00 Corpo Finals (Case Reviewer)

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Corporation Law Finals Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document Case Title; Topic Quick Facts Held/Ratio/Doctrine

CHAPTER VII Ramirez v. Orientalist Co. and Fernandez Who Exercises Corporate Powers: Board of Directors or Trustees

Orientalist Co, engaged in the theater business, desired to be the exclusive agent of Ramirez, who is based in Paris, for two film outfits—Éclair Films and Milano films. Through the active involvement and negotiations of Ramon “El Presidente” Fernandez, a director of Orientalist and also its treasurer, with Ramirez, Orientalist was able to secure an offer, the terms of which were acceptable to the Board as well as to the stockholders. It appears that this acceptance of the terms of the offer was decided during an informal meeting of the board, and conveyed to Ramirez in two letters signed only by Fernandez, both in his individual and his capacity as treasurer of Orientalist. It turns out that the company was not financially capable to comply with the obligations set forth in the agency contract, and about this time films had already been delivered to the company. Two stockholders meetings were organized, the first adopted a resolution approving the action of the board on the offer, the second raising the contingency of the lack of funds and the proviso that the four officers involved, including Fernandez would continue importing the films using their own funds. Ramirez sues Orientalist and Fernandez for what is due on the contract. TC ruled Oriental as the principal debtor while Fernandez is subsidiarily liable.

(1) it was incumbent upon the corporation if it desired to question the authority of Fernandez to bind it, to deny the due execution of the contract made by him. In pleading lack of authority of an officer of a corporation to bind the latter through a contract executed by the former is a special defense which should be specially pleaded and the answer setting up this defense must be verified under oath. The denial shall be specific, and a mere attack on the instrument in general terms is insufficient, even though under oath. In dealing with corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found acting for a corporation with the external indicia of authority, any person not having notice of want of authority, may usually rely upon those appearances, and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a competent person to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted. The public is not supposed nor required to know the transactions which happen around the table where the corporate board of directors or the stockholders are from time to time convoked. It is therefore reasonable, in a case where an officer of a corporation has made a contract in its name, that the corporation should be required, is it denies his authority, to state such defense in his answer. This failure of Orientalist to make any issue in its answer with regard to the authority of Ramon Fernandez to bind it and its failure to deny specifically under oath the genuineness of the due execution of the contracts sued upon, have the effect of eliminating the question of his authority from the case.

(2) Fernandez had no authority to bind the corporation. Corporate powers is exercised by the board of directors, and is recognized in the bylaws of Orientalist. The fact that the power to make contracts is thus vested in the borad does not always signify that a formal vote of the board must always be taken before contractual liability can be fixed; the board can create liability, like an individual, by other means than by formal expression of its will. It may be established without reference to official records of the proceedings of the board, by proof of the usage to which the company had permitted to grow up in the business, and of the acquiescence of the board charged with the duty of supervising and controlling the company’s business. Fernandez was the most active in the effort to secure the films. The negotiations were conducted by him with the knowledge and consent of the other members of the board. The board, before the financial inability of the corporation was revealed, had already recognized the contracts as being in existence and had proceeded to take the steps necessary to utilize the films, particularly the publication of announcements in the papers. In light of this, the contracts in question were thus inferentially approved by the board and that the company is bound unless the subsequent failure of the stockholders to approve the same had the effect of abrogating the liability created.

(3) the action of the stockholders, whatever its character, must be ignored. Stockholders or members resolutions dealing with matters other than the

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document exceptions are not legally effective nor binding on the board, and may be treated as merely advisory or may even be completely disregarded. The functions of the stockholders of a corporation are, of a limited nature. The theory is that the stockholders may have all the profits but shall turn over the complete management of the enterprise to their representatives or agents, called the directors, making by-laws, and exercising special powers defined by law. Thus contracts between a corporation and third persons must be made by the directors and not by the stockholders. The corporation is represented by the directors and not the stockholders. Third persons can have little or no information as to what occurs in corporate meetings, and must necessarily rely on external manifestations of corporate consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon in by its agents in accordance with law. If a corporation knowingly permits one of its officers or any other person to do acts within the scope of an apparent authority, and thus hold him out to the public as possessing the power to do these acts, the corporation will be estopped from denying such authority as against anyone who has dealt with the corporation in GF.

Salvador P. Lopez v. Hon. Vicente Ericta Who Exercises Corporate Powers: Board of Directors or Trustees

Dr Consuelo Blanco was appointed Dean ad interim of the UP College of Education. The Board of Regents met on 26 May and UP President Lopez submitted the ad interim appointment for reconsideration. The minutes of the meeting reveal that the Board voted to defer action on the matter in view of the objections cited by Regent Kalaw, and to further study the same. The matter was referred to the Committee on Personnel. It was extended and made effective 1 May 1970 until 30 April 1971 unless sooner terminated and subject to the approval of the Board of Regents. At the next Board meeting, it appears in the minutes that the Personnel Committee recommended that the UP president review his nomination and that he would discuss with the nominee the possibility of withdrawing her nomination and appointment as Dean. The Committee then withdrew its recommendation, but subjected the Blanco appointment to a vote. The vote was 5-3-4, and not having the necessary number of votes, the Board agreed to expunge the result of the voting from the records, on the condition that the Board suspend action on the matter, which had the effect of the termination of the Blanco ad interim appointment. Blanco questions the action of the Board and the designation of an officer-in-charge of the COE and sues in the TC. Judge Ericta rules info Dr Blanco.

Based on a reading of the minutes and the records of the meeting, it cannot be said that the abstentions were affirmative ifo the ad interim appointment. It is clear that (1) the Blanco appointment was referred for study by the Committee which recommended its rejection; (2) that it should be done in a diplomatic way to avoid embarrassment; (3) the final decision was to ask the UP President to talk to Blanco for the appointment to be withdrawn; (4) a vote was taken which was 5-3-4, and it was unclear what it meant because the rules do not provide for the treatment of abstentions; (5) the Committee withdrew its recommendation; (6) the Board identified the issue of w/n to confirm the ad interim appointment; (7) and that while it will defer action, it considered the appointment to have terminated, and thus a recommendation for non-confirmation. Thus the votes of abstention can in no way be construed as votes for confirmation of the appointment. There can be no doubt as to the decision of the Personnel Committee—it was for rejection of the appointment. Also, the board resolved, without a vote of dissent to cancel the action taken, including the results of the voting, and to return the case to its original status. In effect, as announced by the Chairman, the Board has not acted on the confirmation either adversely or favorably, but that the ad interim appointment has terminated.

Expert Travel v. CA Who Exercises Corporate Powers: Board of Directors or Trustees

Korean Airlines, through Atty. Aguinaldo, filed a Complaint against Expertravel with the RTC for the collection of the principal amount of P260,150.00, plus attorney’s fees and exemplary damages. The verification and certification against forum shopping was signed by Atty. Aguinaldo, who indicated therein that he was the resident agent and legal counsel of KAL and had caused the preparation of the complaint. Expertravel filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not authorized to execute the verification and certificate of non-forum shopping as required by the Rules of Court. KAL opposed the motion, contending that Atty. Aguinaldo was its resident agent and was registered as such with the Securities and Exchange Commission (SEC) as required by the CorpoCode, and was further alleged that Atty. Aguinaldo was also the corporate secretary of KAL. Atty. Aguinaldo also claimed that he had been authorized to file the complaint through a resolution of the KAL Board of Directors approved during

It is settled that the requirement to file a certificate of non-forum shopping is mandatory and that the failure to comply with this requirement cannot be excused. The certification is a peculiar and personal responsibility of the party, an assurance given to the court or other tribunal that there are no other pending cases involving basically the same parties, issues and causes of action. Hence, the certification must be accomplished by the party himself because he has actual knowledge of whether or not he has initiated similar actions or proceedings in different courts or tribunals. Even his counsel may be unaware of such facts. Hence, the requisite certification executed by the plaintiff’s counsel will not suffice. In a case where the plaintiff is a private corporation, the certification may be signed, for and on behalf of the said corporation, by a specifically authorized person, including its retained counsel, who has personal knowledge of the facts required to be established by the documents. The corporation, such as the

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document a special meeting held on June 25, 1999, wherein the board of directors conducted a special teleconference on June 25, 1999, which he and Atty. Aguinaldo attended. It was also averred that in that same teleconference, the board of directors approved a resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping and to file the complaint. Suk Kyoo Kim also alleged, however, that the corporation had no written copy of the aforesaid resolution. TC denies MTD, CA affirms.

petitioner, has no powers except those expressly conferred on it by the Corporation Code and those that are implied by or are incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly-authorized officers and agents. Physical acts, like the signing of documents, can be performed only by natural persons duly-authorized for the purpose by corporate by-laws or by specific act of the board of directors. The respondent’s allegation that its board of directors conducted a teleconference on June 25, 1999 and approved the said resolution (with Atty. Aguinaldo in attendance) is incredible, given the additional fact that no such allegation was made in the complaint. If the resolution had indeed been approved on June 25, 1999, long before the complaint was filed, the respondent should have incorporated it in its complaint, or at least appended a copy thereof. The respondent failed to do so. It was only on January 28, 2000 that the respondent claimed, for the first time, that there was such a meeting of the Board of Directors held on June 25, 1999; it even represented to the Court that a copy of its resolution was with its main office in Korea, only to allege later that no written copy existed. It was only on March 6, 2000 that the respondent alleged, for the first time, that the meeting of the Board of Directors where the resolution was approved was held via teleconference. Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had signed a Secretary’s/Resident Agent’s Certificate alleging that the board of directors held a teleconference on June 25, 1999. No such certificate was appended to the complaint, which was filed on September 6, 1999. More importantly, the respondent did not explain why the said certificate was signed by Atty. Aguinaldo as early as January 9, 1999, and yet was notarized one year later (on January 10, 2000); it also did not explain its failure to append the said certificate to the complaint, as well as to its Compliance dated March 6, 2000. It was only on January 26, 2001 when the respondent filed its comment in the CA that it submitted the Secretary’s/Resident Agent’s Certificate[30] dated January 10, 2000. The Court is, thus, more inclined to believe that the alleged teleconference on June 25, 1999 never took place, and that the resolution allegedly approved by the respondent’s Board of Directors during the said teleconference was a mere concoction purposefully foisted on the RTC, the CA and this Court, to avert the dismissal of its complaint against the petitioner.

Citibank v. Chua Who Exercises Corporate Powers: Board of Directors or Trustees

Velez deposited his unfunded personal checks with his current account with the petitioner. But prior to depositing said checks, he would present his personal checks to a bank officer asking the latter to have his personal checks immediately credited as if it were a cash deposit and at the same time assuring the bank officer that his personal checks were fully funded. Having already gained the trust and confidence of the officers of the bank because of his past transactions, the bank's officer would always accommodate his request. After his requests are granted which is done by way of the bank officer affixing his signature on the personal checks, private respondent Cresencio Velez would then deposit his priorly approved personal checks to his current account and at the same time withdraw sums of money from said current account by way of petitioner bank's manager's check. Private respondent would then deposit petitioner bank's manager's check to his various current accounts in other commercial banks to cover his previously deposited unfunded personal checks with petitioner bank. Naturally, petitioner bank and its officers never discovered that his personal check deposits were

In the corporate hierarchy, there are three levels of control: (1) the board of directors, which is responsible for corporate policies and the general management of the business affairs of the corporation; (2) the officers, who in theory execute the policies laid down by the board, but in practice often have wide latitude in determining the course of business operations; and (3) the stockholders who have the residual power over fundamental corporate changes, like amendments of the articles of incorporation. However, just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. It is clear that corporate powers may be directly conferred upon corporate officers or agents by statute, the articles of incorporation, the by-laws or by resolution or other act of the board of directors. In addition, an officer who is not a director may also appoint other agents when so authorized by the by-laws or by the board of directors. Such are referred to as express powers. There are also powers incidental to express powers conferred. It is a fundamental principle in

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document unfunded. On the contrary, it gave the petitioner bank the false impression that private respondent's construction business was doing very well and that he was one big client who could be trusted. This deceptive and criminal scheme he did every banking day without fail from September 4, 1985 up to March 11, 1986. The amounts that he was depositing and withdrawing during this period (September 4, 1985 to March 11, 1986) progressively became bigger. It started at P46,000.00 on September 4, 1985 and on March 11, 1986 the amount of deposit and withdrawal already reached over P3,000,000.00. At this point in time (March 11, 1986), the private respondent Cresencio Velez presumably already feeling that sooner or later he would be caught and that he already wanted to cash in on his evil scheme, decided to run away with petitioner's money. On March 11, 1986, he deposited various unfunded personal checks totaling P3,095,000.00 and requested a bank officer that the same be credited as cash and after securing the approval of said bank officer, deposited his various personal checks in the amount of P3,095,000.00 with his current account and at the same time withdrew the sum of P3,244,000.00 in the form of petitioner's manager's check. Instead of using the proceeds of his withdrawals to cover his unfunded personal checks, he ran away with petitioner bank's money. Thus, private respondent Cresencio Velez's personal checks deposited with petitioner bank on March 11, 1986 in the total aggregate amount of P3,095,000.00 bounced. The checks bounced after said personal checks were made the substantial basis of his withdrawing the sum of P3,244,000.00 from his current account with petitioner bank. Citibank sues on the grounds of violation of BP 22. Before pre-trial conference, and in pursuance of the authority granted to him by petitioner bank's by-laws, its Executing Officer appointed William W. Ferguson, a resident alien, as its Attorney-in-Fact empowering the latter, among other things, to represent Citibank in court cases such as the present case. In turn, William W. Ferguson executed a power of attorney in favor of J.P. Garcia & Associates (petitioner bank's counsel) to represent petitioner bank in the pre-trial conference before the lower court.

the law of agency that every delegation of authority, whether general or special, carries with it, unless the contrary be express, implied authority to do all of those acts, naturally and ordinarily done in such cases, which are reasonably necessary and proper to be done in order to carry into effect the main authority conferred. Since the by-laws are a source of authority for corporate officers and agents of the corporation, a resolution of the Board of Directors of Citibank appointing an attorney in fact to represent and bind it during the pre-trial conference of the case at bar is not necessary because its by-laws allow its officers, the Executing Officer and the Secretary Pro-Tem, * to execute a power of attorney to a designated bank officer, William W. Ferguson in this case, clothing him with authority to direct and manage corporate affairs. Since paragraph XXI (of the by-laws) specifically allows Ferguson to delegate his powers in whole or in part, there can be no doubt that the special power of attorney in favor, first, of J.P. Garcia & Associates and later, of the bank's employees, constitutes a valid delegation of Ferguson's express power (under paragraph XVII above) to represent petitioner bank in the pre-trial conference in the lower court.

Prime White Cement v. IAC Who Exercises Corporate Powers: Board of Directors or Trustees

Prime White Cement entered into a dealership agreement with one of its directors, Alejandro Te, for the latter to be the exclusive distributor of 20,000 bags of Prime White cement per month @ P9.70 per bag for the entire Mindanao area for 5 years, and that a letter of credit be opened to secure payment. Te advertised his dealership and was able to obtain possible clients, and entered into agreements with several hardware stores for the purchase of the cement. Te then informed Prime White of the orders, but the latter imposed additional conditions, which effectively delayed the delivery of the cement, lowered the number of bags to be delivered, and increased the price per bag. It also made the prices subject to change unilaterally and additional conditions on the manner of payment. Te refused to comply and Prime White cancelled the dealership agreement. Te sued for specific performance and damages. TC ruled ifo Te.

No. it is not valid and enforceable. All corporate powers are exercised by the Board. It may also delegate specific powers to its President or other officers. In the absence of express delegation, a contract entered into by the President in behalf of the corporation, may still bind the latter if the board should ratify expressly or impliedly. In the absence of express or implied ratification, the President may as a general rule bind the corporation through a contract in the ordinary course of business, provided the same is reasonable under the circumstances. These rules are applicable where the President or other officer acting for the corporation is dealing with a third person. The situation is different where a director or officer is dealing with his own corporation. Te was not an ordinary stockholder; he was a member of the Board and Auditor of the corporation. He is what is often called a “self-dealing” director. As a director, he holds a position of trust and owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. The trust relationship springs from the control and guidance of the corporate affairs and property interests of the stockholders. 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. The contract in this case is neither fair nor reasonable. At the time of the contract, the corporation had not

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document yet even started producing the cement. Prices of cement, just like any other commodity, are not stable and expected to rise. Within a period of six years from the date of dealership agreement the prices were certain to rise, and yet the contract pegged the rate to P9.70 per bag. This according to the Court was not fair and reasonable at all, and unduly prejudiced the corporation. The contracts he entered into after the dealership agreement were such as to completely shield him from any increase in the price of cement. The contracts were only for two years at a time, even if the dealership was good for 5. He was attempting to enrich himself at the expense of the corporation. There is no showing that the stockholders ratified the dealership agreement. Thus the same was not valid and he cannot be allowed to reap the fruits of his disloyalty.

Boyer-Roxas v. CA Who Exercises Corporate Powers: Board of Directors or Trustees

The corporation, Heirs of Eugenia Roxas Inc, was established to engage in agriculture to develop the properties inherited from Eugenia Roxas and Eufroncio Roxas, which includes the land upon which the Hidden Valley Springs Resort was put up, including various improvements thereon, using corporate funds (used as site for filming Apocalypse Now). The AOI of Heirs Inc was amended for this purpose. Heirs Inc claims that Boyer-Roxas and Guillermo Roxas had been in possession of the various properties and improvements in the resort and only upon the tolerance of the corporation. It was alleged that they committed acts that impeded the corporation’s expansion and normal operation of the resort. They also did not comply with court and regulatory orders, and thus the corporation adopted a resolution authorizing the ejectment of the defendants. TC grants. CA affirms. Boyer and Roxas contend that, being SHs, their possession of the properties of the corporation must be respected in view of their ownership of an aliquot portion of all properties of the corporation.

Regarding properties owned by the corporation, the SH of Guanzon case says that “properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property, they do not represent property of the corporation. A share of stock only typifies an aliquot part of the corporation’s property, or the right to share in its proceeds to that extent when distributed according to law and equity, but its holder is not the owner of any part of the capital of the corporation, nor is he entitled to the possession of any definite portion of its property or assets. The SH is not a co-owner or tenant in common of the corporate property. The corporation has a personality distinct and separate from its members and transacts business only through its officers or agents. Whatever authority these officers or agents may have derived from the board or other governing body, unless conferred by the charter of the corporation itself. In this case the elder Roxas who then controlled the management of the corporation, being the majority SH, consented to the petitioner’s use and stay within the properties. The Board did not object and were allowed to stay until it adopted a resolution to the effect of authorizing moves to eject them. Since their stay was merely by tolerance, in deference to the wishes of the majority SH who controlled the corporation, when Roxas died his actions cannot bind the company forever. There is no provision in the by-laws or any other resolution authorizing their continued stay.

EPG Constructions v. CA Who Exercises Corporate Powers: Board of Directors or Trustees

EPG undertook the construction of the UP Law Library for around P7.5M. Upon completion, the building was turned over to UP Law. Sometime thereafter, the aircon in the 3rd floor was not functioning properly, and this was reported to EPG. After inspection EPG agreed to repair the same and shoulder the expenses thereof, but for whatever reason the repair was never undertaken despite repeated demands. EPG demanded a hefty sum, which UP claims should be covered by the guarantee provision in their contract. UP then contracts with another repair company, and demands reimbursement from EPG. UP sues EPG and its President, Emmanuel de Guzman. TC ruled ifo UP, and order both the company and its president to pay UP solidarily. The president Guzman claims that as to him, UP was suing him in his official capacity and not in his personal capacity, thus his inclusion as president of the company is superfluous, because his acts were corporate acts imputable to EPG itself as his principal.

A corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other entity to which it may be related. Mere ownership by a since SH or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate personality. The GM of a corporation cannot be made personally liable for his official acts in behalf of the corporation, with the exception that if he official had acted maliciously or in BF, which would make him liable personally. Since it was not proven that Guzman acted maliciously or in BF, whatever damage was caused to UP as a result of his acts is the sole responsibility of EPG even though Guzman is the principal officer and controlling SH.

BENECO v. NLRC Who Exercises Corporate Powers: Board of Directors or Trustees

Cosalan, GM of the Benguet Electric Cooperative, was informed by COA that cash advances received by officers and employees of Benguet Electric had been virtually written off the books, that per diems and allowances showed substantial

the Board members and officers of a corporation who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting, and act in GF, do no become liable, civilly or otherwise, for the

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document inconsistencies with the directives of the National Electricifcation Administration, and that several irregularities in the utilization of funds released by NEA to Benguet. Cosalan then implemented the remedial measures recommended by COA. Board members of Benguet responded by abolishing the housing allowance of Cosalan, reduced his salary, representation and other allowances, and directed him to hold in abeyance all disciplinary actions, and struck his name out as principal signatory of Benguet Electric. The Board adopted another series of resolutions which resulted in te ouster of Cosalan as GM. Cosalan nonetheless continued to work as GM, contending that only the NEA can suspend and remove him. The Board then refused to act on Cosalan request to release compensation due him. Cosalan files a complaint with the NLRC against the Board of Benguet Electric, and impleaded Benguet Electric itself as well as the individual members of the board in their official and private capacities. Labor Arbitrer rules ifo Cosalan, holding both the company and the board solidarily liable to Cosalan. NLRC modifies award to Cosalan by declaring Bengeut alone, and not the Board members, was liable to Cosalan. Benguet appeals.

consequences of their acts. Those acts are properly attributed to the corporation alone and no personal liability is incurred. In this case, the board members obviously wanted to get rid of Cosalan and acted with indecent haste in removing him from his GM position. This shows strong indications that the members of the board had illegally suspended and dismissed him precisely because he was trying the rectify the financial irregularities. The Board members are also liable for damages under Sec 31 of the Corpo Code, which by virtue of Sec 4 thereof, makes it applicable in a supplementary manner to all corporations, including those with special or individual charters so long as these are not inconsistent therewith. The Board members are also guilty of gross negligence and BF in directing the affairs of the corporation in enacting the said resolutions, and in doing so, acted beyond the scope of their authority.

Woodchild Holdings v. Roxas Who Exercises Corporate Powers: Board of Directors or Trustees

The respondent posits that Roxas was not so authorized under the May 17, 1991 Resolution of its Board of Directors to impose a burden or to grant a right of way in favor of the petitioner on Lot No. 491-A-3-B-1, much less convey a portion thereof to the petitioner. Hence, the respondent was not bound by such provisions contained in the deed of absolute sale.

Generally, the acts of the corporate officers within the scope of their authority are binding on the corporation. However, under Article 1910 of the New Civil Code, acts done by such officers beyond the scope of their authority cannot bind the corporation unless it has ratified such acts expressly or tacitly, or is estopped from denying them. Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against the corporation unless ratified by the corporation. Evidently, Roxas was not specifically authorized under the said resolution to grant a right of way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the petitioner a portion thereof. The authority of Roxas, under the resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion of the adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real rights thereon. Neither may such authority be implied from the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the petitioner “on such terms and conditions which he deems most reasonable and advantageous.” The general rule is that the power of attorney must be pursued within legal strictures, and the agent can neither go beyond it; nor beside it. The act done must be legally identical with that authorized to be done. In sum, then, the consent of the respondent to the assailed provisions in the deed of absolute sale was not obtained; hence, the assailed provisions are not binding on it. It bears stressing that apparent authority is based on estoppel and can arise from two instances: first, the principal may knowingly permit the agent to so hold himself out as having such authority, and in this way, the principal becomes estopped to claim that the agent does not have such authority; second, the principal may so clothe the agent with the indicia of authority as to lead a reasonably prudent person to believe that he actually has such authority. There can be no apparent authority of an agent without acts or conduct on the part of the principal and such acts or conduct of the principal must have been known and relied upon in good faith and as a result of the exercise of reasonable prudence by a third person as claimant and such must have produced a change of position to

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document its detriment. The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent. It bears stressing that the respondent sold Lot No. 491-A-3-B-2 to the petitioner, and the latter had taken possession of the property. As such, the respondent had the right to retain the P5,000,000, the purchase price of the property it had sold to the petitioner. For an act of the principal to be considered as an implied ratification of an unauthorized act of an agent, such act must be inconsistent with any other hypothesis than that he approved and intended to adopt what had been done in his name. Ratification is based on waiver – the intentional relinquishment of a known right. 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. Since the respondent had not ratified the 14 unauthorized acts of Roxas, the same are unenforceable. Hence, by the respondent’s retention of the amount, it cannot thereby be implied that it had ratified the unauthorized acts of its agent, Roberto Roxas.

Yu Chuck v. “Kong Lipo” Who Exercises Corporate Powers: Corporate Officers and Agents

Kong Li Po is a corporation engaged in the publication of a Chinese newspaper. Its AOI provide for a president who shall sign all contracts and other instruments of writing, but does not provide for a business or general manager. CC Chen or TC Chen was appointed general business manager of the paper. He then entered into an agreement with Yu Chuck for the printing of the newspaper for P580 per month. Yu Chuck worked for a year until they were discharged by the new manager Tan Tian Hong because CC Chen had left for China. Yu Chuck sues the paper, claiming the the contract was for a period of 3 years, and that discharge without just cause before the expiration of this term entitles them to receive full pay for the remainder of the term. Kong Li Po counters that CC Chen was not authorized to enter into the contract with Yu Chuck. TC ruled ifo of Yu Chuck, concluding that the contract had been impliedly ratified by Kong Li Po and that although he had no express authority to enter into the contract, since he was general business manager in charge of the printing of the paper and thus had implied authority to employ the petitioners

GR: The power to bind a corporation by contract lies with its board of directors or trustees, but this power may either be expressly or impliedly delegated to other officers or agents of the corporation. EXCEPTION: An officer or agent who has general control and management of the corporation’s business or a specific part thereof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business. Exception to exception: Where the authority is vested expressly in the BOD. As to the term of employment, a manager has authority to hire an employee for such a period as is customary or proper under the circumstances, but unless he is expressly authorized or held out to have such authority, he cannot make a contract of employment for a long future period, such as for 3 years. There can be no doubt that CC Chen as general manager of the Kong Li Po, had implied authority to bind the defendant corporation by a reasonable and usual contract of employment with the plaintiffs. But the term of employment is unusually long, and the conditions are otherwise so onerous to the defendant corporation that the possibility of the corporation being thrown into insolvency thereby is expressly contemplated in the same contract. The corporation also did not impliedly ratify the contract, just because the president of Kong Li Po saw the plaintiffs work as printers in the office one day. Before a contract can be ratified, knowledge of its existence must, of course, be brought home to the parties who have authority to ratify it or circumstances must be shown from which such knowledge may be presumed. No such knowledge or circumstances indicating knowledge is shown or proven in the case. Moreover, a ratification by him would have been to no avail; in order to validate a contract, a ratification by the BOD was necessary. The fact that the president was authorized by the by-laws to sign documents evidencing contracts doesn’t mean that he had power to make the contracts.

Lapu-lapu Foundation v. CA Who Exercises Corporate Powers: Corporate Officers and Agents

Elias Q. Tan, then President of the co-petitioner Lapulapu Foundation, Inc., obtained four loans from the respondent Allied Banking Corporation covered by four promissory notes in the amounts of P100,000 each. As of January 23, 1979, the entire obligation amounted to P493,566.61 and despite demands made on them by the respondent Bank, the petitioners failed to pay the same. The respondent Bank was 17

The Court particularly finds as incredulous petitioner Tan’s allegation that he was made to sign blank loan documents and that the phrase “IN MY OFFICIAL/PERSONAL CAPACITY” was superimposed by the respondent Bank’s employee despite petitioner Tan’s protestation. The Court is hard pressed to believe that a businessman of petitioner Tan’s stature could have been so careless as to sign blank loan documents. In contrast, as found by the CA, the promissory

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document constrained to file with the Regional Trial Court of Cebu City, Branch 15, a complaint seeking payment by the petitioners, jointly and solidarily, of the sum of P493,566.61 representing their loan obligation. Foundation denied incurring indebtedness from the respondent Bank alleging that the loans were obtained by petitioner Tan in his personal capacity, for his own use and benefit and on the strength of the personal information he furnished the respondent Bank. The petitioner Foundation maintained that it never authorized petitioner Tan to co-sign in his capacity as its President any promissory note and that the respondent Bank fully knew that the loans contracted were made in petitioner Tan’s personal capacity and for his own use and that the petitioner Foundation never benefited, directly or indirectly, therefrom. Tan admitted that he contracted the loans from the respondent Bank in his personal capacity. The parties, however, agreed that the loans were to be paid from the proceeds of petitioner Tan’s shares of common stocks in the Lapulapu Industries Corporation, a real estate firm. The loans were covered by promissory notes which were automatically renewable (“rolled-over”) every year at an amount including unpaid interests, until such time as petitioner Tan was able to pay the same from the proceeds of his aforesaid shares. According to petitioner Tan, the respondent Bank’s employee required him to affix two signatures on every promissory note, assuring him that the loan documents would be filled out in accordance with their agreement. However, after he signed and delivered the loan documents to the respondent Bank, these were filled out in a manner not in accord with their agreement, such that the petitioner Foundation was included as party thereto.

notes clearly showed upon their faces that they are the obligation of the petitioner Foundation, as contracted by petitioner Tan “in his official and personal capacity.” Moreover, the application for credit accommodation, the signature cards of the two accounts in the name of petitioner Foundation, as well as New Current Account Record, all accompanying the promissory notes, were signed by petitioner Tan for and in the name of the petitioner Foundation. These documentary evidence unequivocally and categorically establish that the loans were solidarily contracted by the petitioner Foundation and petitioner Tan. The evidence shows that Tan has been representing himself as the President of Lapulapu Foundation, Inc. He opened a savings account and a current account in the names of the corporation, and signed the application form as well as the necessary specimen signature cards twice, for himself and for the foundation. He submitted a notarized Secretary’s Certificate from the corporation, attesting that he has been authorized, inter alia, to sign for and in behalf of the Lapulapu Foundation any and all checks, drafts or other orders with respect to the bank; to transact business with the Bank, negotiate loans, agreements, obligations, promissory notes and other commercial documents; and to initially obtain a loan for P100,000.00 from any bank. Under these circumstances, the defendant corporation is liable for the transactions entered into by Tan on its behalf. Per its Secretary’s Certificate, the petitioner Foundation had given its President, petitioner Tan, ostensible and apparent authority to inter alia deal with the respondent Bank. Accordingly, the petitioner Foundation is estopped from questioning petitioner Tan’s authority to obtain the subject loans from the respondent Bank. It is a familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority.

Board of Liquidators v. Kalaw Who Exercises Corporate Powers: Corporate Officers and Agents

Maximo Kalaw is chairman of the board and general manager of the National Coconut Corporation (NACOCO), a non-profit GOCC empowered by its charter to buy sell barter export and… deal in coconut, copra, and dessicated coconut. Bocar, Garcia and Moll were directors. It entered into contracts for the trading and delivery of copra. Nature intervened—4 typhoons devastated agriculture and copra production. NACOCO was on the verge of sustaining losses and could not be able to make good on the contracts. Sensing this, Kalaw submitted the contracts to the board for approval and made a full disclosure of the situation. No action was taken, and no vote was taken on the matter. On 20 Jan 1947 the board met again with Kalaw, Bocar, Garcia, and Moll in attendance, and approved the contracts. NACOCO however only partially performed the contracts. One of the contracts concerns the Louis Drayfus & Co., which sued NACOCO. NACOCO settled out-of-court and paid Drayfus P567,024.52 representing 70% of total claims. The total settlements sum up to P1.3M. NACOCO sues Kalaw, and his directors Bocar, Moll and Garcia to recover this sum, alleging negligence and BF and breach of trust in approving the contracts, by not having them approved by the board. TC dismisses complaint. NACOCO claims that the by-laws provide that prior Board approval is required before the GM can perform or execute in behalf of NACOCO all contracts necessary to accomplish its purpose.

The contracts in question are “forward sales” contracts—a sales agreement entered into, even though the goods are not yet in the hands of the seller. Given the peculiar nature of copra trading, ie copra must be disposed of asap else it would lose weight and would decrease its value, it necessitates a quick turnover and execution of the contract on short notice (w/in 24 hours). It would be difficult if not impractical to call a formal meeting of the board each time a contract is to be executed. NACOCO board met the difficulties attendant to forward sales by leaving the adoption of the means to the sound discretion of Kalaw. Long before the contracts came into being, Kalaw already contract by himself alone some 60 such contracts, and NACOCO reaped a gross profit. These contracts were contracted without prior authority from the Board and were known to all the members, but nothing was said by them. Also contracts entered into by Kalaw had been submitted to the board after execution, not before as required by the by-laws. The Board has knowledge of this and did not object to the same. Thus the practice of the corporation has been to allow its GM to negotiate and execute contracts in behalf of NACOCO without prior Board approval, and by its acts and through acquiescence practically laid aside the requirement in the by-law. The contracts are therefore valid. Ratification by a corporation of an unauthorized act or contract by its officers relates back to the time of the act or contract ratified and is equivalent to original authority. The theory of corporate ratfication is predicated upon the right of a corporation to contract, and any ratification or adoption is

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document equivalent to a grant of prior authority. Ratification “cleanses the contract from all its defects from the moment it was constituted. By corporate confirmation of the contracts in dispute on 20 Jan, the Kalaw contracts are thus purged of whatever vice or defects they may have. Thus even in the face of an express by-law requirement of prior approval, the law on corporations is not to be held so rigid and inflexible as to fail to recognize equitable considerations. There was no BF or breach of trust on the part of Kalaw. The board knew, and Kalaw had so informed it, that the contracts would cause heavy losses. The Court found no trace of any dishonest purpose or moral obliquity or ill will that partakes of the nature of fraud which would consitute BF on the part of Kalaw. The Board did not eventhink of raising their voice in protest against past contracts which brought enormous profits to NACOCO. The ratification was an act of simple justice and fairness to the GM and to the best interest of the corporation whose prestige would have been seriously impaired by a rejection of the board of those contracts which proved disadvantageous.

Zamboanga Transportation Co. v. Bachrach Co. Who Exercises Corporate Powers: Corporate Officers and Agents

The Zamboanga Transpo Corp, a corporation managed by a BOD composed of 5 stockholders, purchased trucks, automobiles and parts from Bachrach Motors Inc. It incurred a balance of P44K due on several White trucks, secured by 2 CMs. As it was in dire financial straits, Zamboanga through its GM, President and Auditor Jose Erquiaga, entered into loan and additional agreements with Jose Clos, Bishop of Zamboanga, who was also the majority stockholder. As security for the financial accommodation, a new CM agreement was executed, wherein goods pledged to Bachrach was also pledged to the Bishop. Erquiaga submitted the mortgage deed to the board for approval. Two directors of Zamboanga expressed their satisfaction with the arrangement. Zamboanga partially complied with the mortgage deed. Bachrach sought the cancellation of the 2 CMs and to have it recorded in the registry of deeds. Erquiaga replied that the cancellations cannot be recorded pending the approval by the board of the mortgage deed. The BoD of Zamboanga then convened and rejected the mortgage deed, because of the discovery that the mortgage had been registered by Bachrach without the knowledge or consent of Zamboanga and without having first recorded the cancellations of the two previous mortgages. This also prompted the Board to adopt another resolution authorizing legal action to annul the mortgages. Bachrach also sued Zamboanga, and was able to obtain possession of all the chattels and sold the same at public auction. Zamboanga claims that an oral agreement existed such that the mortgage would not be valid without approval by resolution of the board and that it would not be recorded until approval thru resolution was obtained, among other conditions.

In his manifold capacity as President, GM, legal counsel, auditor, and majority stockholder, Erquiaga entered into the CM contract with Bachrach by virtue of which Zamboanga obtained greater advantages. While it is true that the last CM contract was not approved by the board, whose approval was needed in order to validate it according to the by-laws, the broad powers vested in Erquiaga, the approval of his acts with the other CMs, the approval of the other directors, and the payments made to Bachrach are equivalent to a tacit approval by the BoD of the CM contract and binds Zamboanga Transport. In truth and in fact Erquiaga was and is the factotum of the corporation and may be said to be the corporation itself. While the chief officers of the corporation are in reality its owners and are permitted to manage the business by the directors, the acts of such officers are binding on the corporation, which cannot escape liability as to third persons dealing with it in GF. Thus when the president of a corporation, who is one of the principal stockholders and at the same time its general manager, auditor, legal counsel, is empowered by the by-laws to enter into CM contracts, subject to the approval of the board, one of whom is also a principal shareholder, and 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 and binds the corporation even if not formally approved by the board.

Board of Directors v. Tan Who Exercises Corporate Powers: Stockholders or members – Notice

Stockholder John del Castillo files an action in court to declare null and void the election of the members of the board of directors and Election Committee of SMB Workers Savings and Loan Assoc Inc. and to compel the board to call for an hold another election in accordance with its by-laws and the Corporation Law, and to restrain the illegally elected directors from exercising the functions of their office. TC grants the petition and declared the election null and void and ordered another election to be held. However, the same members of the Election Committee set the meeting of the members of the association to elect the new members. Del Castillo et al contends that it would be inequitable for them to conduct and supervise again the election. Furthermore, since the notice was posted and sent out only on 26 March, and the election would be held on 28 March, or two days after notice, it

it appears that the notice was posted on 26 March and 28 March was the date for the election. Therefore the five days previous notice required by the by-laws was not complied with. As regards the creation of a committee of three vested with the authority to call conduct and supervise the election, and the appointment of Viernes as chairman of the Committee, the court in the exercise of its equity jurisdiction may appoint such committee, it having been shown that the Election Committee provided for in the by-laws has been annulled by the TC and would jeopardize the rights of respondents if allowed to act.

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document is not in accordance with the by-laws which provide that 5 days notice is required. The TC entered an order that the election set for 28 March be cancelled and a committee of three be constituted and appointed to call conduct and supervise the election.

Logan Johnston v. Louis Johnston Who Exercises Corporate Powers: Stockholders or members – Where all stockholders present

Logan, Irene, and Felisa Johnston, and Louis and Rosario Johnston, and Elizabeth Araneta are the majority shareholders of a family stock corporation known as Johnston Lumber Co Inc. A stockholders meeting was scheduled to elect a new set of directors who would in turn choose the new officers of the corporation. Logan presented a proxy by his mother, Felisa, and another proxy by his wife, Irene, which all-in-all represented 1,242 of the 2,462 shares of the corporation. He also requested that the duly endorsed shares of JB Solis be listed in the books for voting purposes. Minority SH Louis Johnston, as Chairman of the board, denied the request. Logan quickly sent for the original owners so that they could vote in his favor. Louis also disallowed Logan from voting the 307 shares of the elder Johnston which he had been voting in his capacity as administrator of the estate because the estate proceedings were already terminated. Thereafter, and before the existence of a quorum could be declared, Logan et al walked out of the SH meeting and refused to recognize the validity of the meeting. Louis’ group, the minority carried on and elected themselves directors and officers. Another SH meeting was called by Louis at the instance of Logan, which will cover matters not taken up or not finished during the regular SH meeting. During the meeting Logan moved for the election of a new board, claiming that there was no quorum in the last meeting and thus was not validly held. Louis denied the motion. Logan, who represented majority of the stocks, then nominated his own set of directors, and his group cast their votes in favor of the nominees, which were elected the new members of the board. This action was overruled again by Louis as Chair. Logan Irene and Felisa filed a quo warranto suit alleging that they were the duly elected members of the BOD of Johnston Lumber Co, and were also elected as the corporate officers thereof and praying for the ouster of Louis, Araneta and Rosario Johnston.

The SHs who remained after the group representing the majority walked out without a quorum being declared represented the minority and did no constitute a quorum, and it is clear that they could not have validly transacted further business much less have elected a new set of directors. It follows that if the election of the directors after the withdrawal of Logan was null and void, then the subsequent meeting of the board at which the Louis group was elected was likewise null and void. If the purpose in bolting the meeting was to deliberately defeat the existence of a quorum, the absence of a quorum, then it would produce the effect of nullifying the proceedings that follows. It is to be noted that a SH can, for justifiable reasons, break the quorum by w/drawing from the meeting. Logan walked out because Louis persistently and with reason overruled Logan on his requests to vote the shares of the Silos family, which he validly purchased. That Logan did everything possible to register the stocks in order to vote them was substantial compliance with the charter and the by-laws. The denial by Louis to vote the shares of the minor children of Albert Johnston was likewise unreasonable. The withdrawal of Logan, although it actually defeated the existence of a quorum, was neither unreasonable nor unjustifiable. The second meeting of SH was properly convened. All parties were present. The roll was called and a quorum was declared. The contention of Louis that the 2nd meeting did not amount to an election cannot be sustained. It must be remembered that the Logan group held the majority of stocks when they cast their votes ifo the nominees. The inaction of the Louis faction, did not have the effect of defeating or invalidating the election. It is the essence of all elections that the will of the majority, properly expressed, shall govern. A majority of votes cast will decide, although some SHs who are present may refuse to vote, and thus the majority of the votes cast may be less than a majority of the persons or stocks present or represented. Neither may the second election be assailed on the ground that notice did not specifically include the election of the new board on the agenda. The notice provided that matters not taken up or finished during the first meeting will be part of the agenda, therefore the SHs knew that Logan would press for the new board and they were prepared for it, having attended the first meeting. Furthermore, all SHs were present either in person or by proxy during the 1st meeting and whatever defect in the notice was cured b their presence and acquiescence.

Ponce v. Encarnacion Who Exercises Corporate Powers: Stockholders or members – Where no meeting called

At a stockholders meeting of the Daguhoy Enterprises Inc, the voluntary dissolution of the corporation and the appointment of Potenciano Gapol, the majority stockholder, as receiver was agreed upon, with a petition for voluntary dissolution drafted and signed by Ponce. Instead of filing the petition, Gapol changed his mind and filed a complaint in court to compel Ponce et al to render an accounting of the funds of the corp, reimburse it for expenses and purchases, and other amounts which were allegedly misspent and misappropriate for Ponce’s own use. Gapol also sought the removal of Ponce et al as members of the board, and prayed for an order directing him to call a meeting of the stockholders and to preside thereat. 2 days later, without notice to the Ponce group and to the other board members, the TC issued the order prayed for. Ponce only got to know about

The by-laws of the corporation provide in part that its board shall be elected by the stockholders every even year during the month of January. The requirement in the Corp Code that “on the showing of good cause therefor” does not mean that the petition must be set for hearing with notice served upon the board. The TC was satisfied that there was good cause considering that the chairman had failed, neglected, or refused to perform his duty to call a meeting of the stockholders to elect new sets of directors, in accordance with the by-laws. They had no right to continue as directors unless reelected by the stockholders in a meeting called for that purpose every even year. They had no right to hold-over brought about by the failure to perform the duty incumbent upon any of them. The alleged illegality of the election of one members of the board at the meeting called by Gapol was

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document the order when the bank refused to honor the checks because of its refusal to recognize the new board members.

authorized by the court being subsequent to the order complained of and cannot affect the validity and legality of that order. If it be true that the director elected at the meeting authorized by the court was not qualified in accordance with the by-laws the remedy for the aggrieved party would be a quo warranto.

Detective & Protective Bureau v. Cloribel Who Exercises Corporate Powers: Instances When Stockholders’ or Members’ action is necessary – Election of directors and trustees

Fausto Alberto was managing director of the Detective and Protective Bureau Inc. who illegally seized and took control of the assets and books of the corporation, concealed them illegally and refused to allow any member of the corporation to examine. The stockholders in a meeting removed Alberto as managing director and elected Jose de la Rosa, who did not own a share of stock of the corporation. Alberto refused to vacate and surrender his office and continued to perform unauthorized acts and to use corporate funds. The corporation claimed that Alberto arrogated unto himself the powers of the board because of his refusal to surrender his office despite removal by the stockholders.

Since de la Rosa did not own a share of stock of the corporation, he cannot become a director in accordance with the Corpo Code. If he could not be director, then it follows that he cannot be managing director. Since he is not qualified, then Alberto cannot be compelled to vacate his office because the by-laws itself provide that directors shall serve until the election and qualification of duly qualified successor.

Gokongwei v. SEC Who Exercises Corporate Powers: Instances When Stockholders’ or Members’ action is necessary – Election of directors and trustees

This involves two actions in the SEC filed by John Gokongwei, a San Miguel Corporation stockholder by himself and through the URC and CFC, who sued the majority of the SMC BoD (Soriano, Zobel, Roxas, Ortigas, Prieto et al) and SMC itself to declare null and void the amended by-laws and a cancellation of the certificate of filing the amended by-laws. He alleges the following: — SMCBOD acted without authority in amending the by-laws without the prescribed 2/3 vote of stockholders holding subscribed and paid-up capital stock — Some members of the SMCBOD amended the by-laws which state that in determining whether or not a person is engaged in competitive business, the Board may look into factors such as competitive business and family relationship, thus purposely providing for Gokongwei’s disqualification as director, and effectively disqualified him from being elected as director Gokongwei also files an action in the SEC to compel SMC to allow him to inspect the records of the corporation, including the minutes of the last stockholders meeting, copy of the management contract with ANSCOR, latest financial statements among others, including the authority of the stockholders to invest corporate funds in San Miguel International Inc. The Sorianos counter by alleging that Gokongwei as president and majority stockholder of URC and CFC, conducted bad publicity against the SMC to generate support from the stockholders in his effort to secure a seat in the board. They add the fact Gokongwei was rejected by the stockholders because he was engaged in competitive business and securing a seat would have subjected SMC to grave disadvantages. SEC grants Gokongwei motion but denies the motion to inspect the financial statements and records of San Miguel International as he is not a stockholder thereof. SEC also allowed him to run as director but cannot sit as long as the validity of the by-laws has been settled. Meanwhile the SMCBOD submitted the amended by-laws to the stockholders, who ratified the same.

I: were the amended by-laws valid and reasonable H: In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in 1948; and that in the stockholders' annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel Corporation were ratified by the stockholders. I: 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 H: Under US corporate law, corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation's Board of Directors. This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment "advances the benefit of the corporation and is good." In the Philippines, section 21 of the Corporation Law expressly provides that a corporation may make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under "the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director.” It is also well established that corporate officers "are not permitted to use their position of trust and confidence to further their private interests." In a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival business, the directors entered into a new contract themselves

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document with the foreign firm for exclusive sale of its products, the court held that equity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal.” I: W/N Gokongwei, as SH of SMC, has a vested right to be voted as director in the corporation. H: It is further argued by SMC that there is no vested right of any stockholder under Philippine Law to be voted as director of a corporation. 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 petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification. 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", according to Ashaman v. Miller," 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. I: Whether or not respondent San Miguel Corporation could, as a measure of self- protection, disqualify a competitor from nomination and election to its Board of Directors. H: In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and employees ... " This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director ... " 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

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It cannot therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed ... by any act of the former which is authorized by a majority..." 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. Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival. These dangers are enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the competing corporations. It would seem manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director. Indeed, access by a competitor to confidential information regarding marketing strategies and pricing policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for the development of existing or new markets of existing or new products could enable said competitor to utilize such knowledge to his advantage.

Roxas v. dela Rosa Who Exercises Corporate Powers: Instances When Stockholders’ or Members’ action is necessary – Removal of Directors

The majority SHs of Binalbagan Estate Inc formed a voting trust, wherein the trustees (Fisher, Laguda, and Monteblanco) were authorized to represent and vote the shares pertaining to the majority SHs. During the SH meeting the trustees were able to elect a board to their liking without opposition from the minotiry. Various substitutions have been made in the personnel of the voting trust, such that the present composition wanted to oust the officers of Binalbagan elected by the voting trust previously, without waiting the termination of their official term or after one year from date of their election. The trust then called a special general meeting of the SHs for the election of the board, amendment of by-laws, and other business. A board member and a single SH sued the trustees to enjoin them from holding said meeting. TC granted the petition.

Under the law the directors of a corporation can only be removed from office by a vote of the SH representing 2/3 of the subscribed capital stock entitled to vote, while vacanies in the board can only be filled by mere majority vote. While the trust controls a majority of the stock, it does not have a clear 2/3 majority. It was therefore impolitic for the trust, in forcing the call for the meeting, to come out frankly and say in the notice that one of the purposes of the meeting was to remove the directors of the corporation. Instead the call was limited to the election of the board, it being the evident intention to elect a new board as if the directorate had been then vacant. Since the present directors were regularly elected, the proposal to elect another directorate, if carried into effect, would result in the election of a rival set of directors, who would need a court order of quo warranto to install them in office. Thus the TC was correct in forestalling that eventuality and to enjoin the second election.

Angeles v. Santos Who Exercises Corporate Powers: Instances When Stockholders’ or Members’ action is necessary – Removal of Directors

Angeles et al were minority SHs, while Santos et al were the majority SHs of Paranaque Rice Mills Inc. At an extraordinary SH meeting the SH appointed an investigation committee to investigate and determine the properties, assets, and losses of the corporation. Santos denied access to the properties and the records and books of the corporation. Santos took the records and books and

There is ample evidence to show that Santos et al have been guilty of breach of trust as directors of the corporation. The Board is a creation of the SH by delegation of the SH. But the board, or the majority thereof, occupies a position of trusteeship in relation to the minority of stock in the sense that the board should exercise GF, care, and diligence in the administration of the affairs of the

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document appropriated for his own benefit the properties and funds of the corporation. He also refused to issue a certificate of stock for Angeles, and refused to call a SH meeting and a board meeting, as well as disposed of the properties of the corporation without authority. Santos also called no meeting of the board or of the SH thus enabling him to continue holding without any election, the position of president and GM. Angeles et al sought a court order to appoint a receiver, to order Santos to render an accounting, to issue to certificate of stock ifo Angeles, and to remove the present board and hold a special SH meeting to elect a new board.

corporation. And should protect not only the interests of the majority but also those of the minority of the stock. Where the majority of the board performs ultra vires acts or commits fraud or wrongful harm to the corporation, the court, in its exercise of equity jurisdiction, and upon showing that an intracorporate remedy is unavailing, will entertain a suit for and in behalf of the corporation to redress the injuries of the minority SHs against wrong by the majority. 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 SH may institute a suit in behalf of himself and other SH and for the benefit of the corporation. GR: SH cannot ordinarily sue in equity to redress wrongs done to the corporation, but the action must be brought by the board Exception: If the corporation is under the complete control of the wrongful members of the board, or where a demand or suit would be useless and futile The appointment of a receiver upon application of the minority SH is a power to be exercised with great caution. This does not mean that the rights of the minority SH may be entirely disregarded, and that where necessity has arisen, the appointment of a receiver for a corporation is a matter resting largely in the sound discretion of the court. As to the contention that it was wrong for the TC to order the removal of the directors and members of the board upon application by the minority SHs, the law does no confer expressly upon the courts the power to remove a director. But if the court has acquired jurisdiction to appoint a receiver because of the mismanagement and resulting injury caused by the members of the board, these may thereafter be removed and others appointed in their place by the same court in the exercise of its equity jurisdiction. In the present case, the properties and assets of the corporation are amply protected by the appointment of a receiver and thus the removal of the directors is unnecessary and unwarranted.

Campbell v. Leow’s Inc. Who Exercises Corporate Powers: Instances When Stockholders’ or Members’ action is necessary – Removal of Directors

Two factions have been fighting for control of Leows Inc—the Tomlinson (majority SH) Faction, and the Vogel (president) Faction. At the SH meeting each nominated 6 directors and a neutral director, or 13 directors in all. 2 of the 6 Vogel directors, a Tomlinson director, and the neutral director resigned, making it 5-4 ifo Tomlinson. A quorum is 7. Only the 5 Tomlinson directors attended a directors’ meeting to fill the vacancies in the board. Before the meeting, Vogel as president called a SH meeting to fill director vacancies, amend the by-laws to increase the number of board members from 13 to 19, to increase the quorum from 7 to 10, and to elect 6 additional directors, as well as to remove 2 Tomlinson directors. A proxy statement was sent out by Vogel soliciting SH support for the agenda in the notice of the Vogel meeting and to fill the board with Vogel nominees. Tomlinson sued. He claims the president had no authority to call a special meeting of SH to act upon policy matters which have not been defined by the board. He also alleges that the president had no authority, without board imprimatur, to propose an amendment of the by-laws to enlarge the board.

Vogel as president had authority to call the special meeting of SH, although the purposes of the meeting were not in furtherance of the routine business of the corporation, because it is expressly granted by the by-laws. Nonetheless, the SH, by permitting the by-laws to stand, have given the president power to state these broad purposes in his call for a meeting. The call of the Sh meeting is not of the character that would impinge on the power given directors by the statute. A by-law giving the president power to submit matters for SH action presumably only embraced matters which are appropriate for SH action. So construed the by-laws do not impinge on the statutory right and duty of the board to manage the business of the corporation. As to the enlargement of the board, although a radical change in corporate management and could be determinative of control, the wording of the by-law authorizes such action. As to the call of meeting for filing newly created directorships, which plaintiff claims is invalid, the SHs have the inherent right between annual meetings to fill newly created directorships. It would take strong by-law language to warrant the conclusion that those adopting the by-laws intended to prohibit the SHs from filing new directorships. As to the removal of directors by the SH even for cause, which is not authorized by state law, the court ruled that the SH have such power. This power must be implied when we consider that otherwise a director who is guilty of the worst sort of violation of his duty would nevertheless remain on the board. Considering the damage a director might be able to inflict upon his corporation, the doubt must be resolved by construing the statute and by-laws as leaving untouched the question of director removal for cause. This power exists even where there is a provision

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document for cumulative voting. If a director’s presence or action is clearly damaging the corporation and its SH in a substantial way, it is difficult to see why that director should be free to continue such damage merely because he was elected under a cumulative voting system. However, a SH has standing and the right to challenge the legal propriety of action proposed to remove a member of the board, and can attack procedures adopted to remove directors for cause where the procedure is invalid in its face.

De la Rama v. Ma-Ao Sugar Central Who Exercises Corporate Powers: Instances When Stockholders’ or Members’ action is necessary – Fundamental Changes

Derivative suit by 4 minority SHs against the Ma-ao Sugar Central, its president and 3 other directors. The minority SHs contend that the president subscribed for P3M worth of capital stock of the Phil Fiber Co Inc, a company making sugar bags, making 2 payments without any board resolution authorizing the investment at the time, but only after the investment was already made. They claim that the transaction is still wanting in legality, since no resolution was approved by affirmative vote of 2/3 of SHs

a private corporation, in order to accomplish its purpose as state in its AOI, and subject to the limitations of the Code, has to power to acquire, hold, mortgage… shares, bonds, and other debt instruments of any domestic corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of the Shs, but when the purchase of shares of another corporation is done solely for investment and not to accomplish its purpose, the vote of approval of the SH is necessary. When the investment is necessary to accomplish its purpose in the AOI, the approval of SHs is not necessary.

In re Giant Portland Cement Co Devices Affecting Control – The Proxy Device

Stock transferred on the books of the corporation within 20 days prior to a stockholders meeting, for the election of directors, is temporarily disenfranchised, and cannot be voted either by the transferor or by the transferee. The persons on whose proxies the SH meeting were the SH of record within the provision of the statute, although they were not real beneficial or equitable owners of the stock. The right to vote shares of corporate stock, having voting powers, has always been incident to its legal ownership. Whatever the rights of the mere unrecorded assignee of the stock certificate might be in the absence of a by-law or other contract provision requiring all transfers of shares to be recorded on the books of the corporation, it is not contended that such a provision is not authorized or is not binding as between SHs and the corporation. As between the transferor and the unrecorded transferee to the stock certificate, the legal title passes to the latter. A very different rule applies between the corporation and the mere unrecorded assignee of the certificate of stock. That is because limited contract restrictions relating to stock transfers, are for the benefit of the corporation, and to enable it to ascertain from its records who its members of SHs are. So far as the corporation is concerned, until such a by-law is complied with, the record owner must therefore be regarded as the real owner of the stock, with the consequent general right to vote it by proxy or otherwise. When considered from a legal standpoint, there is no privity of contract between the mere holder of the certificate and the corporation, and he is not a real member of that organization until the transfer is recorded. Until that time, the possible legal rights of the holder of the certificate are of an inchoate nature. In other words, a real novation, whereby a new contract between the mere holder of the certificate and the corporation is substituted for the prior contract of the record owner, can only be brought about by complying with the corporate regulation relating to transfers of stock. The record owner may, therefore, be the mere nominal owner, or technically a trustee for the holder of the certificate, but legally he is still a stockholder in the corporation, and so far as the corporation is concerned, like the usual trustee, ordinarily has the right to vote the stock standing in his name. In cases of this nature, when nothing more than a mere dry trust is involved the owners of the certificates can usually protect their rights by recording the transfers and having the new certificates issued; but

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document even though that could not be done in this case because the corporate transfer books were closed at the time of the assignments, they could have compelled the record owners to give them proxies to vote the stock standing in their names. A mere nominal owner naturally owes some duties to the real beneficial owner or equitable owner of the stock, and even if the right to demand a proxy is not exercised, if the vendor exercises his legal right to vote in such a manner as to materially and injuriously affect the rights of the vendee, he is perhaps answerable in damages in some cases. It can hardly be contended that the actual consent of the holder of the certificate is ordinarily essential to the right of the record owners to vote stock standing in their names. When the right and power of a mere record owner to vote is questioned, some ultra vires, negligent, or improper willful act or omission on the part of the corporation or its agents is relied upon and must appear. In some cases the court may also reject votes cast by the record owners, which are regarded as improper, solely because of some peculiar inequitable circumstances affecting the relation between such apparent owners and the transferee of the certificates. Conceding that as between a transferor who has parted will all the beneficial interest in stock and his transferee, the board equities are all in favor of the latter in the matter of its voting.

State ex. Rel Everett Trust v. Pacific Wax Devices Affecting Control – The Proxy Device

The rules against perpetuities is usually stated as prohibiting the creation of future interest or estates, which by possibility may not become vested within a life or lives in being and 21 years… the rule however applies only to the vesting of future estates and does not apply to vested estates. 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 20 years he desired to sell his stock he would give the promissee the first opportunity for a period of 15 days to purchase it a such price and upon such terms and conditions as the promisor offered. It was in effect a promise to give an option in the even the promisor desired to sell his stock. GR: a proxy given by a SH to vote his corporate stock at a meeting of the SHs of a corporation is revocable by him even though the proxy by its terms is expressly made irrevocable. Exceptions:

(1) where authority or power is coupled with an 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. The interest is not limited to the thing itself upon which the power is to be exercised, but is also included the subject upon which the power is to be exercised. It is however 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 tangible shares or certificates of stock, but the subject matter may refer to the intangible voting right and the incidental control of the corporation.

(2) where authority is given as part of a security or is necessary to

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document effectuate a security—in such a case the interest of an 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.

It is clear from the proxy agreement that the parties agreed that Paine Mitchell stock should be used in conjunction with the stock owned by Engle so that the policies of the respondent should be thus controlled. In this situation Engle was more than a mere agent. In voting stock he served purposes of his own in maintaining control of the corporation by his choice of directors and the determination of policies and business affairs of the corporation. 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 mutual agreement 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 Paine-Mitchell after the death of Engle. This power was couple with an interest and by the entire agreement between the parties the power was intended to be and became a security to effectuate the main purpose of the agency. The parties did no more than promise to give each other an option to purchase in the even either had a proposal to buy his or its stock; but 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 conclusion is 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 the appellant.

Alejandrino v. de Leon Devices Affecting Control – The Proxy Device

Pambul Inc was organized by the controlling stockholders of Pampanga Sugar as a scheme to perpetuate their 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, and 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.

We do not think such alleged circumstances are sufficient in law or equity to vitiate or invalidate or render revocable the irrevocable proxies in question. The desire and design of a majority of SHs of a corporation to control its management and operation is legitimate per se, and is in fact the universal practice in the business world. The SH who own a majority of the stock of a corporation may elect themselves directors or appoint themselves its agents, or form and carry into effect policies of management as freely as if the business were their own, so long as they act honestly and do not devote the corporate assets or business to their own private gain or to the prejudice of other stockholders, and no one can question their acts, which are surely intra vires. The allegations of monopoly positions in a corporation, without any allegation of fraud or irregularity resulting therefrom to the prejudice of any stockholder, is 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

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document 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 onditions 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. To vote at a meeting of the SHs of a corporation is, unlike a political franchise, but an exercise of the right of ownership involving no public interest. To call the transfer of such right bribery is to distort the meaning of the word; it can no more be called bribery than the payment by the purchaser of the price of goods bought by him may be considered a bribe to the seller

Campbell v. Leow, Inc. Devices Affecting Control – The Proxy Device

Action to restrain Loew’s Inc from using corporate funds, employees, and facilities for solicitation of proxies for the Vogel group and from voting proxies so solicited. Campbell contends that the Vogel Group, by calling the meeting and by using corporate funds and facilities, are usurping the authority of the BOD, and that the president is in effect in using his corporate authority and the corporate resources to deny the will of the BOD and to maintain himself in office. The by-laws provide for 13 directors. 7 is a quorum. Due to 4 resignations there are now 9 directors in office. 5 of 9 are of the Tomlinson Faction while the remaining 4 are of the Vogel Faction. Since the Vogel Group will not attend directors meetings, it follows that the Tomlinson Group is unable to muster a quorum of the BOD and is thus unable to take action on behalf of the Board.

The BOD acting as a board must be recognized as the only group authorized to speak for management in the sense that under the statute they are responsible for the management of the corporation. Since the Vogel Group, being in physical possession of the records and facilities of the corporation, treated the request of the directors for a stockholders list as though it were to be judged by standards applicable to a mere SH’s request, they violated the duty owed such directors as directors. The fact the Vogel, as president, had the power to call a SH meeting to elect directors and is so to speak, in physical control of the corporation, cannot obscure the fact that the possible proxy fight is between two sets of directors. Vogel has no legal standing to make his faction the exclusive voice of Loew’s in the forthcoming election. On the issue of how the two groups should be classified for purposes of determining the rights of the Vogel Group in connection with the use of corporate money and facilities for proxy solicitation at the SH meeting—w/n the SH approve of a record made by one group and opposed by another group. While the Tomlinson Group has 5 of 9 directors, it would be most misleading to have them represent to the SH that they are management in the sense that they have been responsible for corporate policy and administration. It is apparent that the Vogel Group is entitled to solicit proxies, not as representing a majority of the board, but as representing those who have been and are now responsible for corporate policy and administration. Whereas the Tomlinson Group, while not management in the sense that it is able to take effective director action, is representative of the

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document majority of the incumbent directors and is entitled to so represent to the SHs if it decides to solicit proxies. Since Vogel is entitled to expend reasonable sums of corporate funds in the solicitation of proxies, it follows that the request for an injunction against such us will be denied. On the issue of the entitlement of the Vogel group to use corporate facilities and employees, because such action would carry the intracorporate strife even deeper within the corporation and there is no practical way to ensure equal treatment for both factions where only one group (Vogel) is in control of the physical facilities, Vogel should thus by enjoined from using corporate facilities and personnel in soliciting proxies. On the issue of w/n Vogel, in soliciting proxies, misrepresented himself as management and thus the proxies should not be voted, the evidence presented by Tomlinson Group are not so misleading as to void the proxies. Since the meeting was validly called by the president, there was nothing misleading in the creation of the impression that the meeting and the material were initiated by the company. The whole impact of the proxy material conveyed to the average reader the impression that there is a bitter fight between the president and his faction and another faction on the board. The overall result is no so misleading as to justify the nullification of the proxies for any purpose.

Abercrombie v. Davies Devices Affecting Control – Voting Trust

6 stockholders, led by Davies (president) of the American Independent Oil Company took steps to form a coalition, in order to ensure the smooth functioning of its board considering that not one SH holds a majority of the stock of the corp, and no one SH is represented by more than four directors. The Davies 6 hold 54.5% of the corporate shares and is represented on the board by 8 of 15 directors. An agreement was executed between the 8 directors representing the Davies group and are called “agents,” and the Davies 6 to achieve effective control of the board and control of corporate policy. Motive was to prevent acquisition of control by Philipps, the largest single SH holding 1/3 of the stock. The agreement provides that it transfers voting conrol of the stock of the Davies 6 to the 8 agents for a period of 10 years. An agreement of 7 of the 8 agents is required to vote the stock and in case of disagreement an arbitrator will be designated. Abercrombie (one of the organizers of the company), Philips et al sued Davies and the agents, claiming that the agreement is invalid. In substance it is a voting trust but since it did not comply with the voting trust statute it should be void. Davies contends that it was never intended to be a voting trust but a mere pooling agreement.

The agreement is a voting trust. If any SH agreement provided for joint or concerted voting is so drawn as in effect to occupy the field reserved for the voting trust, it is illegal, whatever the mechanics may be devised to attain the result. Definition of voting trust: a device whereby two or more persons owning stock with voting powers, divorce the voting rights thereof from the ownership, retaining to all intents and purposes the latter in themselves and transferring the former to trustees in whom the voting rights of all depositors in the trust are pooled. The principal object of such trust is voting control. The agent’s agreement effectively divorces the voting rights of the pooled stock from its beneficial ownership, transfers the rights to the agents through irrevocable proxies for 10 years, pools the stocks in the agents as a group through the proxy devise with no SH retaining the right to vote, and its principal object is the voting control of the company. These elements are elements of a voting trust. The provision in the agreement which gives the agents the power to withdraw the stock from escrow and transform the agreement into a voting trust merely added only the special mechanics of a voting trust that the statute requires, the substance of the voting trust having already existed in the agreement. Since the voting trust statute was not complied with i.e. shares were not transferred in the books and a copy not furnished to corporation, it effectively created a secret voting trust. The statutory requirement is for the benefit of all SHs and all beneficiaries of the trust, who are entitled to know where voting control of the corporation resides. This failure to transfer stock on the books is not a sufficient reason for holding the agent’s agreement not a voting trust. The stock here was endorsed in blank and

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document delivered to the agents for deposit in escrow with irrevocable proxies. Transfer on the books is not essential to effect an irrevocable transfer of voting rights to fiduciaries. It is such a transfer which is characteristic 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. The stock is voted by the agents as a group. No one SH retains complete control over the voting. It cannot vote its own stock directly; all it can do is direct its agent how to vote on a decision to be made by the agents as a group/ in effect, each SH participating in the agreement reserves the right to name and remove the fiduciary representing him. Such a provision is not inconsistent with a voting trust.

Everett v. Asia Banking Corporation Devices Affecting Control – Voting Trust

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 bank persuaded Teal, Peabody, and Smith Kirkpatrick to enter into a “creditors 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 SHs to place their shares in a voting trust to be held by the Bank, then the Bank would finance Teal under its own supervision. The Teal SHs 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 SH 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 Corp 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.

Right of transferring SHs to set aside the trust agreement when their rights are trampled upon by the trustee. Corpo Code now provides that no VTA will be used for purposes of fraud.

Mackin v. Nicollet Hotel Devices Affecting Control – Voting Trust

Dixon was the owner of a leasehold interest in a tract of land in Minneapolis upon which stood what was known as the Nicollet Hotel. Nicollet Hotel Inc was organized for the purpose of adding to the hotel accommodation of that city. Arrangements were made to have Dixon take 2500 shares for his lease and to erect an new Nicollet Hotel upon this property. Cost was $3M, to be raised by the sale of $1M mortgage bonds and $1.25M of preferred stock. The Minnesota Loan and Trust Co approved the loan application of Nicollet for $1.8M secured by the said mortgaged bond. The loan agreement stipulates that a voting trust agreement is entered covering the common stock of Nicollet. The State Securities Commission approved Nicollet’s application for the license to sell its preferred stock, provided that the common stock is to be trusted with three trustees for 10 years for the protection of preferred SHs. Thereafter a voting trust agreement was entered with Dixon et al as voting trustees. Mackin is the owner of a trust

Voting trusts are not illegal per se. In the instances where the voting trust has been held void, there existed invalidating circumstances such as want of consideration, voting power not coupled with an interest, fraud, illegal purpose, and so on. In this case there was no charge of illegality or fraud, nor of any invalidating circumstance. The voting power of the three trustees is coupled with an interest because of one of the trustees is a substantial owner of the common stock, and all are charged with the duty of protecting and conserving property for the benefit of those who became purchasers of preferred stock and bonds. The whole purpose of the agreement is legitimate and wholesome. It was a matter of civic pride and to make this possible, it involved the invitation of combinations of capital in substantial amounts, which could only be secured by having those who invested their money assured of the fact that there would be a continuity of management during a period of years until such time that the new enterprise

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document certificate representing 80 shares of common stock, alleging that the voting trust is void and that the trustees and directors appointed have mismanaged the company and have caused large losses. The agreement also allegedly denied them the right to inspect the books, and they ask the court to declare the same null and void and appoint a receiver until the beneficial owners can elect a new set of directors.

would have an opportunity to justify a successful financial future. It would be a manifest injustice to the large number of holders of bonds and preferred stocks, not to the parties to the suit, to adjudge and hold illegal a trust agreement upon the strength of which they had invested their money in the enterprise. It also appears that Mackin purchase the certificates of trust after the creation of the trust agreement and are presumed to have full knowledge of the limitation of their rights.

NIDC v. Aquino Devices Affecting Control – Voting Trust

Batjak, a manufacturer of coco oil and copra cake for export, is on the brink of bankruptcy. It entered in to a Financial Agreement with PNB for additional operating capital for its 3 processing mills and to pay its other debts to other banks. Under the agreement with PNB, NIDC, a wholly-owned subsidiary of PNB, would invest P6.7M worth of preferred shares convertible within 5 years into common stock to pay off the other debts and the balance to pay off its own due with PNB. PNB also granted various credit accommodations. Batjak as part of the deal, mortgaged all its properties in the province. A 5-year voting trust agreement was executed ifo NIDC by the SHs representing 60% outstanding stock of Batjak. Years later, PNB instituted foreclosure proceedings against the mortgaged properties due to Batjak’s insolvency, and soon became owner of the properties. Batjak failed to exercise its right to redeem within the period allowed and PNB transferred ownership of the 2 oil mills to NIDC. 3 years later, Batjak represented by majority SHs, inquired with NIDC if it was still interested in negotiating the renewal of the voting trust agreement. NIDC replied that its was no longer interested and requested turn-over of all Batjak assets and properties. Batjak demanded an accounting of all assets and properties and operations but NIDC refused to comply. Batjak then filed an action for mandamus. CFI Judge Aquino issued a TRO prohibiting NIDC from removing any record, report, or document or disposing all of the properties of Batjak, and allowed Batjak to inspect the same. Batjak then moved for the appointment of a receiver. NIDC and PNB opposes, but overruled by CFI. MRs denied.

Batjak premises its right to possession through the receivership of the 3 oil mills in the voting trust agreement, claiming that under said agreement, NIDC was constituted as trustee of the assets, management, and operations of Batjak, and that due to expiration of the agreement, NIDC should turn over the assets to Batjak. What was assigned to NIDC was the power to vote the shares of stock representing 60% of SHs, who are signatories to the agreement. Nowhere in the agreement is mention made of any transfer or assignment to NIDC of Batjak’s assets operations and management. NIDC was constituted as trustee only of the voting rights of 60% of outstanding shares. What was to be returned by NIDC as trustee to Batjak’s SHs upon termination of the agreement, was the certificates of stock, not the properties or assets which were never delivered to NIDC in the first place. The acquisition of PNB and NIDC of the properties was not in its capacity as trustee but as a creditor in accordance with the financing agreement. - SC failed to appreciate the fact that the voting trust was obtained from the

SHs of the borrowing corporation precisely to allow PNB-NIDC to have management and undertake control in the operations of the borrowing corporation

- In this case, the VTA was part and parcel of the loan arrangement, and should have been considered by the Court as a means by which the lending institution obtains control over the management or operation of the borrowing corporation, and not merely as a transfer only of voting or other rights pertaining to the shares

VTA as part of Loan Agreement — VTA as part of loan agreement can exceed 5 years as an exception to the rule that VTAs cannot be for more than 5 years — VTA as part of loan agreement ensures that the lending institution would have a controlling interest in corporate votes — Constitutes further security to the lending institution — In reality, the lending institution would have very little interest in the operations of the corporation as to require a voting trust

Ringling v. Ringling Devices Affecting Control – Pooling and Voting Agreements

Involves an action contesting the validity of the election of directors and officers of Ringling Bros-Barnum & Bailey Combined Shows Inc. Edith Ringling and Aubrey Haley, two of three majority SHs, entered into an agreement (valid for 10 years) that neither party will sell any shares or VTCs without first making a written offer to the other for the same price and under the same conditions, allowing a period of within 180 days to accept the offer. Each party will consult with the other and act jointly in exercising voting rights, and in case of disagreement, an arbitrator (Loos) will intervene, and his decision shall be binding on the parties. It also provides that each will enter into VTAs or other

The mutual promises in the agreement certainly constitute sufficient consideration to support it. But did the parties agree to agree? Certainly the parties agree as to how they would vote their stock, but they also provided that they shall be bound by the decision of the arbitrator. The agreement to agree therefore has provisions which are capable of being enforced with respect to particular facts. The very nature and object of the agreement render it impossible to do more than agree to agree, and is sufficiently definite in terms of the duties and obligations imposed on the parties to be legally enforceable.

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document agreements as deemed advisable. From 1943-45 both parties voted together in accordance with the agreement and elected 5 of 7 directors in each occasion. James Haley, as proxy for Mrs Haley, refused to follow the instructions of the arbitrator Loos on a particular manner of voting the shares (i.e. vote for adjournment and vote for 5 named nominees for director) by voting all his wife’s shares for the election of Aubrey Haley and James Haley.

I: W/N the agreement is a voting trust agreement. If not, does it violate any public policy? H: The SHs under the present agreement vote their own stock at all times, which is the antithesis of a voting trust because the latter has for its chief attribute the severance of the voting rights from the other attributes of ownership. In cases where the parties cannot reach an accord as to how they will vote, and are directed by the arbitrator to vote in a certain way, the substance of the matter may be said not to differ in effect from a voting trust agreement, however, there is this substantial distinction—the right of the arbitrator to direct the vote is limited to those particular cases where a SHs vote is called for and the parties cannot agree. In a voting trust, the trustees in the first instance determine policy and implement it by their votes, and have continuous voting control for the period stipulated in the voting trust. The agreement in question is actually a variation of the stock pooling agreement and the voting trust. Generally agreements and combinations to vote stock or control corporate action and policy are valid, if they seek without fraud to accomplish only what the parties might do as SHs and do not attempt it by illegal proxies, trust, or other means. The objects and purposes in the agreement are lawful and constitute no constitutional or public policy infirmity, and thus the stock held thereunder should have been voted pursuant to the direction of the arbitrator. When a party refuse to comply with the arbitrator, then the agreement constitutes the willing party to the agreement an implied agent possessing the irrevocable proxy of the recalcitrant party for the purpose of casting the particular vote. Here an implied agency based on an irrevocable proxy is fully justified to implement the agreement without doing violence to its terms. The provisions make it clear that the proxy may be treated as one coupled with an interest so as to render it irrevocable under the circumstances. The nature of the Agreement also does not preclude the granting of specific performance, because to deny it would be tantamount to declaring the agreement invalid.

EK Buck Retail v. Harkert Devices Affecting Control – Pooling and Voting Agreements

Suit for declaratory judgment to test the validity of a corporation control agreement entered by the parties in their capacities as SHs of Harkert House. Harkert, the sole owner of a chain of restaurants and burger chains, sought financial aid from EK Buck, and entered into 4 purchase and resale agreements prior to the incorporation of Harkert’s restaurants. These involve the selling of equipment and fixtures of a designated outlet or stand to an investor for cahs and entering into an agreement to buy back the same at the end of 5 years for a higher price. Harkert then incorporated his business, with its net worth estimated at $47,504.38, which Buck knew. Harkert was then obligated on the repurchase agreements to persons other than Buck. Harkert, also indebted to Buck, entered into another agreement where buck would cancel the gross amount of indebtedness and pay in cash into the business for which he was to receive as consideration 40% of the stock and equal board representation. Buck invested around $90K into the Harkert Houses. In the agreement, the parties agree that the number of board members of Harkert be reduced from 5 to 4, which would include Buck and Devor (of the EK Buck Retail Stores), and at all times 2 nominees shall come from each party (Buck group and Harkert group). It was also agreed

GR: an agreement purporting to control the actions of directors after they are elected, in handling the ordinary business of the corporation, is void. This is because the law imposes the business management of the corporation on its directors, who represent all the SHs and creditors, and they cannot enter into agreements among themselves to abdicate their independent judgment. But the correct rule is that SH control agreements are valid where it is for the benefit of the corporation, where it works no fraud upon creditors or other SHs, and where it violates no statute or recognized public policy. The court upheld the validity of a SH agreement for voting trust, applying as a test the conclusion that there was no wrong to the corporation or no special benefit to the parties to the contract and no turning over of management to strangers. Applied in the present case, the agreement would be valid. Furthermore, the agreement does not place Buck Retail, as the owner of 40% of stock, in control of the corporation. It does give him veto power. But Buck would not have cancelled the gross indebtedness of $55K and paid in fresh money without the stock agreement being made. It must be assumed that the purpose of

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document between the parties that at all SH meetings all of the shares of the parties be voted in such a manner by the directors elected. EK Buck Retail thus became owner of 1198 shares to Harkert’s 1437. The contract was between the parties as SHs. They involved no action on the part of the corporation. The board, offices, or other SH had no knowledge of the transactions. Harkert claims that an agreement between SHs as to how stock shall be voted at the election of directors ipso facto changes the manner of election prescribed by the Constitution. He adds that although a SH may vote as he pleases, public policy forbids the enforcement of a contract by which a SH undertakes to bargain away his right to vote for directors according to his best judgment. Buck counters that no public policy is violated in the making of an agreement between the majority and minority SHs to cause voting rights in the corporation to be equal when it is beneficial to the corporation for the purpose of brining fresh money into the business.

the agreement was to prevent the corporation from getting into financial distress. The difficulties of Harkert and Buck only arose after 11 years of successful operations on the very policy which Buck sought to have maintained when he brought in the fresh capital into the business by purchasing 40% of the stock. SH control agreements are not invalid per se. If they are based on a sufficient consideration between contracting SH 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 SHs. It is not illegal or against public policy for 2 or more SH owning majority shares to unity upon a course of corporate policy, or upon the officers or directors whom they will elect.

Clark v. Dodge Devices Affecting Control – Pooling and Voting Agreements

Action for specific performance between Clark and Dodge, SHs of two New Jersey corporations, Bell & Co and Hollings-Smith Co, engaged in the business of manufacturing medicinal preparations by secret formulae. Clark owned 25% and Dodge 75% of each corporation. Dodge, a director, took no active part in the business but controlled the other directors of both corporations. Clark was a director, treasurer and GM of Bell but was in charge of a major part of the business of Hollings-Smith. The secret formulae were known to Clark alone. Both entered into an agreement that Clark should continue in the management and control of Bell so long as he remained faithful and competent, and that he should not be the sole custodian of the formulae but share his knowledge with Dodge’s son. The agreement also provides that Dodge during his lifetime and after death, a trustee to be appointed by him in his will would vote his stock and so vote as director that Clark would continue to be a director and GM and receive ¼ of the net income of the corporations, among others. Clark agreed to share the formula to Dodge’s son and instruct him on the methods of manufacturing. Clark accuses Dodge of breach and his failure to use his control of the stock to continue Clark as director and GM, and even prevented Clark from receiving a proportion of the income as stipulated in the agreement.

GR: the business of the corporation shall be managed by its board. If the enforcement of a particular contract damages nobody—not even the public—one sees no reason for holding it illegal, even though it impinges on the general rule stated above. Damage suffered or threatened is a logical and practical test. Where the directors are the sole SHs, there seems to be no objection to enforcing an agreement among them to vote for certain people as officers. The rule that all SHs by their universal consent may do as they choose with corporate concerns and assets, provided the interests of creditors are not affected, because they are the complete owners of the corporation, cannot apply in a case where the SHs are not parties to the agreement in question. So when the public is not affected, the parties in interest might, by their original agreement of incorporation, limit their respective rights and powers. As the parties are the complete owners of the corporation, there is no reason why the exercise of power and discretion of the directors cannot be controlled by valid agreement between themselves, provided that the interests of creditors are not affected. The agreement here in question was legal and that the complaint states a cause of action. The only restrictions on Dodge were that he should vote for Clark as director, and that as director he should continue Clark as GM, so long he “proved faithful, efficient and competent, and entitlement to ¼ of the income. These are all perfectly legal contractual stipulations. If there was an invasion of powers of the board, it is so slight as to be negligible; and certainly there is no damage suffered or threatened to anybody. NOTE: Although the GR is that pooling or voting agreement cannot limit the discretion of directors, this principle has not been applied strictly to close corporations, as illustrated by the Clark case. This variation is incorporated in sec 100. The Clark case also illustrates that the remedy of specific performance is available in case of violation of a voting agreement.

Gottschalk v. Avalon Realty Devices Affecting Control – Classification of Shares

I: W/N the provisions authorizing the holders of the 1st and 2nd preferred stock to vote whenever default should exist in the payment of dividends… constitute a denial of the right to vote H: Yes. The AOI deny the right to vote of the first and second preferred SHs. The provision that such stock may vote upon the happening of such contingencies clearly implies that it may not until such contingencies occur. The right to vote

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document may be denied by implication, such as a provision that “sole voting power shall reside in the holders of common stock.” Such a denial may exist expressly or by necessary implication. A denial may exist under an express provision even though the denial may not be expressed. Unless a denial is clearly manifested, it should not be given effect, but in this case, it should be given effect even though it is not express.

Sherman & Ellis v. Indiana Mutual Casualty Co. Devices Affecting Control – Management Contracts

Indiana Mutual Casualty Co was organized to take over the business of an unincorporated association engaged in writing policies covering risks created by the Indiana Workmen’s Compensation Law. It ratified an agreement with Sherman & Ellis by which the management of the casualty company was conferred upon Sherman Ellis for 20 years. Indiana Mutual terminated its contract after some difficulties arose between Sherman Ellis and the Indiana state department in which the latter tried to appoint a receiver for Indiana Mutual. Sherman sues for specific performance to enforce the contract.

the contract provides that the underwriting and executive management for Indiana Mutual will be performed by Ellis, president of Sherman Ellis, and may appoint another officer to be the chief executive head and underwriting manager of the company. It also provides that the managing company (Sherman Ellis) shall have general supervision and charge of underwriting affairs and shall be entitled to 10% of the net earned premiums collected from all policyholders. The grant of corporate power by a state is upon the hypothesis that these powers shall be exercised by the corporation’s officers, annually elected by the SHs and not by the officers of another corporation. Although generally corporations may for a limited period delegate to a stranger certain duties performed by the officers, there are duties the performance of which may not be delegated to outsiders. In this case the period of control of the managing corporation is 20 years. Nothing of importance was left for the BOD but the mere ministerial duties. The agreement contemplated the substitution of Sherman Ells for the officers of Indiana Mutual. The principal business of Indiana was write casualty insurance, which is now solely exercised by Sherman Ellis. No other conclusion can be drawn other than that Indiana Mutual was to be an instrumentality through which Sherman Ellis was to conduct a casualty business in the state of Indiana.

Benintendi v. Kenton Hotel Devices Affecting Control – Unusual Voting and quorum requirements

2 men owned in equal amounts all the stock of a domestic business corporation, made an agreement to vote for and adopt the by-laws of the corporation, providing that no action should be taken by the SHs except by unanimous vote of the SH present in person or by proxy should be sufficient, that the directors of the corporation should be the 3 person receiving the unanimous vote of all SHs, that no action shall be taken by the directors except by unanimous vote of all directors. The minority SHs sued to have the by-laws adjudged valid and to enjoin the majority from doing anything inconsistent therewith.

The device is intrinsically unlawful because it contravenes an essential part of State policy. But a requirement, that there shall be no election of directors unless every single vote be cast for the same nominees is in direct opposition to the rule that the receipt of plurality of votes entitles a nominee to election. The by-law which requires unanimous action of SHs to pass any resolution or take action of any kind, is equally obnoxious to the statutory scheme of stock corporation management. The whole concept of a representative government in a corporation, with voting conducted conformably to statute, and with the power of decision lodged in certain fractions of the stock, is destroyed when the SHs by agreement or by-law or AOI provision as to unanimous action, give the minority interest an absolute, permanent and all-inclusive power of veto. The last by-law makes it impossible for the directors to act on any matter except by unanimous vote of all of them. Such a by-law is almost unworkable and unenforceable because, prima facie in all acts done by a corporation, the major number must bind the lesser, or else differences could never be determined. Every corporation is given the privilege of enacting a by-law fixing its own quorum requirement at a fraction not less than that mandated by law. But the very idea of a quorum is that when that required number of persons goes into session as a body, the votes of a majority thereof are sufficient of binding action. Dissent: While the 2 by-laws are indeed invalid because it is violative of the statutes, the courts should nonetheless enforce against either SH the agreement made by both of them which finds expression in those by-laws.

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document CHAPTER VIII

Otis & Co v. Pennsylvania R. Co. Duty of Diligence: Business Judgment Rule

Otis & Co is a SH in and among the wholly-owned subsidiaries of the Pennsylvania Railroad Co (PRR), which included Pennsylvania Ohio 7 Detroit Railroads (POD). One of its subsidiaries had an outstanding bond issuance of $28.4M. The parent then negotiated with a third party, Kuhn, Loeb and Co, to refinance the bonds. The directors of POD approved a resolution authorizing the sale of the new Series D bonds at a best obtainable price. Bonds were then sold to Kuhn and Loeb. Another buyer was willing to purchase the bonds at a better price but the directors declined. The Interstate Commerce Commission found that the corporation was not able to get the best price for the sale and that other options were not explored, that negotiations were only with one investment house and were at “arms-length dealing”, and that it was possible to have greater savings

Business judgment rule: courts will not interfere in matters of business judgment, in which it is presumed that judgment—reasonable diligence—has in fact been exercised. A director cannot close his eyes to what is going on about him in the conduct of business judgment. Courts have given directors wide latitude in the management of the affairs of the corporation provided that the judgment is unbiased, honest and reasonably exercised. Negligence must be determined as of the time of transaction. Mistakes or errors in the exercise of honest business judgment do not subject the officers and directors to liability for negligence in the discharge of their appointed duties. Directors are entrusted with the management of the affairs of the corporation. If in the course of management they arrive at a decision for which there is a reasonable basis, and they acted in GF as the result of their independent judgment, and uninfluenced by any other consideration than what they honestly felt was in the best interests of the corporation. In the present case, the SC found that the officers and directors of the corporations acted honestly in GF and sought to exercise their best judgment for the best interests of their corporation. No fraud was present, but only a faint suggestion of BF. The directors had the right to negotiate privately with Kuhn and Loeb. In contracting with the latter, the directors were not contracting with another firm in which they were interested, nor did the directorship or officership positions interlock. There is no contention that fraud existed and fraudulent acts will not be presumed.

Montelibano v. Bacolod-Murcia Milling Duty of Diligence: Business Judgment Rule

Montelibano et al are sugar planters adhered to the Milling Company’s sugar central mill under identical contracts. The contracts would be in force for 30 years and provide that the resulting product should be divided in the ratio of 45% for the mill and 55% for the planters. It was proposed to execute the milling contracts, increasing the planter’s shares to 60% of the manufactured sugar and molasses and extending the period from 30 to 45 years. The Board of the Milling company then adopted a resolution granting further concessions to the planters over and above the amended contract. 17 years later, Montelibano sues the Milling company, contending that the 3 sugar centrals with a total annual production exceeding 1/3 of the production of all sugar millis in Negros, had already granted 62.5% participation to their planters, and in accordance with Para 9 of the resolution, it had become obligated to grant similar concessions to them.

When a resolution is passed in GF by the board, 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. Questions of policy or management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment for that of the board; the board is the business manager of the corporation and so long as it acts in GF its orders are not reviewable by the courts

Litwin v. Allen Duty of Diligence: Business Judgment Rule

The officers are liable for the transaction because the entire arrangement was so improvident, risky, and unusual and contrary to fundamental concepts of prudent banking practice. A bank director when appointed takes oath that he will diligently and honestly administer the affairs of the bank or trust company. Honesty alone would not suffice; there must be more than honesty—there must be diligence, and that means care and prudence as well. What sound reason is there for a bank, desiring to make an investment, to buy securities under an arrangement whereby any appreciation will insure to the benefit of the seller and any loss will be borne by the bank. There is here more than a question of business judgment. The directors plainly failed to bestow the care which the situation demanded. A director, however, is not liable for loss or damage other than what was proximately caused by his own acts or omissions in breach of his duty. The

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document directors in this case are liable only for the loss attributable to the improper transaction itself, and not after the option on the improper transaction had expired.

Walker v. Man Duty of Diligence: Business Judgment Rule

was engaged in real estate and advanced a loan to a third person taking as security his PN. The loan was not authorized by the board and was not for the benefit of the corporation nor was it in aid of its business. No effort was done to collect on the loan, which became due and demandable. The corporation went bankrupt, and the receiver sues the directors to collect on the amount due the insolvent corporation and for damages. Court held that the director was negligent.

Steinberg v. Velasco Duty of Diligence: Business Judgment Rule

The board of the corporation authorized the purchase of 330 shares of capital stock of the corporation and the declaration of dividends at a time when the corporation was indebted and in such a bad financial condition. The directors relied on the face value on the books of its A/R, which had little or no value. Furthermore it appears that two of the directors were permitted to resign so that they could sell their stock to the corporation. The corporation became insolvent, and the receiver Steinberg sues the directors.

The corporation did not have a bona fide surplus with which dividends could be declared and paid out. The directors did not act in GF and were grossly ignorant of their duties. Directors were held personally liable for causing the corporation to purchase their own shares and declaring dividends, which because of such failure to take into consideration of worthless receivables, worked to the detriment of the creditors. The directors did not act with diligence in taking the word of their chairman and not making an informed decision based on the facts then available to them and on not relying on other documents available to them. Creditors have the right to assume that so long as there are outstanding debts and liabilities, the board will not use the corporate assets to purchase its own stock, and that it will not declare dividends to SHs when the corporation is insolvent

Barnes v. Andrews Duty of Diligence: Business Judgment Rule

Corporation manufactures starters for Ford motor vehicles and airplanes. Director Andrews, the largest SH, who was induced by the President to become director, held only 2 board meetings. During his term, the company business was mismanaged. Barnes was then appointed receiver after the corporation had gone under, and was found that the company had no funds. He alleged that Andrews failed to give adequate attention to the affairs of the company, which had been conducted incompetently and without regard to the wastage in salaries. Work had languished from incompetence and extravagance and quarrels between the factory manager and the other personnel affected production.

First liability must rest upon the director’s general inattention to his duties. He cannot be charged with neglect in attending director meetings, since there had been only 2. But his liability must depend upon his failure in general to keep advised of the conduct of the corporate affairs. While directors are collectively managers of the company, they are not expected to interfere individually in the actual conduct of its affairs. To do so would disturb the authority of the officers and destroy their individual responsibility, without which no proper discipline is possible. Having accepted a post of confidence, Andrews was charged with an active duty to learn whether the company was moving to production, and why it was not, and to consider what could be done to avoid the conflicts among personnel or correct their incompetence, which was slowly bleeding the business to death. He must go further to show that he should have been more active, as the cause of action against him by the receiver rests upon a tort of omission as though it had rested on a positive act on his part. When a business fails from general mismanagement or business incapacity, could the blame be placed upon a single director and could he have saved the company if he had tried? A director could have least fulfilled his duties to the company and to the SHs to have made the company prosper, or at least to show that he had done his duty enough to have broken the fall of the company. This Andrews failed to do. x True, Andrews was not well-suited by experience for the job he had undertaken. Directors are not specialists, but they must have good sense, and must have acquainted themselves with the corporate affairs, but they need not have any technical talent. They are the general advisers of the business, and if they faithfully give such ability as they have, it would not be lawful to hold them liable.

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document Must a director guarantee that his judgment is good? Can SHs call him to account for deficiencies which their votes assured him did not disqualify him for office?

Bates v. Dresser Duty of Diligence: Business Judgment Rule

Bank employee was able to embezzle cash from the branch operations for a considerable period of time, unbeknown to the bank officers, who relied to heavily and trusted the employee. He was able to swindle money by concealing his withdrawals through entries in the records of the bank, and matched it with the correct statements which were relied upon by the cashier.

Under the circumstances of this case, the directors did not neglect their duty in accepting the statement of the cashier and failing to inspect the depositor’s ledger. They should not be held answerable for taking the cashier’s statement to be as correct as the statement of assets always was. The statement of assets were always correct. A committee was appointed to examine the operations of the bank. The bank itself was in sound financial condition. Their confidence seemed warranted by the semi-annual examinations by the government examiner and they were encouraged in their belief that all was well by the president. They were not bound by virtue of the office gratuitously assumed by them to call in the passbooks and compare them with the ledger, and until the event showed the possibility they hardly could have seen that their failure to look at the ledger opened a way to fraud. The position of the president, however, is different. Practically he was the master of the situation. He was at the bank daily for hours, had the ledger in his hands at time. He had hints and warnings of the unexplained shortages and rapid decline in deposits. He knew the errant employee had been living at a fast pace and had been dabbling in stocks. He had been put on his guard, and had they been heeded by the President, it would have led to an examination of the ledger’s and would have prevented future thefts. In accepting the presidency Dresser must be taken to have contemplated responsibility for losses to the bank.

Palting v. San Jose Petroleum The Self-Dealing Director

Case involves provisions in the by-laws of a corporation seeking to have its securities registered and distributed in the Philippines.

Considering the questioned provision that no contract or transaction between the company and any other association or corporation shall be affected except in case of fraud, by the fact that any of the directors or officers of the company may be interested in or are directors or officers of such other associations or corporation, the impact of these provisions upon the traditional fiduciary relationship between the directors and SHs of a corporation is too obvious to escape notice. The directors and officers of the corporation can do anything, short of actual fraud, with the affairs of the corporation, even to benefit themselves, with immunity. This and other provisions which authorized the election of non-SHs as directors, completely disassociate the SHs from the government and management of the business in which they have invested.

Mead v. McCullough The Self-Dealing Director

While a corporation remains solvent, there is no reason why a director or officer, by authority of a majority of the SHs or board may not deal with the corporation, loan it money or buy property from it. So long as a purely private corporation remains solvent, its director are agents or trustees for the SHs. They owe no duties or obligations to others. But the moment such a corporation becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corporation or not, and must manage its property and assets with strict regard to their interest. A director or officer may in GF and for an adequate consideration purchase from a majority of the directors or SHs the property even of an insolvent corporation, and a sale thus made to him is valid and binding upon the minority. Where a director in a corporation accepts a position in which his duties are incompatible with those as such director it is presumed that he has abandoned his

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document office as director of the corporation.

Barretto v. La Previsora Filipina Fixing Compensation of Directors and Officers

Suit by the resigned directors of a building and loan association to recover 1% of the profits to each complainant in accordance with an amendment to the by-laws, which stipulate that they are entitled to a lifetime annuity from the profits of the corporation.

The amended by-laws does create any obligation to pay to the persons name therein such a life gratuity or pension out of the profits. A by-law of this nature must be clearly regarded as beyond the lawful powers of a mutual building and loan association and is thus ultra vires. As it were, the by-law cannot be held to establish a contractual relation between the parties. The authority conferred upon corporations in the code refers to providing compensation for future services of directors, officers, and employees after the adoption of the by-law and cannot in any sense be held to authorize the giving of continuous compensation to particular directors after their employment has terminated for past services rendered gratuitously by the them to the corporation. To permit the transaction would be to create an obligation unknown to the law, and to countenance a misapplication of funds of the building and loan association to the prejudice of SHs. Contracts between a corporation and third persons must be made by or under authority of its board and not by the SHs. The action of the SHs is only advisory and is not binding on the corporation.

Kerbs v. California Eastern Airways Fixing Compensation of Directors and Officers

The stock option plan of the company provides that 250,000 shares of the corporation’s unissued stock be subject to options to purchase at $1/share, exercisable at any time within a period of 5 years. The profit sharing plan provides that when quarterly earning exceeded $30,000 before taxes, 10% shall be distributed among the name officers and executive personnel. If a loss is incurred, cumulative deficiency plus operating losses shall be carried forward to succeeding quarterly periods. Both plans were adopted at a board meeting, but only the stock options plan was ratified by the SH.

The SH ratification cures any voidable defect in the action of the board on the stock options plan. Ratification by SHs of voidable acts of directors is effective for all purposes unless the action of the directors constituted a gift of corporate assets to themselves or was ultra vires, illegal, or fraudulent. The validity of a stock option plan depends directly upon the existence of consideration to the corporation. Sufficient consideration to the corporation may be inter alia, the retention of the services of an employee, or the gaining of services of a new employee, provided there is a reasonable relationship between the value of the services rendered and the value of options granted. In this case, the stock option plan is deficient because it is not reasonably calculated to insure that the corporation will receive the contemplated benefits. No rule of thumb can be devised to test the sufficiency of the condition which are urged as insurance that the corporation will receive the contemplated benefit. The most that can be said is that in each case there must be some element which, within reason, can be expected to lead to the desired end. The plan and options issued do not of themselves insure that benefit of retaining the services of the employee to whom the option is granted will inure to the corporation. They are too insecure in nature to be regarded as a condition of the stock option plan designed to insure that the corporation will receive the contemplated benefit.

Strong v. Repide Using inside Information

Erica Strong is the owner of 800 shares of the Phil Sugar Estates Devt Company, which owned ½ of the value of friar lands in the Philippines. Repide is director and majority SH. The government made an offer to purchase the lands owned by the corporation and from the other owners. The offer was rejected by Repide, without consulting the other SHs, and held out for a better deal. He was aware that the value of the lands and the shares would be of no value if the sale were not consummated, since the company had not paid dividends, was living on credit, and could not even paid taxes. The land was the only valuable asset of the

In this case, Repide was the chief negotiator for the sale of the lands, acting for all the other SHs. Only he knew the state-of-play in the proposed sale. He owned ¾ of the shares of the corporation. Under these circumstances, and before the negotiations for the sale were completed, he employs agents to purchase shares of his company from another SH and conceals his own identity and knowledge of the state of the negotiations on the sale of the lands and their probable effect on the value of the shares to be purchased. A director may be accountable directly to the SH where the special facts surrounding the transaction give rise to the obligation

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document corporation. Repide than took steps to purchase 800 shares of stock owner by Strong. He employed Kaufmann, who then employed Sloan the broker, to purchase the stock for him. Negotiations ensued. Strong through Jones agreed to sell Strong’s shares to Repide. He thus obtained the 800 shares for 1/10th the amount they were worth by the eventual sale of the lands two months after he bought the shares. The probable value of the shares was unknown to anyone except Repide, while the agent of Strong had no idea that it was Repide who wanted to purchase the shares.

to disclose his identity or the inside information he possesses. This is known as the special facts doctrine.

Taylor v. Wright Using inside Information

Mrs Wright and Allen Wright, majority SH and both director respectively, employed an agent to purchase from Emma Taylor 3750 shares in the corporation to which they are directors in. Said shares were pledged as security for a loan by Taylor which the Wrights knew. The Wrights also knew that the company was operating at a loss, and they knew the true value of the shares (which was not traded in the exchange). They also concealed their identity and purpose in purchasing the stock from Taylor.

Three (3) rules are recognized as applying to the case. — The Majority rule—directors and officers owe no fiduciary duty at all to SHs,

but may deal with them at arm’s length. A director is a fiduciary with respect to the corporation as an entity, and not to the SHs as individuals. In dealings with or for the corporation, the director is exercising a corporate function, and is subject to the usual fiduciary duty to disclose all material facts; but that in personal dealings with SHs he is not exercising a corporate function, and is free to deal with them at arm’s length. It is based on the theory that the corporation—the collective SHs—is a separate and distinct legal entity, an artificial personality, to whom the director owes his duty.

— The Minority Rule—recognizes the director’s obligation to the SHs individually as well as collectively, and refuses to permit him to profit at the latter’s expense by the use of information obtained as a result of his official position and duties. Such a duty exists because the SHs have placed the directors in a strategic position where they can make it appear the shares are much less valuable than they really are.

— The Special Facts rule—an exception to the Majority rule; where special circumstances are present which make it inequitable for the director to withhold information from the SH, the duty to disclose arises, and concealment is fraud.

Assuming the Special Facts rule to be applicable, there is no doubt that the Wrights owed Taylor a duty and violated that duty to her damage. The stock was not sold or traded in any exchange. They concealed their position as directors, and had full knowledge of the real value of the stock, but kept that knowledge to themselves. They had full control over the corporation. Under such circumstances the findings that the Wrights are guilty of fraud within the meaning of the Special Facts rule are supported by the evidence.

Singer v. Carlisle Seizing Corporate Opportunity

Singer et al are SHs of the United Corporation which owns all capital stock of its subsidiary, NY United Corp, both of which are engaged in the business of underwriting securities. Carlisle et al are directors of the two corporations. Other defendants are investment houses JP Morgan, Drexel & Co, and Morgan Stanley. United Corp acquired substantial voting stock of various holding and operating companies/utilities, which were all publicly listed and obtained their funds through the public sale of their securities. JP Morgan et al were able to obtain large profits from the underwriting of such securities to the exclusion of United and NY United. Plaintiff Singer charge that the defendant bankers and investment houses and the directors of the two corporations fraudulently caused the latter corporations to use their influence and control over the subsidiaries in order to

United and NY United were also engaged in underwriting as do the defendant banks. It was the duty of their directors and officers to make every effort consonant with good, honest judgment to obtain for those corporations as much of the underwriting business as possible, and to make this business as profitable as possible. This does not mean, however, that the directors and controlling SHs of United and NY United were required to do anything detrimental to the affairs of other corporations of which they were officers and directors, and to the affairs of United and NY United. One in control of a majority of the stock and of the board of a corporation occupies a fiduciary relation towards the minority, and is charged with the duty of exercising a high degree of GF, care, and diligence for the protection of the same. Every act in its own interest to the detriment of the

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document induce them to award the underwriting business to the defendant bankers. Having eliminated United Corp and NY United as their competitors for the underwriting business of the subsidiaries, the defendants allegedly proceeded to utilize their control and influence to obtain the business for themselves. Singer et al also claimed that the directors of the corporation, as fiduciaries, eliminated their cestui as a competitor in the underwriting profits.

minority interests becomes a breach of duty and of trust, and entitled them to plenary relied. So strict is the rule of undivided loyalty to the beneficiary that the mere fact that a trustee has an interest inconsistent with the interest of his cestui, casts upon him that burden of justification. Where this duty exists, the duty of the trustee is to manage the property and affairs of the corporation with an eye single to the advantage of the corporation itself. It is not proper for the fiduciary to take those opportunities unto itself, while at the same time it stayed the processes of its subsidiary directed towards the same business ends. It is not only a case of a fiduciary seizing business opportunities of the cestui. The trustee at the same time kept its dominant hand over the cestui, suppressing any attempt by the cestui to go out and compete with the trustee. Where a fiduciary is engaged in a business in competition with his corporation, he cannot actively use his position and power over his corporation so as to prevent the corporation from seeking certain businesses in competition with himself. It is charged that the directors here not only failed and refused any attempt to obtain certain business for their own corporation, but that they affirmatively prevent the corporation from competing with them for that business. This they may not do. Directorship in two competing corporation does not in and of itself constitute a wrong. It is only when a business opportunity arises which places the director in a position of serving two masters, and when dominated by one, he neglects his duty to the other, that a wrong has been done.

Irving Trust v. Deutsch Seizing Corporate Opportunity

Irving is the trustee of the insolvent company Sonora Acoustic. Acoustic desired the patents of the De Forest company and wanted gain at least minority stake to have a voice in the management of its patents and products, which goes to Acoustic’s corporate purpose. Reynolds & Co, receiver of the insolvent De Forest, offered to give Acoustic 1/3 participation in the purchase of 600,000 shares of De Forest stock. It also stipulated that Acoustic’s nominees should hold 4 of 9 seats in the board and that it should have the right to enter into a contract to handle the managing and selling of De Forest products. This offer was presented to the board of Acoustic and a resolution was passed authorizing its president, Deutsch, to obtain sufficient funds to enable Acoustic to carry out its obligations in case it accepts the offer. No funds were obtained but Biddle and Deutsch et al, agreed to put up the money and accept the certificates of De Forest stock issued when date of payment came under the offer. Reynolds agreed and issued the certificates. The deal was consummated on the purchase of De Forest stock. It was then traded in the exchange and Biddle, Deutsch et al were able to reap huge profits in selling their shares. Acoustic declares bankruptcy and sues the Biddle group, three of whom were directors of De Forest, appropriated to themselves Acoustic’s right under its contract, when as fiduciaries they were obligated to preserve those rights for Acoustic and were forbidden to take position where personal interest would conflict with the interest of their principal.

The theory of the suit is that a fiduciary may make no profit for himself out of a violation of duty of the cestui, even though he risked his own funds in the venture, and that any one who assists in the fiduciary’s dereliction is likewise liable to account for the profit so made. It is clear that there is no contract between Acoustic and Reynolds because the offer did not run to Acoustic but to the Biddle group as individuals. The management contract, once entered into, would enable access to the patents, stock ownership in De Forest as a going concern after receivership was lifted, and were all concededly legitimate corporate purposes. Thus the proposed purchase is not ultra vires. The facts of the present case militate strongly against the directors since in this case, they absolutely bound Acoustic by contract to make payments to Reynolds and exposing it to risk of a suit for damages for nonperformance, without committing themselves to it to relieve it of this obligation if necessary when time for payment arrives. Directors of a solvent corporation are forbidden to take over for their own profit a corporate contract on the plea of the corporation’s financial inability to perform. If the directors are uncertain whether the corporation can make the necessary outlays, they need not embark upon the venture. If they do, they cannot substitute themselves for the corporation any place along the line and divert possible benefits into their own pockets

Litwin v. Allen Seizing Corporate Opportunity

JP Morgan, in disposing of 1,250,000 shares of CS of Alleghany corporation, offered 500,000 to Guaranty Corporation to be sold on a commission at $24/share. Before the public offering, Morgan also offered the other 750,000 to friends at $20. Among those receiving the shares were some directors of Guaranty Corp, who received 40,000 shares. The market opened at a premium and the directors were able to dispose of their stock at a substantial profit

A director of a corporation is in a position of fiduciary. He will not be permitted to improperly profit at the expense of the corporation. Undivided loyalty will ever be insisted upon. Personal gain will be denied to a director when it comes because he has taken a position adverse to or in conflict with the best interests of the corporation. The fiduciary relationship imposes a duty to act in accordance with the highest standard. There is thus no basis for holding that in acquiring stock through JP Morgan at $20, any of the defendants were guilty of a breach of

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document fiduciary duty. The CS purchased did not represent in any case a business opportunity for the Guaranty Corporation. Having fulfilled their duty to the corporation in accordance to their best judgment, the directors were not precluded from a transaction for their own account and risk. In order to constitute a corporate opportunity that was deprived by the directors, it was necessary to prove the ff: — The shares purchase were in contemplation of equity offered to the cestui — That the cestui had some legitimate right or expectancy in these shares The question to ask is, have the directors profited at the expense of their corporation; have they gained because of disloyalty to its interest and welfare? In this case, the “opportunity” was a routine piece of business wholly lacking in the unique and special quality which distinguished other corporate opportunity cases. The interest of the directors in the stock was purely speculative, and they even incurred a definite risk which at the time was totally eliminated from the cestui’s position in the same stock. In other words, the profit of the cestui was assured; that of the directors were still at hazard.

Globe Woolen v. Utica Gas & Electric Interlocking Directors

Globe Woolen needed electric power to run its mills. Its president and majority SH, Maynard, was able to get a contract with the electric company Utica Gas which was ratified by the executive committee of Globe’s board. Maynard was a nominal SH in the electric company also, and did not vote in the meeting. Globe desires to enforce the contract.

Contracts are voidable at the instance of Utica Gas. Globe argues that by refusing to vote, Maynard shifted responsibility to his associates, and may reap a profit from their errors. One does not divest oneself so readily of one’s duties as trustee. The refusal to vote, has indeed this importance: it gives to the transaction the form and presumption of propriety, and requires one who would invalidate it to prove beneath the surface. The trustee or director holds a duty of constant and unqualified fidelity. He cannot rid himself of the duty to warn and to denounce, if there is improvidence or oppression, either apparent on the surface, or lurking beneath it. There was an influence in this case which was exerted by Mr Maynard the president of Globe Woolen. From beginning to end he dealt with a subordinate, who was alert to serve at his pleasure. The unfairness in the contract is startling and the consequences could be disastrous. No matter how large the business, or how great the increase in prices of labor or fuel, or there be extensions to the plant, the electric company had pledged that for 10 years there will be saving of $600/month, $300 for each mill, $7200/year. As a result of that pledge it has supplied the plaintiff with electric current for practically nothing, and even owes it some money thereafter. Mr Maynard knew the unfairness of the contract, and he cannot have failed to know that he held a one-sided contract which left the defendant at his mercy. Thus his refusal to vote does not nullify, as of course an influence and predominance exerted without a vote. A constant duty rests on a trustee to seek no harsh advantage to the detriment of his trust, but rather to protect and renounce he gains what is unfair.

Insuranshares Corp v. Northern Fiscal Corp Duty of controlling Interest

The Management group (composed of Philadelphia banks) transferred control over the Insuranshares Corporation, an investment trust specializing in shares of small life insurance companies, to the Boston Group, none of whom ever had any interest of any in it. With the control went plenary power under the by-laws to sell or transfer all the securities in the company’s portfolio. Such acquisition of control was the first step of a grand scheme, planned by the Boston Group with the connivance of brokers, to strip the corporation of its valuable assets, leaving a

This case involves more than just a question of liability in the sale of corporate stock: it is the sale of control by a minority—but controlling—interest. Those who control a corporation either by the majority or minority stock ownership owe some duty to the corporation in respect of the transfer of the control to outsiders. Owners of control in a corporation are under a duty not to transfer ownership to outsiders if the circumstances surrounding the proposed transfer are such as to awaken suspicion and put a prudent man on his guard. In

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document mere shell to the remaining SHs this case the evidence shows that the Boston group were acquiring control over

the corporation by improper means and for an improper purpose. CHAPTER IX

Pardo v. Hercules Lumber Remedies Available if Inspection Refused

Corporate secretary of Hercules Lumber refused to permit Pardo, a SH, or his agent to inspect the records and business transactions of the company at the times desired by Pardo. Basis of the refusal was the provision in the company’s by-laws which stipulated that every SH may examine the books of the company and other documents upon the days which the board annually fixes.

The resolution of the board limiting the rights of SHs to inspect its records to a period of 10 days prior to the annual SH meeting is an unreasonable restriction in accordance with the Corpo Code, which provides that the right to inspect can be exercised at reasonable hours. The right of inspection was interpreted to mean that the right may be exercised at reasonable hours on business days throughout the year, and not merely during an arbitrary period of a few days chosen by the directors.

Gonzales v. PNB Remedies Available if Inspection Refused

The Code has prescribed limitations to the right of inspection, requiring as a condition for examination that the person requesting must not have been guilty of using improperly any information secured through a prior examination, and that the person asking for such must be acting in GF and for a legitimate purpose. It is the SH seeking to exercise the right of inspection to set forth the reasons and purposes for which he desires such inspection. SC held that the purpose of Gonzales, which was to arm himself with evidence which he can use against the bank for acts done by the latter when he was still a total stranger (i.e. not a SH), were not deemed proper motives and his request was denied

Vergauth v. Isabela Sugar Co. Remedies Available if Inspection Refused

Directors have the unqualified right to inspect the books and records of a corporation at all reasonable times. Pretexts may not be put forward by the officers to keep a director or SH from inspecting the books and minutes of the corporation, and the right to inspect cannot be denied on the grounds that the director or SHs are on unfriendly terms with the officers. A director or SH has no absolute right to secure certified copies of the minutes until these minutes have been written up and approved by the directors.

Gokongwei v. SEC Remedies Available if Inspection Refused

Gokongwei, a major SH of San Miguel Corporation, sought to exercise his right to inspect the books and records of SMC Int’l, a foreign subsidiary wholly-owned and controlled by SMC. Since he was not a SH of the subsidiary, SMC denied his request to inspect its books.

Where the right to inspect is granted by statute to the SH, it is given to him as such and must be exercised by him with respect to his interest as a SH and for some purpose germane thereto or in the interest of the corporation. The inspection has to be germane to the petitioner’s interest as a SH and has to be proper and lawful in character and not inimical to the interest of the corporation. The SH’s right to inspect is based on his ownership of the assets and property of the corporation. It is therefore an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, beneficial ownership, or quasi-ownership, and is predicated upon the necessity of self-protection. On application for mandamus to enforce the right, it is proper for the court to inquire into and consider the SH’s GF and his purpose and motives in seeking inspection. But the impropriety of purpose such as will defeat enforcement must be set up by the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from the SH the burden of showing the propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive. The foreign subsidiary is wholly-owned by SMC and therefore under its control,

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document and would be more in accord with equity, GF, and fair dealing to construe the statutory right of Gokongwei as SH to inspect the books of the parent as extending to the books of the subsidiary in its control.

CHAPTER X Evangelista v. Santos Requirements Relating to Derivative Suits

Plaintiffs are minority SHs who brought a derivative suit against the principal officer for damages resulting from the mismanagement of corporate affairs and misuse of corporate assets. The complaint prayed for judgment requiring defendant, among others, to pay plaintiffs the value of their respective participation in said assets on the basis of the value of the shares held by them.

Suit would not prosper. SHs brought the action not for the benefit of the corporation but for their own benefit since they asked that the defendant make good the losses occasioned by his mismanagement and pay them the value of their respective participation in the corporate assets on the basis of their respective holdings. The relief sought could not be done until all the corporate debts, if there are any, are paid and the existence of the corporation terminated by the limitation of its charter or by lawful dissolution. Since it is the corporation which is the real party-in-interest, then the reliefs prayed for must be for the benefit or interest of the corporation. When the reliefs prayed for do not pertain to the corporation, then it is an improper derivative suit.

Republic Bank v. Cuaderno Requirements Relating to Derivative Suits

A derivative suit was brought against the officers and the board. Complaint alleged that the directors approved a resolution granting excessive compensation to the corporate officers. Suit was filed in order to prevent dissipation of the corporate funds for the payment of salaries of the said officers. Board claims the action cannot prosper for failure to compel the board to file the suit for and in behalf of the corporation

Such a suit need not be authorized by the corporation where its objective is to nullify the action taken by its manager and the board, in which case any demand for intra-corporate remedy would be futile, and thus necessitating the court to intervene by granting the petition for a derivative suit. A SH in a banking corporation has a right to maintain a suit for an in behalf of the corporation, but the extent of such right depends upon when and for what purpose he acquired the shares of stock of which he is the owner. On the issue that the relators controverted the right to question the appointment and selection of Cuaderno and Dizon, which they contend to be the resilt of corporate acts with which the plaintiff as SH, cannot intervere, the SC held that an individual SH is permitted to institute a derivative suit in behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the official of the corporation refuses to sue, or are to ones to be sued

San Miguel Corp. v. Kahn Requirements Relating to Derivative Suits

Requisites for a proper derivative suit:

(a) party bringing suit should be a SH as of the time of the act or transaction complained of and at the time of filing of the suit. Number of shareholdings immaterial. A bona fide ownership by a SH in his own right suffices to invest him with standing to bring a derivative action in behalf of the corporation

(b) party has tried to exhausted intra-corporate remedies (made demand on the board to sue in behalf of the corporation, but the latter failed or refused)

(c) cause of action actually devolves on the corporation, the wrongdoing or harm having been or being caused to the corporation itself and not to the suing SH

CHAPTER XIV

Marcus v. RH Macy Amendment Changing Stockholder’s Rights

Marcus is registered owner of 50 shares of common stock of RH Macy. --Resp had auth capitalization of 500K shares of cumulative PS ($100 pv) and 2.5M CS no par. Issued: 165K PS and 1.656M CS --PS had no voting rights except for specified contingencies. --A proposal was approved during the SHs meeting that the articles be amended

I: WON Marcus can invoke her appraisal right and to enforce payment of the value of her stock. H: YES. --The amendment granted to the PS additional rights which increased their voting

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document as to add voting rights—equal share for share—as enjoyed by holders of the common stock, to the rights of preferred SHs. --Marcus objected to the proposed amendment and notified the corporation. She also demanded payment for the common stock then owned by her. During the said meeting, her common stock was voted against such amendment. --She then sues to determine the value of her stock as a basis of the enforcement of payment therefor. Her application for the appointment of appraisers having denied, and affirmed by the Appellate court.

privileges from a right to vote only in specified contingencies to voting rights equal share for share to those which CS are entitled. The result was that the aggregate number of shares having voting rights equal to those of the CS was substantially increased and thereby the voting power of each common share outstanding was altered or limited by the resulting prorata diminution of its potential worth as a factor in the management of the corporation. --Such alteration or limitation in the voting power of the CS held by Marcus, considering that she objected to the amendment, notified the company, and the corporation caused her shares to be voted against the proposal to amend, was sufficient to qualify her to invoke the statutory procedure which is the basis for her present action. -- By thus limiting the voting power of Marcus’ common shares to a proportionate extent, the corporate action to which she objected was of such a character as to afford her a legal basis to invoke the procedure as a means to accomplish the appraisal of her stock and payment therefor. --Even if she owns only 50 shares, which the corporation argues as de minimis compared to the entire universe of shares of the corporation, and even if it is claimed that she is not in GF, as argued that if she did have a bona fide desire to sell her CS she could have done so during the said meeting for 3X the amount of her investment, the court ruled that since the law does not mention a minimum percentage or value of stock which must be owned by a non-consenting SH to qualify him to invoke the statutory procedure, it should be applied as is.

Phil. Trust Co. v. Rivera Reduction of Capital Stock

PhilTrust is the assignee in the insolvency case of La Cooperativa Naval Filipina. It sues Marciano Rivera, an incorporator who subscribed for 450 shares of the insolvent, to recover the balance of P22,500, alleged to have been due on his subscription to the stock of the insolvent. (Orig capitalization of Naval = P100,000, at P100 par or 1,000 shares. Rivera subscribed to 450 shares ((P45K) --Rivera claims that during a SHs mtg, it was agreed that the capital of the company be reduced by 50% and the subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50% of the total subscribed shares. --There was no compliance with the formalities of the statute relative to the reduction of capital stock. TC ruled that the resolution was without effect and that Rivera was still liable for his unpaid subscription

Resolution invalid. subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of debts. A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his unpaid shares without a valuable consideration for such a release. Strict compliance with the requirements of law is necessary. The resolution releasing the SHs from their obligation to pay 50% of their respective subscriptions was an attempted withdrawal of so much capital from the fund which the company’s creditors are entitled to rely and, having been effected without statutory compliance, was wholly ineffective. CAMPOS: As a practical matter, even if requirements to reduce capitalization are complied with, if creditors would be prejudiced by the reduction, it is most unlikely that the SEC will approve it. — Resolution releasing the SHs from their obligation to pay the 50% of their

subscriptions was an attempted withdrawal of so much capital from the fund upon which the company’s creditors were entitled ultimately to rely on and having been effected without compliance with the statutory requirements, was wholly ineffectual.

— The subscription to the capital of a corporation constitute a fund to which

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payments of its debts

— Subscriptions payable can be cancelled if there is a reduction in capital stock: o Which is possible if done with the consent of the creditors, or…

If they will not prejudiced by such move, in which case their consent is not necessary

CHAPTER XV Uson v. Diosomito Effect of Lack of Registration

Unson is the creditor of Diosomoto, who is original owner of 75 shares of North Electric which were levied by a writ of attachment to satisfy the judgment creditor. Uson obtained judgment against Diosomoto and the shares were sold at public auction to the judgment creditor Uson. --Diosomoto sold the shares attached to Barcelon and delivered the corresponding certificates. The transfer to Barcelon was not registered and noted on the books of the corporation until after 9 months after the attachment was levied and later (9 months after) transferred to HPE Jollye. HPL Jollye claims to be owner of the 75 shares and presents a certificate of stock issued by North Electric.

I: W/n a bona fide transfer of shares of a corporation, not registered or noted on the books, is valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of the transfer or not . H: GR: NO> No transfer is valid except as between the parties unless it is duly registered. All transfers of shares must be entered on the books of the corporation. All transfers not so validly entered are invalid as to attaching or execution creditors of the assignors, of the corporation, and as to all subsequent purchasers in GF, and even to all parties interested. All transfers not so entered on the books are absolutely void, not because they are without notice or fraudulent in law, but because they are made void by the statute. Courts in the Phils adhere to the principle that the right of the owner of the shares to transfer to same by delivery of the certificate, whether it be regarded as statutory or common law right, is limited and restricted by the express provision that “no transfer shall be valid except as between the parties, until the transfer is entered and noted upon the books of the corporation. The right of the owner of the shares of a corporation to transfer the same by delivery of the certificate, whether it be regarded by the express provision that “no transfer however shall be valid except as between the parties, until the transfer is entered and noted upon the books of the corporation.” --The transfer of 75 shares in the NEC, made by Diosomito to Barcelon was not valid as to Uson, on Jan 18, 1932, the date on w/c they still stood in the name of Diosomito on the books of the corp.

Nautica v. Yumul Roberto C. Yumul was appointed COO/General Manager of Nautica. On the same date, First Dominion Prime Holdings, Inc., Nautica’s parent company, through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase up to 15% of the total stocks it subscribed from Nautica. A Deed of Trust and Assignment was executed between First Dominion Prime Holdings, Inc. and Yumul whereby the former assigned 14,999 of its subscribed shares in Nautica to the latter. The deed stated that the 14,999 “shares were acquired and paid for in the name of the ASSIGNOR only for convenience, but actually executed in behalf of and in trust for the ASSIGNEE.” After Yumul’s resignation from Nautica on August 5, 1996, he wrote a letter to Dee requesting the latter to formalize his offer to buy Yumul’s 15% share in Nautica on or before August 20, 1996; and demanding the issuance of the corresponding certificate of shares in his name should Dee refuse to buy the same. Dee, through Atty. Fernando R. Arguelles, Jr., Nautica’s corporate secretary, denied the request claiming that Yumul was not a stockholder of Nautica. Yumul requested that the Deed of Trust and Assignment be recorded in the Stock and

The SEC and CA correctly found Yumul to be a stockholder of Nautica, of one share of stock recorded in Yumul’s name, although allegedly held in trust for Dee. Nautica’s Articles of Incorporation and By-laws, as well as the General Information Sheet filed with the SEC indicated that Yumul was an incorporator and subscriber of one share. Even granting that there was an agreement between Yumul and Dee whereby the former is holding the share in trust for Dee, the same is binding only as between them. From the corporation’s vantage point, Yumul is its stockholder with one share, considering that there is no showing that Yumul transferred his subscription to Dee, the alleged real owner of the share, after Nautica’s incorporation. Other than petitioners’ self-serving assertion that the beneficial ownership belongs to Dee, they failed to show that the subscription was transferred to Dee after Nautica’s incorporation. The conduct of the parties also constitute sufficient proof of Yumul’s status as a stockholder. On April 4, 1995, Yumul was elected during the regular annual stockholders’ meeting as a Director of Nautica’s Board of Directors. Thereafter, he was elected as president of Nautica.

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect its books and records. Yumul’s requests were denied allegedly because he neither exercised the option to purchase the shares nor paid for the acquisition price of the 14,999 shares. Atty. Arguelles maintained that the cash dividend received by Yumul is held by him only in trust for First Dominion Prime Holdings, Inc. Nautica et al contend that Yumul was not a stockholder of Nautica; that he was just a nominal owner of one share as the beneficial ownership belonged to Dee who paid for said share when Nautica was incorporated. They also allege that Yumul was given the option to purchase shares of stocks in Nautica under the Option to Purchase, and since he failed to exercise the option, there was thus no cause or consideration for the Deed of Trust and Assignment, which makes it void for being simulated or fictitious.

Thus, Nautica and its stockholders knowingly held respondent out to the public as an officer and a stockholder of the corporation. The SC refrained from ruling on whether or not Yumul can compel the corporate secretary to register said deed. It held it to be a question which is civil in nature and thus beyond the ambit of the SEC, the court of origin of the current action. It is only after an appropriate case is filed and decision rendered thereon by the proper forum can the issue be resolved.

Razon v. IAC Enrique Razon organized the E. Razon, Inc. for the purpose of bidding for the arrastre services in South Harbor. Vicente Chuidian is the administrator of the intestate estate of Juan Telesforo Chuidian. A stock certificate for 1,500 shares of stock of E Razon Inc was issued in the name of Juan T. Chuidian. On the basis of the 1,500 shares of stock, the late Juan T. Chuidian and after him, Vicente Chuidian, were elected as directors of E. Razon, Inc. Enrique Razon had not questioned the ownership by Juan T. Chuidian of the shares of stock in question and had not brought any action to have the certificate of stock over the said shares cancelled. The certificate of stock was in the possession of defendant Razon who refused to deliver said shares to the plaintiff, until the same was surrendered by defendant Razon and deposited in a safety box in Philippine Bank of Commerce. 1,500 shares of stook under Stock Certificate No. 003 were delivered by the late Chuidian to Enrique because it was the latter who paid for all the subscription on the shares of stock in the defendant corporation and the understanding was that he (defendant Razon) was the owner of the said shares of stock and was to have possession thereof until such time as he was paid therefor by the other nominal incorporators/ stockholders. Since then, Enrique Razon was in possession of said stock certificate even during the lifetime of the late Chuidian, from the time the late Chuidian delivered the said stock certificate to Razon. By agreement of the parties delivered it for deposit with the bank under the joint custody of the parties. TC ruled Razon owns the shares, IAC reverses. Razon claims that the shares of stock were registered in the name of Chuidian only as nominal stockholder and with the agreement that the said shares of stock were owned and held by the petitioner but Chuidian was given the option to buy the same. Vicente B. Chuidian insists that the appellate court's decision declaring his deceased father Juan T. Chuidian as owner of the 1,500 shares of stock of E. Razon, Inc. should have included all cash and stock dividends and all the pre-emptive rights accruing to the said 1,500 shares of stock.

H: (1) Chuidian owns the shares. For an effective, transfer of shares of stock the mode and manner of transfer as prescribed by law must be followed. As provided under the Corporation Code of the Philippines, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. Title may be vested in the transferee by the delivery of the duly indorsed certificate of stock. However, no transfer shall be valid, except as between the parties until the transfer is properly recorded in the books of the corporation. In the instant case, there is no dispute that the questioned 1,500 shares of stock of E. Razon, Inc. are in the name of the late Juan Chuidian in the books of the corporation. Moreover, the records show that during his lifetime Chuidian was elected member of the Board of Directors of the corporation which clearly shows that he was a stockholder of the corporation. From the point of view of the corporation, therefore, Chuidian was the owner of the 1,500 shares of stock. In such a case, the petitioner who claims ownership over the questioned shares of stock must show that the same were transferred to him by proving that all the requirements for the effective transfer of shares of stock in accordance with the corporation's by laws, if any, were followed or in accordance with the provisions of law. Razon however did not present any by-laws which could show that the 1,500 shares of stock were effectively transferred to him. In the absence of the corporation's by-laws or rules governing effective transfer of shares of stock, the provisions of the Corporation Law are made applicable to the instant case.

The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. (Section 35, Corporation Code) Since the certificate of stock covering the questioned 1,500 shares of stock registered in the name of the late Juan Chuidian was never indorsed to the petitioner, the inevitable conclusion is that the questioned shares of stock belong to Chuidian. The petitioner's asseveration that he did not require an indorsement of the certificate of stock in view of his intimate friendship with the late Juan Chuidian can not overcome the failure to follow the procedure required by law or the proper conduct of business even among friends. To reiterate, indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. The preponderance of evidence also supports the findings that the shares of stock were given to Juan T. Chuidian for value. Juan T. Chuidian was the legal counsel who handled the legal

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document affairs of the corporation. We give credence to the testimony of the private respondent that the shares of stock were given to Juan T. Chuidian in payment of his legal services to the corporation. Razon failed to overcome this testimony.

(2) The cash and stock dividends and all the pre-emptive rights are all incidents of stock ownership. The rights of stockholders are generally enumerated as follows: [F]irst, to have a certificate or other evidence of his status as stockholder issued to him; second, to vote at meetings of the corporation; third, to receive his proportionate share of the profits of the corporation; and lastly, to participate proportionately in the distribution of the corporate assets upon the dissolution or winding up.

— Oral testimony to show that one is the principal or beneficial owner of shares for which he has allowed a certificate of stock to be issued in the name of his alleged nominee will not be sufficient basis to claim rightful ownership over the shares of stock.

— The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be properly indorsed and that title to such certificate of stock is vested in the transferee by delivery of the duly indorsed stock certificate.

Santamaria v. HKSB Unauthorized Transfers

Josefa Santamaria is the owner of 10000 shares of Batangas Minerals Inc thru the offices of the Woo stockbrokerage firm. She then placed an order for 10000 shares of Crown Mines thru RJ Campos & Co stockbrokerage firm and delivered the certificate of stock of her shares in Batangas Minerals as security. Her name was penciled on the certificate she delivered. The certificate then came into the possession of HSBC by virtue of a document of hypothecation, wherein Campos pledged all shares and securities in its possession to HSBC because of an overdraft account it had with the bank. The certificate was indorsed by Campos to HSBC. HSBC then requested the Batangas Minerals to cancel the same and a new certificate was issued in the name of HSBC’s nominee Robert Taplin. Mrs Santamaria then tendered payment for the Crown Mine shares with Campos, but the latter was now prohibited from transacting business due to its insolvency proceedings. She demanded that HSBC return her certificate, but Taplin replied that the bank did not know anything about her transaction with Campos. She sues HSBC.

I: W/n Santamaria could be charged with negligence for failing to take necessary precautions in negotiating her stock certificate. H: In making deposit of her certificate, Santamaria did not take any precaution to protect herself against the possible misuse of shares. She could have asked Batangas Minerals to cancel it and issue another in her name to apprise the holder that she was the owner of the certificate. This she failed to do so, and instead she delivered the certificate to Campos and clothing the latter with apparent title to the shares represented by said certificate, including apparent authority to negotiate it by delivering it to HSBC. HSBC had no knowledge of the circumstances under which the certificate of stock was delivered to Campos and had the perfect right to assume that Campos was in lawful possession, in view of the fact that it was a street certificate, which is transferable by mere delivery. Santamaria made the negotiation of the certificate to other parties possible and the confidence she placed in Campos made the wrong done possible. This was the proximate cause of the damage suffered by her. She is thus estopped from claiming further title to or interest therein as against a bona fide pledgee or transferee thereof. The certificate was delivered by Campos to HSBC in the ordinary course of business, together with many other securities, and at the time of delivery, HSBC had no knowledge that the shares belonged to Santamaria. She was thus chargeable with negligence in failing to take the necessary precautions upon delivering the certificate to her broker. I: w/n HSBC was obligated to inquire who was the real owner of the shares, and w/n it could be charged with negligence for failure to do so. H: Upon its face, the holder of the certificate was entitled to demand its transfer into his name from the issuing corporation. HSBC was not obligated to look beyond the certificate to ascertain the ownership of the stock because it was given pursuant to its contract of hypothecation. A stock certificate, indorsed in blank, is

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document deemed quasi-negotiable, and as such the transferee thereof is justified in believing that it belongs to the holder and transferor. The fact that her name was penciled on the certificate cannot be considered sufficient reason to indicate that she was the owner, considering that certificate was indorsed in blank by her brokers and guaranteed by indorsement in blank by Campos.

— a bona fide pledgee or transferee of a stock from the apparent owner is not chargeable with knowledge of the limitations placed on said certificates by the real owner, or of any secret agreement relating to the use which might be made of stock by the holder.

— When a stock certificate is endorsed in blank, it constitutes what is termed as a “street certificate” so that upon its face, the holder is entitled to demand its transfer into his name from the issuing corporation. Such certificate is quasi-negotiable.

— Santamaria could not recover the certificates since she could have asked that the corporation that issued it to cancel and issue another. Her negligence was the immediate cause of the damage, since the certificate was endorsed be her to constitute as a street certificate.

De los Santos v. McGrath Unauthorized Transfers

Involves the true ownership of 1,600,000 shares of Lepanto Mining. The original owner was the Mitsui Co, a Japanese corporation, and was held in trust by Vicente Madrigal, in whose name the shares were registered in the books of Lepanto. Madrigal delivered the certificates to the Mitsui office in the RP, which kept the same until the liberation of Manila by the US. The Mitsuis nor Madrigal had never sold or disposed of the shares, which was alleged to have been looted or stolen during the liberation. By virtue of vesting order P-12, title in the shares was ordered vested in the Alien Property Custodian of the US, which was succeeded in this action by the US Atty General. De Los Santos and Astraquillo however claim to be owners of 1,600,000 shares of Lepanto Mining, alleging that they bought 1,100,000 from Carl Hess and 500,000 from Juan Campos. All evidence and persons who could testify as to their ownership of the shares no longer existed. Hess was executed by the Japanese and Campos killed during the liberation. A receipt made in a purported sale by Astraquillo of the shares was curiously destroyed by fire.

I: Who owns the certificates? H: Under the Code, a share of stock may be transferred by endorsement of the certificate coupled with delivery. The transfer is not valid except as between the transferring parties, unless it is entered and noted upon the books of the corporation. No such entry in the name of de los Santos and Astraquillo having been made, it follows that the transfer allegedly effected by Hess and Campos is not valid, except as between themselves. It does not bind the Madrigals or the Mitsuis who are not parties to the alleged transaction. Although a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, it is well-settled that the instrument is non-negotiable, because the holder thereof takes it without prejudice to such rights or defense as the registered owner or credit may have under the law. If the owner of the certificate has endorsed it in blank, and it is stolen from him, no title is acquired by an innocent purchaser for value. The doctrine that a bona fide purchaser of shares under a forged or unauthorized transfer acquires no title as against the true owner does not apply where the circumstances are such as to estop the latter from asserting his title. Where one of two innocent parties must suffer by reason of a wrongful or unauthorized act, the loss must fall on the one who first trusted the wrongdoer and put in his hands the means of inflicting such loss. But negligence which will work an estoppel of this kind must be the proximate cause of the damage and must be in or immediately connected with the transfer itself. Moreover, delos Santos and Astraquillo were aware of sufficient facts to put them on notice of the need of inquiring into the regularity of the transactions and the title of supposed vendors. The certificates were in the name of Madrigal. Obviously therefore, the alleged sellers were not the registered owners of the certificates and shares of stock. They must have been conscious of the infirmities

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document in title. The purported sales were also admittedly hostile to the Japanese, who had prohibited it, and plaintiffs had actual knowledge of these facts and of the risks attendant. In other words, they assumed those risks and cannot validly claim against the registered SH, the status of purchasers in GF. — A stock certificate is not a negotiable instrument, but it is regarded as quasi-

negotiable in the sense that it may be transferred by endorsement coupled with delivery

— A transferee under a forged assignment acquires no title which can be asserted against the true owner, unless the true owner’s own negligence has been such as to create an estoppel against him

— The doctrine that a bona fide purchaser of shares under a forged or unauthorized transfer acquires no title as against the true owner does not apply where the circumstances are such as to estop the latter from asserting his title

— It is not negotiable because the holder takes it without prejudice to such rights or defenses as registered owners or transferor’s creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel

Rural Bank of Salinas v. CA Unauthorized Transfers

Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed a Special Power of Attorney in favor of his wife, private respondent Melania Guerrero, giving and granting the latter full power and authority to sell or otherwise dispose of and/or mortgage 473 shares of stock of the Bank registered in his name. Pursuant to said Special Power of Attorney, private respondent Melania Guerrero, as Attorney-in-Fact, executed a Deed of Assignment for 472 shares out of the 473 shares, in favor of private respondents, and executed a Deed of Assignment for the remaining one (1) share of stock in favor of private respondent Francisco Guerrero, Sr. Melania Guerrero presented to petitioner Rural Bank of Salinas the two (2) Deeds of Assignment for registration with a request for the transfer in the Bank's stock and transfer book of the 473 shares of stock so assigned, the cancellation of stock certificates in the name of Clemente G. Guerrero, and the issuance of new stock certificates covering the transferred shares of stocks in the name of the new owners thereof. However, petitioner Bank denied the request of respondent Melania Guerrero.

I: W/n the courts can compel by Mandamus the Rural Bank of Salinas to register in its stock and transfer book the transfer of 473 shares of stock to private respondents. H: Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to hear and decide cases involving intracorporate controversies. An intracorporate controversy has been defined as one which arises between a stockholder and the corporation. There is no distinction, qualification, nor any exception whatsoever. The case at bar involves shares of stock, their registration, cancellation and issuances thereof by petitioner Rural Bank of Salinas. It is therefore within the power of respondent SEC to adjudicate. Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation Code]) contemplates no restriction as to whom the stocks may be transferred. It does not suggest that any discrimination may be created by the corporation in favor of, or against a certain purchaser. The owner of shares, as owner of personal property, is at liberty, under said section to dispose them in favor of whomever he pleases, without limitation in this respect, than the general provisions of law, the only limitation imposed by Section 63 of the Corporation Code being any unpaid claim held by the corporation against the shares intended to be transferred, which is absent in this case. The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing from his ownership of the stocks. Whenever a corporation refuses to transfer and register stock in cases like the present, mandamus will lie to compel the officers of the corporation to transfer said stock in the books of the corporation" (Fleisher vs. Botica Nolasco). The corporation's obligation to register is ministerial. In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does not try to decide the question of ownership. The duty of the corporation to transfer is a ministerial one and if it refuses to make such transaction without good cause, it may be compelled to do so by mandamus. For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and intent of

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document Section 63 of the Corporation Code.

Chua Guan v. Samahang Magsasaka Collateral Transfers

Chua Gan is the assignee of all rights and interests of mortgagee Chua Chiu, in whose favor a mortgage upon shares of corporation Samahang Magsasaka Inc owned by debtor Cotoco was entered into, delivered, and registered in the RoDs. Cotoco defaults, Chua Gan forecloses mortgage and after public auction, certificate of shares were entered in his favor. Chua Gan then tendered the certificates to the corporation for cancellation and the issuance of new certificates in his name. Officers of Samahang Magsasaka refused, contending that 9 attachments had been issued and served against the shares of Cotoco in the books. 8 of the writs were served and noted in the books before the corporation knew of the mortgage of Chua Chiu. Chua Gan sues. (The registered owner mortgaged the shares and the mortgagee not only registered the mortgage with the registry of deeds, but also in the books of the corporation. When the mortgagee foreclosed on the mortgage, the officers of the corporation refused to issue the new certificates in the name of the mortgagee as the winning bidder thereof in the auction sale, on the ground that before the mortgagee made his demand upon the corporation, writs of attachments had been served upon and registered in the books of the corporation against the mortgagor, which the mortgagee refused to have annotated in the new certificate to be issued to him)

I: w/n the registration of the CMs in the ROD is constructive notice to the attaching creditors (w/n the mortgage took priority over the writs of attachment) H: GR: for purposes of execution, attachment, and garnishment, it is not the domicile of the owner of the certificate but the domicile of the corporation which is decisive. By analogy, and considering that the ownership of shares in a corporation as property distinct from the certificates which are merely the evidence of such ownership, the property in the shares may be deemed to be situated in the province in which the corporation has its principal office or place of business. If this province is also the province of the owner’s domicile, a single registration is sufficient. If not, the CM must be registered both at the owner’s domicile and in the province where the corporation has its principal office or place of business. In this sense the property mortgaged is not the certificate but the participation and share of the owner in the assets of the corporation. The transfer by endorsement and delivery of a certificate with intention to pledge the shares covered thereby should be sufficient to give legal effect to that intention and to consummate the juristic act without necessity for registration. Thus the attaching creditors are entitled to priority over the defectively registered mortgage of Chua Gan. — Considering the ownership of shares in a corporation as property distinct

from the certificates which merely evidence the ownership, then the property in the shares may be deemed to be situated in the province which the corporation has its principal office or place of business. In this sense property mortgaged is not the certificate but the participation and share of the owner in the assets of the corporation.

— Although under 63 the surrender of the certificate is necessary to effect the transfer of shares, it does not exclude the possibility that a transfer may be made in a different manner; meaning that the execution of a deed of assignment can be a valid mode of transferring title covering shares of stock.

CHAPTER XVI Financing Corp v. Teodoro Dissolution by minority in close corporations

Lizares et al, minority SHs of the Financing Corp of the Phils, sued the corporation and J Amado Araneta, its president and GM, alleging gross mismanagement and fraudulent conduct of the corporate affairs by Araneta and asking that the corporation be dissolved and Araneta be declared personally accountable for the unauthorized and fraudulent disbursements of the corporate assets. Judge Teodoro granted petition for appointment of a receiver (Yulo). The corporation contends that the appointment is merely an auxiliary remedy; that the principal remedy was the dissolution of the corporation, and that the minority SHs have nor right and personality to maintain an action for dissolution, that right belonging only to the State.

GR: minority SHs of a corporation cannot sue and demand dissolution. Exception: if they are unable to obtain redress and protection of their rights within the corporation (Hall v Piccio). Even the existence of a de jure corporation may be terminated in a private suit for its dissolution by SHs without the intervention of the State. The question of the right of minority SHs to ask for dissolution in Hall was held not to affect the court’s jurisdiction over the case, and that the remedy by the party dissatisfied was to appeal. GR: minority SHs cannot ask for dissolution in a private suit, and that action should be brought by the government through its legal officer. Exception: cases wherein the intervention of the State cannot be obtained because the complaint is a matter strictly between the SH and the corporation and does not involve issues which involve acts/omissions warranting a quo warranto. When such action is brought, the TC has jurisdiction and has discretion to grant the prayer or not. Having such jurisdiction, the appointment of e receiver pendent elite is left to the sound discretion of the TC. In Angeles v Santos, it was held that it is within the

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document power of the court upon proper showing to appoint a receiver pendente lite once the action is properly brought and court acquires jurisdiction. The appointment of a receiver upon petition by the minority SH is a power that must be exercised with great caution, and should be exercised when necessary to protect their rights, especially when they cannot obtain redress through or within the corporation. SC ruled that the TC had jurisdiction and properly entertained the original case and had jurisdiction to appoint a receiver pendente lite.

Republic v. Bisaya Land Trans Co. Quo Warranto Proceedings

Government files petition for quo warranto against the Bisaya Land Tranpo Co and its board, and asks for the appointment of a receiver pendente lite, alleging that the corporation, through the board, violated the provisions of the Corporation Law as outlined in 9 causes of action. Miguel Cuenco, a member of the Board, sets up a cross-claim against the other members to recover P4M arising for illegal acts of the corporation of which damage was caused him, and asks for the appointment of a receiver. The other directors argue that the petition should be dismissed as to Cuenco because his claims did not arise out of the transactions the subject matter of the quo warranto, which did not assert any claim against any of the directors. TC denies MTD the quo warranto. Corporation then filed a motion for judgment on consent, manifesting its consent to the ordering of the dissolution of the corporation, and ordered the board to proceed with the liquidation of its assets. It contended that the pendency of the quo warranto petition had prejudiced the corporation and its business, and that immediate relied be given the corporation. It also alleged that the majority of the board and 2/3 SHs acceded to the request to dissolve as the most feasible remedy to its problems. Republic moves that the matter of implementation of the dissolution be submitted to the TC for judgment. Cuenco concurs but urges the appointment of a receiver. Directors not Cuenco filed a motion to withdraw its previous motion for judgment on consent on the ground that the conditions to which motion was subject had not been accepted. Cuenco opposes withdrawal and pressed for appointment of receiver. TC denied motion to withdraw. Corporation appeals. SolGen Barredo moved to dismiss quo warranto proceedings, to which Cuenco opposed. TC grants Republic’s motion but denies Cuenco’s crossclaim.

I: W/N the TC should have ordered dissolution upon its motion and not the Republic’s, as it amounted to a confession of judgment. H; A motion for judgment on consent is not to be equated with judgment by confession. There must be an unqualified agreement among the parties to the action entered in the record with leave of court. A judgment by confession is not a plea but an affirmative and voluntary act of the defendant himself. In this case, there was no meeting of the minds among the parties with respect to the motion for judgment on consent. Corporation wanted its liquidation to be effected by its Board. Cuenco wanted the appointment of a receiver in agreeing to dissolution, and after his cross-claims were considered. Before the parties could come to an unqualified agreement, the corporation moves to withdraw its motion for judgment on consent. It is clear that the parties could not agree as to the terms of dissolution, and the TC correctly rendered judgment dissolving the corporation. I: W/n TC was wrong in not granting quo warranto because the evidence presented fails to constitute grounds for quo warranto H: TC found that the alleged misuse of funds were committed more particularly by Dr Manuel Cuenco with the cooperation of Velez, for which they are personally liable. The alleged illegal corporate acts had not resulted in substantial injury to the public, nor were they willful and clearly obdurate. It found that the controversy between the parties was more personal than anything else and did not at all affect public interest. Such private controversies can be ventilated in appropriate SHs suit which do not have to occupy the time and attention of government officials. The SolGen himself admits that his reason for the MTD is to take the State out of an unnecessary court litigation. Relief by dissolution would only be awarded where no adequate relief is available, and is not available where the rights of SHs can be or are protected in some other way. I: W/N the SolGen, as the lawyer for the Republic, was vested with full power to manage and control the State’s litigation. H: GR: the SolGen may do so with the approval of the court, subject to well-defined exceptions. If it is discovered that the action commenced was brought for the purpose of enforcing a right, the advisability or necessity of which he later discovers no longer exists, then he should be permitted to withdraw his action. Courts should not require parties to litigate whey they no longer desire to do so. Thus the SolGen was within his power to move to dismiss the petition for quo warranto, and the TC was correct in dismissing Cuenco’s cross-claim, and receivership is ordered terminated.

— Dissolution is a serious remedy granted to the courts against offending corporations. Courts, as a general rule, should not resort to dissolution when the prejudice is not against the public or not an outright abuse or violation of the corporate charter. Even if the

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document prejudice is public in nature, the remedy is to enjoin or rectify the mistake. Only when it cannot be remedied anymore then that dissolution can come in.

Gonzales v. Sugar Regulatory Admin.

Spouses Gonzales obtained a loan from the RPBank in the amount of P 176,000.00 secured by a real estate mortgage. The proceeds of the loan were released on a staggered basis and the loan was "payable from [the] 1980-1981 sugar crop, " the amortization payments to be remitted by the Philsucom to the RPBank. The RPBank is owned and controlled by the Philsucom. Gonzales received a statement of account from the RPBank setting forth that they had an outstanding loan balance due to the bank of P 652,446.38. It appeared that the Gonzaleses had received the total amount of P l,041,610.55 in loan funds from the RPBank and that they had re-paid thereon the total amount of P 1,051,296.77; in other words, they had already more than fully repaid their loan. The Gonzales further averred that Philsucom had deducted from the export sugar proceeds of petitioners the amount of P 421,517.32 without their authority and consent with the result that the spouses had overpaid the RPBank by P 289,260.88. the spouses prayed that the real estate mortgage be cancelled, and that Philsucom and SRA be required jointly and severally to reimburse the petitioners the amount of P 289,260.88 + damages. The RPBank, Philsucom and herein respondent SRA moved to dismiss the complaint upon the ground of lack of cause of action. Philsucom and respondent SRA through the Solicitor General, denied any obligation on the part of the Philsucom to return any amount to petitioners on account of allegedly unauthorized deductions from the proceeds of petitioners' sugar sold by the Philsucom. For its part, the SRA also noted that while the deductions complained of were made by the Philsucom during the period from 1980 to 1984, the SRA itself had been created by Executive Order No. 18 only on 18 May 1986 and that it was not a party to the real estate mortgage between petitioners and the RPBank.

Executive Order No. 18, promulgated on 28 May 1986, abolished the Philsucom, created the SRA and authorized the transfer of assets from Philsucom to SRA. Although the Philsucom is hereby abolished, it shall nevertheless continue as a juridical entity for three years after the time when it would have been so abolished, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the functions for which it was established, under the supervision of the Sugar Regulatory Administration. (Emphasis supplied). We note that Executive Order No. 18 did not provide for universal succession, as it were, of SRA to Philsucom, or more specifically to the assets and liabilities of Philsucom. The SRA has been authorized to determine which of the assets and records of Philsucom are required for the carrying out of the activities which the SRA is to carry on or undertake. The succession of the SRA to the assets and records of the Philsucom is thus limited in nature; the extent of such succession is left to the discretionary determination of the SRA itself. More importantly, Executive Order No. 18 is silent as to the liabilities of Philsucom; it does not speak of assumption of such liabilities by the SRA.

The Philsucom, it will be seen, succeeded as a matter of course to all the assets, liabilities and records of the Philippine Sugar Institute and the Sugar Quota Administration. The SRA did not, quite possibly because the Government wanted the opportunity to examine the assets, liabilities and records carefully and to determine the compatibility of (asserted) liabilities of the Philsucom with applicable law and relevant requirements of public policy and the public interest.

That the assets of the Philsucom must respond for payment of lawful obligations of Philsucom, does not appear to require demonstration. The assets which, in accordance with the second paragraph of Section 13 of Executive Order No. 18, may be taken over by the SRA can thus be only net or residual assets, assets remaining after payment of the valid and enforceable liabilities of Philsucom has been made or been adequately provided for. We believe, in other words, that Section 13 of Executive Order No. 18 is not to be interpreted as authorizing respondent SRA to disable Philsucom from paying Philsucom's demandable obligations by simply taking over Philsucom's assets and immunizing them from legitimate claims against Philsucom. The right of those who have previously contracted with, or otherwise acquired lawful claims against, Philsucom, to have the assets of Philsucom applied to the satisfaction of those claims, is a substantive right and not merely a procedural remedy. Section 13 cannot be read as permitting the SRA to destroy that substantive right. We think that such an interpretation would result in Section 13 of Executive Order No. 18 colliding with the non-impairment of contracts clause of the Constitution insofar as contractual claims are concerned, and with the due process clause insofar as the non-contractual claims are concerned. 5 To avoid such a result, we believe and so hold that should the assets of Philsucom remaining in Philsucom at the time of its

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document abolition not be adequate to pay for all lawful claims against Philsucom, respondent SRA must be held liable for such claims against Philsucom to the extent of the fair value of assets actually taken over by the SRA from Philsucom, if any. To this extent, claimants against Philsucom do have a right to follow Philsucom's assets in the hands of SRA or any other agency for that matter. This result appears no more than a dictate of elementary fairness, particularly when one takes into account that under Section 11 of Executive Order No. 18, the SRA will continue, "until otherwise provided, as directed and ordered by the President of the Philippines," to collect and receive the proceeds of "levies, charges and other impositions as [then] granted by law, decree and/or executive order, to the [Philsucom]." Whether the deductions here assailed by petitioners are included among the "levies, charges and other impositions" then made by Philsucom and now continued by SRA must be determined by the trial court.

Petitioners have noted in this connection that the three (3) year period provided for in the third paragraph of Section 13 of Executive Order No. 18 is about to expire. There is nothing to prevent Philsucom from appointing a trustee SRA for instance and conveying all its properties to such trustee, for the benefit of the Government, creditors and other persons in interest, following at least by analogy the provisions of the second paragraph of Section 122 of the Corporation Code. Should Philsucom decline to so appoint SRA as trustee, the principles set forth above would of course apply, mutatis mutandis, in respect of whichever public agency may find itself actually holding the assets and records of Philsucom.

We conclude that dismissal of petitioners' complaint against respondent SRA was clearly premature. Petitioners have a cause of action against SRA to the extent that they are able to prove lawful claims against Philsucom, which claims Philsucom is or may be unable to satisfy, and to the extent respondent SRA did, or does, in fact take over all or some of the assets of Philsucom. At the very least, the motion to dismiss was not shown to rest upon indubitable grounds and should, therefore, have been denied not only in respect of Philsucom but also in respect of respondent SRA.

H: The termination of the life of a juridical entity does not by itself imply the diminution of extinction of rights demandable against such juridical entity among which would be the priority claims of corporate creditors against corporate assets. Since the assets must respond for payment of lawful obligations of a dissolved corporation, then it is required that the succeeding corporation would be liable for all such lawful claims to the extent of the fair value of assets actually taken over.

No person who assets a claim against a juridical entity can claim any constitutional right to the perpetual existence of such entity. Juridical persons, whether incorporated or not, whether owned by the government or the private sector, may come to any end at one time or another for a variety of reasons, ex the fulfillment or abandonment of the business purposes for which a corporation was set up. Thus the Code provides for termination of corporate life, the dissolution of the corporation, the winding up of its operations, the liquidation of its assets, the

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document payment of its obligations and distribution of any residual assets to its SHs.

Termination of life of a juridical entity does not by itself imply the diminution or extinction of rights demandable against a juridical entity. Consequently, when the assets of a dissolved entity are taken over by another entity, the successor entity must be held liable for the obligations of the dissolved entity pertaining to the assets so assumed, to the extent of the fair value of assets actually taken over.

Pepsi v. CA Pepsi-Cola Products Philippines, Inc. Employees and Workers Union (PCEWU), a duly- registered labor union of the employees of the Pepsi-Cola Distributors of the Philippines (PCDP) filed a Complaint against PCDP for payment of overtime services rendered by fifty-three (53) of its members, for work done during 8 Muslim Holidays. LA held that workers in Region 12 were entitled, but workers in Region 9 were not. Pepsi Distributors appeals to NLRC, which affirms. Pending resolution of its MR, ownership of various Pepsi-Cola bottling plants was transferred to petitioner Pepsi-Cola Products Philippines, Inc. (PCPPI). The PCDP alleged that it had ceased to exist as a corporation on July 24, 1989 and that it has winded up its corporate affairs in accordance with law. It also averred that it was now owned by PCPPI. NLRC dismisses complaint, holding that with the cessation and dissolution of the corporate existence of the PCDP, rendering any judgment against it is incapable of execution and satisfaction. The CA reverses, and declared that the PCDP was still in existence when the complaint was filed, and that the supervening dissolution of the corporation did not warrant the dismissal of the complaint against it. After all, the appellate court ratiocinated, every corporation is given three (3) years to wind up its affairs. Hence, in case any litigation is filed by or against the corporation within the three (3)-year period which could not be terminated within the expiration of the same, such period must necessarily be prolonged until the final determination of the case.

Under Section 122 of the Corporation Code, a corporation whose corporate existence is terminated in any manner continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and to enable it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the three-year term, appoint a trustee or a receiver who may act beyond that period. At any time during the said three (3) years, the corporation is authorized and empowered to convey all of its properties to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its properties in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the properties terminates the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member, who is unknown or cannot be found, shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. The termination of the life of a corporate entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation, within that period, the board of directors (or trustees) itself, may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation.

National Abaca Corp v. Pore Effects of Dissolution, Winding Up and Liquidation: Loss of Juridical Personality

National Abaca Corp sued Apolonia Pore to recover money advanced for the purchase of hemp for the account of the corporation for which she failed to account therefor. Pore in defense, contends that she made an accounting of the advances received by her. TC held her accountable and ordered to her to pay the corporation. Pore moved to dismiss on the ground that the corporation had no legal capacity to sue, it having been abolished by EO 372. Corporation contends that the EO also stipulates that it shall continue as a body corporate for 3 years from date of effectivity of the EO, for the purpose of defending and prosecuting suits and

I: W/n an action, commenced within 3 years after the abolition of the corporation, may be continued by the same after expiration of the period. NO W/m the TC was correct in dismissing motion. NO. should have granted the motion… H: GR: pending actions by or against a corporation are abated upon the expiration of the period allowed by law for liquidation. The old corpo law contains no provision authorizing a corporation after 3 years from expiration of its lifetime, to continue in its corporate name actions instituted by it within a period of 3 years. It

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document enabling the Board of Liquidators to settle and close all its affairs. TC ordered corporation to amend the complaint by including the Board of Liquidators as co-party plaintiff, otherwise case shall be dismissed. The corporation fails to submit amended complaint, and the TC dismisses case. Corporation in seeking reconsideration, said that it was not able to submit the amended complaint on time because of the negligence of the filing clerk, Ms Ocampo, and that it was lost despite diligent efforts to look for it. TC denies motion.

provides that it will continue as a body corporate for 3 years after the time when it would have been dissolved, for purposes of prosecuting and defending suit by or against it. During the time which the corporation, through its officers, may conduct the liquidation of assets and sue and be sued as a corporation is limited to 3 years from the time period of dissolution commences, but that there is no time limit within which trustees must complete a liquidation placed in their hands. The conveyance to the trustees must be made within the 3 year period. It may be found impossible to complete the work of liquidation within the 3 year period or to reduce dispute claims to judgment. Suits by or against a corporate abate when it ceased to be an entity capable of suing or being sued; but trustees to whom the corporate assets have been conveyed pursuant to the authority of the code may sue and be sued as such in all matters connected with the liquidation. The effect of conveyance is to make the trustees legal owners of the property conveyed, subject to the beneficial interest therein of creditors and SHs. The complete loss of Abaca’s corporate existence after the expiration of 3 year period is what impelled the creation of the Board of Liquidators, to continue the management of pending matters. — GR: in the absence of statutory rules to the contrary, pending actions by or

against a corporation are abated upon the expiration of the 3-year period allowed by law for liquidation

China Banking Corp v. Michelin Effects of Dissolution, Winding Up and Liquidation: Distribution of assets after payment of debts

George O’Farrel & Cie Inc is a domestic corporation acting as agent and representative of the M Michelin & Cie, a foreign corporation engaged in the sale and distribution of Michelin tires. Michelin decided to discontinue their business relations, and it was discovered that O Farrel failed to account for an amount representing the price of tires sold by the latter. Michelin claims the money was disposed by O Farrel for its own use and benefit and without the authority or consent of Michelin. Gaston O’Farrel (the person) and Sanchez executed a mortgage on the house of O’Farrel and shares owned by both to guarantee payment of the amount to the Michelin, but left a balance which the latter seeks to recover. The board of O’Farrel filed a petition for its dissolution and sought the appointment of Gaston as receiver and liquidator, which was granted by TC. Michelin filed its claim against O’Farrel Corp with a prayer that its claim be allowed as a preferred one against the latter. TC grants motion of Michelin. Nobody except Michelin and Gaston was notified of the order. China Bank intervened and moved that Michelin’s claim be allowed as an ordinary one under the Insolvency Law and sought the nullification of the TC orders.

Claims against a corporation in the hands of a receiver should not be approved and paid without some formal and regular proceeding after a reasonable opportunity is given to all parties in interest. The SC held that the provisions of the Insolvency Law should operate. There is no reason for the corporation to resort to the court for a decree of voluntary dissolution. If the corporation was under such a financial condition as alleged, and did not desire to continue doing business, there is no necessity for judicial intervention in the winding up of affairs coupled with the appointment for a receiver to deal with creditors as though they were creditors of an insolvent corporation. Under the old corpo law, with respect to decrees of dissolution upon voluntary application, the court may appoint receivers to collect and take charge of the assets. It is permissive and not mandatory, because in cases of voluntary dissolution there is no occasion for the appointment of a receiver except under special circumstances. Such discretion on the part of the court to appoint must be exercised with caution. IT does not empower the court to hear and pass upon the claims of creditors of the corporation at first hand. In such cases, the receiver does not act as a receiver of an insolvent corporation. Since liquidation consists of collecting all that is due the corporation, all claims must be presented for allowance to the receiver or trustees during winding up, within 3 years as provided in Corpo Law. The rulings of the receiver are subject to judicial review by the court which appointed him. The normal method is for directors/officers to have charge of the winding up, though there is the alternative method of assigning property of the corporation to trustees. The law authorizing voluntary dissolutions are generally held to apply only to dissolutions brought about by the SHs themselves.

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document China Bank’s motion was filed 13 months after the decree of dissolution was entered, thus the motion was flied on time to have its claim reviewed by the court. The appointment of Gaston as the receiver, who was also the principal promoter of the corporation and at one time the majority SH, president, and GM, lends itself to serious suspicion. His administration of the business left much to be desired and that he alone ought to be blamed for the shortage claimed by Michelin, but to save himself he made the corporation shoulder the burden of obligations in exchange for a simulated conveyance of his house and shares to the corporation. Once delinquent, Gaston resorted to a judicial proceeding of voluntary dissolution in an attempt to settle Michelin’ claim and to free himself from any liability, and allowed the claim to be a preferred claim without informing or notifying interested parties, such as China Bank, which also had a claim. Michelin’s claim cannot be allowed as a preferred claim, because the merchandise was no longer in the corporation’s possession. The rubber tires consigned were to be sold on order, and the claim for the advance seems to be in the nature of a current account between the two companies more than anything else.

Republic v. Marsman Dev’t Co. Effects of Dissolution, Winding Up and Liquidation: Distribution of assets after payment of debts

: Marsman is a lumber company. An investigation was conducted and certain taxes due from logs produced from its timber concession granted by the government. CIR demanded payment representing three assessments made on forest charges, deficiency sales tax and other surcharges and penalties. Counsel for the corporation requested for reinvestigation, but was denied unless the legal requirements for such a request were complied with and payment of ½ of total assessments were made, and to furnish a bond to guarantee payment of the balance. The corporation repeated failed to comply with the conditions set by the CIR, which was constrained to make extrajudicial demand for the tax liabilities. Marsman was then extrajudicially dissolved. BIR files a complaint for its demands after more than 3 years following the corporation’s dissolution, and the TC sentenced the corporation to pay the amount demanded by CIR.

TC did not err in holding that the period to question the tax assessments had already expired. By its own omission, the corporation made it possible for the BIR to act on its own MR. Mere filing of a motion does not suspend the running of the period for collection of the tax, which implies that any assessment made by the BIR is supposed to be final and executory as to the taxpayer concerned. I: w/n present action is barred by prescription, in light of the fact that the corporation law allows corporations to continue only for 3 years after its dissolution, for the purpose of presenting or defending suits by or against it, and to settle its affairs. no H: Stress given by Marsman on the extinction of corporate personality by virtue of its extra0judicial dissolution is misplaced. The assessments against the corporation were made before its dissolution and not later than 6 months after dissolution. Thus the government became the creditor of the corporation before the completion of its dissolution. Burgess the liquidator became in law the trustee of all its assets for the benefit of all person interested, including the government. It is immaterial that the present action was filed after expiration of the 3 year period, because the assessment definitely established the government as a creditor of the corporation for whom the liquidator is supposed to hold corporate assets. — Code provides for a 3-year period for continuation of the corporate existence

for purposes of liquidation — But there is nothing in the provision which bars an action for recovery of

debts of the corporation against the liquidator himself, after the lapse of the 3-year period

Tan Chiong Bio v. CIR Effects of Dissolution, Winding Up and Liquidation: Distribution of assets after payment of debts

: Tan Tiong Bio et al are incorporators and directors (some are officers—President and treasurer) of the Central Syndicate. The company realized a net profit of close to P300K, and sale of goods was the only transaction undertaken by it. BIR sues the Tan Tiong et al for deficiency sales taxes and surcharges on surplus goods purchased by the corporation from the Foreign Liquidation Commission. Corporation was dissolved, and Tan Tiong and company substituted themselves as parties, thereby becoming successors-in-interests in the corporate

I: W/n the sales tax can be enforced against the corporation’s successors-in-interest, even if corporation has been dissolved by expiration of corporate existence. --YES H: Tan Tiong, as substitute parties-in-interest, cannot now be heard to complain that they were being held liable for the tax due from the corporation whose

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document assets after liquidation. TC rules ifo BIR, and Tan Tiong et al appeals, claiming that they cannot be held liable for tax liability there being no law authorizing the government to proceed against SHs of a defunct corporation as transferees of the corporate assets upon liquidation. If they were liable, it is only to the extent of the benefits derived by them, and that the action is barred by prescription due to the 3-year limit in the corpo Law.

representation they assumed and whose assets are distributed to them. The creditor of a dissolved corporation may follow its assets once they passed into the hands of a SH. The dissolution of a corporation does not extinguish debts due or owing to it. A creditor of a dissolved corporation may follow its assets, as in the nature of a trust fund, into the hands of the SHs. The hands of government cannot collect taxes from a defunct corporation, it loses thereby none of its rights to assess taxes due, and to collect the taxes due from the corporation from persons who by reason of transactions with the corporation, hold property against which the tex may be enforced. Court ruled that the net profit remained intact and was distributed among the SHs immediately after sale of surplus. Tan Tiong et al are thus the beneficiaries of the defunct corporation and should be held liable to pay the taxes, but only in proportion to their respective shares in the distribution of assets. — Even after the 3 year period of liquidation, corporate creditors can still

pursue their claims against corporate assets against the officers or SHs who have taken over the properties of the corporation

— SC held that the State cannot insist on making tax assessments against a corporation that no longer exists and then turn around and oppose the appeal questioning the legality of the assessment precisely on the same ground that the corporation is non-existent

The remedy of corporate creditors after the 3-year period is to race where the corporate assets have gone, wherever they rested, be he a SH or a non-SH. Cause of action is to file an action against that person who has control over the corporate assets.

CHAPTER XVII Reyes v. Blouse Sale of Substantially All Assets

Minority SHs of the Laguna Tayabas Bus Co file an action to enjoin Blouse et al from executing its resolution approved by 99 ½% of SHs to consolidate the properties and franchises of Laguna Tayabas with Batangas Transport. Blouse believes it is merely an exchange of properties and not a consolidation.

I: W/n the real purpose of the resolution is merger or consolidation, and if so, whether it can be carried out under the old Corpo Law. H: The questioned resolution charges the board of Laguna to consolidate properties and franchises thereof with that of Batangas Transport. Both corporations have passed similar resolutions to take steps to effect the consolidation. It is apparent that the purpose of the resolution is not to dissolve but to merely transfer its assets to a new corporation in exchange for its shares. This comes within the purview of the old corporation law, which provides that a corporation may sell, exchange, lease or otherwise dispose of all its property and assets when authorized by affirmative vote of 2/3 of SHs. The phrase “otherwise dispose of” covers mergers and consolidations. The transaction in this case cannot be considered, strictly speaking, as a merger or consolidation because a merger implies the termination or cessation of the merged corporations and not merely a merger of assets and properties. The two companies will not lose their corporate existence but will continue to exist after consolidation. What is intended to be managed and operated by a new corporation, and not a merger. The court added that the merger/consolidation (if any) would still be carried out under the Public Service Law. It does not impose any qualification other that it shall be done with the approval of the PSC.

Edward Nell v. Pacific Farms : The Edward Nell Co secured a judgment representing the unpaid balance of the GR: where the corporation sells or otherwise transfers all of its assets to another

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document Sale of Substantially All Assets price of a pump sold to Insular Farms. Pacific Farms then purchased all or

substantially all of shares of stock as well as real and personal property of Insular, selling the shares to certain individuals who reorganized Insular. The board of the reorganized Insular then sold its assets to be sold to Pacific for P10000. The writ of execution was returned, stating that Insular had no leviable property. Nell Co sued Pacific Farms, on the ground as a result of the purchase of all or substantially all assets of Insular, Pacific became the alter ego of Insular Farms.

corporation, the latter is not liable for the debts and liabilities of the former. Exception: (1) purchaser expressly or impliedly assumes such debts; (2) transaction amounts to a consolidation or merger; (3) purchasing corporation is merely a continuation of the selling corp; (4) there is fraud to escape liability for the debts In the present case, no proof was submitted that Pacific expressly agreed to assume the debts of Insular or that it is a continuation of Insular, or that the transaction was tainted in fraud of creditors, or that the two parties merged or consolidated. In fact, the sales took place, not only over 6 months before judgment, but also over a month before the filing of the case. Pacific also purchased the shares as the highest bidder at an auction sale held at the instance of a bank to which shares have been pledged as security by Insular. Nell Co’s theory that Pacific is the alter ego of Insular negates the fact of consolidation/merger, because a corporation cannot be its own alter ego. As to the allegation that the selling price of the assets of P10K was grossly inadequate and thus tainted with fraud, the SC held that the sale was approved by the SEC and that it should be presumed that the price was fair and reasonable, and should be a matter litigated in another venue. SC: since there is neither proof nor allegation that the transferee-corporation expressly or impliedly agreed to assume the debt of the corporation, or that the sale of either the shares or the assets to the appellee has been entered into fraudulently, in order to escape liability for the debt of the subject corporation, there was no basis to hold the transferee liable for the debts and liabilities of the subject corporation Rules on enforceability of liabilities of the transferor against the transferee after the transfer

1. pure assets-only transfer: transferee not liable 2. transfer of business enterprise: transferee liable 3. transfer of equity: not liable except where transferee expressly or

impliedly agrees to assume the same CHAPTER XVIII – see sui notes

Marshall Wells v. Elser Effects of Failure to Secure SEC License

Columbia Pictures v. CA Effects of Failure to Secure SEC License

Geneeral Garments Corp. v. Director Effects of Failure to Secure SEC License

La Chemiste Lacoste v. Fernandez Effects of Failure to Secure SEC License

Litton Mills v. CA Effects of Failure to Secure SEC License

Mentholatum v. Mangaliman What Constitutes Transacting Business

Agilent Tech v. Integ. Silicon Tec.h

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Unless otherwise stated, all digests are from Sui’s Corpo Reviewers. This reviewer is only for the convenience of having all cases in one document ` Merryl Lynch v. CA Topweld Manuel v. ECED What Constitutes Transacting Business

Antam Consolidated v. CA What Constitutes Transacting Business

00 Corpo Finals (Case Reviewer)

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