yao Ka Sin and that he has ten days to reply; that if no reply is made by Yao then they

will consider it as an acceptance and that thereafter Prime White shall deposit the

P243k check in its account and then deliver the cements to Yao Ka Sin. Henry Yao never

replied.

Later, Yao Ka Sin sued Prime White to compel the latter to comply with what Yao Ka Sin

considered as the true contract, i.e., 45,000 bags at P24.30 per bag. Prime White in its

defense averred that although Maglana is empowered to sign contracts in behalf of

Prime White, such contracts are still subject to approval by Prime Whites Board, and

then it still requires further approval by the National Investment and Development

Corporation (NIDC), a government owned and controlled corporation because Prime

White is a subsidiary of NIDC.

Henry Yao asserts that the letter from Maglana is a binding contract because it was

made under the apparent authority of Maglana. The trial court ruled in favor of Yao Ka

Sin. The Court of Appeals reversed the trial court.

ISSUE: Whether or not the president of a corporation is clothed with apparent authority

to enter into binding contracts with third persons without the authority of the Board.

HELD: No. The Board may enter into contracts through the president. The president

may only enter into contracts upon authority of the Board. Hence, any agreement signed

by the president is subject to approval by the Board. Unlike a general manager (like the

case of Francisco vs GSIS), the president has no apparent authority to enter into binding

contracts with third persons. Further, if indeed the by-laws of Prime White did provide

Maglana with apparent authority, this was not proven by Yao Ka Sin.

As a rule, apparent authority may result from (1) the general manner, by which the

corporation holds out an officer or agent as having power to act or, in other words, the

apparent authority with which it clothes him to act in general or (2) acquiescence in his

acts of a particular nature, with actual or constructive knowledge thereof, whether

within or without the scope of his ordinary powers. These are not present in this case.


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Also, the subsequent letter by Prime White to Yao Ka Sin is binding because Yao Ka Sins

failure to respond constitutes an acceptance, per stated in the letter itself which was

not contested by Henry Yao during trial.

Kung-Westmont vs inland construction

Magsumbol-Associated Bank vs Ponstroller

DOCTRINE: Rationale for the Doctrine of Apparent AuthorityNaturally, the

3rd person has little or no information as to what occurs in corporate meeting; and he

must necessarily rely upon the external manifestations of corporate consent. The

integrity of commercial transactions can only be maintained by holding the corporation

strictly to the liability fixed upon it by its agents in accordance with law. What transpiresin the corporate board room is entirely an internal matter. Hence, petitioner may not

impute negligence on the part of the respondents in failing to find out the scope of Atty.

Solutas authority. Indeed, the public has the right to rely on the trustworthiness of bank

officers and their acts.

FACTS::

In 1988, the spouses Vaca executed a real estate mortgage in favor of petitioner bank

over their parcel of land in Quezon City. For failure of the sps. Vaca to pay their

obligation, the subject property was sold at public auction with the petitioner as the

highest bidder. TCT was issued to petitioner. The sps. Vaca however commenced an

action for the nullification of the real estate mortgage and the foreclosure sale.

Petitioner filed a petition for a writ of possession. The cases reached the SC, whicheventually decided that the petitioner has a right to possess the property.

During their pendency however, the petitioner advertised the property for sale. The

spouses Pronstroller offered to purchase the property. Said offer was made through

Atty. Soluta, Jr., the banks VP, Corporate Secretary and a member of its Board of

Directors. Respondents paid P750th or 10% of the purchase price. Petitioner,through

Atty. Soluta, and respondents executed a Letter-Agreement containing the terms and

conditions of the sale. One of the terms was that the Pronstrollers have to make 10%

deposit and balance of P6.75M to be deposited under escrow agreement. This was

modified by another letter-agreement which allowed the spouses to pay the balance of

the purchase price after the SC resolution of the cases.

By the end of 1993, petitioner reorganized its management and the new managementdiscovered that the spouses failed to pay the balance of the purchase price. The bank

then rescinded the sale and suggested that spouses come up with anew proposal. The

parties failed to reach an agreement and the spouses informed the bank that they would

be enforcing their second Letter-Agreement. Petitioner countered that it was not aware

of the existence of such agreement and Atty. Soluta was not authorized to represent the

bank. Respondents commenced the suit for specific performance. During the pendency

of this case, the bank sold the

propertyto spouses Vaca. Trial court ruled in favor of the respondents and applied thedo

ctrine ofapparentauthority. CA upheld the RTC decision. Hence, this petitionfor

review on certiorari.

Issue: 1) WON the petitioner is bound by the letter-agreement signed by Atty.

Solutaunder the doctrine of apparent authority


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Held: Yes.

The general rule is that, in the absence of authority from th

eboard of directors, no person, not even its officers, can validly bind a

corporation.

The power and responsibility to decide whether the corporation should enter into a

contract that will bind the corporation is lodged in the boardof directors. However, the board may validly delegate some of its functions andpowers

to officers, committees and agents. The authority of such individuals to bind the

corporation is generally derived from law, corporate by-laws or authorization from the

board, either expressly or impliedly, by habit, custom, or acquiescence, in the general

course of business. The authority of a corporate officer or agent on dealing with third

persons may be actual or apparent. The doctrine of apparent

authority with special reference to banks, had long been recognized in this jurisdiction.

Apparent authority is derived not merely from practice. Its existence may be ascertained

through 1) the general manner in which the corporation holds out an officer or agent as

having the power to act, or in other words, the apparent authority to act in

general, with which it clothes him; or 2) the acquiescence in his acts of particular nature,

with actual or constructive knowledge thereof, within or beyond the scope of hisordinary powers. Accordingly, the authority to act for and to bind a corporation may be

presumed from acts of recognition in other instances, wherein the power was exercised

without any objection from its board or shareholders.

The bank had previously allowed Atty. Soluta to enter into the first agreement without a

board resolution; thus it had clothed him with apparent authority to modify the same

via the second letter-agreement. It is not the quantity of similar acts which establishes

apparent authority, but the vesting of a corporate officer with the power to bind the

corporation. Naturally, the third person has to rely upon the external manifestations of

corporate consent. The public has to rely on the trustworthiness of bank officers and

their acts.

Perez-Gokongwei vs SEC

Tabag-Lee vs CA

Bisnar-Premium vs CA

Premium Marble Resources v. CAFacts:

Premium Marble Resources, Inc. (Petitioner), assisted by Atty. Arnulfo Dumadag ascounsel, filed an action for damages against International Corporate Bank

(Respondent). In the meantime, Premium Marble, but this time represented by Siguion Reyna,

Montecillo and Ongsiako Law Office as counsel, filed a motion to dismiss on theground that the filing of the case was without authority from its duly constituted boardof directors as shown by the excerpt of the minutes of Premiums board of directorsmeeting.

In opposition, Premium thru Atty. Dumagdag contended that the persons who signedthe board resolution, namely, Belen, Jr., Nograles and Reyes, are not directors of thecorporation and were allegedly former officers and stockholders of Premium whowere dismissed for various irregularities and fraudulent acts; that Siguion Reyna LawOffice is the lawyer of Belen and Nograles and not of Premium and that the Articles ofIncorporation of Premium shows that Belen, Nograles and Reyes are not majoritystockholders.

On the other hand, Siguion Reyna Law firm as counsel for Premium asserted that it isthe general information sheet filed with the SEC, among others, that is the best


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evidence that would show who are the stockholders of a corporation and not theArticles of Incorporation since the latter does not keep track of the many changes thattake place after new stockholders subscribe to corporate shares of stocks.

Issue: Whether the filing of the case for damages against International Bank was authorizedby a duly constituted Board of Directors of Premium Marble?

Ruling: No. It appears from the general information sheet and Certification issued by the SEC on

Aug. 19,1986 that as of Mar. 4, 1981, the officers and members of the board ofdirectors of Premium were:

o Alberto C. Nograles President/ Directoro Fernando D. Hilario Vice President/ Directoro Augusto I. Galace Treasurero Jose L.R. Reyes Secretary/ Directoro Pido E. Aguilar Directoro Saturnino G. Belen, Jr. Chairman of the Board

While the Minutes of the Meeting of the Board on Apr. 1, 1982 states that newlyelected officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico

and Rodolfo Millare, petitioner failed to show proof that this election was reported tothe SEC.

o Last entry in their General Information Sheet with the SEC, as of 1986appears to be the set of officers elected in Mar. 1981.

In the absence of any board resolution from its board of directors for authority to actfor and in behalf of the corporation, the present action must necessarily fail.

o The power of the corporation to sue and be sued in any court is lodged withthe board of directors that exercises its corporate powers.

o Thus, the issue of authority and the invalidity of plaintiff-appellant 'ssubscription which is still pending, is a matter that is also addressed,considering the premises, to the sound judgment of the Securities &Exchange Commission."

By the express mandate of the Corporation Code (Section 26), all corporations duly

organized pursuant thereto are required to submit within the period therein stated (30days) to the Securities and Exchange Commission the names, nationalities andresidences of the directors, trustees and officers elected.

o Sec. 26. Report of election of directors, trustees and officers . Within thirty(30) days after the election of the directors, trustees and officers of thecorporation, the secretary, or any other officer of the corporation, shall submitto the Securities and Exchange Commission, the names, nationalities andresidences of the directors, trustees and officers elected. . . .

Evidently, the objective sought to be achieved by Section 26 is to give the publicinformation, under sanction of oath of responsible officers, of the nature of business,financial condition and operational status of the company together with information onits key officers or managers so that those dealing with it and those who intend to dobusiness with it may know or have the means of knowing facts concerning thecorporation's financial resources and business responsibility.

The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et al., arethe incumbent officers of Premium has not been fully substantiated. In the absence of anauthority from the board of directors, no person, not even the officers of the corporation, canvalidly bind thecorporation.

Bombales-Valley vs Africa

Doctrines:

The underlying policy of the Corporation Code is that the business and affairs of

a corporation must be governed by a board of directors whose members havestood for election, and who have actually been elected by the stockholders, on an


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annual basis. Only in that way can the directors continued accountability to the

shareholders, and the legitimacy of their decisions that bind the corporationsstockholders, be assured. The shareholder vote is critical to the theory that

legitimizes the exercise of power by the directors or officers over properties that

they do not own.

The theory of delegated power of the board of directors similarly explains why,under Section 29 of the Corporation Code, in cases where the vacancy in the

corporations board of directors is caused not only by the expiration of a

members termm the successor so elected to fill in a vacancy shall be electedonly for the unexpired term of his predecessors office. The law has authorized

the remaining members of the board to fill in a vacancy only in specified

instances, so as not to retard or impair the corporations operations; yet, inrecognition of the stockholders right to elect the members of the board, it

limited the period during which the successor shall serve only to the unexpiredterm of his predecessor in office.

Facts:

On February 27, 1996, during the Annual Stockholders Meeting of petitionerValle Verde Country Club, Inc. (VVCC), the following were elected as members of

the VVCC Board of Directors: Ernesto Villaluna, Jaime C. Dinglasan

(Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor

Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa.

9-member board (those who will resign later are in BOLD)

In the years 1997, 1998, 1999, 2000, and 2001, however, the requisite quorum

for the holding of the stockholders meeting could not be obtained.Consequently, the above-named directors continued to serve in the VVCC Board

in a hold-over capacity.

DA TE RESIGNED REPLACEMENT

Sept. 1, 1998 Dinglasan Eric Roxas Quorum

Nov. 10, 1998 Makalintal Jose Ramirez Remaining members

Respondent Africa (Africa), a member of VVCC, questioned the election ofRoxasand Ramirez as members of the VVCC Board with the Securities and Exchange

Commission (SEC) and the Regional Trial Court (RTC), respectively.

AFRICAS CONTENTIONS The election ofRoxas was contrary to Section 29, in relation to Section

23, of the Corporation Code.

1. For the members to exercise the authority to fill in vacancies inthe board of directors, Section 29 requires, among others, that

there should be an unexpired term during which the successor-

member shall serve. Since Makalintals term had already

expired with the lapse of the one-year term provided in Section

23, there is no more unexpired term during which Ramirezcould serve.

Hence, a year after Makalintals election as member of the VVCC Board

in 1996, Makalintals term as well as those of the other members ofthe VVCC Board should be considered to have already expired. Thus,


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according to Africa, the resulting vacancy should have been filled by the

STOCKHOLDERS in a regular or special meeting called for that purpose,

and not by the remaining members of the VVCC Board, as was done

in this case.

VVCCs DEFENSE

Under Section 29 of the Corporation Code, a vacancy occurring in the board of

directors caused by the expiration of a members term shall be filled by the

corporations stockholders. Correlating Section 29 with Section 23 of the samelaw, VVCC alleges thata members term shall be for one year anduntil his

successor is elected and qualified; otherwise stated, a members term expiresonly when his successor to the Board is elected and qualified. Thus, untilsuch time as [a successor is] elected or qualified in an annual election where a

quorum is present, VVCC contends that the term of [a member] of the board ofdirectors has yetnotexpired.

As the vacancy in this case was caused by Makalintals resignation, not by the

expiration of his term, VVCC insists that the board rightfully appointed Ramirezto fill in the vacancy.

Issues:

1. Whatconstitutes a directors term of office.2. W/N the remaining directors of a corporations Board, still constituting a

quorum, can elect another director to fill in a vacancy caused by the

resignation of a hold-over director

Ruling:

1. TERM

The time during which the officer may claim to hold the office as ofright, and fixes the interval after which the several incumbents shall

succeed one another.

The term of office is not affected by the holdover.

Fixed by statute and it does not change simply because the office may

have become vacant, nor because the incumbent holds over in office

beyond the end of the term due to the fact that a successor has not been

elected and has failed to qualify.

Distinguished from tenure in that an officers tenurerepresents the

term during which the incumbentactually holds office. The tenure

may be shorter (or, in case ofholdover, longer) than the term for

reasons within or beyond the power of the incumbent.

After the lapse of one year from his election as member of the VVCC Board in 1996,

Makalintals term of office is deemed to have already expired. That he continued to

serve in the VVCC Board in a holdover capacity cannot be considered as extending

his term. To be precise, Makalintals term of office began in 1996 and expired in 1997,

but, by virtue of the holdover doctrine in Section 23 of the Corporation Code, he

continued to hold office until his resignation on November 10, 1998. This holdover

period, however, is not to be considered as part of his term, which, as declared,

had already expired. His resignation as a holdover director did not change the nature

of the vacancy; the vacancy due to the expiration of Makalintals term had been created

long before his resignation.


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2. NO. It also bears noting that the vacancy referred to in Section 29 contemplates avacancy occurring within the directors term of office. When a vacancy is

created by the expiration of a term, logically, there is no more unexpired term

to speak of. Hence, Section 29 declares that it shall be the corporations

stockholders who shall possess the authority to fill in a vacancy caused by the

expiration of a members term.

As correctly pointed out by the RTC, when remaining members of the VVCC Board

elected Ramirez to replace Makalintal, there was no more unexpired term to speak

of, as Makalintals one-year term had already expired. Pursuant to law, the authority to

fill in the vacancy caused by Makalintals leaving lies with the VVCCs stockholders, notthe remaining members of its board of directors.

Fernandez-Western vs Salas

Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja, AntonioS. Salas, and Richard S. Salas, belonging to the same family, are the majority and

controlling members of the Board of Trustees of Western Institute of Technology, Inc.

(WIT, for short), a stock corporation engaged in the operation, among others, of an

educational institution. According to petitioners, the minority stockholders of WIT,

sometime on June 1, 1986 in the principal office of WIT at La Paz, Iloilo City, a Special

Board Meeting was held.

A few years later, that is, on March 13, 1991, petitioners Homero Villasis, Prestod

Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against private

respondents before the Office of the City Prosecutor of Iloilo, as a result of which two (2)separate criminal informations, one for falsification of a public document

The charge for falsification of public document was anchored on the private

respondents' submission of WIT's income statement for the fiscal year 1985-1986 with

the Securities and Exchange Commission (SEC) reflecting therein the disbursement of

corporate funds for the compensation of private respondents based on Resolution No. 4,

series of 1986, making it appear that the same was passed by the board on March 30,

1986, when in truth, the same was actually passed on June 1, 1986, a date not covered

by the corporation's fiscal year 1985-1986 (beginning May 1, 1985 and ending April 30,

1986).

Petitioners filed a Motion for Reconsideration 6 of the civil aspect of the RTC Decision

which was, however, denied in an Order dated November 23, 1993

Hence, the instant petition.

W/N compensation to corporate directors/trustees as such under Section 30 is violated?No


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Petitioners would like us to hold private respondents civilly liable despite their acquittal

in Criminal Cases Nos. 37097 and 37098. They base their claim on the alleged illegal

issuance by private respondents of Resolution No. 48, series of 1986 ordering the

disbursement of corporate funds in the amount of P186,470.70 representing retroactive

compensation as of June 1, 1985 in favor of private respondents, board members of WIT,

plus P1,453,970.79 for the subsequent collective salaries of private respondents every

15th and 30th of the month until the filing of the criminal complaints against them on

March 1991. Petitioners maintain that this grant of compensation to private

respondents is proscribed under Section 30 of the Corporation Code. Thus, private

respondents are obliged to return these amounts to the corporation with interest.

We cannot sustain the petitioners. The pertinent section of the Corporation Code

provides:

Sec. 30. Compensation of directors In the absence of any provision in the by-laws

fixing their compensation, the directors shall not receive any compensation, as suchdirectors, except for reasonable per diems: Provided, however, That any such

compensation (other than per diems) may be granted to directors by the vote of the

stockholders representing at least a majority of the outstanding capital stock at a

regular or special stockholders' meeting. In no case shall the total yearly compensation

of directors, as such directors, exceed ten (10%) percent of the net income before

income tax of the corporation during the preceding year. [Emphasis ours]

There is no argument that directors or trustees, as the case may be, are not entitled to

salary or other compensation when they perform nothing more than the usual and

ordinary duties of their office. This rule is founded upon a presumption thatdirectors/trustees render service gratuitously, and that the return upon their shares

adequately furnishes the motives for service, without compensation. 9 Under the

foregoing section, there are only two (2) ways by which members of the board can be

granted compensation apart from reasonable per diems: (1) when there is a provision in

the by-laws fixing their compensation; and (2) when the stockholders representing a

majority of the outstanding capital stock at a regular or special stockholders' meeting

agree to give it to them

This proscription, however, against granting compensation to directors/trustees of a

corporation is not a sweeping rule. Worthy of note is the clear phraseology of Section 30which states: ". . . [T]he directors shall not receive any compensation, as such directors, . .

. ." The phrase as such directors is not without significance for it delimits the scope of the

prohibition to compensation given to them for services performed purely in their

capacity as directors or trustees. The unambiguous implication is that members of the

board may receive compensation, in addition to reasonable per diems, when they

render services to the corporation in a capacity other than as directors/trustees. 10 In

the case at bench, Resolution No. 48, s. 1986 granted monthly compensation to private

respondents not in their capacity as members of the board, but rather as officers of the

corporation, more particularly as Chairman, Vice-Chairman, Treasurer and Secretary of

Western Institute of Technology


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17/24

No. 3 is an advance condonation of any activity pursued in conflict of interestbetween the directors and the corporation

The Court felt disdain towards these by-law provisions: directors and officers ofthe company can do anything, short of actual fraud, with the affairs of the

corporation.

o

even to benefit themselves directly or other persons or entities in whichthey are interested, and with immunity because of the advancecondonation or relief from responsibility by reason of such acts.

This and the other provisions which authorizes the election of non-stockholdersas directors, completely disassociate the stockholders from the government and

management of the business in which they have invested.

Cleto-Prime white v IAC

Prime White Cement Corporation vs. Intermediate Appellate Court

[GR 68555, 19 March 1993]

Facts: On or about 16 July 1969, Alejandro Te and Prime White Cement Corporation

(PWCC) thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the

Board, entered into a dealership agreement whereby Te was obligated to act as the

exclusive dealer and/or distributor of PWCC of its cement products in the entire

Mindanao area for a term of 5 years and providing among others that (a) the

corporation shall, commencing September, 1970, sell to and supply Te, as dealer with

20,000 bags (94 lbs/bag) of white cement per month; (b) Te shall pay PWCC P9.70,

Philippine Currency, per bag of white cement, FOB Davao and Cagayan de Oro ports; (c)

Te shall every time PWCC is ready to deliver the good, open with any bank or bankinginstitution a confirmed, unconditional, and irrevocable letter of credit in favor of PWCC

and that upon certification by the boat captain on the bill of lading that the goods have

been loaded on board the vessel bound for Davao the said bank or banking institution

shall release the corresponding amount as payment of the goods so shipped."

Right after Te entered into the dealership agreement, he placed an advertisement in a

national, circulating newspaper the fact of his being the exclusive dealer of PWWC's

white cement products in Mindanao area, more particularly, in the Manila Chronicle

dated 16 August 1969 and was even congratulated by his business associates, so much

so, he was asked by some of his businessmen friends and close associates if they can be

his sub-dealer in the Mindanao area. Relying heavily on the dealership agreement, Te

sometime in the months of September, October, and December, 1969, entered into a

written agreement with several hardware stores dealing in buying and selling white

cement in the Cities of Davao and Cagayan de Oro which would thus enable him to sell

his allocation of 20,000 bags regular supply of the said commodity, by September, 1970.

After Te was assured by his supposed buyer that his allocation of 20,000 bags of white

cement can be disposed of, he informed the defendant corporation in his letter dated 18

August 1970 that he is making the necessary preparation for the opening of the

requisite letter of credit to cover the price of the due initial delivery for the month of

September 1970, looking forward to PWCC's duty to comply with the dealership

agreement.


18/24

In reply to the aforesaid letter of Te, PWCC thru its corporate secretary, replied that the

board of directors of PWCC decided to impose the following conditions: (a) Delivery of

white cement shall commence at the end of November, 1970; (b) Only 8,000 bags of

white cement per month for only a period of three (3) months will be delivered; (c) The

price of white cement was priced at P13.30 per bag; (d) The price of white cement is

subject to readjustment unilaterally on the part of the defendant; (e) The place of

delivery of white cement shall be Austurias (sic); (f) The letter of credit may be opened

only with the Prudential Bank, Makati Branch; (g) Payment of white cement shall be

made in advance and which payment shall be used by the defendant as guaranty in the

opening of a foreign letter of credit to cover costs and expenses in the procurement of

materials in the manufacture of white cement. Several demands to comply with the

dealership agreement were made by Te to PWCC, however, PWCC refused to comply

with the same, and Te by force of circumstances was constrained to cancel his

agreement for the supply of white cement with third parties, which were concluded in

anticipation of, and pursuant to the said dealership agreement. Notwithstanding that the

dealership agreement between Te and PWCC was in force and subsisting, PWCC, inviolation of, and with evident intention not to be bound by the terms and conditions

thereof, entered into an exclusive dealership agreement with a certain Napoleon Co for

the marketing of white cement in Mindanao. Te filed suit. After trial, the trial court

adjudged PWCC liable to Alejandro Te in the amount of P3,302,400.00 as actual

damages, P100,000.00 as moral damages, and P10,000 00 as and for attorney's fees and

costs. The appellate court affirmed the said decision. Hence, PWCC filed the petition for

review on certiorari.

Issue: Whether the "dealership agreement" referred by the President and Chairman of

the Board of PWCC is a valid and enforceable contract.

Held: The dealership agreement is not valid and unenforceable. Under the

Corporation Law, which was then in force at the time the case arose, as well as under the

present Corporation Code, all corporate powers shall be exercised by the Board of

Directors, except as otherwise provided by law. Although it cannot completely abdicate

its power and responsibility to act for the juridical entity, the Board may expressly

delegate specific powers to its President or any of its officers. In the absence of such

express delegation, a contract entered into by its President, on behalf of the corporation,

may still bind the corporation if the board should ratify the same expressly or impliedly.

Implied ratification may take various forms like silence or acquiescence; by acts

showing approval or adoption of the contract; or by acceptance and retention of benefitsflowing therefrom. Furthermore, even in the absence of express or implied authority by

ratification, the President as such may, as a general rule, bind the corporation by a

contract in the ordinary course of business, provided the same is reasonable under the

circumstances. These rules are basic, but are all general and thus quite flexible. They

apply where the President or other officer, purportedly acting for the corporations, is

dealing with a third person, i.e., a person outside the corporation. The situation is quite

different where a director or officer is dealing with his own corporation. Herein, Te was

not an ordinary stockholder; he was a member of the Board of Directors and Auditor of

the corporation as well. He was what is often referred to as a "self-dealing" director. A

director of a corporation holds a position of trust and as such, he owes a duty of loyalty

to his corporation. In case his interests conflict with those of the corporation, he cannot


19/24

sacrifice the latter to his own advantage and benefit. As corporate managers, directors

are committed to seek the maximum amount of profits for the corporation. A director's

contract with his corporation is not in all instances void or voidable. If the contract is

fair and reasonable under the circumstances, it may be ratified by the stockholders

provided a full disclosure of his adverse interest is made.

Granting arguendo that the "dealership agreement" would be valid and enforceable if

entered into with a person other than a director or officer of the corporation, the fact

that the other party to the contract was a Director and Auditor of PWCC changes the

whole situation. First of all, the contract was neither fair nor reasonable. The "dealership

agreement" entered into in July 1969, was to sell and supply to Te 20,000 bags of white

cement per month, for 5 years starting September 1970, at the fixed price of P9.70 per

bag. Te is a businessman himself and must have known, or at least must be presumed to

know, that at that time, prices of commodities in general, and white cement in

particular, were not stable and were expected to rise. At the time of the contract, PWCC

had not even commenced the manufacture of white cement, the reason why deliverywas not to begin until 14 months later. He must have known that within that period of 6

years, there would be a considerable rise in the price of white cement. In fact, Te's own

Memorandum shows that in September 1970, the price per bag was P14.50, and by the

middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in

the "dealership agreement" to allow for an increase in price mutually acceptable to the

parties. Instead, the price was pegged at P9.70 per bag for the whole 5 years of the

contract. Fairness on his part as a director of the corporation from whom he was to buy

the cement, would require such a provision. In fact, this unfairness in the contract is also

a basis which renders a contract entered into by the President, without authority from

the Board of Directors, void or voidable, although it may have been in the ordinary

course of business. The fixed price of P9.70 per bag for a period of 5 years was not fair

and reasonable. As director, specially since he was the other party in interest, Te's

bounden duty was to act in such manner as not to unduly prejudice the corporation. In

the light of the circumstances of this case, it is to Us quite clear that he was guilty of

disloyalty to the corporation; he was attempting in effect, to enrich himself at the

expense of the corporation. There is no showing that the stockholders ratified the

"dealership agreement" or that they were fully aware of its provisions. The contract was

therefore not valid and the Court cannot allow him to reap the fruits of his disloyalty.

Kung-Steinberg vs Velasco

Magsumbol-Bates v Dresser

Syllabus:

The degree of care required of director of a national bank depends upon the subject to

which it is to be applied, and each case is to be determined in view of all the

circumstance.

The bookkeeper of a national bank during a series of years defrauded it of an amount

aggregating more than its capital and more than the normal average amount of its

deposit by a novel scheme involving exchanges of his personal checks on the bank for

checks of an outsider on another bank, cashing of the checks outside, abstraction by thebookkeeper of his own checks when returned to his bank with clearing-house


20/24


21/24


22/24

authorization was already used in 1962 and 1963. He also contends that the amendment

deprived him of hisright to vote and be voted upon as a stockholder (because it

disqualified competitors from nomination and election in the BOD of SMC), thus the

amended by-laws were null and void. While this was pending, the corporation called for

a stockholders meeting for theratification of the amendment to the by-laws. This

prompted petitioner to seek for summary judgment. This was denied by the SEC. Inanother case filed by petitioner, he alleged that the corporation had been using

corporate funds in other corps and businesses outside the primary purpose clause of the

corporation in violation of the Corporation Code.

Issue: Are amendments valid?

Held: The validity and reasonableness of a by-law is purely a question of law. Whether

the by-law is in conflict with the law of the land, or with the charter of the corporation

or is in legal sense unreasonable and therefore unlawful is a question of law. However,

this is limited where the reasonableness of a by-law is a mere matter of judgment, and

one upon which reasonable minds must necessarily differ, a court would not be

warranted in substituting its judgment instead of the judgment of those who areauthorized to make by-laws and who have exercised authority. The Court held that a

corporation has authority prescribed by law to prescribe thequalifications of directors.

It has the inherent power to adopt by-laws for its internal government, and to regulate

the conduct andprescribe the rights and duties of its members towards itself and among

themselves in reference to the management of its affairs. A corporation, under

the Corporation law, may prescribe in its by-laws the qualifications, duties and

compensation of directors, officers, and employees. 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 he impliedly contracts that the will of the majority shall govern in

all matters within the limits of the acts of incorporation and lawfully enacted by-laws

and not forbidden by law. Any corporation may amend its by-laws by the owners of themajority of the subscribed stock. It cannot thus be said that petitioners has the vested

right, as a stock holder, to be elected director, in the face of the fact that the law at the

time such stockholder's right was acquired contained the prescription that the

corporate charter and the by-laws shall be subject to amendment, alteration and

modification. A Director stands in a fiduciary relation to the corporation and its

shareholders, which is characterized as a trust relationship. An amendment to the

corporate by-laws which renders a stockholder ineligible to be director, if he be also

director in a corporation whose business is in competition with that of the other

corporation, has been sustained as valid. This is based upon the principle that where the

director is employed in the service of a rival company, he cannot serve both, but must

betray one or the other. The amendment in this case serves to advance the benefit of the

corporation and is good. Corporate officers are also not permitted to use their positionof trust and confidence to further their private needs, and the act done in furtherance of

private needs is deemed to be for the benefit of the corporation. This is called the

doctrine of corporate opportunity.

Fernandez-gokongwei vs SEC

Petitioner claims that the amended by-laws are invalid and unreasonable because they

were tailored to suppress the minority and prevent them from having representation in

the Board", at the same time depriving petitioner of his "vested right" to be voted for

and to vote for a person of his choice as director.


23/24

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel

Corporation content that ex. conclusion of a competitor from the Board is legitimate

corporate purpose, considering that being a competitor, petitioner cannot devote an

unselfish and undivided Loyalty to the corporation; that it is essentially a preventive

measure to assure stockholders of San Miguel Corporation of reasonable protective

from the unrestrained self-interest of those charged with the promotion of the corporateenterprise; that access to confidential information by a competitor may result either in

the promotion of the interest of the competitor at the expense of the San Miguel

Corporation. It is further argued that there is not vested right of any stockholder under

Philippine Law to be voted as director of a corporation

Whether or not the amended by-laws of SMC of disqualifying a competitor from

nomination or election to the Board of Directors of SMC are valid and reasonable ? yes

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.

Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary

obligation of the directors of corporations, thus:

A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such

fiduciary position cannot serve himself first and his cestuis second. ... He cannot

manipulate the affairs of his corporation to their detriment and in disregard of the

standards of common decency. He cannot by the intervention of a corporate entity

violate the ancient precept against serving two masters ... He cannot utilize his inside

information and strategic position for his own preferment.

It is obviously to prevent the creation of an opportunity for an officer or director of SanMiguel 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.

Sound principles of corporate management counsel against sharing sensitive

information with a director whose fiduciary duty of loyalty may well require that hedisclose this information to a competitive arrival. These dangers are enhanced

considerably where the common director such as the petitioner is a controlling

stockholder of two of the competing corporations. It would seem manifest that in such

situations, the director has an economic incentive to appropriate for the benefit of his

own corporation the corporate plans and policies of the corporation where he sits as

director.

Indeed, access by a competitor to confidential information regarding marketing

strategies and pricing policies of San Miguel Corporation would subject the latter to a

competitive disadvantage and unjustly enrich the competitor, for advance knowledge by

the competitor of the strategies for the development of existing or new markets of

existing or new products could enable said competitor to utilize such knowledge to hisadvantage


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Cases for Corporation Law, July 3, 2013

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