Case Digest Compilation_Corporation Law (Jacinto)
Case Digest Compilation_Corporation Law (Jacinto)...
UNION GLASS & CONTAINER CORPORATION and CARLOS PALANCA, JR., in his capacity as President of Union Glass & Container Corporation vs. THE SECURITIES AND EXCHANGE COMMISSION and CAROLINA HOFILEÑA November 28, 1983 Facts; This petition seeks to annul the Order of the Securities and Exchange Commission, upholding its jurisdiction in SEC Case No. 2035, entitled "Carolina Hofileña, versus Development Bank of the Philippines" Hofileña, is a stockholder of Pioneer Glass w/c is engaged in the manufacture of glassware. Pioneer Glass had obtained various loans from DBP. As security, Pioneer Glass mortgaged its assets to the DBP. The proceeds were used in the construction of a glass plant in Rosario, Cavite, and the operation of seven silica mining claims. Through the conversion into equity of the accumulated unpaid interests amounting to P5.4 million as of 1975, and subsequently increased by another P2.2 million in 1976, DBP was able to get three, regular seats in the board0 of directors. In March, 1978, suffering from liquidity problems, Pioneer Glass entered into a dacion en pago agreement with DBP, in full satisfaction of the obligations in the amount of P59,000,000.00. Part of the assets transferred was the glass plant in Cavite, which DBP sold to Union Glass. On 1981, Hofileña filed a complaint before Securities and Exchange Commission against the DBP, Union Glass and Pioneer Glass. Of the five causes of action, only the first cause of action concerned Union Glass. Said first cause of action was based on the alleged illegality of the aforesaid dacion en pagoresulting from:  the supposed unilateral and unsupported undervaluation of the assets of Pioneer Glass covered by the agreement;  the self-dealing indulged in by DBP, having acted both as stockholder/director and secured creditor of Pioneer Glass; and  the wrongful inclusion by DBP in its statement of account of P26M as due from Pioneer Glass when the same had already been converted into equity. SEC Hearing Officer Reyes granted the motion to dismiss for lack of jurisdiction. However, upon motion for reconsideration, Hearing Officer Reyes reversed his original order by upholding the SEC's jurisdiction. …the present action is in the form of a derivative suit instituted by a stockholder for the benefit of the corporation, …Pioneer Glass …principally against another stockholder, Development Bank of the Philippines, for alleged illegal acts and gross bad faith which resulted in the dacion en pagoarrangement. Union Glass and Container Corporation, its inclusion as a party-respondent by virtue of its being an indispensable party to the present action, it being in possession of the assets subject of the dacion en pago and, therefore, situated in such a way that it will be affected by any judgment thereon
Issue; WON SEC has jurisdiction Held / ratio; None, reversed. Union Glass dropped from case w/o prejudice to a separate suit before a regular court In the ordinary course of things, Union Glass, should be joined as party-defendant under the general rule which requires the joinder of every party who has an interest in or lien on the property subject matter of the dispute. Such joinder of parties avoids multiplicity of suits.
But since petitioner Union Glass has no intra-corporate relation with either the complainant or the DBP, its joinder as party-defendant brings the cause of action asserted against it outside the jurisdiction of the respondent SEC. The jurisdiction of the SEC is delineated by Section 5 of PD No. 902-A as follows: Sec. 5. In addition to the regulatory and adjudicative function of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and devices, it shall have original and exclusive jurisdiction to hear and decide cases involving: a] Devices and schemes employed by or any acts, of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or the stockholders, partners, members of associations or organizations registered with the Commission b] Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members or associates; between any or all of them and the corporation, partnership, or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity; c] Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations.
Section 3 of PD No. 902-A confers upon the latter "absolute jurisdiction, supervision, and control over all corporations, partnerships or associations, who are grantees of primary franchise and/or license or permit issued by the government to operate in the Philippines ... " The principal function of the SEC is the supervision and control over corporations, partnerships and associations with the end in view that investment in these entities may be encouraged and protected, and their activities pursued for the promotion of economic development. 5 Thus the law explicitly specified and delimited its jurisdiction to matters intrinsically connected with the regulation of corporations, partnerships and associations and those dealing with the internal affairs of such corporations, partnerships or associations. Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: [a] between the corporation, partnership or association and the public; [b] between the corporation, partnership or association and its stockholders, partners, members, or officers; [c] between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned; and [d] among the stockholders, partners or associates themselves. The case should be tried and decided by the court of general jurisdiction, the Regional Trial Court. This view is in accord with the rudimentary principle that administrative agencies, like the SEC, are tribunals of limited jurisdiction6 and, as such, could wield only such powers as are specifically granted to them by their enabling statutes. While the Rules of Court, which applies suppletorily to proceedings before the SEC, allows the joinder of causes of action in one complaint, such procedure however is subject to the rules regarding jurisdiction, venue and joinder of parties. But such action, if instituted, shall be suspended to await the final outcome of SEC Case No. 2035, for the issue of the validity of the dacion en pago posed in the last mentioned case is a prejudicial question.
SPOUSES JOSE ABEJO AND AURORA ABEJO, TELEC. TRONIC SYSTEMS, INC., vs. HON. RAFAEL DE LA CRUZ, JUDGE OF THE REGIONAL TRIAL COURT, SPOUSES AGAPITO BRAGA AND VIRGINIA BRAGA, VIRGILIO BRAGA AND NORBERTO BRAGA POCKET BELL PHILIPPINES, INC., AGAPITO T. BRAGA, VIRGILIO T. BRAGA, NORBERTO BRAGA, and VIRGINIA BRAGA, vs. THE HONORABLE SECURITIES AND EXCHANGE COMMISSION, TELECTRONIC SYSTEMS, INC., JOSE ABEJO, JOSE LUIS SANTIAGO, SIMEON A. MIRAVITE, SR., ANDRES T. VELARDE AND L. QUIDATO BANDOLINO May 19, 1987 Facts; These two cases involve the question of who, between the Regional Trial Court and the Securities and Exchange Commission (SEC), has original and exclusive jurisdiction over the dispute between the principal stockholders of the corporation Pocket Bell, a voice paging corporation," namely, the spouses Abejo and the purchaser, Telectronic of their 133,000 minority shareholdings (for P5 million) and of 63,000 shares registered in the name of Virginia Braga covered by five stock certificates endorsed in blank by her (for P1,674,450.00), and the spouses Braga erstwhile majority stockholders. With the said purchases, Telectronics would become the majority stockholder, holding 56%. Telectronics requested the corporate secretary Norberto Braga, to register and transfer to its name, and those of its nominees the total 196,000 Pocket Bell shares in the corporation's transfer book. Norberto Braga, the corporate secretary and son of the Bragas, refused asserting that the Bragas claim preemptive rights over the 133,000 Abejo shares and that Virginia Braga never transferred her 63,000 shares to Telectronics but had lost the five stock certificates. This triggered off the series of intertwined actions (both in SEC & RTC), all centered on the question of jurisdiction over the dispute, which were to culminate in the filing of the two cases at bar. ABEJOS -> SEC: Mandamus: to compel Norberto Braga to register; TRO: To prevent Bragas from disposing assets BRAGAS -> SEC: Dismissal of above BRAGAS -> RTC: Rescission of sale due to preemptive rights The Bragas assert that the regular civil court has original and exclusive jurisdiction as against the Securities and Exchange Commission, while the Abejos claim the contrary. Norberto Braga, contends that the SEC has no jurisdiction since it does not involve an intracorporate controversy between stockholders, the principal petitioners therein, Telectronics, not being a stockholder of record of Pocket Bell. Issue; WON SEC has jurisdiction Held / ratio;
Yes, RTC prohibited from proceeding w/ civil case; TRO lifted; Mandamus proceed immediately; receivership implemented The dispute at bar, is an intracorporate dispute that has arisen between and among the principal stockholders of the corporation Pocket Bell due to the refusal of the corporate secretary to perform his "ministerial duty" to record the transfers of the corporation's controlling (56%) shares of stock, covered by duly endorsed certificates of stock, in favor of Telectronics. Mandamus in the SEC was properly resorted to under Rule XXI, Section 1 of the SEC's New Rules of Procedure, 4 which provides for the filing of such petitions with the SEC. Section 3 of said Rules further authorizes the SEC to "issue orders expediting the proceedings ... and also [to] grant a preliminary injunction for the preservation of the rights of the parties pending such proceedings, " The complaint of the Bragas for annulment of the sales questions the validity of the transfer and endorsement of the certificates of stock, claiming alleged pre-emptive rights. Such dispute c learly involve's controversies "between and among stockholders, " as to the Abej os' right to sell and dispose of their shares to Telectronics, the validity of the latter's acquisition of Virginia Braga's shares, who between the Bragas and the Abejos' transferee should be recognized as the controlling shareholders of the corporation, with the right to elect the corporate officers and the management and control of its operations. Such a dispute fall within the original and exclusive jurisdiction of the SEC to decide, under Section 5 of P.D. 902-A, above-quoted. "Nowhere does the law [PD 902-A] empower any Court of First Instance [now Regional Trial Court] to interfere with the orders of the Commission," 5 and consequently "any ruling by the trial court on the issue of ownership of the shares of stock is not binding on the Commission 6 for want of jurisdiction. The dispute therefore clearly falls within the general classification of cases within the SEC's original and exclusive jurisdiction to hear and decide,. Insofar as the Bragas and their corporate secretary's refusal on behalf of the corporation Pocket Bell to record the transfer of the 56% majority shares to Telectronics may be deemed a device or scheme amounting to fraud and misrepresentation emplolyed by them to keep themselves in control of the corporation to the detriment of Telectronics and the Abejos, the case falls under paragraph (a). The dispute is likewise an intra-corporate controversy between and among the majority and minority stockholders as to the transfer and disposition of the controlling shares of the corporation, failing under paragraph (b). Considering the announced policy of PD 902-A, the expanded jurisdiction of the respondent Securities and Exchange Commission under said decree extends exclusively to matters arising from contracts involving investments in private corporations, partnerships and associations." The dispute also concerns the fundamental issue ofwhether the Bragas or Telectronics have the right to elect the corporate directors and officers and manage its business and operations, which falls under paragraph (c). In Philex Mining Corp. v. Reyes, 8 the Court spelled out that"'an intra-corporate controversy is one which arises between a stockholder and the corporation. There is no distinction, qualification, nor any exemption whatsoever. The provision is broad and covers all kinds of controversies between stockholders and corporations. The issue of whether or not a corporation is bound to replace a stockholder's lost certificate of stock is a matter purely between a stockholder and the corporation.
The Bragas contend that Telectronics, as buyertransferee of the 56% majority shares is not a registered stockholder, because they, through their son the corporate secretary, appear to have refused to perform "the ministerial duty of recording transfers of shares of stock of the corporation of which he is the secretary," and that the dispute is therefore, not an intracorporate one. This contention begs the question which must properly be resolved by the SEC, but which they would prevent by their own act, through their son, of blocking the due recording of the transfer and cannot be sanctioned. The dispute between the Bragas and Telectronics as to the sale and transfer for P1,674,450.00 of Virginia Braga's 63.000 shares covered by Street certificates duly endorsed in blank by her is within the special competence and jurisdiction of the SEC, dealing as it does with the free transferability of corporate shares, particularly street certificates," as guaranteed by the Corporation Code and its proclaimed policy of encouraging foreign and domestic investments in Philippine private corpora. tions and more active public participation therein for the Promotion of economic development. But as to the sale and transfer of the Abejos' shares, the Bragas cannot oust the SEC of its original and exclusive jurisdiction to hear and decide the case, by blocking through the corporate secretary, their son, the due recording of the transfer and sale of the shares in question and claiming that Telectronics is not a stockholder of the corporation – which is the very issue that the SEC is called upon to resolve. As the SEC maintains, "There is no requirement that a stockholder of a corporation must be a registered one in order that,the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder." 14 This is because the SEC by express mandate has "absolute jurisdiction, supervision and control over all corporations" and is called upon to enforce the provisions of the Corporation Code, among which is the stock purchaser's right to secure the corresponding certificate in his name under the provisions of Section 63 of the Code. Needless to say, any problem encountered in securing the certificates of stock representing the investment made by the buyer must be expeditiously dealt with through administrative mandamus proceedings with the SEC, rather than through the usual tedious regular court procedure. Furthermore, as stated in the SEC order of April 13, 1983, notice given to the corporation of the sale of the shares and presentation of the certificates for transfer is ,equivalent to registration: "Whether the refusal of the (corporation) to effect the same is ivalid or not is still subject to the outcome of the hearing on the merits of the case. In this era of clogged court dockets, the need for specialized administrative boards or commissions with the special knowledge, experience and capability to hear and determine promptly disputes on technical matters or essentially factual matters, subject to judicial review in case of grave abuse of discretion, has become well nigh indispensable. Thus, the Corporation Code (B.P. No. 178) enacted on May 1, 1980 specifically vests the SEC with the Rule-making power in the discharge of its task of implementing the provisions of the Code and particularly charges it with the duty of preventing fraud and abuses on the part of controlling stockholders, directors and officers
ALMA MAGALAD, vs. PREMIERE FINANCING CORP May 22, 1992 Facts; This is an appeal from the decision of the Regional Trial Court ordering appellant Premiere Financing to pay appellee Magalad P50,000.00, the principal obligation, plus interest and damages. Premiere is engaged in soliciting and accepting money market placements or deposits. On September 1983 with expired permit to issue commercial papers and with intention to defraud its creditors, Premiere misled Magalad into making a money market placement of P50,000.00 at 22% interest per annum. Aside from the receipt, Premier likewise issued two PDCs in the total sum of P51,079.00 and assigned to Magalad its receivable from a certain Saman for the same amount. When the said checks were presented for payment, the drawee bank dishonored the checks for lack of sufficient funds. Premiere, for no valid reason, failed and refused to honor such Magalad’s demands. On January 1984, Magalad filed a complaint for damages. Premiere filed a motion for reconsideration alleging that the Securities and Exchange Commission (SEC) has exclusive and original jurisdiction over a corporation under a state of suspension of payments. Issue; WON SEC has jurisdiction Held / ratio; Yes, reversed Magalad's complaint alleges acts amounting to fraud committed by Premiere, the SEC must be held to retain its original and exclusive jurisdiction over the case, despite the fact that the suit involves collection of sums of money paid to said corporation, the recovery of which would ordinarily fall within the jurisdiction of regular courts. The fraud committed is detrimental to the interest of the public and, therefore, encompasses a category of relationship within the SEC jurisdiction. Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: (a) between the corporation, partnership or association and the public; (b) between the corporation, partnership or association and its stockholders, partners, members or officers; (c) between the corporation, partnership or association and the state so far as its franchise, permit or license to operate is concerned; and (d) among the stockholders, partners or associates themselves. The devices or schemes amounting to fraud and misrepresentation detrimental to the interest of the public have been resorted to by Premiere Corporation. It can not but be conceded, therefore, that the SEC may exercise its adjudicative powers pursuant to Sec. 5(a) of Pres. Decree No. 902-A (Supra). The fact that Premiere's authority to engage in financing already expired will not have the effect of divesting the SEC of its original and exclusive jurisdiction. The expanded jurisdiction of the SEC was conceived primarily to protect the
interest of the investing public. That Magalad's money placements were in the nature of investments in Premiere can not be gainsaid. Magalad had reasonably expected to receive returns from moneys she had paid to Premiere. Reliance by Magalad on the cases of DMRC v. Este del Sol, (132 SCRA 293) and Union Glass & Container Corp. v. SEC (126 SCRA 31), is misplaced for nowhere in the complaints therein is found any averment of fraud or misrepresentation. Further bolstering the jurisdiction of the SEC is the fact that said agency had already appointed a Rehabilitation Receiver for Premiere and has directed all proceedings or claims against it be suspended. This, pursuant to Sec. 6(c) of Pres. Decree No. 902-A providing that "upon appointment of a . . . rehabilitation receiver . . . all actions for claims against corporations . . . under receivership pending before any court, tribunal, board or body shall be suspended accordingly." By so doing, SEC has exercised its original and exclusive jurisdiction to hear and decide cases involving: a) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments … (Section 5(d) of Pres. Decree No. 902-A as added by Pres. Decree 1758).
THE COLLECTOR OF INTERNAL REVENUE, vs. THE CLUB FILIPINO, INC. DE CEBU May 31, 1962 Facts; This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector of Internal Revenue, assessing against "Club Filipino, Inc. de Cebu", the sum of P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, allegedly due from it as a keeper of bar and restaurant. "Club Filipino, Inc. de Cebu," (Club, for short), is a civic corporation with an original authorized capital stock of P22,000.00, which was subsequently increased to P200,000.00. Neither in the articles or by-laws is there a provision relative to dividends although it is covenanted that upon its dissolution, the Club's remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu. The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the government), and a bar-restaurant. The bar-restaurant was a necessary incident to the operation of the club and its golf-course. The club is operated mainly with funds derived from membership fees and dues. Whatever profits it had, were used to defray its overhead expenses and to improve its golf-course. In 1951. as a result of a capital surplus, arising from the re-valuation of its real properties, the value or price of which increased, the Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and restaurant, although it secured B-4, B-9(a) and B-7 licenses. In December 1952, the Collector of Internal Revenue assessed against the Club, As percentage tax on its gross receipts during the tax years 1946 to 1951 ~12,000 Issues; WON liable for percentage taxes prescribed in sections 182, 183 and 191 of the Tax Code Held / ratio; No, reversed It has been held that the liability for fixed and percentage taxes, as provided by these sections, does not ipso facto attach by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be engaged in the business as a barkeeper and restaurateur. The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood. The Club was organized to develop and cultivate sports of all class and denomination, for the healthful recreation and entertainment of its stockholders and members; …it is operated mainly with funds derived from membership fees and dues; the Club's bar and restaurant catered only to its members and their guests; …it stands to reason that the Club is not engaged in the business of an operator of bar and restaurant. The Club derived profit from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental to the primary object. That a Club makes some profit, does not make it a profit-making Club. As has been remarked a club should always strive, whenever possible, to have surplus
It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a stock corporation. This is unmeritorious. The facts that the capital stock of the respondent Club is divided into shares, does not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose, as stated in its articles and by-laws. The actual purpose is not controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation. Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at bar, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock corporation.
MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND NEPOMUCENO REDOVAN, vs. THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN, MANUEL A. TORRES, JR., MARIA THERESA V. VELOSO AND CASTRENSE C. VELOSO August 27, 1993 Facts; This is a petition for review on certiorari to annul the decision 1 of the Court of Appeals affirming the decision 2 of the Regional Trial Court of Pasay ordering Dulay to surrender and deliver possession of the subject parcel of land. Dulay Enterprises, Inc, a domestic corporation with the following as members of its Board: Manuel R. Dulay with 19,960 shares and designated as president, treasurer and general manager, Atty. Virgilio E. Dulay with 10 shares and designated as vice-president; Linda E. Dulay with 10 shares; Celia Dulay-Mendoza with 10 shares; and Atty. Plaridel C. Jose with 10 shares and designated as secretary, owned a property known as Dulay Apartment consisting of sixteen (16) apartment units on a six hundred eighty-nine (689) square meters lot, more or less, located at Pasay City. On December 23, 1976, Manuel Dulay by virtue of Board Resolution sold the subject property to spouses Veloso in the amount of P300,000.00. Subsequently, Manuel Dulay and spouses Veloso executed a Memorandum to the Deed of Absolute Sale of December 23, 1976 dated December 9, 1977 giving Manuel Dulay within (2) years or until December 9, 1979 to repurchase the subject property for P200,000.00 which was not annotated. On December 24, 1976, Veloso, without the knowledge of Manuel Dulay, mortgaged the subject property to Manuel A. Torres for a loan of P250,000.00 which was duly annotated. Upon the failure of private respondent Maria Veloso to pay, the subject property was sold on April 5, 1978 to private respondent Torres as the highest bidder in an extrajudicial foreclosure sale. On July 20, 1978, Veloso executed a Deed of Absolute Assignment of the Right to Redeem in favor of Dulay assigning her right to repurchase from Torres as a result of the extra sale held on April 25, 1978. As neither Veloso nor Dulay was able to redeem, Torres filed an Affidavit of Consolidation of Ownership. Torres filed an action against petitioner corporation, Virgilio Dulay and Nepomuceno Redovan, a tenant for the recovery of possession. The trial court rendered a decision in favor of private respondents w/c the CA affirmed. Issue; WON sale binding against the corporation Dulay Inc Held / ratio; Yes, affirmed During the pendency of this petition, Torres died and named Torres-Pabalan Realty & Development Corporation as his heir in his holographic will. Petitioners contend that the court erred when it applied the doctrine of piercing the veil of corporate entity considering that the sale has no binding effect on petitioner corporation as Board Resolution No. 18 was resolved without the approval of all the members of the board and Resolution was not prepared by its secretary.
Section 101 of the Corporation Code of the Philippines provides: Sec. 101. When board meeting is unnecessary or improperly held. Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by all the directors, or 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiese of all the stockholders, or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. If a directors' meeting is held without call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof.
Petitioner corporation is classified as a close corporation and consequently a board resolution authorizing the sale is not necessary to bind the corporation for the action of its president. Corporate action taken at a board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his written objection with the secretary of the corporation after having knowledge of the meeting which, in his case, petitioner Virgilio Dulay failed to do. Although a corporation is an entity which has a personality distinct and separate from its individual stockholders or members, the veil of corporate fiction may be pierced when it is used to defeat public convenience justify wrong, protect fraud or defend crime. The privilege of being treated as an entity distinct and separate from its stockholder or members is therefore confined to its legitimate uses and is subject to certain limitations to prevent the commission of fraud or other illegal or unfair act. When the corporation is used merely as an alter ego or business conduit of a person, the law will regard the corporation as the act of that person. The Supreme Court had repeatedly disregarded the separate personality of the corporation where the corporate entity was used to annul a valid contract executed by one of its members. Petitioners' claim that the sale is null and void as the alleged Board Resolution No. 18 was passed without the knowledge and consent of the other members cannot be sustained. Dulay's protestations of complete innocence is difficult to believe. He is very much privy to the transactions. He is a incorporator and one of the board of directors. In ordinary parlance, the said entity is loosely referred to as a "family corporation". The nomenclature, if imprecise, however, fairly reflects the cohesiveness of a group and the parochial instincts of the individual members of such an aggrupation of which Manuel R. Dulay Enterprises, Inc. is typical: fourfifths of its incorporators being close relatives namely, three (3) children and their father whose name identifies their corporation. Besides, Virgilio Dulay executed an affidavit that he was a signatory witness to the execution of the Deed of Absolute Sale w/c indicates that he was aware of the transaction. Consequently, petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject property to private respondents by Manuel Dulay is valid and binding. As stated by the trial court: . . . the sale …was a corporate act …. This is so because Manuel R. Dulay was not only president and treasurer but also the general manager of the corporation. The corporation was a closed family corporation and the only non-relative in the board of directors was Atty. Plaridel C. Jose who appeared on paper as the secretary. …It cannot be concealed that Manuel R. Dulay as president, treasurer and general manager almost had absolute control over the business and affairs of the corporation.
NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC., vs. PHILIPPINE VETERANS BANK, THE EX-OFFICIO SHERIFF and GODOFREDO QUILING, in his capacity as Deputy Sheriff of Calamba December 10, 1990 Facts; This case involves the constitutionality of Pres. Decree No. 1717, which ordered the rehabilitation of the Agrix Group of Companies to be administered mainly by the National Development Company. The law outlined the procedure for filing claims against the Agrix companies and created a Claims Committee. Especially relevant to this case is Sec. 4(1) thereof providing that "all mortgages and other liens presently attaching to any of the assets of the dissolved corporations are hereby extinguished." The Agrix Marketing, Inc. (AGRIX) had executed in favor of Philippine Veterans Bank a real estate mortgage dated July 7, 1978, over three (3) parcels of land situated in Laguna. During the existence of the mortgage, AGRIX went bankrupt. It was for the expressed purpose of salvaging this and the other Agrix companies that the aforementioned decree was issued by Marcos. The private respondent filed a claim with the AGRIX Claims Committee. The New Agrix, Inc. and the National Development Company, invoking Sec. 4 (1) of the decree, filed a petition with the Regional Trial Court for the cancellation of the mortgage lien. Private respondent took steps to extrajudicially foreclose the mortgage. The trial court annulled not only the challenged provision, viz., Sec. 4 (1), but the entire Pres. Decree No. 1717 on the grounds that: (1) the presidential exercise of legislative power was a violation of the principle of separation of powers; (2) the law impaired the obligation of contracts; and (3) the decree violated the equal protection clause. The petitioners contend that the private respondent is now estopped. In support of this contention, it cites the recent case of Mendoza v. Agrix Marketing, Inc.. The Court, after noting that the petitioners had already filed their claims with the AGRIX Claims Committee had simply dismissed the petition on the ground of estoppel. Issue; WON PD 1717 consti Held / ratio; Unconsti, affirmed. The Court does not agree that the principle of estoppel is applicable. Private respondent did file a claim with the AGRIX Claims Committee. It must be noted, however, that this was done in 1980, when President Marcos was the absolute ruler of this country. Any judicial challenge to them would have been futile. This case must be distinguished from Mendoza, where the petitioners, received in settlement thereof shares of stock valued at P40,000.00 without protest. The private respondent has not been paid a single centavo on its claim. The Court is especially disturbed by Section 4(1) of the decree. It also notes, with equal concern, the restriction in Subsection (ii) thereof that all "unsecured obligations shall not bear interest" and in Subsection (iii) that "all accrued
interests, penalties or charges as of date hereof pertaining to the obligations, whether secured or unsecured, shall not be recognized." In defending the decree, the petitioners argue that property rights, are subject to regulation under the police power. The police power is not a panacea for all constitutional maladies. Neither does its mere invocation conjure an instant and automatic justification for every act of the government depriving a person of his life, liberty or property. A legislative act based on the police power requires the concurrence of a lawful subject and a lawful method. In more familiar words, a) the interests of the public generally, as distinguished from those of a particular class, should justify the interference of the state; and b) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. 2 The Court finds first of all that the interests of the public are not sufficiently involved to warrant the interference of the government with the private contracts of AGRIX. The decree speaks vaguely of the "public, particularly the small investors," who would be prejudiced if the corporation were not to be assisted. However, the record does not state how many there are of such investors, and who they are, and why they are being preferred to the private respondent and other creditors of AGRIX with vested property rights. The indispensable link to the welfare of the greater number has not been established. On the contrary, it would appear that the decree was issued only to favor a special group of investors who, for reasons not given, have been preferred to the legitimate creditors of AGRIX. Assuming there is a valid public interest involved, the Court still finds that the means employed to rehabilitate AGRIX fall far short of the requirement that they shall not be unduly oppressive. The right to property owing to the creditors of AGRIX is arbitrarily destroyed. A mortgage lien is a property right derived from contract and so comes under the protection of the Bill of Rights. So do interests on loans, as well as penalties and charges, which are also vested rights once they accrue. There is discrimination as well. In extinguishing the mortgage and other liens, the decree lumps the secured creditors with the unsecured creditors and places them on the same level in the prosecution of their respective claims. In this respect, all of them are considered unsecured creditors. The only concession given to the secured creditors is that their loans are allowed to earn interest from the date of the decree, but that still does not justify the cancellation of the interests earned before that date. Under the equal protection clause, all persons or things similarly situated must be treated alike, both in the privileges conferred and the obligations imposed. Conversely, all persons or things differently situated should be treated differently. On top of all this, New Agrix, Inc. was created by special decree notwithstanding the provision of Article XIV, Section 4 of the 1973 Constitution, then in force, that: SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the formation, organization, or regulation of private corporations, unless such corporations are owned or controlled by the Government or any subdivision or instrumentality thereof. 4
The new corporation is neither owned nor controlled by the government. The National Development Corporation was merely required to extend a loan of not more than P10,000,000.00 to New Agrix, Inc. New Agrix, Inc. is entirely private and so should have been organized under the Corporation Law in accordance with the above-cited constitutional provision. The Court also feels that the decree impairs the obligation of the contract between AGRIX and the private respondent without justification. While it is true that the police power is superior to the impairment clause, the principle will apply only where the contract is so related to the public welfare that it will be considered congenitally susceptible to change by the legislature in the interest of the greater number. 5 Most present-day contracts are of that nature. But as already observed, the contracts of loan and mortgage executed by AGRIX are purely private transactions and have not been shown to be affected with public interest. Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of the police power, not being in conformity with the traditional requirements of a lawful subject and a lawful method. The extinction of the mortgage and other liens and of the interest and other charges pertaining to the legitimate creditors of AGRIX constitutes taking without due process of law, and this is compounded by the reduction of the secured creditors to the category of unsecured creditors in violation of the equal protection clause. Moreover, the new corporation, being neither owned nor controlled by the Government, should have been created only by general and not special law. And insofar as the decree also interferes with purely private agreements without any demonstrated connection with the public interest, there is likewise an impairment of the obligation of the contract.
PIONEER INSURANCE & SURETY CORPORATION, vs. THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, JACOB S. LIM, vs. COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO MAGLANA, July 28, 1989 Facts; The subject matter is the decision of the Court of Appeals which modified the decision of the Court of First Instance. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was dismissed but in all other respects the trial court's decision was affirmed. The dispositive portion of the trial court's decision reads as follows: WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay plaintiff the amount of P311,056.02,… WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-operator of Southern Air Lines (SAL) a single proprietorship. On May 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into a sales contract for the sale and of two (2) DC-3A Type aircrafts and one (1) set of necessary spare parts for US $109,000.00 in installments. On May 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) acted as surety in favor of JDA, in behalf of Lim, for the balance price. Bormaheco Inc), Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana contributed some funds used in the purchase. The funds were supposed to be their contributions to a new corporation proposed by Lim. They executed two (2) separate indemnity agreements in favor of Pioneer. On June 1965, Lim executed in favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered. Lim defaulted prompting JDA to request payments from the surety. Pioneer paid a total sum of P298,626.12. Pioneer then filed a petition for the extrajudicial foreclosure of the chattel mortgage. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners . After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against all other defendants. The appellate court modified the trial court's decision in that the plaintiffs complaint against all the defendants was dismissed. Issues;
84197: WON Pioneer has COA against defs / WON Pioneer has a claim based on the indemnity agreement Held / ratio; Both no. It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer. Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as against the respondents for the reason that the petitioner was not the real party in interest in the complaint and, therefore, has no cause of action against the respondents. SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer as surety having made of the payments to JDA, the alternative remedies open to Pioneer were as provided in Article 1484 of the New Civil Code, known as the Recto Law. Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial foreclosure and the instant suit. Such being the case, Pioneer shall have no further action against the purchaser to recover any unpaid balance and any agreement to the contrary is void. The operation of the foregoing provision cannot be escaped from through the contention that Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of JDA as vendor, having subrogated it in such rights. Nor may the application of the provision be validly opposed on the ground that these defendants and defendant Maglana are not the vendee but indemnitors. Issue; 84157: What legal rules govern the relationship among co-investors whose agreement was to do business through the corporate vehicle but who failed to incorporate the entity in which they had chosen to invest? How are the losses to be treated in situations where their contributions to the intended 'corporation' were invested not through the corporate form? Held / ratio; Affirmed These questions are premised on the petitioner's theory that as a result of the failure to incorporate, a de facto partnership among them was created, and that as a consequence of such relationship all must share in the losses and/or gains in proportion to their contribution. While it has been held that as between themselves the rights of the stockholders in a defectively incorporated association should be governed by the supposed charter and the laws of the state relating thereto and not by the rules governing partners, it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on business under the corporate name occupy the position of partners inter se.. However, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no partnership shall exist, and it should be implied only when necessary to do justice between the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under the name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and contribution. A partnership relation between certain stockholders and other stockholders, who
were also directors, will not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally contracted by the latter. Petitioner denied having received any amount from respondents. The trial court found that the petitioner received the amount of P151,000.00. It is clear that the petitioner never had the intention to form a corporation with the respondents. This gives credence to the cross-claims of the respondents to the effect that they were induced and lured by the petitioner to make contributions to a proposed corporation which was never formed because the petitioner reneged on their agreement. Applying the principles of law earlier cited, no de facto partnership was created among the parties which would entitle the petitioner to a reimbursement of the supposed losses. The record shows that the petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare parts.
PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., vs. COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and STANDARD PHILIPS CORPORATION, February 21, 1992 Facts; Petitioners challenge the Decision of the Court of Appeals, upholding the Securities and Exchange Commissiondismissing petitioners' prayer for the removal of the word "PHILIPS" from private respondent's corporate name. Philips Export, a foreign corporation organized in Netherlands, although not engaged in business here, is the registered owner of the trademarks PHILIPS and PHILIPS SHIELD EMBLEM. Philips Electrical and Philips Industrial are authorized users of the trademarks and were incorporated in 1956. All petitioner corporations belong to the PHILIPS Group of Companies. Standard Philips was issued a Certificate of Registration on 1982. On September 1984, Petitioners filed a complaint with the SEC asking for the cancellation of the word "PHILIPS" from Private Respondent's corporate name in view of the prior registration with the Bureau of Patents of its trademark and the previous registration of Philips Electrical and Philips Industrial with the SEC. Private Respondent countered that Petitioner PEBV has no legal capacity to sue; that its use of its corporate name is not at all similar to Petitioners' trademark PHILIPS when considered in its entirety; and that its products consisting of chain rollers, belts, bearings and cutting saw are grossly different from Petitioners' electrical products. The Hearing Officer dismissed the Petition for lack of merit. It declared that Section 18 of the Corporation Code is applicable only when the corporate names in question are identical. Here, there is no confusing similarity as those of the Petitioners contain at least two words different from that of the Respondent. The SEC en banc affirmed the dismissal. Upholding the SEC, the Appellate Court concluded that "private respondents' products consisting of chain rollers, belts, bearings and cutting saw are unrelated and non-competing with petitioners' products i.e. electrical lamps such that consumers would not in any probability mistake one as the source or origin of the product of the other." Issue; WON “Philips” should be removed Held / ratio; Yes, set aside. Enjoined from using Philips. A corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world. It cannot be impaired or defeated by subsequent appropriation by another corporation in the same field. The general rule as to corporations is that each corporation must have a name by which it is to sue and be sued and do all legal acts. The name of a corporation designates the corporation in the same manner as the name of an individual designates the person.
A corporation acquires its name by choice and need not select a name identical with or similar to one already appropriated by a senior corporation while an individual's name is thrust upon him. Our own Corporation Code, in its Section 18, expressly provides that: No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing law…
To come within its scope, two requisites must be proven, namely: (1) that the complainant corporation acquired a prior right over the use of such corporate name; and (2) the proposed name is either: (a) identical; or (b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law. The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption. Petitioners were incorporated 1956 while Respondent Standard Philips was 1982, twenty-six (26) years later. Petitioner PEBV has also used the trademark "PHILIPS" since 1922. The second also exists. In determining the existence of confusing similarity, the test is whether the similarity is such as to mislead a person, using ordinary care and discrimination. While the corporate names are not identical, a reading of Petitioner's corporate names, leads one to conclude that "PHILIPS" is, indeed, the dominant word in that all the companies affiliated or associated with the principal corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group of Companies. Respondents maintain that Petitioners did not present proof of actual confusion. It is settled, however, that proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur. Even the Director of Patents denied Private Respondent's application for registration of the trademarks "Standard Philips & Device" for chain, rollers, belts, bearings and cutting saw. That office held that PEBV, "had shipped to its subsidiaries in the Philippines equipment, machines and their parts which fall under international class where "chains, rollers, belts, bearings and cutting saw," the goods in connection with which Respondent is seeking to register 'STANDARD PHILIPS' . . . also belong". Philips Electrical also includes, among its primary purposes, the following: To develop manufacture and deal in electrical products, including electronic, mechanical and other similar products . . . (p. 30, Record of SEC Case No. 2743) Given aforesaid underlined primary purpose, nothing could prevent it from dealing in the same line of business of electrical devices, products or supplies which fall under its primary purposes. Besides, there is showing that Private Respondent not only manufactured and sold ballasts for fluorescent lamps with their corporate name printed thereon but also advertised the same as, among others, Standard Philips.
P]rivate respondent's choice of "PHILIPS" as part of its corporate name tends to show said respondent's intention to ride on the popularity and established goodwill of said petitioner's business throughout the world". The SEC maintains that the corporate names of Petitioners contain at least two words different which words will readily identify Private Respondent from Petitioners and vice-versa. True, under the Guidelines in the Approval of Corporate and Partnership Names formulated by the SEC, the proposed name "should not be similar to one already used by another corporation or partnership. If the proposed name contains a word already used as part of the firm name or style of a registered company; the proposed name must contain two other words different from the company already registered" (Emphasis ours). What is lost sight of, however, is that PHILIPS is a trademark or trade name which was registered as far back as 1922. Petitioners, therefore, have the exclusive right to its use which must be free from any infringement by similarity. A corporation has an exclusive right to the use of its name, which may be protected by injunction upon a principle similar to that upon which persons are protected in the use of trademarks and tradenames. As a general rule, parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, if misleading and likely to injure it in the exercise in its corporate functions, regardless of intent, may be prevented by the corporation having the prior right, by a suit for injunction against the new corporation to prevent the use of the name
LYCEUM OF THE PHILIPPINES, INC., , vs. COURT OF APPEALS, LYCEUM OF APARRI, LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., … March 5, 1993 Facts; Petitioner is an educational institution registered with the SEC on September 1950. On February 1984, petitioner instituted proceedings before the SEC to compel the private respondents, which are also educational institutions, to delete the word "Lyceum" from their corporate names. These are the following, the dates of their original SEC registration being set out below opposite their respective names: Western Pangasinan Lyceum — 27 October 1950 Lyceum of Cabagan — 31 October 1962 Lyceum of Lallo, Inc. — 26 March 1972 Lyceum of Aparri — 28 March 1972 Lyceum of Tuao, Inc. — 28 March 1972 Lyceum of Camalaniugan — 28 March 1972 Petitioner had sometime before commenced in the SEC a proceeding against the Lyceum of Baguio, Inc. The SEC held that the corporate names were substantially identical. The SEC ordered the latter to change its name. The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court w/c was denied in 1977. Armed with this Resolution, petitioner wrote all the educational institutions it could find using the word "Lyceum" as part of their corporate name, and advised them to discontinue such use. Soon, petitioner filed a complaint before the SEC. The SEC sustained petitioner's claim. The SEC En Banc reversed. It did not consider the word "Lyceum" to have become so identified with petitioner as to render use thereof by other institutions as productive of confusion about the identity of the schools concerned in the mind of the general public. The SEC En Banc held that the attaching of geographical names to the word "Lyceum" served sufficiently to distinguish the schools. The Court of Appeals affirmed the SEC En Banc. Issue; WON “Lyceum” should be removed Held /ratio; No (not identical / confusing), affirmed The Articles of Incorporation must set out the name of the corporation. Section 18 of the Corporation Code establishes a restrictive rule insofar as corporate names are concerned. The policy underlying the prohibition in Section 18 is the avoidance of fraud upon the public which would have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations.
We do not consider that the corporate names of private respondent institutions are "identical with, or deceptively or confusingly similar". Confusion and deception are effectively precluded by the appending of geographic names. The word "Lyceum" is the Latin word for the Greek lykeion which in turn referred to a locality on the river Ilissius in ancient Athens. In time, the word "Lyceum" became associated with schools. Lyceum" is in fact as generic in character as the word "university." In the name of the petitioner, "Lyceum" appears to be a substitute for "university;" It is clear that a considerable number of educational institutions have adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum" or "Liceo" denotes a school or institution of learning, it is not unnatural to use this word to designate an entity which is organized and operating as an educational institution. It is claimed, by petitioner that the word "Lyceum" has acquired a secondary meaning in relation to petitioner. The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, been extended to corporate names sine the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or tradename. The doctrine of secondary meaning was elaborated in the following terms: " . . . a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product." 12 The Court of Appeals recognized this issue and answered it in the negative: ...appellant failed to satisfy the aforementioned requisites. No evidence was ever presented …which sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant…. Appellan) exclusive use of the word (Lyceum) was never established …. Furthermore, educational institutions of the Roman Catholic Church had been using the same or similar word like 'Liceo de Manila,' 'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de Albay' long before appellant started using the word 'Lyceum'. We agree. The number alone of the private respondents suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the exclusivity. It may be noted also that at least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the term "Lyceum" seventeen (17) years before the petitioner registered its own corporate name . It follows that if any institution had acquired an exclusive right to the word "Lyceum," that institution would have been the Western Pangasinan Lyceum, Inc. rather than the petitioner institution. Petitioner argues that because the Western Pangasinan Lyceum, Inc. failed to reconstruct its records before the SEC, Western Pangasinan Lyceum should be deemed to have lost all rights it may have acquired. Whether or not Western Pangasinan Lyceum, Inc. must be deemed to have lost its rights under its original 1933 registration, appears to us to be quite secondary in importance; we refer to this earlier registration simply to underscore the fact that petitioner's use of the word "Lyceum" was neither the first use of that term in the Philippines nor an exclusive use thereof.
P.C. JAVIER & SONS, INC., SPS. PABLO C. JAVIER, SR. and ROSALINA F. JAVIER,, vs. HON. COURT OF APPEALS, PAIC SAVINGS & MORTGAGE BANK, INC., SHERIFFS GRACE BELVIS, SOFRONIO VILLARIN, PIO MARTINEZ and NICANOR BLANCO, June 29, 2005 Facts; This is an appeal by certiorari to set aside the Court of Appeals which affirmed in toto the the Regional Trial Court dismissing the complaint for Annulment of Mortgage and Foreclosure with Preliminary Injunction, Prohibition and Damages filed by petitioners. In 1981, P.C. Javier Inc applied with First Summa Savings and Mortgage Bank, later on renamed as PAIC Savings, for a loan for P1.5 Million. The central bank released the loan to Defendant Bank in two (2) tranches of P750,000 each. The first tranche was released to the Plaintiff Corporation on May 1981 and the second tranche on November 1981. From the second tranche release, the amount of P250,000.00 was deducted and deposited in the name of Plaintiff Corporation under a time deposit. Plaintiffs claim that the loan releases were delayed; that Plaintiffs were never allowed to withdraw the proceeds of the time deposit because Defendant Bank intended this time deposit as automatic payments on the accrued principal and interest due. Defendant Bank, claims that only the final proceeds of the loan was delayed but this was because of the shortfall in the collateral cover of Plaintiff’s loan; this second tranche of the loan was released after a commitment by Plaintiff Corporation to cover the collateral deficiency through the opening of a time deposit using a portion of the loan in the amount of P250,000.00; in compliance with this, Plaintiff Javier opened a time deposit and on February 1983, executed a chattel mortgage over some machineries in favor of Defendant Bank; thereafter, Plaintiff Corporation defaulted in the payment of its loan. When Plaintiffs failed to pay, Defendant Bank initiated extrajudicial foreclosure of the real estate mortgage. The instant complaint was filed to forestall the extrajudicial foreclosure sale of a piece of land. The RTC declared that First Summa Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc. are one and the same entity and that petitioner corporation is liable to respondent bank for the unpaid balance of its Industrial Guarantee Loan Fund (IGLF) loans. Issue; WON petitioner liable to def Held / ratio; Yes, affirmed in toto Petitioners argue that they are legally justified to withhold their amortized payments until such time they would have been properly notified of the change in the corporate name.
Their defense that they should first be formally notified presupposes that there exists a requirement ordering a bank that changes its corporate name to formally notify all its debtors. There is no such requirement. Moreover evidence abound that they had notice or knowledge thereof. First, in letter signed by Accountant of petitioner corporation, addressed to PAIC Savings. Part of said letter reads: “In connection with your inquiry as to the utilization of funds we obtained from the former First Summa Savings and Mortgage Bank, . . .” Second, Board Resolution of authorizing Javier to execute a Chattel Mortgage. Third, Secretary’s Certificate certifying that a board resolution was passed authorizing Javier, Sr. to execute a chattel mortgage to cover the loan with PAIC Savings. Fourth, undated letter addressed to PAIC Savings authorizing Javier to secure from PAIC Savings certain documents. Knowing fully well of such change, petitioner corporation has no valid reason not to pay. A change in the corporate name does not make a new corporation, whether effected by a special act or under a general law. It has no effect on the identity of the corporation, or on its property, rights, or liabilities. Respondent court did not err when it sustained the collection of the entire proceeds amounting to P1,500,000.00 despite the withholding of P250,000.00. Petitioners maintain that to collect the P250,000.00 from them would be a clear case of unjust enrichment because they have not availed or used said amount for the same was unlawfully withheld from them. There is no unjust enrichment to speak of. The amount of P225,905.79 was applied as payment for petitioner corporation’s loan which was taken from the P250,000.00, together with its accrued interest, that was placed in time deposit with First Summa Savings. The use of said amount as payment was approved by petitioner Javier. Petitioners argue that there being no malice or bad faith on their part when they filed the instant case, no damages should have been awarded to respondent bank. We cannot sustain such argument. The presence of malice or bad faith is very evident. Petitioner corporation was well aware that First Summa Savings changed its corporate name. Despite this knowledge, it pretended otherwise. If it were in good faith, it should have made a valid consignation in court. It could have easily taken steps and inquired from the SEC, CB of the Philippines or from the bank itself. It never took any initiative to clear the matter.
THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER MACAORAO BALINDONG, vs. PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG ANDOY, MACALABA INDAR LAO March 28, 1969 Facts; The petitioner Balindong is the mayor of Malabang, Lanao del Sur, while respondent Bonito is the mayor, and the rest councilors, of Balabagan of the same province. Balabagan was formerly a part of the municipality of Malabang, having been created on March 1960, by EO386 of then President Carlos Garcia. The petitioners brought this to nullify EO386 relying on the ruling in Pelaez v. Auditor General and Municipality of San Joaquin v. Siva. In Pelaez this Court ruled: (1) that section 23 of Republic Act 2370 [Barrio Charter Act], by vesting the power to create barrios in the provincial board, is a " denial of the presidential authority to create a new barri," and (2) that section 68 of the Administrative Code, insofar as it gives the President the power to create municipalities, is unconstitutional (a) because it constitutes an undue delegation of legislative power and (b) because it offends against section 10 (1) of article VII of the Constitution, which limits the President's power over local governments to mere supervision. The respondents argue that the rule announced in Pelaez can have no application in this case because unlike the municipalities involved in Pelaez, the municipality of Balabagan is a de facto corporation, having been organized under color of a statute before this was declared void, and the municipality having discharged its corporate functions for the past five years. As a de facto corporation, its existence cannot be collaterally attacked, although it may be inquired into directly in an action for quo warranto at the instance of the State and not of an individual like Balindong. Issue; WON Balabagan is de facto Held / ratio; No, EO368 annulled Generally, an inquiry into the legal existence of a municipality is reserved to the State in a proceeding for quo warranto or other direct proceeding. But the rule disallowing collateral attacks applies only where the municipal corporation is at least a de facto corporation. Where it is neither de jure nor de facto, but a nullity, its existence may be questioned collaterally in any action by any one whose rights are affected unless they are estopped. Whether a statute can lend color of validity to an attempted organization of a municipality despite the fact that such statute is subsequently declared unconstitutional An early article in the Yale Law Journal offers the following analysis: … As a result of this analysis of the cases the following principles may be deduced which seem to reconcile the apparently conflicting decisions: I. The color of authority requisite to the organization of a de facto municipal corporation may be: 1. A valid law enacted by the legislature.
2. An unconstitutional law, valid on its face, which has either (a) been upheld for a time by the courts or (b) not yet been declared void; provided that a warrant for its creation can be found in some other valid law or in the recognition of its potential existence by the general laws or constitution of the state. II. There can be no de facto municipal corporation unless either directly or potentially, such a de jurecorporation is authorized by some legislative fiat. III. There can be no color of authority in an unconstitutional statute alone, the invalidity of which is apparent on its face. IV. There can be no de facto corporation created to take the place of an existing de jure corporation, as such organization would clearly be a usurper In the cases where a de facto municipal corporation was recognized despite the fact that the statute creating it was later invalidated, the decisions could fairly be made to rest on the consideration that there was some other valid law giving corporate vitality to the organization. Hence, in the case at bar, the mere fact that Balabagan was organized at a time when the statute had not been invalidated cannot conceivably make it a de facto corporation, as, independently of the Administrative Code provision in question, there is no other valid statute to give color of authority to its creation. An unconstitutional act is not a law; it confers no rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal contemplation, as inoperative as though it had never been passed." Executive Order 386 "created no office." This is not to say, that the acts done by the municipality of Balabagan in the exercise of its corporate powers are a nullity." For the existence of Executive, Order 386 is "an operative fact which cannot justly be ignored." In Chicot County Drainage District v. Baxter State Bank: The actual existence of a statute, prior to such a determination, is an operative fact and may have consequences which cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various aspects — with respect to particular relations, individual and corporate, and particular conduct, private and official. Questions of rights claimed to have become vested, of status of prior determinations deemed to have finality and acted upon accordingly, of public policy in the light of the nature both of the statute and of its previous application, demand examination. These questions are among the most difficult of those which have engaged the attention of courts, state and federal, and it is manifest from numerous decisions that an all-inclusive statement of a principle of absolute retroactive invalidity cannot be justified. There is then no basis for the respondents' apprehension that the invalidation of the executive order creating Balabagan would have the effect of unsettling many an act done in reliance upon the validity of the creation of that municipality. EO386 is declared void, and the respondents are hereby permanently restrained from performing the duties and functions of their respective offices.
C. ARNOLD HALL and BRADLEY P. HALL, vs. EDMUNDO S. PICCIO, Judge of the Court of First Instance, FRED BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, as receiver of the Far Eastern Lumber June 29, 1950 Facts; This is petition to enjoin the respondent judge from acting upon a civil case. On May 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed in Leyte, the article of incorporation of the Far Eastern Lumber organized to engage in a general lumber business. Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had been subscribed and fully paid with certain properties. After the execution of said articles of incorporation, the corporation proceeded to do business with the adoption of bylaws and the election of its officers. On December 1947, the articles were filed in the SEC. Pending action on the articles, respondents filed the civil case alleging that the Far Eastern Lumber was an unregistered partnership; that they wished to have it dissolved because of dissension among the members, mismanagement, fraud and heavy financial losses. After hearing, Hon. Piccio ordered the dissolution. Whereupon, the present special civil action was instituted. They allege that the court had no jurisdiction in civil case because it being a de facto corporation, dissolution thereof may only be ordered in a quo warranto proceeding. Issue; WON CFI has juris / WON Far East is a de facto Held / ratio; Section 19 reads as follows: . . . The due incorporation of any corporations claiming in good faith to be a corporation under this Act and its right to exercise corporate powers shall not be inquired into collaterally in any private suit to which the corporation may be a party, but such inquiry may be had at the suit of the Insular Government on information of the Attorney-General.
There are two reasons why this section does not govern. Not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its stockholders — may not probably claim "in good faith" to be a corporation. Under our statue (Corporation Law, sec. 11) it is the issuance of a certificate of incorporation which calls a corporation into being. The immunity if collateral attack is granted to corporations "claiming in good faith to be a corporation under this act." Such a claim is compatible with the existence of errors and irregularities; but not with a total or substantial disregard of the law. Unless there has been an evident attempt to comply with the law the claim to be a corporation "under this act" could not be made "in good faith." Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the state.
There might be room for argument on the right of minority stockholders to sue for dissolution but that question does not affect the court's jurisdiction, and is a matter for decision by the judge, subject to review on appeal. Which brings us to one principal reason why this petition may not prosper, namely: the petitioners have their remedy by appealing the order of dissolution at the proper time.
ASIA BANKING CORPORATION, vs. STANDARD PRODUCTS, CO., INC September 11, 1924 Facts; This action is to recover the sum of P24,736.47, the balance due on the a promissory note: …we promise to pay to the Asia Banking Corporation, or order, the sum of thirty-seven thousand seven hundred fifty-seven and 22/100 pesos … THE STANDARD PRODUCTS CO., INC. By (Sgd.) GEORGE H. SEAVER By President The court below favored plaintiff. At the trial, plaintiff failed to prove the corporate existence of the parties and the appellant insists that under these circumstances the court erred in finding that the parties were corporations with juridical personality. Issue; WON parties may sue / be sued Held / ratio; Yes, affirmed The general rule is that in the absence of fraud, a person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate existence in any action leading out of or involving such contract or dealing, unless its existence is attacked for cause which have arisen since making the contract or other dealing relied on as an estoppel and this applies to foreign as well as to domestic corporations. The defendant having recognized the corporate existence of the plaintiff by making a promissory note in its favor and making partial payments on the same is therefore estopped to deny said plaintiff's corporate existence. It is also estopped from denying its own corporate existence. It is unnecessary for the plaintiff to present evidence of the corporate existence of either.
CRANSON v. I.B.M. CORP. April 30, 1964 Facts; On the theory that the Real Estate Service Bureau was neither a de jure nor a de facto corporation and that Albion C. Cranson, Jr., was a partner in the business conducted by the Bureau and as such was personally liable for its debts, the International Business Machines Corporation brought this action against Cranson for the balance due on electric typewriters purchased by the Bureau. Cranson asserted that the Bureau was a de facto corporation and that he was not personally liable for its debts. In April 1961, Cranson was asked to invest in a new business corporation. He met with other interested individuals and agreed to purchase stock and become an officer and director. Thereafter, he paid for and received a stock certificate evidencing ownership of shares. The business of the new venture was conducted as if it were a corporation, through corporate bank accounts, with auditors maintaining corporate books and under a lease for the office. Cranson was elected president. At no time did he assume any personal obligation or pledge his individual credit to I.B.M. Due to an oversight on the part of the attorney, of which Cranson was not aware, the certificate of incorporation, which had been signed prior to May 1961, was not filed until November 1961. Between May and November 8, the Bureau purchased eight typewriters from I.B.M., on account of which partial payments were made, leaving a balance of $4,333.40. Issue; WON Cranson may be held liable Held / ratio; No, doctrine of estoppel applies Two doctrines have been used by the courts to clothe an officer of a defectively incorporated association with the corporate attribute of limited liability. The first, often referred to as the doctrine of de facto corporations, has been applied in those cases where there are elements showing: (1) the existence of law authorizing incorporation: (2) an effort in good faith to incorporate under the existing law; and (3) actual user or exercise of corporate powers The second, the doctrine of estoppel to deny the corporate existence, is generally employed where the person seeking to hold the officer personally liable has contracted or otherwise dealt with the association in such a manner as to recognize and in effect admit its existence as a corporate body. It is not at all clear what Maryland has done with respect to the two doctrines. There have been no recent cases in this State on the subject and some of the seemingly irreconcilable earlier cases offer little to clarify the problem. When summarized, the law in Maryland pertaining to the de facto and estoppel doctrines reveals that the cases seem to fall into one or the other of two categories. In one line of cases, the Court, refused to recognize both doctrines where there had been a failure to comply with a condition precedent to corporate existence, but, whenever such
noncompliance concerned a condition subsequent to incorporation, the Court often applied the estoppel doctrine. In the other line of cases, the Court, emphasized the course of conduct between the parties and applied the estoppel doctrine when there had been substantial dealings between them on a corporate basis. There is a wide difference between creating a corporation by means of the de facto doctrine and estopping a party. Where there is a concurrence of the three elements necessary for the application of the de facto corporation doctrine, there exists an entity which is a corporation de jure against all persons but the state. On the other hand, the estoppel theory is applied only to the facts of each particular case and may be invoked even where there is no corporation de facto. I.B.M. contends that the failure of the Bureau to file its certificate of incorporation barred all corporate existence. But, we think that I.B.M. having dealt with the Bureau as if it were a corporation and relied on its credit rather than that of Cranson, is estopped to assert that the Bureau was not incorporated. "The doctrine in relation to estoppel is based upon the ground that it would generally be inequitable to permit the corporate existence of an association to be denied by persons who have represented it to be a corporation, or held it out as a corporation, or by any persons who have recognized it as a corporation by dealing with it as such; and by the overwhelming weight of authority, therefore, a person may be estopped to deny the legal incorporation of an association which is not even a corporation de facto.
MANUELA T. VDA. DE SALVATIERRA, vs. HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance, and SEGUNDINO REFUERZO May 23, 1958 Facts; This is a petition to nullify the order of the Court of First Instance relieving Refuerzo of liability for the contract entered into between the former and the Philippine Fibers Producers Co., Inc., of which Refuerzo is the president. Salvatierra owns a parcel of land located in Leyte. On March 1954, she entered into a 10 year lease with the Philippine Fibers Producers Co., Inc., represented by Refuerzo, the President". The land would be planted to kenaf, ramie or other crops; that the lessor would be entitled to 30 per cent of the net income; and that after every harvest, the lessee was to declare at the earliest possible time the income and to deliver the corresponding share due the lessor. The obligations imposed were not complied hence Salvatierra filed with the CFI a complaint against the Philippine Fibers Producers Co., Inc., and Refuerzo, for accounting, rescission and damages. The lower Court rendered judgment granting plaintiff's prayer. No appeal perfected within the reglementary period, the Court, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte caused the attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No property of the Philippine Fibers Producers Co., Inc., was found available for attachment. On January 1956, Refuerzo filed a motion claiming that the decision was null with respect to him, there being no allegation in the complaint pointing to his personal liability and thus prayed that an order be issued limiting such liability to defendant corporation. The Court granted the same and ordered the Provincial Sheriff to release all properties belonging to the movant. Issue; WON Refuerzo liable Held / ratio; Yes, reversed The order sought to be nullified was issued pursuant to Rule 38 of the Rules of Court. Section 3 of said Rule in providing for the period within which such a motion may be filed, prescribes that: SEC. 3.WHEN PETITION FILED; CONTENTS AND VERIFICATION. — A petition …must be verified, filed within sixty days after the petitioner learns of the judgment, order, or other proceeding to be set aside, and not more than six months after such judgment or order was entered, or such proceeding was taken; … The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the judgment, and not more than 6 months after the judgment or order was rendered, both of which must be satisfied. As the decision in the case at bar was date of June 8, 1955, whereas the motion was dated January 31, 1956, or after the lapse of 7 months and 23 days, the filing of the motion was beyond the prescriptive period. The remedy allowed by Rule 38 to a party adversely affected by a decision is certainly an alert of grace or benevolence intended to afford said litigant a penultimate opportunity to protect his interest.
Considering the nature of such relief and the purpose behind it, the periods fixed by said rule are non-extendible and never interrupted; nor could it be subjected to any condition or contingency because it is of itself devised to meet a condition or contingency. Refuerzo interposed the defense that the complaint contained no allegation which would hold him liable personally. Plaintiff refute this averment by contending that her failure to specify defendant's personal liability was due to the fact that all the time she was under the impression that the Philippine Fibers Producers Co., Inc., was a duly registered corporation but a subsequent inquiry from the SEC yielded otherwise. While as a general rule a person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such transaction or dealing, yet this doctrine may not be held to be applicable where fraud takes a part in the said transaction. In the instant case, on plaintiff's charge that she was unaware of the fact that the Philippine Fibers Producers Co., Inc., had no juridical personality, Refuerzo gave no confirmation or denial and the circumstances surrounding the execution of the contract lead to the inescapable conclusion that Salvatierra was really made to believe that such corporation was duly organized. There can be no question that a corporation with registered has a juridical personality separate and distinct from its component members or stockholders and officers such that a corporation cannot be held liable for the personal indebtedness of a stockholder even if he should be its president and conversely, a stockholder or member cannot be held personally liable for any financial obligation be, the corporation in excess of his unpaid subscription. But this rule is understood to refer merely to registered corporations and cannot be made applicable to the liability of members of an unincorporated association. The reason behind this doctrine is obvious-since an organization which before the law is non-existent has no personality and would be incompetent to act and appropriate for itself the powers and attribute of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. A person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the rights and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and comes personally liable for contracts entered into or for other acts performed as such, agent. Considering that Refuerzo, as president of the unregistered corporation was the moving spirit behind the consummation of the lease agreement by acting as its representative, his liability cannot be limited or restricted that imposed upon corporate shareholders. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of reaping the consequential damages.
REYNALDO M. LOZANO, vs. HON. ELIEZER R. DE LOS SANTOS, Presiding Judge, and ANTONIO ANDA June 19, 1997 Facts; This petition is to annul the decision of the Regional Trial Court which ordered the Municipal Circuit Trial Court to dismiss Civil Case for lack of jurisdiction. Both were presidents of their respective Jeepney Operators' and Drivers' Association, Inc.; in August 1995, petitioner and private respondent agreed to consolidate their respective associations and form the Unified Mabalacat-Angeles Jeepney Operators' and Drivers Association, Inc. (UMAJODA); they also agreed to elect one set of officers who shall be given the sole authority to collect the daily dues; elections were held on October 1995 and both ran for president; petitioner won private respondent protested and, alleging fraud, refused to recognize the results of the election; private respondent also refused to abide by their agreement and continued collecting the dues from the members of his association. Petitioner was thus constrained to file the complaint to restrain private respondent. Respondent claimed that jurisdiction was lodged with the SEC. Issue; WON SEC has juris Held / ratio; None, granted The jurisdiction of the SEC) is set forth in Section 5 of Presidential Decree No. 902-A: Sec. 5. . . . [T]he Securities and Exchange Commission [has] original and exclusive jurisdiction to hear and decide cases involving: (a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, members of associations or organizations registered with the Commission. (b) Controversies arising out of intracorporate or partnership relations, between and among stockholders, members or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members, or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity. (c) Controversies in the election or appointment of directors, trustees, officers or managers of such corporations, partnerships or associations. (d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to over its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree.
This jurisdiction is determined by a concurrence of two elements: (1) the status or relationship of the parties; and (2) the nature of the question that is the subject of their controversy. The first element requires that the controversy must arise out of intracorporate or partnership relations between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the State in so far as it concerns their individual franchises.
The second element requires that the dispute among the parties be intrinsically connected with the regulation of the corporation, partnership or association or deal with the internal affairs of the corporation, partnership or association. After all, the principal function of the SEC is the supervision and control of corporations, partnership and associations with the end in view that investments in these entities may be encouraged and protected. There is no intracorporate nor partnership relation between petitioner and private respondent. The controversy between them arose out of their plan to consolidate their respective associations. This unified association was still a proposal. It had not been approved by the SEC. Consolidation becomes effective not upon mere agreement of the members but only upon issuance of the certificate of consolidation by the SEC. The dispute is between members of separate and distinct associations. Petitioner and private respondent have no intracorporate relation much less do they have an intracorporate dispute. The SEC therefore has no jurisdiction over the complaint. The doctrine of corporation by estoppel by respondent cannot override jurisdictional requirements. Jurisdiction is fixed by law and is not subject to the agreement of the parties. It cannot be acquired through or waived, enlarged or diminished by, any act or omission of the parties, neither can it be conferred by the acquiescence of the court. Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and unfairness. Where there is no third person involved and the conflict arises only among those assuming the form of a corporation, who therefore know that it has not been registered, there is no corporation by estoppel.
LIM TONG LIM, vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC November 3, 1999 Facts; A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to divide the profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital of their own to a "common fund." Being partner, they are all liable for debts incurred by or on behalf of the partnership. The liability for a contract entered into on behalf of an unincorporated association or ostensible corporation may lie in a person who may not have directly transacted on its behalf, but reaped benefits from that contract. In the Petition, Lim Tong Lim assails the the Court of Appeals w/c affirmed the RTC finding Lim et al liable to PFGI On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract for the purchase of fishing nets from the Philippine Fishing Gear Industries, Inc.. They claimed that they were engaged in a business venture with Lim Tong Lim. The total price is P532,045 The buyers failed to pay hence, private respondents filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim. The suit was brought in their capacities as general partners, on the allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation as shown by a Certification from the SEC. The trial court ruled that Philippine Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay respondent. CA affirmed. Issue; WON Lim liable Held / ratio; Yes, denied, affirmed The Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have entered into a partnership. First and Second Issues: Existence of a Partnership and Petitioner's Liability Petitioner disclaims any direct participation in the purchase, and that he has not even met the representatives of the respondent company. Petitioner further argues that he was a lessor, not a partner, of Chua and Yao, for the "Contract of Lease ", showed that he had merely leased to the two the main asset of the purported partnership — the fishing boat F/B Lourdes. We are not persuaded. Article 1767 of the Civil Code provides: Art. 1767 — By the contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.
Both lower courts ruled that a partnership existed based on the following (1) Lim requested Yao who was engaged in commercial fishing to join him, while Antonio Chua was already Yao's partner;
(2) after convening for a few times, Lim, Chua, and Yao verbally agreed to acquire two fishing boats (3) they borrowed P3.25 million from Jesus Lim, brother of Lim, to finance the venture. (4) they bought the boats from CMF Fishing Corporation; (5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry docking and other expenses for the boats would be shouldered by Chua and Yao; (6) because of the "unavailability of funds," Jesus Lim again extended a loan (7) In pursuance of the business agreement, Yao and Chua bought nets from Respondent 8) subsequently, Civil Case was filed by Chua and Yao against Lim for (a) declaration of nullity of commercial documents; (b) reformation of contracts; (9) That the case was amicably settled through a Compromise Agreement In their Compromise Agreement, they revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase and the repair of which were financed with borrowed money, fell under the term "common fund" under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. It is clear that there was a partnership. Petitioner Was a Partner, Not a Lessor We are not convinced. His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of them. Indeed, his consent to the sale proved that there was a preexisting partnership among all three. Corporation by Estoppel Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao. We disagree. Sec. 21 of the Corporation Code of the Philippines provides: Sec. 21.Corporation by estoppel. — All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. Even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from denying its corporate existence. "An unincorporated association has no personality and would be incompetent to act; it cannot create agents; thus, those who act or purport to act as its representatives do so without authority and at their own risk. It is an elementary principle of law that a person who acts as an agent without authority is himself regarded as the principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable. The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first instance, an unincorporated association, which represented itself to be a corporation, will be estopped from denying its corporate capacity in a suit against it by a third person who relied in good faith on such representation. It cannot allege lack of
personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received advantages and benefits. On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation. In such case, all those who benefited from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of. The only question here is whether petitioner should be held jointly liable. Petitioner contests such liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Unquestionably, petitioner benefited from the use of the nets. Clearly, under the law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held liable as general partners. Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the benefits of he is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel. Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts. There should be no vested rights in technicalities.
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., , vs. HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, October 19, 2000 Facts; On June 1989, International Express Travel and Tour Services, Inc., wrote a letter to the Philippine Football Federation through its president Henri Kahn, offering its services as a travel agency. The offer was accepted. Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to Kuala Lumpur, China and Brisbane. The total cost amounted to P449,654.83. The Federation made two partial payments, in the total amount of P176,467.50. On October 1989, petitioner wrote the Federation, requesting for the amount of P265,894.33. On October 1989, the Federation, paid the amount of P31,603.00. 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000. Thereafter, no further payments were made. This prompted petitioner to file a civil case. Petitioner sued Henri Kahn in his personal capacity and as President and impleaded the Federation as an alternative defendant. Henri Kahn averred that the petitioner has no cause of action against him either in his personal capacity or in his official capacity as president. He maintained that he did not guarantee payment but merely acted as an agent of the Federation. The trial court favored petitioner and declared Henri Kahn personally liable. Henri Kahn would have been correct in his contentions had it been duly established that defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the defendant Henri Kahn has adduced any evidence proving the corporate existence of the defendant Federation. … A voluntary unincorporated association, has no power to enter into, or to ratify, a contract. The contract entered into by its officers or agents on behalf of such association is not binding on, or enforceable against it. The officers or agents are themselves personally liable. CA reversed. Issue; WON Kahn liable Held / ratio; The resolution of the case at bar hinges on the determination of the existence of the Philippine Football Federation as a juridical person. The appellate court recognized the existence of the Federation. In support of this, the CA cited Republic Act 3135, the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential Decree No. 604. Both R.A. 3135 and P.D. No. 604 recognized the juridical existence of national sports associations. Section 14 of R.A. 3135 provides:
SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall have the following functions, powers and duties: 1. To adopt a constitution and by-laws for their internal organization and government; 2. To raise funds by donations, benefits, and other means for their purposes. 3. To purchase, sell, lease or otherwise encumber property both real and personal, for the accomplishment of their purpose; 4. To affiliate with international or regional sports' Associations after due consultation with the executive committee;
Before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act. We cannot agree with the view of the appellate court and the private respondent that the Philippine Football Federation came into existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the Philippine Football Federation. These laws merely recognized the existence of national sports associations and provided the manner by which these entities may acquire juridical personality. These laws require that before an entity may be considered as a national sports association, such entity must be recognized by the accrediting organization, the Philippine Amateur Athletic Federation under R.A. 3135, and the Department of Youth and Sports Development under P.D. 604. This fact of recognition, however, Henri Kahn failed to substantiate. Accordingly, we rule that the Philippine Football Federation is not a national sports association within the purview of the aforementioned laws and does not have corporate existence of its own. It follows that Kahn should be held liable. Any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts performed as such agent. As president, Henri Kahn is presumed to have known about the corporate existence or nonexistence of the Federation. We cannot subscribe to the position taken by the appellate court of applying the doctrine of corporation by estoppel. The application of the doctrine applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation. In the case at bar, the petitioner is not trying to escape liability from the contract but rather is the one claiming from the contract.
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC., vs. HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO August 7, 1997 Facts; This is a petition for review of Court of Appeals affirming the decision of the Home Insurance and Guaranty Corporation (HIGC). This quasi-judicial body recognized LGVHA as the sole homeowners’ association in Loyola Grand Villas, a subdivision in Quezon City and Marikina City developed by Solid Homes, Inc. It revoked the certificates of registration issued to Loyola Grand Villas Homeowners (North) Association Incorporated (the North Association) and Loyola Grand Villas Homeowners (South) Association Incorporated (the South Association). LGVHAI was organized on February 1983. It was registered with the Home Financing Corporation, predecessor of respondent HIGC. For unknown reasons, LGVHAI did not file its corporate by-laws. In 1988, the officers of the LGVHAI tried to register its by-laws. They failed. They discovered that there were two other organizations within the subdivision – the North Association and the South Association. None of the members of the LGVHAI was listed as member of the North Association while three (3) members of LGVHAI were listed as members of the South Association. The North Association was registered on February 1989. It submitted its by-laws on December 1988. In July, 1989, when Soliven (the developer) inquired about the status of LGVHAI, HIGC informed him that LGVHAI had been automatically dissolved for two reasons. First, it did not submit its by-laws within the period required by the Corporation Code and, second, there was non-user of corporate charter because HIGC had not received any report on the association’s activities. This information resulted in the registration of the South Association with the HIGC on July 1989. It filed its by-laws on July 1989. These prompted the officers of the LGVHAI to lodge a complaint with the HIGC. Private respondents obtained a favorable ruling. The South Association appealed to the Appeals Board of the HIGC. The Board dismissed the appeal. The South Association in turn appealed to the Court of Appeals. The Court of Appeals affirmed the Resolution of the HIGC. Hence this petition. Issue; WON nonfiling of bylaws w/in prescribed period results in automatic dissolution Held / ratio; No, affirmed Petitioner contends that, since Section 46 uses the word “must” with respect to the filing of by-laws, noncompliance therewith would result in “self-extinction” either due to non-occurrence of a suspensive condition or the occurrence of a resolutory condition “under the hypothesis that (by) the issuance of the certificate of registration alone the corporate personality is deemed already formed.” Petitioner concedes that Section 46 and the other provisions of the Corporation Code do not provide for sanctions for non-filing of the by-laws. However, it insists that no sanction need be provided “because the mandatory nature of the
provision is so clear that there can be no doubt about its being an essential attribute of corporate birth.” Moreover, no sanction is provided for because “in the first place, no corporate identity has been completed.” Private respondents counter that the requirement of adoption of by-laws is not mandatory. They point to P.D. No. 902A as having resolved the issue of whether said requirement is mandatory or merely directory. Section 6(I) of that decree provides that non-filing of by-laws is only a ground for suspension or revocation of the certificate of registration of corporations and, therefore, it may not result in automatic dissolution of the corporation. Moreover, the adoption and filing of by-laws is a condition subsequent which does not affect the corporate personality of a corporation like the LGVHAI. This is so because Section 9 of the Corporation Code provides that the corporate existence and juridical personality of a corporation begins from the date the SEC issues a certificate of incorporation under its official seal. Consequently, even if the by-laws have not yet been filed, a corporation may be considered a de facto corporation. The pertinent provision of the Corporation Code that is the focal point of controversy in this case states: “Sec. 46. Adoption of by-laws. – Every corporation formed under this Code, must within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation, the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members, in the case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to inspection of the stockholders or members during office hours; and a copy thereof, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the bylaws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law.”
Interpretation of this provision of law begins with the determination of the meaning and import of the word “must” in this section. Ordinarily, the word “must” connotes an imperative act or operates to impose a duty which may be enforced. However, the word “must” in a statute, like “shall,” is not always imperative. It may be consistent with an exercise of discretion. In this jurisdiction, the tendency has been to interpret “shall” as the context or a reasonable construction of the statute in which it is used demands or requires. This is equally true as regards the word “must.” Thus, if the language of a statute considered as a whole and with due regard to its nature and object reveals that the legislature intended to use the words “shall” and “must” to be directory, they should be given that meaning. In this respect, the following portions of the deliberations of the Batasang Pambansa No. 68 are illuminating: MR. FUENTEBELLA. But it will not automatically amount to a dissolution of the corporation by merely failing to file the by-laws within one month… MR. MENDOZA. I do not think it will necessarily result in the automatic or ipso facto dissolution of the corporation. …
Note should be taken of the second paragraph of the law which allows the filing of the by-laws even prior to incorporation. This provision in the same section of the Code rules out mandatory compliance with the requirement of filing the by-laws “within one (1) month after receipt of official notice of the issuance of its certificate of incorporation. It necessarily follows that failure to file the by-laws within that period does not imply the “demise” of the corporation. By-laws may be necessary for the “government” of the corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code and related statutes.
“The by-laws of a corporation are the rule of its life, and that until by-laws have been adopted the corporation may not be able to act for the purposes of its creation, and that the first and most important duty of the members is to adopt them. This would seem to follow as a matter of principle from the office and functions of by-laws. Viewed in this light, the adoption of by-laws is a matter of practical, if not one of legal, necessity. Moreover, the peculiar circumstances attending the formation of a corporation may impose the obligation to adopt certain by-laws, as in the case of a close corporation organized for specific purposes. And the statute or general laws from which the corporation derives its corporate existence may expressly require it to make and adopt by-laws and specify to some extent what they shall contain and the manner of their adoption.The mere fact, however, of the existence of power in the corporation to adopt by-laws does not ordinarily and of necessity make the exercise of such power essential to its corporate life, or to the validity of any of its acts.” Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences of the non-filing of the same within the period provided for in Section 46. However, such omission has been rectified by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of the SEC of which state: “SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers: xxx xxx xxx xxx (l) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law, including the following: xxx xxx xxx xxx 5. Failure to file by-laws within the required period; xxx xxx xxx xxx Even under the foregoing express grant of power and authority, there can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the Corporation Code. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society. In other words, the incorporators must be given the chance to explain their neglect or omission and remedy the same. By-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation. Private respondents are correct in relying on the pronouncements of this Court in Chung Ka Bio v. Intermediate Appellate Court: “x x x. Moreover, failure to file the by-laws does not automatically operate to dissolve a corporation but is now considered only a ground for such dissolution. …Whether this provision should be given mandatory or only directory effect remained a controversial question until it became academic with the adoption of PD 902-A. Under this decree, it is now clear that the failure to file by-laws within the required period is only a ground for suspension or revocation of the certificate of registration of corporations. … Substantial compliance with conditions subsequent will suffice to perfect corporate personality. Organization and commencement of transaction of corporate business are but conditions subsequent and not prerequisites for acquisition of corporate personality. The adoption and filing of by-laws is also a condition subsequent.
HENRY FLEISCHER, vs. BOTICA NOLASCO CO., INC., March 14, 1925 Facts; Manuel Gonzalez was the original owner of the five shares of stock in question.; On March 1923, he assigned and delivered said five shares to the plaintiff, Henry Fleischer in consideration of a large sum of money owed by Gonzalez to Fleischer; Dr. Eduardo Miciano, who was the secretary-treasurer of said corporation, offered to buy from Henry Fleischer, on behalf of the corporation, said shares at their par value of P100 a share, for P500 by virtue of article 12 of the by-laws of Botica Nolasco, Inc., said corporation had the preferential right to buy from Manuel Gonzalez said shares; Plaintiff refused, instead he requested Miciano to register said shares in his name; Miciano refused to do so, saying that it would be in contravention of the by-laws of the corporation. The plaintiff filed an complaint against the Botica Nolasco, Inc. The CFI held that article 12 of the by-laws of the corporation which gives it preferential right to buy its shares from retiring stockholders, is in conflict with Act No. 1459 (Corporation Law), especially with section 35 thereof; and rendered a judgment ordering the defendant corporation to register in the books of said corporation the said five shares of stock in the name of the plaintiff, Henry Fleischer. Issue; WON article 12 of bylaws contravene Sec 35 of Act 1459 (Corpo Law) Held / ratio; ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra persona, pero para que estas transferencias tengan validez legal, deben constar en los registros de la Corporacion con el debido endoso del accionista a cuyo nombre se ha expedido la accion o acciones que se transfieran, o un documento de transferencia. Entendiendose que, ningun accionista transferira accion alguna a otra persona sin participar antes por escrito al Secretario-Tesorero. En igualdad de condiciones, la sociedad tendra el derecho de adquirir para si la accion o acciones que se traten de transferir.(Exhibit 2.)
The above-quoted article constitutes a by-law by the Botica Nolasco, Inc., governing the transfer of shares of stock of said corporation. The latter part creates in favor of the Botica Nolasco, Inc., a preferential right to buy, under the same conditions, the share or shares of stock of a retiring shareholder. Has said corporation any power, under the Corporation Law (Act.No. 1459), to adopt such by-law? The particular provisions of the Corporation Law referring to transfer of shares of stock are as follows: SEC. 13. Every corporation has the power: xxx xxx xxx (7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of the number of its officers and directors within the limits prescribed by law, and for the transferring of its stock, the administration of its corporate affairs, etc. xxx xxx xxx SEC. 35. The capital stock of stock corporations shall de divided into shares for which certificates signed by the president or the vicepresident, countersigned by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the bylaws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, that date of the transfer, the number of the certificate, and the number of shares transferred. No share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation.
A by-law adopted by a corporation relating to transfer of stock should be in harmony with the law on the subject of transfer of stock. The law on this subject is found in section 35 of Act No. 1459. Under said section they are personal property and may be transferred as therein provided. Said section contemplates no restriction as to whom they may be transferred or sold. It does not suggest that any discrimination may be created by the corporation in favor or against a certain purchaser. The holder of shares, as owner of personal property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases, without any other limitation in this respect, than the general provisions of law. In adopting said by-law the corporation has transcended the limits fixed by law. As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation, and are not contradictory to the general policy of the laws of the land. On the other hand, by-laws of a corporation must be reasonable and for a corporate purpose, and always within the charter limits. They must always be strictly subordinate to the constitution and the general laws of the land. They must not infringe the policy of the state, nor be hostile to public welfare. They must not disturb vested rights or impair the obligation of a contract, take away or abridge the substantial rights of stockholder or member, affect rights of property or create obligations unknown to the law. The power to enact by-laws restraining the sale and transfer of stock must be found in the governing statute or the charter. Restrictions upon the traffic in stock must have their source in legislative enactment, as the corporation itself cannot create such impediments. Bylaw are intended merely for the protection of the corporation, and prescribe regulation and not restriction; they are always subject to the charter of the corporation. The corporation, in the absence of such a power, cannot ordinarily inquire into or pass upon the legality of the transaction by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. A bylaw cannot take away or abridge the substantial rights of stockholder. Under a statute authorizing by- laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction upon the right of sale. The right of unrestrained transfer of shares inheres in the very nature of a corporation, and courts will carefully scrutinize any attempt to impose restrictions or limitations upon the right of stockholders to sell and assign their stock. The right to impose any restraint in this respect must be conferred upon the corporation either by the governing statute or by the articles of the corporation. It cannot be done by a by-law without statutory or charter authority. The jus disponendi, being an incident of the ownership of property, the general rule (subject to exceptions hereafter pointed out and discussed) is that every owner of corporate shares has the same uncontrollable right to alien them which attaches to the ownership of any other species of property. A shareholder is under no obligation to refrain from selling his shares at the sacrifice of his personal interest, in order to secure the welfare of the corporation, or to enable another shareholder to make gains and profits. It follows from the foregoing that a corporation has no power to prevent or to restrain transfers of its shares, unless such power is expressly conferred in its charter or governing statute. This conclusion follows from the further consideration that by-laws or other regulations restraining such transfers, unless derived from authority expressly granted by the legislature, would be regarded as impositions in restraint of trade.
The foregoing authorities go farther than the stand we are taking on this question. They hold that the power of a corporation to enact by-laws restraining the sale and transfer of shares, should not only be in harmony with the law or charter of the corporation, but such power should be expressly granted in said law or charter. The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No. 1459, as follows: "No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred."
This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is essential in conducting elections of officers, in calling meeting of stockholders, and for other purposes. but any restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade. Moreover, the by-laws now in question cannot have any effect on the appellee. He had no knowledge of such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable consideration. He was not a privy to the contract created by said by-law between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser. An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the corporation for a period of thirty days is not binding upon an assignee of the stock as a personal contract, although his assignor knew of the by-law and took part in its adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.) When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not affected by any contractual restriction of which he had no notice. (Brinkerhoff-Farris Trust and Savings Co. vs. Home Lumber Co., 118 Mo., 447.) The assignment of shares of stock in a corporation by one who has assented to an unauthorized by-law has only the effect of a contract by, and enforceable against, the assignor; the assignee is not bound by such by-law by virtue of the assignment alone. (Ireland vs. Globe Milling Co., 21 R.I., 9.) A by-law of a corporation which provides that transfers of stock shall not be valid unless approved by the board of directors, while it may be enforced as a reasonable regulation for the protection of the corporation against worthless stockholders, cannot be made available to defeat the rights of third persons. (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.)
THE GOVERNMENT OF THE PHILIPPINE ISLANDS vs. EL HOGAR FILIPINO July 13, 1927 Facts / issues / held / ratio; This is a quo warranto proceeding instituted by the Government against the building and loan association known as El Hogar Filipino, for the purpose of depriving it of its corporate franchise. The complaint enumerates seventeen distinct causes of action. On March 1906, the Philippine Commission enacted the Corporation Law (Act No. 1459) effective upon April 1 of the same year. Section 171 to 190, are devoted to the subject of building and loan associations. Respondent, El Hogar Filipino, was the first corporation organized under the provisions cited. The articles of incorporation bear the date of December 1910, with capital stock subscribed to the amount of P150,000 of which P10,620 had been paid. Under the law as it then stood, the capital of the Association was not permitted to exceed P3,000,000, but by Act No. 2092, passed December 1911, the statute was so amended as to permit the capitalization of building and loan associations to the amount of ten millions. The association amended its articles so as to provide that the capital should be in an amount not exceeding the then lawful limit. On December 1925, the association had 5,826 shareholders holding 125,750 shares, with a total paid-up value of P8,703,602.25. First cause of action —illegal holding by the respondent of the title to real property for a period in excess of five years after the property had been bought in by the respondent at one of its own foreclosure sales. The provision of law relevant to the matter is found in section 75 of Act of Congress of July 1, 1902 (repeated in subsection 5 of section 13 of the Corporation Law.) The question then arises whether the failure of the respondent to get rid of the San Clemente property within five years after it first acquired the deed thereto, even supposing the five-year period to be properly counted from that date, is such a violation of law as should work a forfeiture of its franchise and require a judgment to be entered for its dissolution in this action of quo warranto. Upon this point we do not hesitate to say that in our opinion the corporation has not been shown to have offended against the law in a manner that should entail a forfeiture of its charter. The law applicable to the case is in our opinion found in section 212 of the Code of Civil Procedure. This section (212), prescribes the judgment to be rendered against a corporation in an action of quo warranto. This provision shows that the court has a discretion with respect to the infliction of capital punishment upon corporation and that there are certain misdemeanors and misuses of franchises which should not be recognized as requiring their dissolution. We content ourselves with holding that upon the facts here before us the penalty of dissolution would be excessively severe and fraught with consequences altogether disproportionate to the offense committed. The evident purpose behind the law restricting the rights of corporations with respect to the tenure of land was to prevent the revival of the entail (mayorazgo) or other similar institution by which land could be fettered and its alienation hampered over long periods of time. In the case before us the respondent corporation has in good faith disposed of the piece of property which appears to have been in its hands at the expiration of the period fixed by law, and a fair explanation is given of its failure to dispose of it sooner.
But the case for the plaintiff supposes that the discretion of this court in matters like that now before us has been expressly taken away by the third section of Act No. 2792, and that the dissolution of the corporation is obligatory upon the court a mere finding that the respondent has violated the provision of the Corporation Law in any respect. The contention for the plaintiff is to the effect that the second sentence in this enactment has entirely abrogated the discretion of this court with respect to the application of the remedy of qou warranto, as expressed in section 212 of the Code of Civil Procedure, and that it is now mandatory upon us to dissolved any corporation whenever we find that it has committed any violation of the Corporation Law, however trivial. In our opinion in this radical view of the meaning of the enactment is untenable. Evidently such could not have been the intention; and the only way to avoid the consequence suggested is to hold, as we now hold, that the provision now under consideration has not impaired the discretion of this court in applying the writ of quo warranto. Notwithstanding, therefore, the use of the imperative "shall" the injunction is not to be granted unless a proper case for injunction be made out, in accordance with the principles and practice of equity. The word "shall" when used by the legislature to a court, is usually a grant of authority and means "may", and even if it be intended to be mandatory it must be subject to the necessary limitation that a proper case has been made out for the exercise of the power. Second cause of action —respondent is owning and holding a business lot, with the structure thereon, in the financial district of the City of Manila is excess of its reasonable requirements and in contravention of subsection 5 of section 13 of the corporation Law. With this contention we are unable to agree. Under subsection 5 of section 13 of the Corporation Law, every corporation has the power to purchase, hold and lease such real property as the transaction of the lawful business of the corporation may reasonably and necessarily require. When this property was acquired in 1916, the business of El Hogar Filipino had developed to such an extent, and its prospects for the future were such as to justify its directors in acquiring a lot in the financial district of the City of Manila and in constructing thereon a suitable building as the site of its offices; and it cannot be fairly said that the area of the lot — 1,413 square meters — was in excess of its reasonable requirements. The law expressly declares that corporations may acquire such real estate as is reasonably necessary to enable them to carry out the purposes for which they were created; and we are of the opinion that the owning of a business lot upon which to construct and maintain its offices is reasonably necessary to a building and loan association such as the respondent was at the time this property was acquired. A different ruling on this point would compel important enterprises to conduct their business exclusively in leased offices — a result which could serve no useful end but would retard industrial growth and be inimical to the best interests of society. Third cause of action —engaging in activities foreign to the purposes for which the corporation was created and not reasonable necessary to its legitimate ends. The administration of property in the manner described is more befitting to the business of a real estate agent or trust company than to the business of a building and loan association. The management and administration of the property of the shareholders of the corporation is not expressly authorized by law, and we are unable to see that, upon any fair construction of the law, these activities are necessary to the exercise of any of the granted powers. The corporation, upon the point now under the criticism, has clearly extended itself beyond the legitimate range of its powers. But it does
not result that the dissolution of the corporation is in order, and it will merely be enjoined from further activities of this sort. Fourth cause of action —among the by laws of the association there is an article (No. 10): The board of directors of the association, by the vote of an absolute majority of its members, is empowered to cancel shares and to return to the owner thereof the balance resulting from the liquidation thereof whenever, by reason of their conduct, or for any other motive, the continuation as members of the owners of such shares is not desirable.
This by-law is of course a patent nullity, since it is in direct conflict with the latter part of section 187 of the Corporation Law, which expressly declares that the board of directors shall not have the power to force the surrender and withdrawal of unmatured stock except in case of liquidation of the corporation or of forfeiture of the stock for delinquency. It is supposed, in the fourth cause of action, that the existence of this article among the by-laws of the association is a misdemeanor on the part of the respondent which justifies its dissolution. In this view we are unable to concur. The obnoxious by-law, as it stands, is a mere nullity, and could not be enforced even if the directors were to attempt to do so. Fifth cause of action — In section 31 of the Corporation Law it is declared that, "at all elections of directors there must be present, either in person or by representative authorized to act by written proxy, the owners of the majority of the subscribed capital stock entitled to vote. . . ." As the corporation has grown, however, it has been fond increasingly difficult to get together a quorum of the shareholders, or their proxies, at the annual meetings. Owing to the failure of a quorum at most of the general meetings since the respondent has been in existence, it has been the practice of the directors to fill vacancies in the directorate by choosing suitable persons from among the stockholders. This custom finds its sanction in article 71 of the by-laws, which reads as follows: ART. 71. The directors shall elect from among the shareholders members to fill the vacancies that may occur in the board of directors until the election at the general meeting.
It is supposed in the statement of the fifth cause of action in the complaint that the failure of the corporation to hold annual meetings and the filling of vacancies in the directorate in the manner described constitute misdemeanors on the part of the respondent which justify the resumption of the franchise by the Government and dissolution of the corporation; and in this connection it is charge that the board of directors of the respondent has become a permanent and self perpetuating body composed of wealthy men instead of wage earners and persons of moderate means. We are unable to see the slightest merit in the charge. No fault can be imputed to the corporation on account of the failure of the shareholders to attend the annual meetings; and their non-attendance at such meetings is doubtless to be interpreted in part as expressing their satisfaction of the way in which things have been conducted. Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to function until another directorate is chosen and qualified. It result that the practice of the directorate of filling vacancies by the action of the directors themselves is valid. Nor can any exception be taken to then personality of the individuals chosen by the directors to fill vacancies in the body. Certainly it is no fair criticism to say that they have chosen competent businessmen of financial responsibility instead of electing poor persons to so responsible a position. The possession of means does not disqualify a man for filling positions of responsibility in corporate affairs.
Sixth cause of action —directors of El Hogar Filipino, instead of serving without pay, or receiving nominal pay or a fixed salary, — as the complaint supposes would be proper, — have been receiving large compensation, varying in amount from time to time, out of the profits of the respondent. The Corporation Law does not undertake to prescribe the rate of compensation for the directors of corporations. The power to fixed the compensation they shall receive, if any, is left to the corporation, to be determined in its by-laws(Act No. 1459, sec. 21). Pursuant to this authority the compensation for the directors of El Hogar Filipino has been fixed in section 92 of its by-laws, as already stated. The justice and property of this provision was a proper matter for the shareholders when the by-laws were framed; and the circumstance that, with the growth of the corporation, the amount paid as compensation to the directors has increased beyond what would probably be necessary to secure adequate service from them is matter that cannot be corrected in this action; nor can it properly be made a basis for depriving the respondent of its franchise, or even for enjoining it from compliance with the provisions of its own bylaws. If a mistake has been made, or the rule adopted in the by-laws meeting to change the rule. The remedy, if any, seems to lie rather in publicity and competition, rather than in a court proceeding. Seventh cause of action —the promoter and organizer of El Hogar Filipino was Mr. Antonio Melian, and in the early stages of the organization of the association the board of directors authorized the association to make a contract with him with regard to the services him therefor. Pursuant to this authority the president of the corporation, on January 11, 1911, entered into a written agreement with Mr. Melian. In conformity with this agreement there was inserted in section 92 of the by-laws of the association a provision recognizing the rights of Melian, as founder, to 5 per centum of the net profits shown by the annual balance sheet, payment of the same to be made to him or his heirs during the life of the association. As a seventh cause of action it is alleged in the complaint that this royalty of the founder is "unconscionable, excessive and out of all proportion to the services rendered, besides being contrary to and incompatible with the spirit and purpose of building and loan associations." This contention is entirely without merit. No possible doubt exists as to the power of a corporation to contract for services rendered and to be rendered by a promoter in connection with organizing and maintaining the corporation. It is true that contracts with promoters must be characterized by good faith; but could it be said with certainty, in the light of facts existing at the time this contract was made, that the compensation therein provided was excessive? If the amount of the compensation now appears to be a subject of legitimate criticism, this must be due to the extraordinary development of the association in recent years. It is rudimentary in law that an action to annul a contract cannot be maintained without joining both the contracting parties as defendants. Moreover, the proper party to bring such an action is either the corporation itself, or some shareholder who has an interest to protect. The mere fact that the compensation paid under this contract is in excess of what, in the full light of history, may be considered appropriate is not a proper consideration for this court, and supplies no ground for interfering with its performance. The majority of the court is of the opinion that our traditional respect for the sanctity of the contract obligation should prevail over the radical and innovating tendencies which find acceptance with some and which, if
given full rein, would go far to sink legitimate enterprise in the Islands into the pit of populism and bolshevism. The seventh count is not sustainable. Eight cause of action —Under the eight cause of action the alleged ground for putting an end to the corporate life of the respondent is found in the presence of other articles in the by-laws, namely, articles 70 and 76, which are alleged to be unlawful but which, as will presently be seen, are entirely valid. Article 70 of the by-laws in effect requires that persons elected to the board of directors must be holders of shares of the paid up value of P5,000 which shall be held as security may be put up in the behalf of any director by some other holder of shares in the amount stated. Article 76 of the by-laws declares that the directors waive their right as shareholders to receive loans from the association. It is asserted, under the eight cause of action, that article 70 is objectionable in that, under the requirement for security, a poor member, cannot serve as director, irrespective of other qualifications. Article 76 is criticized on the ground that the provision requiring directors to renounce their right to loans unreasonably limits their rights and privileges as members. There is nothing of value in either of theses suggestions. Section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualifications of directors; and the requirement of security from them for the proper discharge of the duties of their office, in the manner prescribed in article 70, is highly prudent and in conformity with good practice. Article 76, prohibiting directors from making loans to themselves, is of course designed to prevent the possibility of the looting of the corporation by unscrupulous directors. Ninth cause of action —respondent has abused its franchise in issuing "special" shares. The issuance of these shares is allege to be illegal and inconsistent with the plan and purposes of building and loan associations; and in particular, it is alleged and inconsistent with the plan and purposes of building and loan associations; and in particular, it is alleged that they are, in the main, held by well-to-wage-earners for accumulating their modest savings for the building of homes. The ground for supposing the issuance of the "special" shares to be unlawful is that special shares are not mentioned in the Corporation Law as one of the forms of security which may be issued by the association. The issuance of the special shares did not affect the respondent's character as a building and loan association nor make its loans usurious. From what has been said it will be seen that there is express authority, even in the very letter of the law, for the emission of advance-payment or "special" shares, and the argument that these shares are invalid is seen to be baseless. In addition to this it is satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even assuming that the statute has not expressly authorized such shares, yet the association has implied authority to issue them. Tenth cause of action —defendant is pursuing a policy of depreciating, at the rate of 10 per centum per annum, the value of the real properties acquired by it at its sales; and it is alleged that this rate is excessive. It is not claimed for the Government that the association is without power to allow some depreciation; and it is quite clear that the board of directors possesses a discretion in this matter. There is no positive provision of law prohibiting the association from writing off a reasonable amount for depreciation on its assets for the purpose of determining its real profits; and article 74 of its by-laws expressly authorizes the board of directors to determine each year the amount to be written down upon the expenses of installation and the property of the corporation. There can be no question that
the power to adopt such a by-law is embraced within the power to make by-laws for the administration of the corporate affairs of the association and for the management of its business, as well as the care, control and disposition of its property (Act No. 1459, sec. 13 ). This count for the complaint proceeds, in our opinion, upon an erroneous notion as to what a court may do in determining the internal policy of a business corporation. If the criticism contained in the brief of the Attorney-General upon the practice of the respondent association with respect to depreciation be well founded, the Legislature should supply the remedy by defining the extent to which depreciation may be allowed by building and loan associations. Certainly this court cannot undertake to control the discretion of the board of directors of the association about an administrative matter as to which they have legitimate power of action. Eleventh and twelfth causes of action —the eleventh cause of action is that the respondent maintains excessive reserve funds, and in the twelfth cause of action that the board of directors has settled upon the unlawful policy of paying a straight annual dividend of 10 per centum, regardless of losses suffered and profits made by the corporation and in contravention of the requirements of section 188 of the Corporation Law. The government insists, we thing, upon an interpretation of section 188 of the Corporation Law that is altogether too strict and literal. From the fact that the statute provides that profits and losses shall be annually apportioned among the shareholders it is argued that all earnings should be distributed without carrying anything to the reserve. But it will be noted that it is provided in the same section that the profits and losses shall be determined by the board of directors: and this means that they shall exercise the usual discretion of good businessmen in allocating a portion of the annual profits to purposes needful to the welfare of the association. The law contemplates the distribution of earnings and losses after other legitimate obligations have been met. Our conclusion is that the respondent has the power to maintain the reserves criticized in the eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that the reserves referred to have become excessive, the remedy is in the hands of the Legislature. It is no proper function of the court to arrogate to itself the control of administrative matters which have been confided to the discretion of the board of directors. The causes of action under discussion must be pronounced to be without merit. Thirteenth cause of action — respondent association has made loans which, to the knowledge of the associations officers were intended to be used by the borrowers for other purposes than the building of homes. In this jurisdiction at least the lawmaker has taken care not to limit the activities of building and loan associations in an exclusive manner, and the exercise of the broader powers must in the end approve itself to the business community. Judging from the past history of these institutions it can be truly said that they have done more to encourage thrift, economy and saving among the people at large than any other institution of modern times, not excepting even the saving banks. In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental Negros, this court had before it the question whether a loan made by the respondent association upon the security of a mortgage upon agricultural land, — where the loan was doubtless used for agricultural purposes, — was usurious or not; and the case turned upon the point whether, in making such loans, the association had violated the law and departed from its fundamental purposes. The conclusion of the court was that the loan was valid and could be lawfully enforced by a nonjudicial foreclosure in
conformity with the terms of the contract between the association and the borrowing member. We now find no reason to depart from the conclusion reached in that case. Fourteenth cause of action —the loans made by the defendant for purposes other than building or acquiring homes have been extended in extremely large amounts and to wealthy persons and large companies. The question for use here to decide is whether the making of this and the other large loans constitutes such a misuser of the franchise as would justify us in depriving the association of its corporate life. This question appears to us to be so simple as almost to answer itself. The law states no limit with respect to the size of the loans to be made by the association. That matter is confided to the discretion of the board of directors; and this court cannot arrogate to itself a control over the discretion of the chosen officials of the company. If it should be thought wise in the future to put a limit upon the amount of loans to be made to a single person or entity, resort should be had to the Legislature; it is not a matter amenable to judicial control. The fourteenth cause of action is therefore obviously without merit. Fifteenth cause of action —upon the expiration of the franchise of the association through the effluxion of time, or earlier liquidation of its business, the accumulated reserves and other properties will accrue to the founder, or his heirs, and the then directors of the corporation and to those persons who may at that time to be holders of the ordinary and special shares of the corporation. There is nothing in article 95 of the by-laws which is, in our opinion, subject to criticism. The real point of criticism is that upon the final liquidation of the corporation years hence there may be in existence a reserve fund out of all proportion to the requirements that may then fall upon it in the liquidation of the company. It seems to us that this is matter that may be left to the prevision of the directors or to legislative action if it should be deemed expedient to require the gradual suppression of the reserve funds as the time for dissolution approaches. It is no matter for judicial interference, and much less could the resumption of the franchise on this ground be justified. There is no merit in the fifteenth cause of action. Sixteenth cause of action —various loans now outstanding have been made by the respondent to corporations and partnerships, and that these entities have in some instances subscribed to shares in the respondent for the sole purpose of obtaining such loans In section 173 of the Corporation Law it is declared that "any person" may become a stockholder in building and loan associations. The word "person" appears to be here used in its general sense, and there is nothing in the context to indicate that the expression is used in the restricted sense of both natural and artificial persons, as indicated in section 2 of the Administrative Code. When it is said in section 173, that "any person" may become a stockholder in a building and loan association, no reason is seen why the phrase may not be taken in its proper broad sense of either a natural or artificial person. At any rate the question whether these loans and the attendant subscriptions were properly made involves a consideration of the power of the subscribing corporations and partnerships to own the stock and take the loans; and it is not alleged in the complaint that they were without power in the premises. The result is that we find nothing in the allegations of the sixteenth cause of action, or in the facts developed in connection therewith, that would justify us in granting the relief. Seventeenth cause of action
—in disposing of real estates purchased by it in the collection of its loans, the defendant has no various occasions sold some of the said real estate on credit, transferring the title thereto to the purchaser; that the properties sold are then mortgaged to the defendant to secure the payment of the purchase price, said amount being considered as a loan, and carried as such in the books of the defendant, and that several such obligations are still outstanding. It is further charged that the persons and entities to which said properties are sold under the condition charged are not members or shareholders nor are they made members or shareholders of the defendant. This part of the complaint is based upon a mere technicality of bookkeeping. The central idea involved in the discussion is the provision of the Corporation Law requiring loans to be stockholders only and on the security of real estate and shares in the corporation, or of shares alone. It seems to be supposed that, when the respondent sells property acquired at its own foreclosure sales and takes a mortgage to secure the deferred payments, the obligation of the purchaser is a true loan, and hence prohibited. But in requiring the respondent to sell real estate which it acquires in connection with the collection of its loans within five years after receiving title to the same, the law does not prescribe that the property must be sold for cash or that the purchaser shall be a shareholder in the corporation. Such sales can of course be made upon terms and conditions approved by the parties; and when the association takes a mortgage to secure the deferred payments, the obligation of the purchaser cannot be fairly described as arising out of a loan. Nor does the fact that it is carried as a loan on the books of the respondent make it a loan on the books of the respondent make it a loan in law.
STOCKHOLDERS OF F. GUANZON AND SONS, INC., vs. REGISTER OF DEEDS OF MANILA, October 30, 1962 Facts; On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of liquidation of the assets of the corporation dissolving the corporation, distributing among themselves in proportion to their shareholdings, as liquidating dividends, the assets of said corporation. The certificate of liquidation was denied registration by the Registry on seven grounds, of which the following were disputed by the stockholders: 3. The number of parcels not certified to in the acknowledgment; 5. P430.50 Reg. fees need be paid; 6. P940.45 documentary stamps need be attached to the document; 7. The judgment of the Court approving the dissolution and directing the disposition of the assets of the corporation need be presented (Rules of Court, Rule 104, Sec. 3). The Commissioner of Land Registration overruled No. 7 and sustained Nos. 3, 5 and 6. Issue; WON liquidation is conveyance from Corp to Sholders or merely a partition of common properties Held / ratio; Conveyance, affirmed. Appellants contend that the certificate of liquidation is not a conveyance but merely a distribution of the assets of the corporation which has ceased to exist. Not being a conveyance the certificate need not contain a statement of the number of parcel of land involved in the distribution in the acknowledgment appearing therein. Hence the amount of documentary stamps to be affixed thereon should only be P0.30 and not P940.45, as required by the register of deeds. The Commissioner of Land Registration, expressed by the register of deed to the effect that the certificate of liquidation in question, though it involves a distribution of the corporation's assets, in the last analysis represents a transfer of said assets from the corporation to the stockholders. Hence, in substance it is a transfer or conveyance. We agree. A corporation is a juridical person distinct from the members composing it. 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. The corporation has property of its own which consists chiefly of real estate. 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 stockholder is not a co-owner or tenant in common of the corporate property. The act of liquidation is not a partition of community property, but rather a transfer or conveyance. Since the purpose of the liquidation, as well as the distribution of the assets of the corporation, is to transfer their title from the corporation to the stockholders in proportion to their shareholdings, — and this is in effect the purpose which they seek to obtain
from the Register of Deeds of Manila, — that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance.
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, vs. THE HONORABLE COURT OF APPEALS and ALBERTO V. ARELLANO June 30, 1987 Facts; Decision of the respondent court: * 1. Defendants are hereby ordered to jointly and severally pay the plaintiff the amount of P50,000.00 for the preparation of the project study and his technical services that led to the organization of the defendant corporation
The CA said that it was upon the request of defendants Barretto and Garcia that plaintiff handled the preparation of the project study which was presented to Caram so the latter was convinced to invest in the proposed airlines. Defendants Garcia and Caram, and Barretto became members of the Board and/or officers of defendant corporation. Thus, not only the defendant corporation but all the other defendants who were involved in the preparatory stages of the incorporation, who caused the preparation and/or benefited from the project study and the technical services of plaintiff must be liable. Issue; WON petitioners themselves are also and personally liable Held / ratio; Not liable, reversed Petitioners were not involved in the initial stages of the organization of the airline, which were being directed by Barretto as the main promoter. Barretto was described as "the moving spirit." It was he who was putting all the pieces together, so to speak. The petitioners were merely among the financiers. The finding of the respondent court is that the project study was undertaken by the private respondent at the request of Barretto and Garcia who presented it to the petitioners to induce them to invest. The study could have been presented to others. At any rate, the airline was eventually organized on the basis of the project study with the petitioners as major stockholders and, together with Barretto and Garcia, as principal officers. As a bona fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts as duly authorized by its officers and directors. Petitioners cannot be held personally liable for the compensation claimed by the private respondent. Petitioners did not contract such services. It was only the results of such services that Barretto and Garcia presented to them and which persuaded them to invest in the proposed airline. The most that can be said is that they benefited from such services, but that surely is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation, including those who came in later, and regardless of the amount of their share holdings, would be equally and personally liable also with the petitioners for the claims of the private respondent.
PALAY, INC. and ALBERT ONSTOTT, vs. JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING AUTHORITY and NAZARIO DUMPIT September 21, 1983 Facts; The Resolution, issued by Clave directing Palay, Inc. and Alberto Onstott jointly and severally, to refund to private respondent, Dumpit, the amount of P13,722.50 as resolved by the National Housing Authority are being assailed in this petition. On March 1965, Palay, Inc., through its President, Onstott executed in favor of Dumpit, a Contract to Sell a parcel of Land in Antipolo for P23,300.0, payable with a downpayment of P4,660.00 and monthly installments of P246.42. It provided for automatic rescission upon default and with forfeiture of all installments paid. Dumpit paid the downpayment and several installments amounting to P13,722.50. On May 1973, private respondent wrote petitioner offering to update all his overdue accounts and seeking its consent to the assignment of his rights to a certain Lourdes Dizon. Petitioners informed respondent that his Contract to Sell had long been rescinded and that the lot had already been resold. Respondent filed a letter complaint with the NHA for reconveyance. The NHA, found the rescission void in the absence of either judicial or notarial demand, and ordered Palay, Inc. and Alberto Onstott, jointly and severally, to refund Nazario Dumpit. On appeal to the Office of the President, respondent Presidential Executive Assistant, affirmed the Resolution of the NHA. Issue; 1. WON rescission proper 2. WON Onstott personally liable Held / ratio; 1. No, void That judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions. However, the act of a party in treating a contract as cancelled should be made known to the other. Resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in Court. If the debtor impugns the declaration, it shall be subject to judicial determination. In this case, private respondent has denied that rescission is justified and has resorted to judicial action. It is now for the Court to determine whether resolution of the contract by petitioners was warranted. We hold that resolution by petitioners of the contract was ineffective and inoperative against private respondent for lack of notice of resolution. 2. No
A corporation is invested by law with a personality separate and distinct from those of the persons composing it as wen as from that of any other legal entity to which it may be related. As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced when: it is used as a shield to further an end subversive of justice; or for purposes that could not have been intended by the law that created it; or to defeat public convenience, justify wrong, protect fraud, or defend crime; or to perpetuate fraud or confuse legitimate issues; or to circumvent the law or perpetuate deception; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on its contract when it rescinded the contract to sell. Onstott was made liable because he was then the President and the controlling stockholder. No sufficient proof exists that said petitioner used the corporation to defraud. He cannot be made personally liable just because he "appears to be the controlling stockholder". Mere ownership by a single stockholder or by another corporation is not of itself sufficient ground for disregarding the separate corporate personality.
J.G. SUMMIT HOLDINGS, INC., vs. COURT OF APPEALS; COMMITTEE ON PRIVATIZATION, its Chairman and Members; ASSET PRIVATIZATION TRUST; and PHILYARDS HOLDINGS, INC January 31, 2005 Facts; The petitioner questions the Resolution which reversed our Decision of November 20, 2000, which in turn reversed and set aside a Decision of the Court of Appeals promulgated on July 18, 1995. On January 1997, the National Investment and Development Corporation (NIDC), entered into a Joint Venture Agreement with Kawasaki Heavy Industries, Ltd. for the construction and, operation and management of the Subic National Shipyard, Inc. (SNS) which subsequently became the Philippine Shipyard and Engineering Corporation (PHILSECO). Under the JVA, the NIDC and KAWASAKI will contribute P330 million in the proportion of 60%-40%. It granted to the parties the right of first refusal should either of them decide to assign interest in the joint venture. On November 1986, NIDC transferred all its rights in PHILSECO to PNB. Such interests were subsequently transferred to the National Government. President Corazon Aquino issued Proclamation No. 50 establishing the Committee on Privatization (COP) and the Asset Privatization Trust (APT) to take title to, non-performing assets of the National Government. Thereafter, APT was named the trustee of the National Government's share in PHILSECO. As a result of a quasi-reorganization of PHILSECO to settle its huge obligations to PNB, the National Government's shareholdings in PHILSECO increased to 97.41%. In the interest of the national economy, the APT deemed it best to sell the National Government's share in PHILSECO. After a series of negotiations between the APT and KAWASAKI, they agreed that the latter's right of first refusal under the JVA be "exchanged" for the right to top by five percent (5%) the highest bid. KAWASAKI informed APT that Philyards Holdings, Inc. (PHI)1 would exercise its right to top. At the public bidding, J.G. Summit Holdings, Inc. submitted a bid of P2,030,000,000.00. As petitioner was declared the highest bidder, the COP approved the sale on December 1993 "subject to the right of Kawasaki to top JGSMI's bid by 5%." On December 1993, petitioner informed APT that it was protesting the offer of PHI to top its bid on the grounds that: (a) the KAWASAKI/PHI consortium composed of KAWASAKI, [PHILYARDS], Mitsui, Keppel, SM Group, ICTSI and Insular Life violated the ASBR because the last four (4) companies were the losing bidders thereby circumventing the law; (b) only KAWASAKI could exercise the right to top; (c) giving the same option to top to PHI constituted unwarranted benefit to a third party; (d) no right of first refusal can be exercised in a public bidding or auction sale; and (e) the JG Summit consortium was not estopped from questioning the proceedings.
On February 1994, the APT and PHI executed a Stock Purchase Agreement. Consequently, petitioner filed with this Court a Petition for Mandamus. The Court of Appeals denied. Petitioner filed a Petition for Certiorari with this Court. On November 2000, this Court rendered Decision ruling that the Court of Appeals erred when it dismissed the petition. Thus, this Court voided the transfer to Philyard[s] Holdings, Inc., and upheld the right of JG Summit. In separate Motions for Reconsideration, respondents submit[ted] three basic issues for x x x resolution: (1) Whether PHILSECO is a public utility;
(2) Whether under the 1977 JVA, KAWASAKI can exercise its right of first refusal only up to 40% of the total capitalization of PHILSECO; and (3) Whether the right to top granted to KAWASAKI violates the principles of competitive bidding.
This Court ruled in favor of the respondents. On the first issue, we held that Philippine Shipyard and Engineering Corporation (PHILSECO) is not a public utility, as by nature, a shipyard is not a public utility4 and that no law declares a shipyard to be a public utility. On the second issue, we found nothing in the 1977 Joint Venture Agreement (JVA) which prevents Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) from acquiring more than 40% of PHILSECO’s total capitalization. On the final issue, we held that the right to top granted to KAWASAKI in exchange for its right of first refusal did not violate the principles of competitive bidding. Issues; 1. the contracts do not authorize the right to top to be derived from the right of first refusal. 2. neither the right of first refusal nor the right to top can be legally exercised by the consortium which is not the proper party granted such right under either the JVA 3. the maintenance of the 60%-40% relationship between the NIDC and KAWASAKI arises from contract and from the Constitution because PHILSECO is a landholding corporation and need not be a public utility to be bound by the 60%40% constitutional limitation Held / ratio; Dismissed, affirmed 1. We upheld the mutual right of first refusal in the JVA. We also rule that nothing in the JVA prevents KAWASAKI from acquiring more than 40% of PHILSECO’s total capitalization. Likewise, nothing in the JVA or ASBR bars the conversion of the right of first refusal to the right to top. 2. Likewise, we already disposed of the argument that neither the right of first refusal nor the right to top can legally be exercised by the consortium which is not the proper party granted such right. The fact that the losing bidder, Keppel Consortium has joined PHILYARDS in the latter's effort to raise P2.131 billion necessary in exercising the right to top is not contrary to law, public policy or public morals. There is nothing in the ASBR that bars the losing bidders from joining KAWASAKI/PHI to raise the purchase price. The petitioner did not allege that the participation of the losing bidders in the public bidding was done with fraudulent intent. This is a purely commercial decision over which the State should not interfere absent any legal infirmity. This is in contrast to a case involving a contract for the operation of or construction of a government infrastructure where the identity of the buyer/bidder or financier constitutes an important consideration. In such cases, the government would have to take utmost precaution to protect public interest by ensuring that the parties with which it is contracting have the ability to satisfactorily construct or operate the infrastructure. 3. On the landholding issue, J.G. Summit submits that since PHILSECO is a landholding company, KAWASAKI could exercise its right of first refusal only up to 40% of the shares of PHILSECO due to the constitutional prohibition on landholding by corporations with more than 40% foreign-owned equity. Respondents assert that since the right of first refusal was validly converted into a right to top, which was exercised not by KAWASAKI, but by PHILYARDS
which is a Filipino corporation (i.e., 60% of its shares are owned by Filipinos), then there is no violation of the Constitution. The only issue is whether KAWASAKI had a valid right of first refusal over PHILSECO shares under the JVA considering that PHILSECO owned land until the time of the bidding and KAWASAKI already held 40% of PHILSECO’s equity. We uphold the validity of the mutual rights of first refusal. First of all, the right of first refusal is a property right. The agreement of co-shareholders to mutually grant this right to each other, by itself, does not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations. As PHILYARDS correctly puts it, if PHILSECO still owns land, the right of first refusal can be validly assigned to a qualified Filipino entity in order to maintain the 60%-40% ratio. This transfer, by itself, does not amount to a violation of the Anti-Dummy Laws, absent proof of any fraudulent intent. The transfer could be made either to a nominee or such other party which the holder of the right of first refusal feels it can comfortably do business with. Alternatively, PHILSECO may divest of its landholdings, in which case KAWASAKI, in exercising its right of first refusal, can exceed 40% of PHILSECO’s equity. In fact, it can even be said that if the foreign shareholdings of a landholding corporation exceeds 40%, it is not the foreign stockholders’ ownership of the shares which is adversely affected but the capacity of the corporation to own land – that is, the corporation becomes disqualified to own land. This finds support under the basic corporate law principle that the corporation and its stockholders are separate juridical entities. In this vein, the right of first refusal over shares pertains to the shareholders whereas the capacity to own land pertains to the corporation. Hence, the fact that PHILSECO owns land cannot deprive stockholders of their right of first refusal. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land. This is the clear import of the following provisions in the Constitution: Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into coproduction, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant. xxx xxx xxx Section 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain.42 (emphases supplied)
The petitioner further argues that "an option to buy land is void in itself citing Philippine Banking Corporation v. Lui She,. The right of first refusal granted to KAWASAKI, is similarly void. Hence, the right to top is also void." Contrary to the contention of petitioner, the case of Lui She did not that say "an option to buy land is void in itself,". In Lui She, the option to buy was invalidated because it amounted to a virtual transfer of ownership as the owner could not sell or dispose of his properties. The contract in Lui She prohibited the owner of the land from selling, donating, mortgaging, or encumbering the property during the 50-year period of the option to buy. This is not so in the case at bar where the mutual right of first refusal in favor of NIDC and KAWASAKI does not amount to a virtual transfer of land to a
non-Filipino. In fact, the case at bar involves a right of first refusal over shares of stockwhile the Lui She case involves an option to buy the land itself. As discussed earlier, there is a distinction between the shareholder’s ownership of shares and the corporation’s ownership of land arising from the separate juridical personalities of the corporation and its shareholders. J.G. Summit alleges that PHILSECO continues to violate the Constitution as its foreign equity is above 40% and yet owns long-term leasehold rights which are real rights. It cites Article 415 of the Civil Code which includes in the definition of immovable property, "contracts for public works, and servitudes and other real rights over immovable property." J.G. Summit misreads the provisions of the Constitution. The prohibition in the Constitution applies only to ownership of land. It does not extend to immovable or real property as defined under Article 415 of the Civil Code.
MARVEL BUILDING CORPORATION, ET AL., vs. SATURNINO DAVID, Collector, Bureau of Internal Revenue February 24, 1954 Facts; The Articles of Incorporation of the Marvel Building Corporation is dated February 12, 1947 and according to it the capital stock is P2,000,000, of which P1,025,000 was (at the time of incorporation) subscribed and paid for by the following incorporators: Maria B. Castro 250 shares P 250,000.00 Amado A. Yatco 100 " 100,000.00 Santiago Tan 100 " 100,000.00 Jose T. Lopez 90 " 90,000.00 Benita Lamagna 90 " 90,000.00 C.S. Gonzales 80 " 80,000.00 Maria Cristobal 70 " 70,000.00 Segundo Esguerra, Sr. 75 " 75,000.00 Ramon Sangalang 70 " 70,000.00 Maximo Cristobal 55 " 55,000.00 Antonio Cristobal 45 " 45,000.00 P1,025,000.00
Maria B Castro was elected President. The Wise Building was purchased on September 4, 1946, the purchase being made in the name of Dolores Trinidad, wife of Amado A. Yatco and the Aguinaldo Building, on January 17, 1947, in the name of Segundo Esguerra, Sr. Both building were purchased for P1,800,000, but as the corporation had only P1,025,000, the balance of the purchase price was obtained as loans from the Insular Life Assurance Co., Ltd. and the Philippine Guaranty Co., Inc. Of the incorporators of the Marvel Building Corporation, Maximo Cristobal and Antonio Cristobal are half-brothers of Maria B. Castro, Maria Cristobal is a half-sister, and Segundo Esguerra, Sr. a brother-in-law, husband of Maria Cristobal, Maria B. Castro's half-sister. It does not appear that the stockholders or the board of directors of the Marvel Building Corporation have ever held a business meeting. The by-laws of the corporation, if any had ever been approved, has not been presented. Neither does it appear that any report of the affairs of the corporation has been made, either of its transactions or accounts. The Secretary of Finance, upon consideration of the report of a special committee assigned to study the war profits tax case of Mrs. Maria B. Castro, recommended the collection of P3,593,950.78 as war profits taxes. Pursuant thereto various properties were seized by the Collector of Internal Revenue on October 31, 1950. On November 1950, the original complaint in this case was filed. After trial, the Court of First Instance of Manila rendered judgment ordering the release of the properties mentioned, and enjoined the Collector of Internal Revenue from selling the same. The Collector of Internal Revenue has appealed to this Court against the judgment. Defendant claims that Maria B. Castro is the true and sole owner of all the subscribed stock of the Marvel Building Corporation, including those appearing to have been subscribed and paid for by the other members, and consequently said Maria B. Castro is also the true and exclusive owner of the properties seized Issue;
Is Maria B. Castro the owner of all the shares of stocks of Marvel Building Corporation and the other stockholders mere dummies of hers? Held / ratio; Yes, reversed In general the evidence offered by the plaintiffs is testimonial and direct evidence, easy of fabrication; that offered by defendant, documentary and circumstantial, not only difficult of fabrication but in most cases found in the possession of plaintiffs. There is very little room for choice as between the two. The circumstantial evidence is not only convincing; it is conclusive. The existence of endorsed certificates, discovered by the internal revenue agents between 1948 and 1949 in the possession of the Secretary-Treasurer, the fact that twenty-five certificates were signed by the president of the corporation, for no justifiable reason, the fact that two sets of certificates were issued, the undisputed fact that Maria B. Castro had made enormous profits and, therefore, had a motive to hide them to evade the payment of taxes, the fact that the other subscribers had no incomes of sufficient magnitude to justify their big subscriptions, the fact that the subscriptions were not receipted for and deposited by the treasurer in the name of the corporation but were kept by Maria B. Castro herself, the fact that the stockholders or the directors never appeared to have ever met to discuss the business of the corporation, the fact that Maria B. Castro advanced big sums of money to the corporation without any previous arrangement or accounting, and the fact that the books of accounts were kept as if they belonged to Maria B. Castro alone — these facts are of patent and potent significance. What are their necessary implications? Maria B. Castro would not have asked them to endorse their stock certificates, or be keeping these in her possession, if they were really the owners. They never would have consented that Maria B. Castro keep the funds without receipts or accounting, nor that she manages the business without their knowledge or concurrence, were they owners of the stocks in their own rights. Each and every one of the facts all set forth above, in the same manner, is inconsistent with the claim that the stockholders, other than Maria B. Castro, own their shares in their own right. On the other hand, each and every one of them, and all of them, can point to no other conclusion than that Maria B. Castro was the sole and exclusive owner of the shares and that they were only her dummies. In our opinion, the facts and circumstances duly set forth above, all of which have been proved to our satisfaction, prove conclusively and beyond reasonable doubt (section 89, Rule 123 of the Rules of Court and section 42 of the Provisional law for the application of the Penal Code) that Maria B. Castro is the sole and exclusive owner of all the shares of stock of the Marvel Building Corporation and that the other partners are her dummies.
CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD MAGSAYSAY-CABRERA, LUISA MAGSAYSAY-CORPUZ, assisted be her husband, Dr. Jose Corpuz, FELICIDAD P. MAGSAYSAY, and MERCEDES MAGSAYSAY-DIAZ, vs. COURT OF APPEALS and ADELAIDA RODRIGUEZ-MAGSAYSAY, Special Administratrix of the Estate of the late Genaro F. Magsaysay December 19, 1989 Facts; Petitioners seek to reverse the decision of the Court of Appeals affirming that of the Court of First Instance which denied petitioners' motion to intervene in an annulment suit filed by herein private respondent. On February 1979, Adelaida Rodriguez-Magsaysay, administratix of the estate of the late Senator Genaro Magsaysay, brought an action against Artemio Panganiban, Subic Land Corporation (SUBIC), Filipinas Manufacturer's Bank (FILMANBANK) and the Register of Deeds of Zambales. She alleged that in 1958, she and her husband acquired, thru conjugal funds, a parcel of land known as "Pequena Island"; that after the death of her husband, she discovered [a] an annotation at the back of TCT that "the land was acquired by her husband from his separate capital;" [b] the registration of a Deed of Assignment dated June 1976 purportedly executed by the late Senator in favor of SUBIC; and [c] the registration of Deed of Mortgage dated April 1977 executed by SUBIC in favor of FILMANBANK; that the foregoing acts were done in an attempt to defraud the conjugal partnership considering her marital consent was not obtained. She prayed that the Deed of Assignment and the Deed of Mortgage be annulled. On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for intervention on the ground that their brother conveyed to them one-half (1/2 ) of his shareholdings in SUBIC and as assignees of around 41 % of the total outstanding shares of SUBIC, they have a substantial and legal interest. On July 26, 1979, the court denied the motion for intervention, and ruled that petitioners have no legal interest whatsoever in the matter in litigation because SUBIC has a personality separate and distinct from its stockholders. On appeal, respondent Court of Appeals affirmed. Issue; WON petitioners may intervene Held / ratio; No, affirmed Petitioners strongly argue that their ownership of 41.66% of the entire outstanding capital stock of SUBIC entitles them to a significant vote in the corporate affairs; that they are affected by the action of the widow of their late brother for it concerns the only tangible asset of the corporation and that it appears that they are more vitally interested in the outcome of the case than SUBIC. This Court affirms the respondent court's holding that petitioners herein have no legal interest in the subject matter in litigation so as to entitle them to intervene.
In Section 2 of Rule 12 of the Rules of Court, to be permitted to intervene in a pending action: [a] it must be shown that the movant has legal interest in the matter in litigation, or otherwise qualified; and [b] consideration must be given as to whether the adjudication of the rights of the original parties may be delayed or prejudiced, or whether the intervenor's rights may be protected in a separate proceeding or not. The interest which entitles a person to intervene in a suit between other parties must be in the matter in litigation and of such direct and immediate character that the intervenor will either gain or lose by the direct legal operation and effect of the judgment. Otherwise, if persons not parties of the action could be allowed to intervene, proceedings will become unnecessarily complicated, expensive and interminable. The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not recover. Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations. While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person.
INDOPHIL TEXTILE MILL WORKERS UNION-PTGWO, vs. VOLUNTARY ARBITRATOR TEODORICO P. CALICA and INDOPHIL TEXTILE MILLS, INC February 3, 1992 Facts; This is a petition seeking the nullification of the award issued by the respondent Voluntary Arbitrator finding that Section 1 (c), Article I of the Collective Bargaining Agreement between Indophil Textile Mills, Inc. and Indophil Textile Mill Workers Union-PTGWO does not extend to the employees of Indophil Acrylic Manufacturing Corporation Petitioner is the exclusive bargaining agent of all the rank-and-file employees of Indophil Textile Mills, Incorporated. Indophil Textile Mills, Inc. is engaged in the manufacture of yarns and has its plants at Bulacan. In April, 1987, petitioner and private respondent executed a collective bargaining agreement effective from April 1987 to March 1990. On November 1967 Indophil Acrylic Manufacturing Corporation was formed. In 1988, Acrylic became operational and hired workers. Sometime in July, 1989, the workers of Acrylic unionized and a collective bargaining agreement was executed. In 1990, the petitioner claimed that the plant facilities built by Acrylic should be considered as an extension or expansion of the facilities of private respondent pursuant to Section 1(c), Article I of the CBA. c) This Agreement shall apply to the Company's plant facilities and installations and to any extension and expansion thereat. (Rollo, p.4) It is the petitioner's contention that Acrylic is part of the Indophil bargaining unit. The petitioner's contention was opposed by private respondent which submits that it is a juridical entity separate and distinct from Acrylic. The parties requested the public respondent to act as voluntary arbitrator. The public respondent awarded that Sec. l, (c), Art. I, of the 1987 CBA do (sic) not extend to the employees of Acrylic. Issue; WON Indophil Acrylic Corporation is an extension of private respondent Held / ratio; No, affirmed Petitioner maintains that the creation of the aforesaid Indophil Acrylic is but a devise of respondent Company to evade the application of the CBA between petitioner Union and respondent Company. Furthermore, petitioner emphasizes that the two corporations have the same incorporators, directors and officers. In fact, of the total stock subscription of Indophil Acrylic, seventy percent (70%) of the total subscription of P2,500,000.00 was subscribed to by respondent Company.
Petitioner notes that the foregoing evidence sufficiently establish that Acrylic is but an extension or expansion of private respondent, to wit: (a) the two corporations have their physical plants, offices and facilities situated in the same compound; (b) many of private respondent's own machineries are now installed and being used in the Acrylic plant; (c) the services of a number of departments of private respondent are provided to Acrylic; and (d) the employees of private respondent are the same persons manning and servicing the units of Acrylic We find the petition devoid of merit. Decisions of voluntary arbitrators are to be given the highest respect and a certain measure of finality, but this is not a hard and fast rule, it does not preclude judicial review thereof where want of jurisdiction, grave abuse of discretion, violation of due process, denial of substantial justice, or erroneous interpretation of the law were brought to our attention. Voluntary arbitrator Calica, a professor of the U.P. Asian Labor Education Center, found that the existing law and jurisprudence on the matter, supported the private respondent's contentions. Public respondent did not abuse his discretion. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders of the corporation will be considered as the corporation, that is liability will attach directly to the officers and stockholders. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. The fact that the businesses of private respondent and Acrylic are related, that some of the employees of the private respondent are the same persons manning and providing for auxilliary services to the units of Acrylic, and that the physical plants, offices and facilities are situated in the same compound – these facts are not sufficient to justify the piercing of the corporate veil of Acrylic. The legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation." Petitioner does not seek to impose a claim against the members of the Acrylic. Furthermore, it is grave abuse of discretion to treat two companies as a single bargaining unit when these companies are indubitably distinct entities with separate juridical personalities. Hence, the Acrylic not being an extension or expansion of private respondent, the rank-and-file employees working at Acrylic should not be recognized as part of, and/or within the scope of the petitioner, as the bargaining representative of private respondent.
ROBERTO A. JACINTO, vs. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY June 6, 1991 Facts; This is an appeal to partially set aside the Court of Appeals which affirmed in toto the decision of the Regional Trial Court ordering defendants (including petitioner herein) solidarily liable. Petitioner's co-defendant in the courts below, Inland Industries Inc., chose not to join him in this appeal. Issue; WON petitioner solidarily liable Held / ratio; Yes, affirmed Roberto A. Jacinto is admittedly the President and General Manager of the corporation and a substantial stockholders thereof. It was Jacinto who dealt entirely with responded in those transactions. In the Trust Receipts that he signed supposedly in behalf of Inland Industries, Inc., it is not even mentioned that he did so in this official capacity. Jacinto even admitted that he and his wife own 52% of the stocks of defendant corporation. We cannot accept as true the assertion that he only acted in his official capacity as President and General Manager. The same is just a clever ruse to thwart his personal liability. As could be expected, Jacinto presented a different corporate scenario and declared that it is Bienvenida Catabas who is its President, while Aurora Heresa is its Chairman of the Board. His assertion is not convincing in view of his admission in the same breath, that his wife own with him 52% of the shares of stock of said corporation. Indeed, this circumstance –– even if standing alone –– cannot but engender in the most unprejudiced mind doubt and misgiving why Catabas and Heresa would be defendant corporation's President and Chairman of the Board, respectively. The conflicting statements by Jacinto place in extreme doubt his credibility anent his alleged participation in said transactions. Petitioner, however, faults the courts below for piercing the veil of corporate fiction despite the absence of any allegation in the complaint questioning the separate identity of Inland Industries, Inc. This is not accurate. While on the face of the complaint there is no specific allegation that the corporation is a mere alter ego of petitioner, subsequent developments, from the stipulation of facts up to the presentation of evidence and the examination of witnesses, unequivocally show that respondent Metropolitan Bank and Trust Company sought to prove that petitioner and the corporation are one or that he is the corporation. No serious objection was heard from petitioner. Section 5 of Rule 10 of the Rules of Court provides: Sec. 5.Amendment to conform to or authorize presentation of evidence. –– When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects, as if they had been raised in the pleadings. Such amendment of the
pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure so to amend does not affect the trial of these issues. If the evidence is objected to at the time of trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall do so freely when the presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would prejudice him in maintaining his action or defense upon the merits. The court may grant continuance to enable the objecting party to meet such evidence.
Pursuant thereto, "when evidence is presented by one party, with the express or implied consent of the adverse party, as to issues not alleged in the pleadings, judgment may be rendered validly as regards those issues, which shall be considered as if they have been raised in the pleadings. There is implied consent to the evidence thus presented when the adverse party fails to object thereto.
CONCEPT BUILDERS, INC., vs. NATIONAL LABOR RELATIONS COMMISSION, (First Division); and Norberto Marabe; Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar, Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea, et al May 29, 1996 Facts; The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another corporation. The law in these instances will regard the corporation as a mere association of persons and, in case of two corporations, merge them into one. Thus, where a sister corporation is used as a shield to evade a corporation's subsidiary liability for damages, the corporation may not be heard to say that it has a personality separate and distinct from the other corporation. The piercing of the corporate veil comes into play. This action raises the question of whether the National Labor Relations Commission committed grave abuse of discretion when it issued a "break-open order" to the sheriff to be enforced against property found in the premises of petitioner's sister company. Concept Builders, Inc., with office at Valenzuela is engaged in the construction business. Private respondents were employed by said company as laborers. On November, 1981, private respondents were served written notices of termination. It was stated that their contracts of employment had expired and the project in which they were hired had been completed. Public respondent found it to be, that at the time of the termination the project had not yet been finished. Petitioner had to engage the services of sub-contractors. Aggrieved, private respondents filed a complaint for illegal dismissal. The Labor Arbiter ordered petitioner to reinstate private respondents and to pay them back wages amounting to P199,800.00. The Labor Arbiter issued a writ of execution. The writ was partially satisfied through garnishment of sums from petitioner's debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of P81,385.34. On February 1989, an Alias Writ of Execution was issued directing the sheriff to collect from herein petitioner the sum of P117,414.76, representing the balance and to reinstate private respondents to their former positions. The sheriff issued a report stating that he tried to serve the alias writ of execution on petitioner through the security guard on duty but the service was refused on the ground that petitioner no longer occupied the premises. 1. All the employees inside petitioner's premises claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent; 2. Levy was made upon personal properties he found in the premises; 3. Security guards with high-powered guns prevented him from removing the properties he had levied upon. 4
Private respondents filed a "Motion for Issuance of a Break-Open Order," alleging that HPPI and petitioner corporation were owned by the same incorporator/stockholders. HPPI filed an Opposition contending that HPPI is a corporation which is separate and distinct from petitioner. HPPI also alleged that the two corporations are engaged in two different kinds of businesses, i.e., HPPI is a manufacturing firm while petitioner was then engaged in construction. The Labor Arbiter denied private respondents' motion for break-open order. But the NLRC issued a break-open order. Issue; WON HPPI may be held liable Held / ratio; Yes, affirmed Petitioner contends, that the doctrine of piercing the corporate veil should not have been applied, in this case, in the absence of any showing that it created HPPI in order to evade its liability to private respondents. It also contends that HPPI is engaged in the manufacture and sale of steel, concrete and iron pipes, a business which is distinct and separate from petitioner's construction business. Hence, it is of no consequence that petitioner and HPPI shared the same premises, the same President and the same set of officers and subscribers. We find petitioner's contention to be unmeritorious. When the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation. The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, to wit: 1. Stock ownership by one or common ownership of both corporations. 2. Identity of directors and officers. 3. The manner of keeping corporate books and records. 4. Methods of conducting the business. The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding the separate juridical personality of corporations as follows: Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the "instrumentality" may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of instances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: 1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty or dishonest and unjust act in contravention of plaintiff's legal rights; and 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant's relationship to that operation. Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or a subterfuge is purely one of fact. In this case, thwhile petitioner claimed that it ceased its business operations on April 1986, it filed an Information Sheet with the SEC on May 1987, stating that its office address is Valenzuela. HPPI submitted on the same day, a similar information sheet stating that its office address is at Valenzuela. Furthermore, both were filed by the same Virgilio O. Casiño as the corporate secretary. Both corporations had the same president, thesame board of directors, the same corporate officers, and substantially the same subscribers. Under this circumstances, (sic) it cannot be said that the property levied upon by the sheriff were not of respondents. Petitioner ceased its business operations in order to evade the payment to private respondents of back wages and to bar their reinstatement. HPPI is obviously a business conduit of petitioner corporation and its emergence was skillfully orchestrated to avoid the financial liability.
EDUARDO CLAPAROLS, ROMULO AGSAM and/or CLAPAROLS STEEL AND NAIL PLANT, vs. COURT OF INDUSTRIAL RELATIONS, ALLIED WORKERS' ASSOCIATION and/or DEMETRIO GARLITOS, ALFREDO ONGSUCO, JORGE SEMILLANO, SALVADOR DOROTEO, ROSENDO ESPINOSA, LUDOVICO BALOPENOS, ASER AMANCIO, MAXIMO QUIOYO, GAUDENCIO QUIOYO, and IGNACIO QUIOYO July 31, 1975 Facts; A petition to set aside Court of Industrial Relations directing petitioners to pay back wages to private respondents It appears that on August 1957, a complaint for unfair labor practice was filed by Allied Workers' Association, Demetrio Garlitos and ten (10) respondent workers against herein petitioners on account of the dismissal of respondent workers from petitioner Claparols Steel and Nail Plant. Respondent Court rendered its decision finding "Mr. Claparols guilty of union busting and" of having "dismissed said complainants because of their union activities," and ordering respondents to reinstate said complainants with back wages. Respondent workers were accompanied by the Chief of Police of Negros Occidental to the compound to report for reinstatement. Respondent workers were refused reinstatement by company accountant Francisco Cusi for he had no order from plant owner Eduardo Claparols to reinstate them. On January 1965, the CIR Chief Examiner Submitted his report containing three computations: The first computation covers the period February 1, 1957 to October 31, 1964. The second is up to and including December 7, 1962, when the corporation stopped operations, While the third is only up to June 30, 1957 when the Claparols Steel and Nail Plant ceased to operate with the explanation that: 6. Since the records of the Claparols Steel Corporation show that it was established on July 1, 1957 succeeding the Claparols Steel and Nail Plant which ceased operations on June 30, 1957, and that the Claparols Steel Corporation stopped operations on December 7, 1962, three (3) computations are presented herein for the consideration Petitioners oppose alleging that petitioner Claparols could not personally reinstate respondent workers;; and that since Claparols Steel Corporation ceased to operate on December 1962, re-employment of respondent workers cannot go beyond December 1962. Respondent workers, allege that Claparols Steel and Nail Plant and Claparols Steel and Nail Corporation are one and the same corporation controlled by petitioner Claparols, with the latter corporation succeeding the former. Respondent Court issued an order approving the examiner’s report. Upon petitioner’s certiorari, this Court ordered for a recomputation. Later, the new computation was approved by the CIR. Hence this petition.
Issue; WON petitioner corporation liable Held / ratio; Yes, affirmed WE uniformly held that "a bonus is not a demandable and enforceable obligation, except when it is a part of the wage or salary compensation" Whether or not bonus forms part of wages depends upon the condition or circumstance for its payment. If it is an additional compensation WHICH THE EMPLOYER PROMISED AND AGREED to give without any condition imposed for its payment ... then it is part of the wage. An employee is not entitled to bonus where there is no showing that it had been granted by the employer to its employees periodically or regularly as to become part of their wages or salaries. The clear implication is that bonus is recoverable as part of the wage or salary where the employer regularly or periodically gives it to employees. Petitioners in the present case do not dispute that as a matter of tradition, the company has been doling out bonuses to employees. As such, bonus for a given year earmarked as a matter of tradition for distribution to employees has formed part of their recoverable wages from the company. Moreover, with greater reason, should recovery of bonuses as part of back wages be observed in the present case since the company, in the light of the very admission of company accountant Francisco Cusi, distributes bonuses to its employees even if the company has suffered losses. Petitioners insist that We adopt the ruling in the Sta. Cecilia Sawmills case wherein the recoverable back wages were limited to only three (3) months; because as in the Sta. Cecilia Sawmills case, the Claparols Steel and Nail Plant ceased operations due to enormous business reverses. The Claparols Steel and Nail Plant, which ceased operation of June 30, 1957, was SUCCEEDED by the Claparols Steel Corporation effective the next day, July 1, 1957 up to December 7, 1962,. It is very clear that the latter corporation was a continuation and successor of the first entity, and its emergence was skillfully timed to avoid the financial liability that already attached to its predecessor, the Claparols Steel and Nail Plant. Both predecessors and successor were owned and controlled by the petitioner Eduardo Claparols and there was no break in the succession and continuity of the same business. This "avoiding-the-liability" scheme is very patent, considering that 90% of the subscribed shares of stocks of the Claparols Steel Corporation (the second corporation) was owned by respondent (herein petitioner) Claparols himself, and all the assets of the dissolved Claparols Steel and Nail Plant were turned over to the emerging Claparols Steel Corporation. It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in the present case could, and should, be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association or persons, or, in the case of two corporations, will merge them into one.
Where a corporation is a dummy and serves no business purpose and is intended only as a blind, the corporate fiction may be ignored. Where a corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct corporate entities should be disregarded.
VILLA REY TRANSIT, INC., plaintiff-appellant, vs. EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC SERVICE COMMISSION,defendants. EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC., defendants-appellants. PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant, vs. JOSE M. VILLARAMA, third-party defendant-appellee October 29, 1968 Facts; This is a tri-party appeal from the decision of the Court of First Instance declaring the plaintiff Villa Rey Transit, Inc., to be the lawful owner of the said certificates of public convenience; and ordering the private defendants to pay to the plaintiff. Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the business name of Villa Rey Transit, pursuant to certificates of public convenience granted by the Public Service Commission (PSC, for short). He sold the two certificates of public convenience to the Pangasinan Transportation Company, Inc. (Pantranco), for P350,000.00 with the condition that the seller (Villarama) "shall not for a period of 10 years apply for any TPU service competing with the buyer." Three months thereafter a corporation called Villa Rey Transit, Inc. (Corporation) was organized with a capital stock of P500,000.00. The Corporation, bought five certificates of public convenience, forty-nine buses, tools and equipment from Valentin Fernando, for the sum of P249,000.00. The very same day, the parties applied with the PSC for its approval. The PSC granted provisional permit. Before the PSC could take final action on said application for approval of sale, however, the Sheriff of Manila, on July 1959, levied on two of the five certificates of public convenience in favor of Eusebio Ferrer, judgment creditor, against Valentin Fernando. A public sale was conducted by the Sheriff and Ferrer was the highest bidder. Thereafter, Ferrer sold the certificates to Pantranco, and submitted for approval the contract of sale to the PSC. The applications for approval of sale, filed by Fernando and the Corporation, and Ferrer and Pantranco were scheduled for a joint hearing. The Corporation filed a complaint for the annulment of the sheriff's sale and the subsequent sale thereof. The CFI annulled the sale and declared the Corp the lawful owner. Issue; (1) Does the stipulation between Villarama and Pantranco, apply to new lines only or does it include existing lines?; (2) Assuming that said stipulation covers all lines, is such stipulation valid and enforceable?; (3) In the affirmative, that said stipulation is valid, did it bind the Corporation? Held / ratio;
Reversed Pantranco disputes the decision insofar as it holds that the Corporation is a distinct and separate entity from Jose M. Villarama; that the restriction clause in the contract between Pantranco and Villarama is null and void; Ferrer, challenges the decision insofar as it holds that the sheriff's sale is null and void; The Corporation, prays for a review of that portion of the decision awarding damages. Villarama, albeit was not an incorporator or stockholder of the Corporation, alleging that he did not become such, because he did not have sufficient funds to invest, his wife, however, was an incorporator with the least subscribed number of shares, and was elected treasurer of the Corporation. The finances of the Corporation which, under all concepts in the law, are supposed to be under the control and administration of the treasurer keeping them as trust fund for the Corporation, were, nonetheless, manipulated and disbursed as if they were the private funds of Villarama, in such a way and extent that Villarama appeared to be the actual owner-treasurer of the business without regard to the rights of the stockholders. The initial cash capitalization of the corporation of P105,000.00 was mostly financed by Villarama. Of the P105,000.00 P85,000.00 was covered by Villarama's personal check. The accountant testified that while in the books there appears an entry that the treasurer received P95,000.00 as second installment of the paid-in subscriptions, and, subsequently, also P100,000.00 as the first installment of the offer for second subscriptions, Villarama directed him to make vouchers liquidating the sums. Thus, it was made to appear that the P95,000.00 was delivered to Villarama in payment for equipment purchased from him, and the P100,000.00 was loaned as advances to the stockholders. The said accountant, however, testified that he was not aware of any amount of money that had actually passed hands. Further, when the Corporation was in its initial months of operation, Villarama purchased and paid with his personal checks Ford trucks. It would appear that: Villarama supplied the organization expenses and the assets of the Corporation, such as trucks and equipment; there was no actual payment by the original subscribers of the amounts; Villarama made use of the money of the Corporation and deposited them to his private accounts; and the Corporation paid his personal accounts. The foregoing are strong persuasive evidence showing that Villarama has been too much involved in the affairs of the Corporation to altogether negative the claim that he was only a part-time general manager. The Corporation is his alter ego. Not a single one of the acts has been denied by Villaram. Villarama has admitted having paid P85,000.00 of the initial capital with the lame excuse that "his wife had requested him to reimburse the amount entrusted to her by the incorporators which she had used to pay his obligations" But with his admission that he had received P350,000.00 from Pantranco it becomes difficult to accept Villarama's explanation. On his having paid for purchases of trucks, his reason was that he was only sharing with the Corporation his credit with some companies. And his main reason for mingling his funds with that of the Corporation and for the latter's paying his private bills is that it would be more convenient that he kept the money to be used in paying the registration fees on time, and since he had loaned money to the Corporation, this would be set off by the latter's paying his bills.
While Villarama was not the Treasurer but was, allegedly, only a part-time manager, he admitted that he advanced and lent funds for the Corporation, and there was no Board Resolution allowing it. The interference of Villarama in the complex affairs of the corporation, and particularly its finances, are much too inconsistent with the ends and purposes of the Corporation law, which, precisely, seeks to separate personal responsibilities from corporate undertakings. It is the very essence of incorporation that the acts and conduct of the corporation be carried out in its own corporate name because it has its own personality. The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized and respected in all cases which are within reason and the law. When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals. Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and the restrictive clause in the contract is also enforceable and binding against the said Corporation. For the rule is that a seller or promisor may not make use of a corporate entity as a means of evading the obligation of his covenant. Where the Corporation is substantially the alter ego of the covenantor to the restrictive agreement, it can be enjoined from competing with the covenantee.
RAYMUNDO ODANI SECOSA, EL BUENASENSO SY and DASSAD WAREHOUSING and PORT SERVICES, INCORPORATED, vs. HEIRS OF ERWIN SUAREZ FRANCISCO June 29, 2004 Facts; This is a petition seeking reversal of Court of Appeals which affirmed in toto the Regional Trial Court of Manila On June 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen year old third year physical therapy student of the Manila Central University, was riding a motorcycle near the Veteran Shipyard Gate in the Manila. At the same time, petitioner, Raymundo Odani Secosa, was driving an Isuzu cargo truck. The truck was owned by petitioner, Dassad Warehousing and Port Services, Inc. Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which was being tailed by Secosa. The three vehicles were traversing the southbound lane at a fairly high speed. When Secosa overtook the sand truck, he bumped the motorcycle. The rear wheels of the Isuzu truck then ran over Francisco, which resulted in his death. Petitioner Secosa left his truck and fled. Respondents, the parents of Erwin, filed an action for damages against Secosa, Dassad Warehousing and Port Services, Inc. and Dassad’s president, El Buenasucenso Sy. The court a quo rendered a decision in favor of herein respondents. It held the defendants solidarily liable. The CA affirmed in toto. Issue; WON defendants solidarily liable Held / ratio; No, reversed in part On the issue of whether Dassad Warehousing and Port Services, Inc. exercised the diligence of a good father the selection and supervision of its employees, we find the assailed decision to be in full accord with law and established jurisprudence. Dassad Warehousing and Port Services, Inc. failed to conclusively prove that it had exercised the requisite diligence. Edilberto Duerme, the lone witness by Dassad Warehousing and Port Services, Inc., testified that he was the one who recommended petitioner Secosa as a driver; that it was his duty to scrutinize the capabilities of drivers; and that he believed petitioner to be physically and mentally fit for he had undergone rigid training and attended the PPA safety seminar. Dassad Warehousing and Port Services, Inc. failed to support the testimony with documentary evidence. Such omission is fatal to its position, on account of which, Dassad can be rightfully held solidarily liable with its co-petitioner Raymundo Secosa. However, we find that El Buenasenso Sy cannot be held solidarily liable.
A corporation is invested by law with a personality separate from that of its stockholders or members. It has 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 single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not in itself sufficient ground for disregarding the separate corporate personality.A corporation’s authority to act and its liability for its actions are separate and apart from the individuals who own it. The so-called veil of corporation fiction treats as separate and distinct the affairs of a corporation and its officers and stockholders. As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed. The records of this case are bereft of evidence tending to show the presence of any grounds enumerated above. The Isuzu cargo truck was registered in the name of Dassad Warehousing and not in the name of Sy. Secosa is an employee of Dassad Warehousing and not of Sy. These things, when taken collectively, point toward El Buenasenso Sy’s exclusion from liability.
BENJAMIN YU, vs. NATIONAL LABOR RELATIONS COMMISSION and JADE MOUNTAIN PRODUCTS COMPANY LIMITED, WILLY CO, RHODORA D. BENDAL, LEA BENDAL, CHIU SHIAN JENG and CHEN HO-FU June 30, 1993 Facts; Benjamin Yu was the Assistant General Manager of the marble quarrying and export business operated by a registered partnership "Jade Mountain Products Company Limited" ("Jade Mountain"). The partnership was organized on June 1984 with Lea Bendal and Rhodora Bendal as general partners and Chin Shian Jeng, Chen Ho-Fu and Yu Chang, all citizens of Taiwan, as limited partners. The business consisted of exploiting a marble deposit found on land owned by the Sps. Cruz, in Bulacan. The partnership had its main office in Makati. Benjamin Yu was hired by virtue of a Partnership Resolution dated March 1985, with monthly salary of P4,000.00. According to Yu, however, he actually received only half of his salary, since he accepted the promise of the partners that the balance would be paid when the firm secured additional funds from abroad. Yu had overall supervision of the workers at the quarry and took charge of the preparation of papers relating to the exportation. In 1988, without the knowledge of Yu, the general partners sold their interests to private respondent Willy Co and Emmanuel Zapanta. Yu Chang, a limited partner, also sold his interest to Willy Co. The partnership now constituted solely by Willy Co and Emmanuel Zapanta continued to use the old firm name though they moved the main office to Mandaluyong. All the employees continued working save Benjamin Yu. On November 1987, Yu reported to the Mandaluyong office and met Willy Co for the first time. Willy Co told the latter that he had bought the business and that it was for him to decide whether or not he was responsible for the obligations of the old partnership, including petitioner's unpaid salaries. Petitioner was not allowed to work anymore. His unpaid salaries remained unpaid. On December 1988. Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid salaries against Jade Mountain, Mr. Willy Co and the other private respondents. The partnership contend that Yu was never hired as an employee by the new partnership. The Labor Arbiter held that petitioner had been illegally dismissed. The NLRC reversed. Issue; WON respondents liable to petitioner for unpaid salaries / WON petitioner illegally dismissed Held / ratio; Granted, set aside. Yes, No. The basic contention of petitioner is that the partnership has a juridical personality separate and distinct from that of each of its members. Such independent legal personality subsists notwithstanding changes in the identities of the partners. Consequently, the employment contract between Benjamin Yu and the partnership Jade Mountain could not have been affected by changes in the latter's membership.
The legal effect of the changes in the membership of the partnership was the dissolution of the old partnership which had hired petitioner. The applicable law is Article 1828 of the Civil Code: Art. 1828. The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.
Article 1830: Art. 1830. Dissolution is caused: (1) without violation of the agreement between the partners; xxx xxx xxx (b) by the express will of any partner, who must act in good faith, when no definite term or particular undertaking is specified; xxx xxx xxx (2) in contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this article, by the express will of any partner at any time;
The acquisition of 82% of the partnership interest by new partners, coupled with the retirement or withdrawal of the partners who had originally owned such 82% interest, was enough to constitute a new partnership. However, this does not automatically result in the termination of the legal personality of the old partnership. Article 1829: [o]n dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed.
The legal personality of the expiring partnership persists for the limited purpose of winding up and closing of the affairs of the partnership. In the case at bar, the new partnership simply took over the business enterprise without winding up the business affairs of the old partnership. Under the above described situation, not only the retiring partners but also the new partnership are liable for the debts of the preceding partnership. A withdrawing partner remains liable to a third party creditor of the old partnership. The liability of the new partnership, upon the other hand is established in Article 1840: Art. 1840. In the following cases creditors of the dissolved partnership are also creditors of the person or partnership continuing the business: (1) When any new partner is admitted into an existing partnership, or when any partner retires and assigns (or the representative of the deceased partner assigns) his rights in partnership property to two or more of the partners, or to one or more of the partners and one or more third persons, if the business is continued without liquidation of the partnership affairs; …
Creditors of the old Jade Mountain are also creditors of the new Jade Mountain which continued the business of the old one without liquidation. It is clear that under Article 1840 Benjamin Yu is entitled to enforce his claim for unpaid salaries against the new Jade Mountain. It is at the same time evident that the new partnership was entitled to hire a new general or assistant general manager. The non-retention of Benjamin Yu is not unlawful termination. The precise authorized cause for termination in the case at bar was redundancy. The new partnership had its own new General Manager, apparently Mr. Willy Co. Benjamin Yu's old position became redundant.
ERNESTO CEASE, CECILIA CEASE, MARION CEASE, TERESA CEASE-LACEBAL and the F.L. CEASE PLANTATION CO., INC. as Trustee of properties of the defunct TIAONG MILLING & PLANTATION CO vs. HONORABLE COURT OF APPEALS, HON. MANOLO L. MADDELA, Presiding Judge, Court of First Instance of Quezon, BENJAMIN CEASE and FLORENCE CEASE October 18, 1979 Facts; Appeal from Court of Appeals which dismissed the petition by petitioners against respondent judge and private respondents. In June 1908, Forrest L. Cease (predecessor in interest of the parties) together with 5 other American citizens organized the Tiaong Milling and Plantation Company. The company acquired various properties but at the same time all the other original incorporators were bought out by Forrest Cease together with his children namely Ernest, Cecilia, Teresita, Benjamin, Florence and one Bonifacia Tirante. The charter of the company lapsed in June 1958 but whether there were steps to liquidate it, the record is silent. Forrest L. Cease died on August 1959. The children entered into extrajudicial partition of his shares in October 1959. It was here where the trouble came to arise because it would appear that Benjamin and Florence wanted an actual division while the other children wanted reincorporation. The other children Ernesto, Teresita and Cecilia and Bonifacia Tirante proceeded to incorporate into the F.L. Cease Plantation Company on December 1959. Benjamin and Florence initiated a Proceeding for the settlement of the estate and one month after they filed Civil Case against Ernesto, Teresita and Cecilia Cease asking that properties of Tiaong Milling and Plantation Corporation be divided among his intestate heirs. On May, 1961 on the eve of the expiry of the three (3) year period provided by the law for the liquidation of corporations, the board of liquidators of Tiaong Milling executed an assignment of properties and trust agreement in favor of F.L. Cease Plantation Co. Inc. as trustee. Both the civil case and the partition case were assigned to Judge Maddela. The Judge held for the plaintiffs Benjamin and Florence (in favor of partition). The CA dismissed the appeal. Issue; WON properties of Tiaong Milling may be included in the partition Held / ratio; Yes, denied, affirmed Petitioners argue that the action for partition should not have prospered in view of the repudiation of the co-ownership by Tiaong Milling and Plantation Company when, it already asserted ownership and corporate title over the properties adverse to the right of ownership of Forrest L. Cease. In an action for partition, it has been held that if any party to a suit for partition denies the pro-indiviso character of the estate whose partition is sought, and claims instead, exclusive title thereto the action becomes one for recovery of property cognizable in the courts of ordinary jurisdiction.
It must be remembered that when Tiaong Milling raised the issue of ownership, its corporate existence already terminated through the expiration of its charter. It is clear in Section 77 of Act No. 1459 (Corporation Law) that upon the expiration of the charter period, the corporation ceases to exist and is dissolved ipso facto except for purposes connected with the winding up and liquidation. The provision allows a three year period from expiration of the charter within which the entity settles and its affairs, disposes and convey its property and to divide its capital stock, but not for the purpose of continuing the business for which it was established. At this terminal stage of its existence, Tiaong Milling may no longer persist to maintain adverse title and ownership of the corporate assets as against the prospective distributees when at this time it merely holds the property in trust. Its assertion of ownership is not only a legal contradiction, but more so, to allow it to maintain adverse interest would certainly thwart the very purpose of liquidation and the final distribute loll of the assets to the proper, parties. Petitioners also argue that no evidence has been found to support the conclusion that the registered properties of Tiaong Milling are also properties of the estate of Forrest Cease. We do not agree. In sustaining respondents' theory of "merger of Forrest L. Cease and The Tiaong Milling as one personality", or that "the company is only the business conduit and alter ego of the deceased Forrest L. Cease and the registered properties of Tiaong Milling are actually properties of Forrest L. Cease and should be divided equally, share and share alike among his six children, ... ", the trial court did aptly apply the familiar exception to the general rule by disregarding the legal fiction of distinct and separate corporate personality and regarding the corporation and the individual member one and the same. In shredding the fictitious corporate veil, the trial judge narrated the undisputed factual premise, thus: In the course of its existence, it developed into a close family corporation. The Board belong to one family the head of which Forrest L. Cease always retained the majority stocks and hence the control. Only 9 nominal shares out of 300 appears in the name of his 3 eldest children then and another person close to them. As his children become of age, he continued distributing his shares among them until at the time of his death only 190 were left to his name. Definitely, only the members of his family benefited from the Corporation. The accounts of the corporation as well as that of the family appears to be indistinguishable. The corporation 'never' had any account with any banking institution or if any account was carried in a bank on its behalf, it was in the name of Mr. Forrest L. Cease. The corporation is only a business conduit of the father and an extension of his personality. Thus, the assets of the corporation are also the estate of Forrest L. Cease. A corporation is invested by law with a personality separate and distinct from that of the persons composing it as well as from that of any other legal entity to which it may be related. A corporation may not, generally, be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected, and vice versa. This separate and distinct personality is, however, merely a fiction created by law for convenience and to promote the ends of justice. For this reason, it may not be used or invoked for ends subversive of the policy and purpose behind its creation or which could not have been intended by law to which it owes its being. This is particularly true where the fiction is used to defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or judicial issues, perpetrate deception or otherwise circumvent the law. This is likewise true where the corporate entity
is being used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another corporate entity. In any of these cases, the notion of corporate entity will be pierced, and the corporation will be treated as an association of persons or, where there are two corporations, they will be merged as one, the one being merely regarded as part or the instrumentality of the other. So must the case at bar add to this jurisprudence. The business of the corporation is largely the personal venture of Forrest L. Cease. There is not even a shadow of a showing that his children were subscribers or purchasers of the stocks they own. Their participation as nominal shareholders emanated solely from Forrest L. Cease's gratuitous dole out of his own shares. Were we sustain the theory of petitioners then that legal fiction of separate corporate personality shall have been used to delay and ultimately deprive and defraud the respondents of their successional rights to the estate of their deceased father.
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, vs. INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC January 26, 1988 Facts; The petitioners question the Appellate Court which sustained the private respondent's contention that the deed of exchange whereby Delfin and Pelagia Pacheco conveyed a land to Delpher Trades in exchange for 2,500 shares was actually a deed of sale which violated a right of first refusal under a lease contract. Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of land in Valenzuela. On April 1974, the said co-owners leased to Construction Components International Inc. the property providing that the lessor should he decide to sell the property shall first offer the same to the lessee. On August 1974, Construction Components International, Inc. assigned its rights under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the consent of lessors Delfin and Pelagia. The contract of lease, as well as the assignment were annotated at the back of the title. On January 1976, a deed of exchange was executed between lessors and defendant Delpher Trades Corporation conveying to the latter the leased property for 2,500 shares of defendant corporation with value of P1,500,000.00. Hydro Pipes Philippines, Inc., filed a complaint for reconveyance under conditions similar to those whereby Delpher Trades Corporation acquired the property. The Court of First Instance ruled in favor of the plaintiff. The lower court's decision was affirmed on appeal. Issue; WON right of first refusal enforceable Held / ratio; No, granted, reversed The resolution of the case hinges on whether or not the "Deed of Exchange" was meant to be a contract of sale which prejudiced the private respondent's right of first refusal . Eduardo Neria, son-in-law of the late Pelagia Pacheco testified 1. that Delpher Trades is a family corporation; 2. that the corporation was organized by the children of the two spouses who owned in common the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property through the corporation and to avoid taxes; 3. that in order to accomplish this end, two pieces of real estate, which had been leased to Hydro Pipes were transferred to the corporation; 4. that in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the corporation because the other owners only owned 2,000 shares; and 5. that at the time of incorporation, he knew all about the contract of lease to Hydro Pipes.
In the petitioners' motion for reconsideration, they refer to this scheme as "estate planning." Petitioners contend that there was actually no transfer of ownership since the Pachecos remained in control. The transfer of ownership was merely in form but not in substance. Petitioner corporation is a mere alter ego of the Pacheco co-owners. They argue that there was no sale and that they exchanged the land for shares of stocks in their own corporation. There is a sale when ownership is transferred for a price certain in money or its equivalent while there is a barter or exchange when one thing is given in consideration of another thing. On the other hand, private respondent argues that Delpher Trades Corporation is a corporate entity separate and distinct from the Pachecos. It maintains that there was actual transfer of ownership interests over the leased property. We rule for the petitioners. After incorporation, one becomes a stockholder by subscription or by purchasing stock directly from the corporation or from individual owners. In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares. The Pachecos became stockholders by subscription. "The essence of the stock subscription is an agreement to pay for original unissued shares of a corporation, formed or to be formed. It is significant that the Pachecos took no par value shares in exchange for their properties. A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation. The holder of no-par shares may see from the certificate itself that he is only an aliquot sharer in the assets of the corporation. But this character of proportionate interest is not hidden beneath a false appearance of a given sum in money, as in the case of par value shares. The capital stock of a corporation issuing only no-par value shares is not set forth by a stated amount of money, but instead is expressed to be divided into a stated number of shares, such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons interested in the financial condition of a corporation is focused upon the value of assets and the amount of its debts. Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a square meter was turned over to the family's corporation for only P14.00 a square meter. By their ownership of the 2,500 no par shares of stock, the Pachecos have control. In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes. The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. The Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract.
W. H. GARRETT v. SOUTHERN RAILWAY COMPANY May 8, 1959. Facts; The plaintiff was employed as a wheel moulder by Lenoir Car Works, a Tennessee corporation. He claims injuries from silicosis contracted from silica dust from the foundry. Issue; WON Southern, which acquired the entire capital stock of Lenoir Car Works (Lenoir) in 1904, the year of the latter's organization, so completely dominated Lenoir that the latter was instrumentality, of Southern. If it did, then the complainant would be an employee of Southern and would be entitled to recover under the Federal Employers' Liability Act. Held / ratio; No, dismissed The general rule is that stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable for the torts of the subsidiary unless the separate corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. Whether the subsidiary is an instrumentality of the owner corporation is a question to be determined from all the surrounding circumstances. The plaintiff relies upon the following circumstances: • That all directors and officers of Lenoir are employees of Southern; • that Southern owns all the stock of Lenoir; • that Lenoir sold to Southern over 30 million dollars worth of its products; • that all profits of Lenoir went to Southern; • that all claims of Lenoir employees for accidents are handled by the claim's office of Southern; • that all litigation against Lenoir is handled by Southern's attorneys; • that general accounting of Lenoir is handled by personnel of Southern; • that the Railroad Retirement Board decided that employees of Lenoir were entitled to benefits under the Railroad Retirement Act because of the relationship between Lenoir and Southern; • and that on May 13, 1904, the Board of Directors of Southern authorized the purchase of the entire capital stock of Lenoir Defendant railroad says that these matters are not controlling and emphasizes the following facts: • That Lenoir in the fifteen-year period prior to the suit sold twelve percent to other customers; • that Lenoir maintains its offices and business in Lenoir City, Tennessee; • that the management of Lenoir is vested in a manager, Henry Marius is paid by Lenoir, and although he holds the proxy of Southern at the annual stockholders meeting, he has no other connection with Southern; • that never has any individual served at the same time as a Director of Lenoir and Southern; • that Southern has not purchased all its wheels, steel and brass castings from Lenoir; • that all sales to Southern have been upon the basis of a bid price or negotiated price; • that in every case Southern obtains bids from several manufacturers;
• • • • • • • •
that all sales are the result of the business judgment of the Manager; that at no time has any individual occupied the same official position in both companies with the exception of corporate and financial officials; that Lenoir maintains a separate bank account and has never intermingled its funds; that the companies keep separate books and Lenoir pays its own taxes; that Lenoir uses no facilities or property jointly with Southern; that local accounting is handled by Lenoir employees at Lenoir City; that Lenoir makes separate collective bargaining agreements with its employees; that Lenoir has its own legal counsel in Lenoir City
The Court finds the existence of two distinct operations. There is no evidence that Southern dictated the management of Lenoir. In fact, the evidence indicates that Henry Marius was in full control of the operation. There is no evidence that Lenoir was run solely for the benefit of Southern. A substantial part of its requirements in the field of operation of Lenior were bought elsewhere. Lenoir sold substantial quantities to other companies. It operated no rolling stock and had nothing to do with the transportation business. Policy decisions and pricings remained in the hands of Marius. Certain accounting and claims work was done in Washington to eliminate duplication. But there is no evidence that policy decisions of Lenoir were made or dictated by Southern. The facts do not reveal the intimacy and inseparability of control which would lead the Court to hold that Southern and Lenoir were one and the same. It was not performing what have been called non-delegable duties of the railroad. It was not an operator of a terminal, performed no switching or transportation functions at all. It was a manufacturer and plaintiff was one of its employees. It was hence not an "agent" of Southern in the sense used in some of the cases cited by the plaintiff, since it performed no common carrier operations. Defendant manufactured car wheels, bearings of various kinds and items of a related nature. Southern could produce such items for its own use and if it did so would be liable in tort under the F.E. L.A. for accidents occurring in the activity. But Southern did not manufacture these things in its own plants. Substantial purchases of these products were made elsewhere. A corporation is ordinarily an entity, separate and apart from its stockholders, and mere ownership of all the stock of one corporation by another, and the identity of officers of one with officers of another, are not alone sufficient to create identity of corporate interest between the two companies or to create the relation of principal and agent or to create a representative or fiduciary relationship between the two. If such stock ownership and potential control be resorted to only for the purpose of normally participating in the affairs of the subsidiary corporation in a manner usual to stockholders and not for the purpose of taking some unfair advantage of the subsidiary or using it as a mere adjunct to the main corporation or as a subterfuge to justify wrongdoing, their identity as separate corporations will not be disregarded but their respective rights when dealing with each other in respect to their separate property will be recognized and maintained. Something must be disclosed to indicate the exercise of undue domination or influence resulting in an infringement upon the rights of the subservient corporation for the benefit of the dominant one. There must be present in addition to the elements of control through stock ownership and common directorates and officers, elements of fraud or
wrongdoing on the part of the parent corporation to the detriment of the susbidiary and third persons in their relations with the subsidiary. "`The Instrumentality Rule, in its shortest form, may now be stated: "`…the parent corporation will be responsible for the obligations of its subsidiary when its control has been exercised to such a degree that the subsidiary has become its mere instrumentality. It is manifestly impossible to catalogue the infinite variations of fact that can arise but there are certain common circumstances which are important and which, if present in the proper combination, are controlling. "`(a) The parent corporation owns all or most of the capital stock of the subsidiary. "`(b) The parent and subsidiary corporations have common directors or officers. "`(c) The parent corporation finances the subsidiary. "`(d) The parent corporation subscribes to all the capital stock of the subsidiary or causes its incorporation. "`(e) The subsidiary has grossly inadequate capital. "`(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary. "`(g) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to it by the parent. "`(h) In the papers of the parent corporation, the subsidiary is described as a department or division "`(i) The parent corporation uses the property of the subsidiary as its own. "`(j) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation in the latter's interest. "`(k) The formal legal requirements of the subsidiary are not observed.'"
JARDINE DAVIES, INC v. JRB REALTY, INC July 15, 2005 Facts; This is a petition for review of Court of Appeals affirming the Regional Trial Court In 1979, JRB Realty, Inc. built a nine-storey building, named Blanco Center, on its land in Salcedo Village, Makati City. An air conditioning system was needed for the Blanco Law Firm housed at the second floor. On March 1980, the respondent’s Executive Vice-President, Jose Blanco, accepted the quotation of Mr. Morrison, President of Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of Fedders air conditioning equipment for P99,586.00. Thereafter, it was installed. They could not deliver the desired cooling temperature. Aircon stated that it would be replacing the units currently installed with new ones using rotary compressors. However, it could not specify a date when delivery could be effected. TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance. In October 1987, the respondent learned that Maxim Industrial Corporation (Maxim) was the new and exclusive licensee of Fedders Air Conditioning for the manufacture, sale, installation and maintenance of Fedders air conditioners. The respondent requested that Maxim honor the obligation of Aircon, but the latter refused. Considering that the ten-year period of prescription was fast approaching, to expire on March 13, 1990, the respondent then instituted, on January 1990, an action for specific performance with damages against Aircon & Refrigeration Industries, Inc., Fedders Air Conditioning USA, Inc., Maxim Industrial & Merchandising Corporation and Jardine Davies, Inc. The latter was impleaded as defendant, considering that Aircon was a subsidiary of the petitioner. On May 1996, the RTC held defendants Jardine Davies, Inc., Fedders Air Conditioning USA, Inc. and Maxim Industrial and Merchandising Corporation, jointly and severally liable. The CA affirmed. Issue; WON Jardine Inc. (parent) liable Held / ratio; No, reversed A corporation is an artificial being invested by law with a personality separate and distinct from its stockholders and from other corporations to which it may be connected. While a corporation is allowed to exist solely for a lawful purpose, the law will regard it as an association of persons or in case of two corporations, merge them into one, when this corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction which applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. The rationale behind piercing a corporation’s identity is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that Aircon’s corporate legal existence can just be disregarded.
A subsidiary has an independent and separate juridical personality, distinct from that of its parent company; hence, any claim or suit against the latter does not bind the former, and vice versa. In applying the doctrine, the following requisites must be established: (1) control, not merely majority or complete stock control; (2) such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest acts in contravention of plaintiff’s legal rights; and (3) the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. Aircon is a subsidiary of the petitioner only because the latter acquired Aircon’s majority of capital stock. It, however, does not exercise complete control; nowhere can it be gathered that the petitioner manages the business affairs of Aircon. No management agreement exists between the petitioner and Aircon. Jardine Davies, Inc., incorporated on June 1946, is primarily a financial and trading company. On the other hand, Aircon, incorporated on December 27, 1952, is a manufacturing firm. The existence of interlocking directors, corporate officers and shareholders, which the respondent court considered, is not enough justification to pierce the veil of corporate fiction, in the absence of fraud or other public policy considerations. But even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. There must be proof that the corporation is being used as a cloak or cover for fraud or illegality, or to work injustice. The wrongdoing must be clearly and convincingly established. In the instant case, there is no evidence that Aircon was formed or utilized with the intention of defrauding its creditors or evading its contracts and obligations. Aircon complied with its obligation of providing two air conditioning units in good faith. After enjoying ten (10) years of its cooling power, respondent cannot now complain about the performance of these units, nor can it demand a replacement thereof. We sustain the petitioner’s separateness from that of Aircon. Petitioner was never a party to the contract. Privity of contracts take effect only between parties, their successors-in-interest, heirs and assigns.
KOPPEL (PHILIPPINES), INC., vs. ALFREDO L. YATCO, Collector of Internal Revenue October 10, 1946 Facts; This is an appeal by Koppel (Philippines), Inc., from the judgment of the Court of First Instance of Manila dismissing complaint for the recovery it had paid under protest to the Collector of Internal Revenue as merchant sales tax I. Paintiff is a corporation with principal office in Manila, the capital stock of which is divided into thousand (1,000) shares of P100 each. The Koppel Industrial Car and Equipment company, a corporation organized in State of Pennsylvania, United States of America, and not licensed to do business in the Philippines, owned 995 shares and the remaining five (5) shares only were and are owned one each by officers of the plaintiff corporation. II. Plaintiff, was licensed to engage in business as a merchant and commercial broker in the Philippines IV. From 1929 to 1932, plaintiff transacted business in the Philippines: When a local buyer was interested in the purchase of railway materials, machinery, and supplies, it asked for price quotations from plaintiff. Plaintiff then cabled for the quotation desired for Koppel Industrial Car and Equipment Company. A cable was then sent to Koppel Industrial Car and Equipment company giving instructions to ship the merchandise to Manila. Commercial invoices were issued by Koppel Industrial Car and Equipment Company in the names of the purchasers. The purchasers secured the shipping papers by arrangement with the banks, and thereupon received and cleared the shipments. In many cases, where sales was effected on the basis of C. I. F. Manila, duty paid, plaintiff advanced the sums required for the payment of the duty. Payments were made to the banks by the purchasers on presentation and delivery to them of the above-mentioned shipping documents or copies thereof. Plaintiff received by way of compensation a percentage of the profits realized on the above transactions VII. That plaintiff's share in the profits realized out of these transactions described in paragraphs IV, V and VI hereof totaling P3,772,403.82, amounts to P132,201.30; and that plaintiff within the time provided by law returned the aforesaid amount P132,201.30 for the purpose of the commercial broker's 4 per cent tax and paid thereon the sum P5,288.05 as such tax. VIII. That defendant demanded of the plaintiff the sum of P64,122.51 as the merchants' sales tax of 1% per cent on the amount of P3,772,403.82, representing the total gross value of the sales A preponderance of evidence has established, besides the facts thus stipulated, the following: (a) The shares of plaintiff corporation were all owned by Koppel Industries Car and Equipment Company; (b) Plaintiff corporation acted as the representative of Koppel Industrial Car and Equipment Company only, and not as the agent of both the company and the purchasers (c) The plaintiff bore incidental expenses — as, for instance, cable expenses-not only those of its own cables but also those of its "principal"; (d) the plaintiff's "share in the profits" was left virtually in the hands of Koppel Industrial Car and Equipment Company; (e) Where drafts were not paid by the purchasers, the local banks were instructed not to protest them but to refer them to plaintiff
(f) Where the goods were European origin, consular invoices, bill of lading, and, in general, the documents necessary for clearance were sent directly to plaintiff; (g) If the plaintiff had in stock the merchandise, it immediately filled the orders of such local buyers and made delivery; (h) Whenever the deliveries were incomplete plaintiff used to make good the deficiencies by deliveries from its own local stock; (i) The contract of sale were all perfected in the Philippines. The Court of First Instance held for the defendant. The lower held that Koppel (Philippines), Inc. is a mere dummy or brach ("hechura") of Koppel industrial Car and Equipment Company. Issue; WON piercing the corp veil proper Held / ratio; Yes, affirmed 1. It contends that its corporate existence as Philippine corporation cannot be collaterally attacked and that the Government is estopped from so doing. In looking through the corporate form to the ultimate person or corporation behind that form, the court did so in order to prevent the contravention of the local internal revenue laws, and the perpetration of what would amount to a tax evasion, inasmuch as it considered that Koppel (Philippines), Inc. was a mere branch or agency or dummy ("hechura") of Koppel Industrial Car and Equipment Co. The court did not hold that the corporate personality of Koppel (Philippines), Inc., would also be disregarded in other cases or for other purposes. It would have had no power to so hold. The courts' action in this regard must be confined to the transactions involved in the case at bar. A corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; The entity is normally regarded but is disregarded to prevent injustice, or the distortion or hiding of the truth, or to let in a just defense. From the facts hereinabove stated, particularly those narrated in paragraph (a), (b), (c), (d), (e),(f), (h), (i), and (j) after the agreed statement of facts, we find that, in so far as the sales involved herein are concerned, Koppel (Philippines), Inc., and Koppel Industrial Car and Equipment company are to all intents and purposes one and the same. This is conclusively borne out by the fact, that the amount of "share in the profits" of Koppel (Philippines), Inc., was ultimately left to the sole, unbridled control of Koppel Industrial Car and Equipment Company. Koppel Industrial Car and Equipment Company made us of its ownership of the overwhelming majority — 99.5% —to control the operations of the latter to such an extent that it had the final say even as to how much should be allotted to said local entity in the socalled sharing in the profits. We note that Koppel (Philippines), Inc., was represented in the Philippines by its "resident Vice-President." This fact necessarily leads to the inference that the corporation had at least a Vice-President, and presumably also a President, who were not resident in the Philippines but in America, where the parent corporation is domiciled. If Koppel
(Philippines), Inc., had been intended to operate as a regular domestic corporation in the Philippines, where it was formed, the record and the evidence do not disclose any reason why all its officers should not reside and perform their functions in the Philippines. Plaintiff charged the parent corporation no more than actual cost for merchandise allegedly of its own to complete deficiencies of shipments— a fact which could not conceivably have been the case if plaintiff had acted in such transactions as an entirely independent entity doing business. The evidence reveals such commongling and interlacing of their activities as to render even incomprehensible certain accounting operations between them, except upon the basis that the Philippine corporation was to all intents and purposes a mere subsidiary, branch, or agency of the American parent entity. Koppel Industrial Car and Equipment Company could have been as conviniently and efficiently transacted and handled — if not more so — had said corporation merely established a branch or agency. So far as we can discover, there would be only one, but very important, difference between the two schemes — a difference in tax liability on the ground that the sales were made through another and distinct corporation, as alleged broker. As stated above, Exhibit H contains to the following paragraph: It is clearly understood that the intent of this contract is that the broker shall perform only the functions of a broker as set forth above, and shall not take possession of any of the materials or equipment applying to said orders or perform any acts or duties outside the scope of a broker; and in no sense shall this contract be construed as granting to the broker the power to represent the principal as its agent or to make commitments on its behalf. The foregoing paragraph, betrays a deliberate intent, through the medium of a scheme devised with great care, to avoid the payment of precisely the 1½ per cent merchants' sales tax in force in the Philippines. We are dealing with a scheme the primary, not to say the sole, object of which the evasion of the payment of such tax. It is this aim of the scheme that makes it illegal. The merchants' sales tax attached upon the happening of the respective sales of the "commodities, goods, wares, and merchandise" involved, and we are clearly of opinion that such "sales" took place upon the perfection of the corresponding contracts. If such perfection took place in the Philippines, the merchants' sales tax then in force here attached to the transactions. The real transaction in each case of sale, in final effect, began with an offer of sale from the seller, said American corporation, through its agent, the local corporation, of the railway materials, machinery, and supplies at the prices quoted, and perfected or completed by the acceptance of that offer by the local buyers when the latter, accepting those prices, placed their orders. The offer could not correctly be said to have been made by the local buyers when they asked for price quotations, for they could not rationally be taken to have bound themselves to buy before knowing the prices.
LIDDELL & CO., INC vs. THE COLLECTOR OF INTERNAL REVENUE June 30, 1961 Facts; This is an appeal from the decision of the Court of Tax Appeals imposing a tax deficiency liability of P1,317,629.61 on Liddell & Co., Inc. Liddell & Co. is a domestic corporation establish on February 1946, with authorized capital of P100,000 divided into 1000 shares. 196 shares were subscribed by Frank Liddell while the other four shares were in the name of Charles Kurz, E.J. Darras, Angel Manzano and Julian Serrano. Its purpose was to engage in the business of importing and retailing Chevrolet cars and trucks. On January 1947, with the limited paid-in capital of P20,000, Liddell & Co. was able to declare a 90% stock dividend. This was followed by a resolution increasing the authorized capital of the company to P1,000.000. Upon such approval, Frank Liddell subscribed to 3,000 additional shares, for which he paid into the corporation P300,000 so that he had in his own name 4,960 shares. On March and November 1948, stock dividends were again declared. As a result: Name No. of Shares Amount Per Cent Frank Liddell 19,738 P1,973,800 65.791% Irene Liddell 1 100 .003% Mercedes Vecin 1 100 .003% Charles Kurz 2,215 221,500 7.381% E.J. Darras 2,215 221,500 7.381% Angel Manzano 1,810 181,000 6.031% Julian Serrano 1,700 170,000 5.670% E. Hasim 830 83,000 2.770% G. W. Kernot 1,490 149,000 4.970% 30,000 P3,000,000 100.000% On December 1948, the Liddell Motors, Inc. was organized with an authorized capital stock of P100,000 of which P20,000 was subscribed: Irene Liddell wife of Frank Liddell 19,996 shares and Messrs. Marcial P. Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia Silva, 1 share each. At the end of 1948, Messrs. Manzano, Kurz and Kernot resigned from their respective positions in the Retail Dept. of Liddell & Co. and they were employed by Liddell Motors, Inc.: Kurz as Manager-Treasurer, Manzano as General Sales Manager for cars and Kernot as General Sales Manager for trucks. Liddell & Co. stopped retailing cars and trucks; it conveyed them instead to Liddell Motors, Inc. which in turn sold the vehicles to the public. Since then, Liddell & Co. paid sales taxes on the basis of its sales to Liddell Motors Inc. considering said sales as its original sales. Upon review of the transactions, the Collector of Internal Revenue determined that the latter was but an alter ego of Liddell & Co. Wherefore, he concluded, that for sales tax purposes, those sales made by Liddell Motors, Inc. to the public were considered as the original sales of Liddell & Co. Accordingly, the Collector of Internal Revenue assessed against Liddell & Co. a sales tax deficiency, of P1,317,629.61.
In the computation, the gross selling price of Liddell Motors, Inc. to the general public was made the basis without deducting from the selling price, the taxes already paid by Liddell & Co. in its sales to the Liddell Motors Inc. Issues; Whether or not Liddell & Co. Inc., and the Liddell Motors, Inc. are (practically) identical corporations Held / ratio; Yes, affirmed Liddell & Co. is wholly owned by Frank Liddell. 98% of the capital stock belonged to Frank Liddell. The 20% paid-up subscription with which the company began was paid by him. The subsequent subscriptions were made and paid with his own money. These stipulations and conditions appear in the agreement: (1) that Frank Liddell had the authority to designate in the future the employee who could receive earnings of the corporation; to apportion among the stock holders the share in the profits; (2) that all certificates of stock of the employees should be deposited with Frank Liddell duly indorsed in blank; (3) that each employee was required to sign an agreement with the corporation to the effect that, upon his death or upon his retirement or separation the said corporation should have exclusive option to purchase and acquire the whole of the stock interest. As to Liddell Motors, Inc. we are fully persuaded that Frank Liddell also owned it. He supplied the original capital funds. It is not proven that his wife Irene, ostensibly the sole incorporator. had money of her own to pay for her P20,000 initial subscription. Her income in the United States could not be enough. The alleged sale of her property in Oregon might have been true, but the money received was never shown to have been available at the time of the organization. Irene Liddell had scant participation in the affairs of Liddell Motors, Inc. She could hardly be said to possess business experience. The income tax forms record no independent income of her own. The checks that represented her salary and bonus from Liddell Motors, Inc. found their way into the personal account of Frank Liddell. Her frequent absences from the country negate any active participation. There are conspicuous circumstances that militate against the separate and distinct personality of Liddell Motors, Inc. from Liddell & Co. Bulk of the business of Liddell & Co. was channeled through Liddell Motors, Inc. Liddell Motors, Inc. pursued no activities except to secure cars, trucks, and spare parts from Liddell & Co. Inc. and then sell them to the general public. Mere fact that one or more corporations are owned and controlled by a single stockholder is not of itself sufficient ground for disregarding separate corporate entities. It is lawful to obtain a corporation charter, even with a single substantial stockholder, to engage in a specific activity, and such activity may co-exist with other private activities of the stockholder. If the corporation is a substantial one, conducted lawfully and without fraud on another, its separate identity is to be respected. There is, however, in this instant case, a peculiar consequence of the organization and activities of Liddell Motors, Inc. Under the law in force at the time of its incorporation the sales tax on original sales of cars (sections 184, 185 and 186 of the National Internal Revenue Code), was progressive, i.e. 10% of the selling price of the car if it did not exceed P5000, and 15% of the price if more than P5000 but not more than P7000, etc. This progressive rate of the sales tax naturally
would tempt the taxpayer to employ a way of reducing the price of the first sale. And Liddell Motors, Inc. was the medium created by Liddell & Co. to reduce the price and the tax liability. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them by means which the law permits, cannot be doubted." But, where a corporation is a dummy, is unreal or a sham and serves no business purpose and is intended only as a blind, the corporate form may be ignored for the law cannot countenance a form that is bald and a mischievous fiction." A taxpayer may gain advantage of doing business thru a corporation if he pleases, but the revenue officers in proper cases, may disregard the separate corporate entity where it serves but as a shield for tax evasion and treat the person who actually may take the benefits of the transactions as the person accordingly taxable." Thus, we repeat: to allow a taxpayer to deny tax liability on the ground that the sales were made through an other and distinct corporation when it is proved that the latter is virtually owned by the former or that they are practically one and the same is to sanction a circumvention of our tax laws.
LA CAMPANA FACTORY, INC., and TAN TONG doing business under the trial name "LA CAMPANA GAUGAU PACKING", vs. KAISAHAN NG MGA MANGGAGAWA SA LA CAMPANA (KKM) and THE COURT OF INDUSTRIAL RELATIONS, May 25, 1953 Facts; Tan Tong, has since 1932 been engaged in the business of selling gaugau under the trade name La Campana Gaugau Packing in Binondo which was later transferred Quezon City. On July 1950, Tan Tong, with himself and members of his family corporation known as La Campana Factory Co., Inc., with its principal office in the same place as that of La Campana Gaugau Packing. On July 1949, Tan Tong had entered into a CBA with the Philippine Legion of Organized Workers (PLOW), to which the union of Tan Tong's employees headed by Manuel E. Sadde was affiliated. Seceding, however, from the PLOW, Tan Tong's employees later formed their own organization known as Kaisahan (KKM). On July 1951, the Kaisahan counted with 66 members — workers of both La Campana Gaugau Packing and La Campana Coffee Factory Co., Inc. — presented a demand for higher wages. As the demand was not granted and an attempt at settlement had given no result, the said Department certified the dispute to the Court of Industrial Relations. "La Campana Gaugau and Coffee Factory" filed motions for the dismissal on grounds: 1. That the action is directed against two different entities with distinct personalities, with "La Campana Starch Factory" and the "La Campana Coffee Factory, Inc."; 2. That the petitioning union has no legal capacity to sue, because its registration as an organized union has been revoked by the Department of Labor on September 5, 1951; and The Court of Industrial Relations denied the motions. Issue; WON the two have separate identities (hence the actions by the KKM must be dismissed) Held / ratio; No, denied As to the first ground, petitioners obviously do not question the fact that the number of employees of the La Campana Gaugau Packing involved in the case is more than the jurisdictional number (31) required bylaw, but they do contend that the industrial court has no jurisdiction to try the case as against La Campana Coffee Factory, Inc. because the latter has allegedly only 14 laborers and only of these are members of the respondent Kaisahan. This contention loses force when it is noted that, as found by the industrial court — and this finding is conclusive upon us — La Campana Gaugau Packing and La Campana Coffee Factory Co. Inc., are operating under one single management, that is, as one business though with two trade names. True, the coffee factory is a corporation and, by legal fiction, an entity existing separate and apart fro the persons composing it, that is, Tan Tong and his family. But it is settled that this fiction of law, which has been introduced as a matter of convenience and to subserve the ends of justice cannot be invoked to further an end subversive of that purpose.
In the present case Tan Tong appears to be the owner of the gaugau factory. And the coffee factory, though an incorporated business, is in reality owned exclusively by Tan Tong and his family. As found by the Court of industrial Relations, the two factories have but one office, one management and one payroll. Above all, the laborers of the gaugau factory and the coffee factory were interchangeable. In view of all these, the attempt to make the two factories appears as two separate businesses, when in reality they are but one, is but a device to defeat the ends of the law. Findings of CIR: A. La Campana Gaugau Packing is merely a business name. B. According to the contract of lease (Exhibit 23), Mr. Tan Tong., propriety and manager of the Ka Campana Gaugau Factory, leased a space of 200 square meters in the bodega housing the gaugau factory to his son Tan Keng Lim, manager of the La Campana Coffee Factory. But the lease was executed only on September 1, 1951, while the dispute between the parties was pending before the Court. C. There is only one entity La Campana Starch and Coffee Factory, as shown by the signboard, the advertisement in the delivery trucks, the packages, and delivery forms D. All the laborers receive their pay from the same person, secretary of Mr. Tan Tong; and they are transferred from the gaugau to the coffee and vice-versa as the management so requires. E. There has been only one payroll for the entire La Campana personnel and only one person preparing the same F. In the ground floor and second floor of the gaugau factory there were hundreds of bags of raw coffee behind the pile of gaugau sacks. There were also women employees working paper wrappers for gaugau, and, in the same place there were about 3,000 cans to be used as containers for coffee. There were 16 trucks used both for the delivery of coffee and gaugau.
McArthur v. Times Printing Co. February 05, 1892 Facts; In September, 1889, C.A. Nimocks and others were engaged as promoters of the defendant company; Nimocks, as such promoter, made a contract with plaintiff, in behalf of the contemplated company, for his services as advertising solicitor for one year; After the organization of the company, he continued in its employment in the same capacity until discharged, the following April; defendant's board of directors never took any formal action with reference to the contract made in its behalf by Nimocks, but all of the stockholders, directors, and officers of the corporation knew of this contract at the time of its organization and none of them repudiated it, but, on the contrary, retained plaintiff. Issue; WON Corp liable for contract entered into by CANimocks (as promoter) Held / ratio; No, denied While a corporation is not bound by engagements made on its behalf by its promoters before its organization, it may, after its organization, make such engagements its own contracts. And this it may do precisely as it might make similar original contracts; formal action of its board of directors being necessary only where it would be necessary in the case of a similar original contract. That it is not requisite that such adoption or acceptance be express, but it may be inferred from acts or acquiescence on part of the corporation, or its authorized agents, as any similar original contract might be shown. The right of the corporate agents to adopt an agreement originally made by promoters depends upon the purposes of the corporation and the nature of the agreement. Of course, the agreement must be one which the corporation itself could make, and one which the usual agents of the company have express or implied authority to make. The defendant, however, claims that the contract was void under the statute of frauds, because, “by its terms, not to be performed within one year from the making thereof,”. This proceeds upon the erroneous theory that the act of the corporation, is a ratification, which relates back to the date of the contract with the promoter, under the familiar maxim that “a subsequent ratification has a retroactive effect, and is equivalent to a prior command.” But the liability of the corporation, under such circumstances, does not rest upon any principle of the law of agency, but upon the immediate and voluntary act of the company. Although the acts of a corporation with reference to the contracts made by promoters are frequently loosely termed “ratification,” yet a “ratification,” properly so called, implies an existing person, on whose behalf the contract might have been made at the time. There cannot, be a ratification of a contract which could not have been made binding on the ratifier at the time it was made, because the ratifier was not then in existence. What is called “adoption,” is, in legal effect, the making of a contract of the date of the adoption, and not as of some former date. The contract in this case was, therefore, not within the statute of frauds.
CAGAYAN FISHING DEVELOPMENT CO., INC., vs. TEODORO SANDIKO, December 23, 1937 Facts; This is an appeal from Court of First Instance absolving the defendant. Manuel Tabora is the owner of four parcels of land in Cagayan. To guarantee payment of a loan of P8,000, Tabora, on August 1929, executed in favor of PNB a mortgage on the four parcels. A second mortgage in favor of the same bank was in executed by Tabora over the same lands to secure another loan of P7,000. A third mortgage was executed on April 1930 in favor of Severina Buzon to secure a loan of P2,9000. These mortgages were annotated in the title. On May 1930, Tabora executed a public document entitled "Escritura de Transpaso de Propiedad Inmueble" by which the four parcels were sold to Cagayang Fishing, said to under process of incorporation, in consideration of one peso (P1) subject to the mortgages and, to the condition that the title shall not be transferred to the name of the company until the it has fully paid Tabora's debt to PNB. The company filed its article incorporation on October 1930. A year later, the board authorized its president, Jose Ventura, to sell the four parcels to Teodoro Sandiko for P42,000. A notarized deed of sale, a promisory note for P25,300, and a notarized deed of mortgage over the four parcels as security for the payment of the promissory note were all executed. All these three instrument were dated February 1932. Sine defendant failed to pay, plaintiff brought this action. The court below, absolved the defendant. The court below, reached the conclusion that the Deed of Sale (to Sandiko) is invalid because of vice in consent and repugnancy to law. Issue; WON Tabora liable to Cagayan Held/ Ratio; Affirmed, No (but for reasons diff from the CFI) The transfer by Tabora to Cagayan fishing was effected on May 1930 and the actual incorporation was affected later on October 1930. A duly organized corporation has the power to purchase and hold such real property. But before a corporation may be said to be organized, many things have to be done. Among other things, the law requires the filing of articles of incorporation. Although there is a presumption that all the requirements of law have been complied with (sec. 334, par. 31 Code of Civil Procedure), in the case before us it cannot be denied that the plaintiff was not yet incorporated when it entered into the sale. The contract referred to it as "una sociedad en vias de incorporacion." It was not even a de facto corporation at the time. Not being in legal existence then, it did not possess juridical capacity to enter into the contract. A corporation, until organized, has no being, franchises or faculties. Nor do those engaged in bringing it into being have any power to bind it by contract, unless so authorized by the charter there is not a corporation nor does it possess franchise or faculties for it or others to exercise, until it acquires a complete existence.
The contract was entered into not between Tabora and a non-existent corporation but between the Tabora as owner of the lands and the same Tabora, his wife and others, as mere promoters of a corporation. These promoters could not have acted as agent since that which no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere. This is not saying that under no circumstances may the acts of promoters of a corporation be ratified by the corporation if and when subsequently organized. But under the circumstances of the present case we decline to extend the doctrine of ratification. Tabora succeeded in mortgaging to PNB so that he might have the funds to develop the lands into fishery. He appeared to have met with financial reverses. He formed a corporation composed of himself, his wife, and a few others. From the articles of incorporation, it appears that out of the P48,700, capital stock subscribed, P45,000 was subscribed by Tabora and P500 by his wife, Rufina Q. de Tabora; and out of the P43,300, paid on subscription, P42,100 is made to appear as paid by Tabora and P200 by his wife. Both Tabora and His wife were directors and the latter was treasurer as well. In fact, to this day, the lands remain inscribed in Tabora's name. The defendant always regarded Tabora as the owner. He dealt with Tabora directly. Ventura, president of the corporation, intervened only to sign the contract. Even the PNB, treated Tabora as the owner. Two civil suits were brought against Tabora and in both cases a writ of attachment against the four parcels of land was issued. The PNB threatened to foreclose its mortgages. Tabora approached Sandiko and succeeded in the making him assume the payment of Tabora's indebtedness to PNB. The promisory note was made payable to the company so that it may not be attached by Tabora's creditors, two of whom had obtained writs of attachment against the four parcels. If the corporation could not acquire the four parcels, it follows that it did not possess any resultant right to dispose of them by sale to the defendant, Sandiko. The transfer from Tabora to the Cagayan Fishing was subject to a condition precedent, the payment of the mortgage debt of said Tabora to the PNB, and that this condition not having been complied with by the Cagayan Fishing, the transfer was ineffective.
RIZAL LIGHT & ICE CO., INC., vs. THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE COMMISSION, RIZAL LIGHT & ICE CO., INC., vs.THE PUBLIC SERVICE COMMISSION and MORONG ELECTRIC CO., INC September 28, 1968 Facts; Case G.R. No. L-20993 is a petition of the Rizal Light & Ice Co., Inc. to review orders of respondent Public Service Commission, revoking the CPCN and forfeiting the franchise of said petitioner. Case G. R. L-21221 is a petition of the Rizal Light & Ice Co., Inc. to review the decision of the Commission granting a CPCN to respondent Morong Electric Co., Inc. to operate an electric light, heat and power service in the municipality of Morong, Rizal. On August 1949, Rizal Light & Ice Co., Inc was granted by the Commission a CPCN for the operation of an electric light, heat and power service in Morong, Rizal. In December 1956, the Commission required the petitioner to show cause why it should not be penalized for violation of the conditions of its certificate, and for failure to raise its service voltage and maintain them within the limits prescribed by the Commission, and to acquire and install a kilowattmeter. For failure of the petitioner to appear at the hearing, the Commission revoked petitioner's certificate. Petitioner moved for reconsideration on the ground that its manager, was not aware of said hearing. Respondent municipality opposed alleging that petitioner has not rendered efficient service. Finding that the failure of the petitioner to appear was really due to the illness of its manager, Juan Francisco, the Commission set aside its order. Meanwhile, inspections were made of petitioner's plant and installations by the engineers of the Commission, as follows: April 15, 1958; September 18, 1959, July 12-13, 1960, and June 21-24, 1961. Petitioner manifested that improvements have been made on its service and that, on the basis of the inspection report, it would agree to the submission of the case for decision without further hearing. When the case was called for hearing, petitioner failed to appear. Respondent municipality was allowed to present its documentary evidence, and thereafter the case was submitted for decision. On July 1962 petitioner's electric plant was burned. In August 1962, the Commission, on the basis of the inspection reports, found that the petitioner failed to comply with the directives and had violated the conditions of its certificate. Accordingly, it ordered the revocation of petitioner's certificate and the forfeiture of its franchise. Petitioner moved for reconsideration alleging that before its electric plant was burned, its service was greatly improved. But eight days before said motion for reconsideration was filed, Morong Electric, having been granted a municipal franchise on May 1962 filed with the Commission an application for a CPCN. Petitioner opposed alleging that the approval of said application would not promote public convenience, but would only cause ruinous and wasteful competition. Petitioner filed another motion, asking for the dismissal of the application upon the ground that applicant Morong Electric had no legal personality when it filed its application on September 1962,
because its certificate of incorporation was issued only on October 1962. This motion to dismiss was denied on the premise that applicant Morong Electric was a de facto corporation. Consequently, the case was heard on the merits. The Commission, found that there was an absence of electric service in the municipality of Morong and that applicant Morong Electric, has the financial capacity to maintain said service. The Commission approved the application of Morong Electric and ordered the issuance of the CPCN. Issue; WON revocation of Rizal Light’s CPCN proper / WON issuance of CPCN in favor of Morong Electric proper Held / ratio; Affirmed, yes both Before any certificate may be granted, authorizing the operation of a public service, three requisites must be complied with, namely: (1) the applicant must be a citizen, or a corporation organized under the laws of the Philippines, sixty per centum at least belongs entirely to citizens; (2) the applicant must be financially capable and (3) the applicant must prove that the operation of the public service will promote the public interest Petitioner claims, that Morong Electric should not have been granted the certificate because it did not have a corporate personality at the time it was granted a franchise and when it applied for said certificate; The bulk of petitioner's arguments dwells on the proposition that since a franchise is a contract, at least two competent parties are necessary to the execution thereof, and parties are not competent except when they are in being. It is contended that until a corporation has come into being by the issuance of a certificate of incorporation, it cannot enter into any contract as a corporation. The certificate of incorporation of the Morong Electric was issued on October 1962, so only from that date did it acquire juridical personality. Petitioner concludes that the franchise granted on May 1962 when it was not yet in esse is null and void and cannot be the subject of the Commission's consideration. Morong Electric argues that it was a de facto corporation at the time the franchise was granted and, as such, it was not incapacitated to enter into any contract. Petitioner's contention that Morong Electric did not yet have a legal personality on May 1962 is correct. Pending the issuance of the certificate of incorporation, the incorporators cannot be considered as de factocorporation. But the fact that Morong Electric had no corporate existence does not render the franchise invalid, because later Morong Electric obtained its certificate of incorporation and then accepted the franchise in accordance with the terms and conditions thereof. The incorporation of Morong Electric and its acceptance of the franchise as shown by its application for the CPCN, cured the deficiency pointed out by the petitioner in. The conclusion herein reached regarding the validity of the franchise granted to Morong Electric is not incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc. vs. Teodoro Sandiko upon which the petitioner
leans heavily in support of its position. In said case this Court held that a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business. It should be pointed out, that this Court did not say in that case that the rule is absolute or that under no circumstances may the acts of promoters of a corporation be ratified or accepted by the corporation if and when subsequently organized. Of course, there are exceptions. It will be noted that American courts generally hold that a contract made by the promoters of a corporation on its behalf may be adopted, accepted or ratified by the corporation when organized.
Quaker Hill, Inc. v. Parr September 25, 1961 Facts; The plaintiff filed an action to recover the sum of $14,503.56 from defendants. Judgment was in favor of the defendants, and Quaker Hill seeks review. In May 1958, the plaintiff, a New York corporation, sold a large quantity of nursery stock to the Denver Memorial Nursery, Inc. A sales contract, together with a promissory note was executed, and the Denver Memorial Nursery, Inc. was named as the contracting party in the sales contract and as the maker of the promissory note. The form of the signature on the note was as follows: 'Denver Memorial Nursery, Inc. E. D. Parr, Pres. James P. Presba, Sc'y.-Treas.' The contract shows the Denver Memorial Nursery, Inc. as purchaser and is signed: 'E. D. Parr, Pres.' In 1958, prior to this transaction, Parr, Presba and others formed a corporation 'Denver Memorial Gardens, Icn.' Its purpose was to operate a cemetery. Parr and Presba, while in the course of negotiations, undertook to organize a separate corporation called 'Denver Memorial Nursery, Inc.' An order was signed by Parr on behalf of Denver Memorial Nursery, Inc. which, to the knowledge of plaintiff, was not yet formed, that fact being noted in the contract. Balance of the purchase price due in the end of the year. The nursery stock was shipped on May 26, 1958. After the temporary planting, a substitute order was sent to Quaker Hill which contained 'Mountain View Nurseries' instead of 'Denver Memorial Nursery, Inc.' as the purchaser. The Denver Memorial Nursery, Inc. was never formed. Because of name confusion, this corporation was called Mountain View Nurseries, Inc. Its articles were executed on May 27, 1958,. Neither the Denver Memorial Nursery, Inc. nor the Mountain View Nurseries, Inc. ever functioned as going concerns. The explanation given at the trial for failure to form stemmed from insistence of Quaker Hill that the deal be consummated at once because the growing season was rapidly passing. After Mountain View Nurseries, Inc. was formed, a new note and contract, containing the name 'Mountain View Nurseries, Inc.' as contracting party, was submitted to defendants, signed in the name of Mountain View Nurseries, Inc.. The plaintiff company thereafter used the designation 'Mountain View Nurseries' in its communications. The present action seeks to subject defendants to personal liability in view of the defunct financial condition of the corporation, based upon the fact that the corporation was not formed at the time the contract was made and on the further ground that the defendants as promoters were individually liable. Trial court favored defendants. It held that defendants were not promoters of a corporation called 'Denver Memorial Nurseries, Inc.' but yielded to the suggestion of the plaintiff that the name of 'Denver Memorial Nurseries, Inc.' be used for the purpose of consummating the order above referred to. Issue;
WON Parr et al liable personally Held / ratio; No, affirmed Plaintiff argues: 1. That promoters who enter a contract in the name of a proposed corporation are personally liable in the absence of an agreement that they should not be liable. 2. That the subsequent formation of a corporation and the ratification of the contract does not operate to release the promoters. 3. That the failure of the nursery stock, the subject matter of this contract, is not a defense because the contractual remedy was replacement. 4. That there should be liability on a quantum meruit basis. The general principle which plaintiff urges as applicable here is that promoters are personally liable on their contracts, though made on behalf of a corporation to be formed. A well recognized exception to this general rule, however, it that if the contract is made on behalf of the corporation and the other party agrees to look to the corporation and not to the promoters for payment, the promoters incur no personal liability. In the present case, plaintiff was aware that the corporation was not formed and nevertheless urged that the contract be made in the name of the proposed corporation. There is little evidence indicating intent of the plaintiff to look to the defendants for payment. The curious form of this transaction is undoubtedly explainable on the basis of the long distance dealing, the great rush to complete it, the heavy emphasis on completion of the sale rather than on securing payment. No effort was made to expressly obligate the defendants and this present effort must be regarded as pure afterthought.
OLD DOMINION COPPER MINING AND SMELTING COMPANY vs. ALBERT S. BIGELOW, November 18, 19, 1908 - September 14, 1909 Facts; These are suits by which the plaintiff seeks to recover secret profits made by the defendant as one of its organizers, in selling to it while under the absolute control and management of himself and his associate, one Lewisohn, certain mining properties belonging to him and Lewisohn. In April, 1895, the defendant and Lewisohn formed a device to secure the control of the stock (the par value of which was $500,000) of the Old Dominion Copper Company of Baltimore City, called the Baltimore Company, and the title to certain other neighboring mining properties, called the outside properties, and to cause these properties and the real estate of the Baltimore Company to be transferred to a new corporation (which they should procure to be organized with a much larger capital), for an increased price. Options were secured upon these properties, and the price agreed to be paid by the defendant and Lewisohn to the owners was $1,000,000, divided in the proportion of 547/1000 by the defendant, and 453/1000 by Lewisohn. For the purpose making funds, the defendant organized an underwriting syndicate and another syndicate called the Old Dominion Syndicate. They proceeded to organize the plaintiff corporation with a capital stock of $3,750,000. This organization was conducted wholly by the defendant and Lewisohn. Without providing the plaintiff with an independent board of officers, they, as the only managers of the plaintiff, acting in its name, contracted with themselves as mine owners to sell to it the real estate of the Baltimore Company for $2,500,000 of the capital stock of the plaintiff and the outside properties, for $750,000 and to sell to the general public the remaining $500,000 of capital stock without disclosing that they had sold property costing them only $1,000,000. Issue; WON promoters liable to corp for secret profits Held / ratio; The plaintiff seeks to establish this on the ground that the defendant and Lewisohn framed a scheme to pass upon the wisdom of the purchase and without disclosing the substance of the transaction and their extraordinary profit to the purchasers of its stock for cash at par. Such a transaction creates a liability on the part of the defendant to account for his profits to the plaintiff in this proceeding. The plaintiff seeks to recover a secret profit made by the promoters in the sale of their own property to the corporation, basing its claim on the general and well recognized proposition that a promoter cannot take lawfully a secret profit and will be held to account for it if he does. The action is to recover profits obtained by a breach of trust. The defendant and Lewisohn were the promoters. In their brains it was conceived, by their direction the formalities of its incorporation were carried out, their resources provided its mines, their influence and reputation with those desiring to invest in mines procured its working cash capital. The word " promoter " has no precise and inflexible meaning in this country. The duties of promoters as fiduciaries to the company are matters of common law cognizance.
"promoter" includes those who undertake to form a corporation and to procure for it the rights, instrumentalities and capital by which it is to carry out the purposes set forth in its charter, and to establish it as fully able to do its business. Their work may begin long before the organization of the corporation, in seeking the opening for a venture and projecting a plan for its development, and may continue after the incorporation by attracting the investment of capital in its securities and providing it with the commercial breath of life. It is now established without exception that a promoter stands in a fiduciary relation to the corporation in which he is interested, and that he is charged with all the duties of good faith which attach to other trusts. In this respect he is held to the high standards which bind directors and other persons occupying fiduciary relations. Notwithstanding this fiduciary relation the promoter may sell property to the company which he is promoting. But in order that the contract may be absolutely binding he must pursue one of four courses : (a) He may provide an independent board of officers in no respect directly or indirectly under his control, and make full disclosure to the corporation through them ; (b) He may make a full disclosure of all material facts to each original subscriber of shares in the corporation ; (c) He may procure a ratification of the contract after disclosing its circumstances by vote of the stockholders of the completely established corporation; (d) He may be himself the real subscriber of all the shares of the capital stock contemplated as a part of the promotion scheme. Defendant rest his claim chiefly upon the third and fourth courses. As applied to the facts of this case these two come to the same thing, the defendant and his associate were subscribers for only one hundred and thirty thousand shares out of a total one hundred and fifty thousand and in the light most favorable to them they held all the shares which had been issued at the time of the ratification, but not all which it was proposed to issue as a part of the scheme of promotion. The point to be determined, therefore, is whether the promoter is immune from liability if he and his associates are owners of all the issued stock at the time of the act complained of, although intending as a part of their plan the immediate issue of further stock to the public without disclosure, and whether, while a substantial portion of the stock intended to be issued to the public remains unissued, a vote of ratification of the breach of trust will protect him. Promoters stand in a fiduciary position toward the corporation, as well when as a part of the scheme of promotion uninformed stockholders are expected to come in after the wrong has been perpetrated, as when at that time there are shareholders to whom no disclosure is made. The starting point is that a promoter is a fiduciary to the corporation. Promoters " have in their hands the creation and moulding of the company: they have power of defining how, and when, and in what shape, and under what supervision, it shall start into existence and begin business." The corporation is in the hands of the promoter like clay in the hands of the potter. It is to this person, absolutely helpless and incapable of independent initiative or uncontrolled action, that the promoter stands as trustee. The fiduciary relation must in reason continue until the promoter has completely established according to his plan the being which he has undertaken to create. His liability must be commensurate with the scheme of promotion on which he has embarked. If the plan contemplates merely the organization of the corporation his duties may end there. But if the scheme is more ambitious and includes beside the incorporation, not only the conveyance to it of property but the procurement of a working capital in cash from the public, then the obligation of faithfulness stretches to the length of the plan. It would be a vain thing for the law to say that the promoter is a trustee subject to all the stringent liabilities which inhere in that character and at the same time say that, at any
period during his trusteeship and long before an essential part of it was executed or his general duty as such ended, he could, by changing for a moment the cloak of the promoter for that of director or stockholder, by his own act alone, absolve himself from all past, present or future liability in his capacity as promoter. The plaintiff was fully organized and authorized to do business on July 8 and 11, 1895, when only $1,000 in capital stock had been paid in. It would be an idle ceremony indeed to establish for promoters the obligations of trustees, and at the same time hold that by their tools and with only $1,000 paid in, and that as a mere form (for it was soon after repaid to one of them) they could vote to themselves a wholly unwarranted profit of $1,250,000, kept secret from other initial shareholders, because at that moment they were the only stockholders. By such a course the law would be holding out apples of Sodom to the wronged corporation. Corporations can be formed through irresponsible agents with ease. If these agents can vote away a substantial part of the capital stock for property of comparatively small value, and still with immunity to themselves and their principals receive from the uninformed public cash subscriptions for the rest of the capital stock, the organization and management of corporations might readily become a " system of frauds." transaction with full knowledge of the facts. But it has not assented when it stood where it could act independently. The assent to the wrongful act of the promoters was given at the behest and by vote of the promoters themselves, while still occupying the position of protectors to their own creature, while it was bound hand and foot by them and prevented from taking any action except through them as a step in its further exploitation, and while their trust was uncompleted. The corporation although by law fully organized was still in its swaddling clothes, so far as the plans of the promoters were concerned. The value of their stock taken in return for their mining property was dependent in a substantial degree upon the corporation having $500,000 in cash for a working capital. They could not perfect their plans nor reap their contemplated profit, except by retaining their hold upon the corporation until the public had made this contribution. In one sense it is true that the plaintiff was completely organized on July 11 and on September 20, 1895. It was fully competent to be bound by its contracts and ratification of contracts with those dealing with it at arm's length. But it was not free from its wardship to its promoters, whose scheme from the first looked forward to a corporation with treasury filled by subscriptions from the unenlightened public. The corporation was not dealing with these fiduciaries upon an independent ground. The plaintiff, although a legal corporation from July 8, leaned wholly upon its promoters, because they made it so to lean, until long after the events here in controversy. An assent under these conditions can be of no greater effect than the assent of a minor under guardianship to the breaches of trust of his guardian. The situation is akin to the conveyance of property by a man solvent but in contemplation of insolvency. Such conveyance is not wrong until the contemplated indebtedness is incurred which makes him an insolvent. Then the executed evil intent stretches back and invalidates the original conveyance. Here the conveyance to the corporation with the secret profit, when there are no uninformed subscribers to stock, is not an actionable tort. But the vicious intent looks forward to the procurement of money from the ignorant public by means of original subscriptions and the execution of this evil intent extends backward to contaminate the sale and its profit. Stress has sometimes been laid upon the fact that the promoters were paid a part of their purchase price out of the public subscriptions. But there is no difference in principle between such a case and the present, where a substantial part of the value of the stock taken by the defendant and Lewisohn depended upon the cash subscriptions to be made by the public for the remaining shares not issued to the promoters. But it is further argued that, the entire capital stock outstanding at the time being' in the hands of the promoters, the sale of the property to the corporation was merely changing the form of title of the promoters from owners of real estate to that of shares of stock, and that, there being then no other shareholders, no wrong was done.
The distinction is clear between cases of that class and those like the present, where the promoters took for themselves a large number of shares of stock without adequate consideration and without disclosure to the detriment of the corporation and all its future shareholders, at the same time planning that there should be immediate public subscriptions. It is one thing to take all the shares of a corporation in payment for physical property conveyed. It does not much matter to the stockholders in such a case whether the total is one hundred and thirty thousand shares or one hundred and fifty thousand shares. But it is a very different thing to take 130,000/150,000 of capital stock of a corporation whose assets consist of the same physical property, and in addition $500,000 in money subscribed by others. The latter course affects the other stockholders and the corporation itself, and it gives the promoters something appreciably more valuable than what they contribute. The fundamental reasoning upon which these cases can rest is not that no wrong has been committed, but there is no one to enforce the remedy. All courts recognize the soundness of the doctrine that no man can be on both sides of the same bargain with justice to all interests. The principle that one cannot rightfully sell property, belonging to him in his private right, to himself in a trust capacity is universal. The theory upon which corporations are founded is that they are artificial persons, distinct and separate from officers and stockholders. Corporate liabilities do not attach to the latter. The wrong which the defendant and his associate did in this case was in selling property worth intrinsically $1,000,000 and in the market at most $2,000,000 for $3,250,000 without revealing that they were making a secret profit. The wrong was done to the corporation. The wrong is not done to the shareholders as individuals, nor to the shareholders collectively, it is done to the corporation as an independent being, and thus indirectly the rights of those who are or who may become stockholders are affected. In buying the promoters' mine, the directors of the corporation acted for the corporation, as such, without regard to who were the then stockholders, or even if there were no stockholders. The wrong is not done when the innocent public subscribes, but when the sale was made to the corporation at a grossly exaggerated price with secret profit. The occasion for complaining of this wrong comes when the promoters issue to the public the balance of the stock in order to provide the money necessary to set the corporation on its feet and to give thereby the contemplated value to the stock taken by themselves in payment for their mines. The exemption of the promoter from liability to the corporation for a sale without disclosure when he takes the entire issue of capital stock is an exception to the general rule imposing upon him the liabilities of a trustee. If this exception is to be extended to a case like the present, it leaves nothing of substantial value in the original rule. It might still reach small and grosser forms of want of fidelity to corporations, but would leave unharmed the vastly greater and more refined variety illustrated by the present case. It is said further that the result reached is harsh from the business man's point of view. A discussion of this aspect of the case involves ethical considerations. Courts are constantly dealing with the various relations of the business world. Legal principles are applied to these transactions, but such principles "have almost always been the fundamental ethical rules of right and wrong." There is little to the credit of the defendant and his associate. The offering by the defendant as promoter for public subscription for cash at par a substantial part of the capital stock of a corporation, the rest of whose capital stock had been issued for property conveyed to it under a law which permitted such stock to be issued only for the real value of property, was equivalent to a representation that no fictitious value had been placed upon the property so acquired. But
the distinct finding of the single justice is that the real value was less than one third the price for which the defendant and Lewisohn sold it. Nothing can be said in support of a business enterprise carried on by promoters, which involves the purchase by them of mines, costing and intrinsically worth $1,000,000, with money in substantial part solicited from associates on representations that a corporation is to be formed with a capitalization of $2,500,000, of whose stock $2,000,000 is to be issued for the conveyance to it by them of the mines, and the rest for cash ; the actual organization of the corporation under the laws of a State which permitted the issuance of capital stock for property conveyed only to the real value of the property, with a capital stock of $3,750,000, of which $3,250,000 is issued as fully paid for the conveyance of the mines ; the settlement with a very great majority of the associates on the basis of a sale for $2,000,000 of stock as at first represented, the promoters retaining $1,250,000 of shares as a secret profit, intending also to procure from the public subscriptions for $500,000 of stock in cash at par and actually carrying out this purpose, the promoters themselves during all these manipulations having entire control of all executive offices of the corporation. In the absence of compelling authority, we cannot set the seal of judicial approval upon such business policies. We have discussed the question as if the same legal principles are involved now as were presented upon the demurrer. There are, however, certain aspects of the evidence which seem to us to make it essentially different and materially stronger for the plaintiff. When the votes to purchase the mines of the promoters were passed on July 11, only forty shares of stock had been subscribed for or issued. The votes were passed by the directors alone and there was no vote by the stockholders at this time. It is true that the directors comprised all the stockholders, but on that date they were acting wholly in their capacity as directors, that is, as trustees. They did not attempt, so far as any records show, to shift their character as trustees for that of individual stockholders. They did not pursue the careful course of separation of these dual capacities by calling a stockholders' meeting nor did they assent in writing as stockholders. So far as the records show up to this point, there was only a directors' vote for the purchase. It is argued that, even though the ratification in writing be disregarded, still the acts of the stockholders of the plaintiff after some of them knew of the fact that there was some profit to Bigelow and Lewisohn beyond that accruing to all the other members of the syndicate has amounted to a ratification. The complete answer to this argument is that the single justice has found that until shortly before the bringing of these suits neither the stockholders nor the company had gained any knowledge as to the facts upon which the claim is now based, that the very great majority of the stockholders never knew or assented to the operations by which the secret profit was obtained and did not have knowledge of or access to the books or records of the corporation. The votes of ratification of 1899 and 1901 being passed under these conditions do not bind the plaintiff. It follows from what has been said as to the nature of the wrong done by the defendant that he is liable in solido. The act of the defendant and Lewisohn was a joint act for the benefit of both. Their subdivision of the profits made cannot affect the right of the plaintiff. The breach of trust, which they as promoters committed, was in the nature of a tort. This renders them liable severally as well as jointly and for the whole damage.
REPUBLIC OF THE PHILIPPINES, vs. ACOJE MINING COMPANY, INC February 28, 1963 Facts; In May 1948, the Acoje Mining requesting the opening of a post offices at its mining camp at Zambales, to service its employees and their families. The Director of Posts replied he would agree if the company will provide free quarters, all essential equipment and assign a responsible employee to perform the duties of a postmaster without compensation from his office until such time as funds therefor may be available. The company agreed to comply. On April 1949, the Director of Posts again wrote a letter stating that the company shall assume direct responsibility for pecuniary loss suffered by the Bureau due to dishonesty or negligence of the employee of the company assigned as postmaster," thereby suggesting that a resolution be adopted by the board of directors expressing conformity. On September 1949, the company informed the Director of Posts of the passage by its board of directors of a resolution: "That the requirement of the Bureau of Posts that the Company should accept full responsibility for all cash received by the Postmaster be complied with, … The post office branch was opened on October 1949 with one Hilario Sanchez as postmaster. On May 1954, the postmaster went on a three-day leave but never returned. A check of the accounts of the postmaster was done and a shortage was found in the amount of P13,867.24. The government commenced the present action upon failure to be compensated by Acoje MIning. The company denied liability contending that the resolution of the board of directors is ultra vires, and in any event its liability under said resolution is only that of a guarantor. The court a quo rendered judgment for the plaintiff. Issue; WON Acoje Mining liable Held / ratio; Yes, affirmed The contention that the resolution is ultra vires has no factual or legal basis. The opening of a post office branch was undertaken because of a request submitted by it. After the company had signified its willingness to comply and accepting this condition, the company, adopted a resolution. The least that can be said is that it cannot now go back on its plighted word on the ground of estoppel. The claim that the resolution is an ultra vires act cannot also be entertained it appearing that the same covers the benefit and welfare of its employees. While as a rule an ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred upon it by law, there are however certain corporate acts that may be performed outside of the scope if they are necessary to promote the interest or welfare of the corporation.
It is undisputed that the establishment of the local post office is a reasonable and proper adjunct to the conduct of the business of appellant company. Even assuming arguendo that the resolution is an ultra vires act, the same is not void for it was approved not in contravention of law, customs, public order or public policy. The term ultra viress hould be distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. A transaction which is ultra vires and not malum in se or malum prohibitum, is, not void as between the parties and an action may be brought directly on the transaction and relief had according to its terms. This rule is based on the consideration that as between private corporations, one party cannot receive the benefits which are embraced in total performance of a contract made with it by another party and then set up the invalidity of the transaction as a defense." The defense of ultra vires rests on violation of trust or duty toward stockholders, and should not be entertained where its allowance will do greater wrong to innocent parties dealing with corporation.. The acceptance of benefits arising from the performance by the other party may give rise to an estoppel precluding repudiation of the transaction. This is especially true where there is nothing to put the other party to the transaction on notice that the corporation has exceeded its powers. Neither can we entertain the claim of appellant that its liability is only that of a guarantor. A mere reading of the resolution show otherwise. Defendant assumed 'full responsibility for all cash received by the Postmaster.' The responsibility of the defendant is that of a principal."
NATIONAL POWER CORPORATION, vs. HONORABLE ABRAHAM P. VERA, Presiding Judge, Regional Trial Court, and SEA LION INTERNATIONAL PORT TERMINAL SERVICES, INC., February 27, 1989 Facts; NPC, seeks to annul the order which enjoined NPC from undertaking stevedoring and arrastre services in its pier located at the Batangas Coal-Fired Power Plant at Batangas. Private respondent was also allowed to continue stevedoring and arrastre services at the pier. In a complaint, private respondent alleged that NPC acted in bad faith in not renewing its Contract for Stevedoring Services for Coal-Handling Operations at NPC's plant, and in taking over its stevedoring services. Respondent judge issued a writ of preliminary injunction, after finding that NPC was not empowered by its Charter, Republic Act No. 6395, to engage in stevedoring and arrastre services. Hence, the instant petition. Issue; WON NPC may undertake stevedoring services on its own Held / ratio; Yes, reversed Acted without jurisdiction when he issued the writ of preliminary injunction Presidential Decree No. 1818 explicitly provides: SECTION 1. No court in the Philippines shall have jurisdiction to issue any restraining order, preliminary injunction, or preliminary mandatory injunction in any case, dispute, or controversy involving an infrastructure project, or a mining, fishery, forest or other natural resource development project of the government, or any public utility operated by the government… NPC is a public utility, created under special legislation engaged in the generation and distribution of electric power and energy. It, therefore, enjoys the protective mantle of the above decree. Moreover, respondent judge's finding that NPC is not empowered by its Charter to undertake stevedoring services in its pier is erroneous. The NPC was created and empowered not only to construct, operate and maintain power plants, reservoirs, transmission lines, and other works, but also: ... To exercise such powers …reasonably necessary to carry out the business and purposes for which it was organized, or which, from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish said purpose, . . . [Sec. 3 (1) of Rep. Act No. 6395, as amended.] The Court must decide whether or not a logical and necessary relation exists between the act questioned and the corporate purpose. For if that act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense, it may be fairly considered within the corporation's charter powers.
A corporation is not restricted to the exercise of powers expressly conferred upon it by its charter, but has the power to do what is reasonably necessary or proper to promote the interest or welfare of the corporation. In the instant case, it is an undisputed fact that the pier located at Batangas, which is owned by NPC, receives the various shipments of coal which is used exclusively to fuel the Batangas Power Plant. The stevedoring services are incidental and indispensable to the operation of the plant. Hence NPC is empowered under its Charter to undertake such services, it being reasonably necessary to the operation and maintenance of the power plant. Issued in grave abuse of discretion The assailed Order was issued in grave abuse of discretion, considering: (1) that private respondent had failed to establish a right to the issuance of a writ of preliminary injunction; and (2) that the court cannot direct the exercise of a corporate prerogative. Before a writ of preliminary injunction may be issued, there must be a clear showing by the complainant that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right Private respondent's contract already expired. There is no existing contractual relationship. Moreover, private respondent's permit for cargo handling services expired as well. On the other hand, NPC, which was under no legal obligation to renew the contract was granted authority by the PPA to provide cargo handling services in its pier. Consequently, there was no right of private respondent that needed to be protected or preserved by a writ of preliminary injunction. Furthermore, respondent judge's directive amounted to a writ of mandamus. But it is a settled rule that mandamus will lie only to compel the performance of a ministerial duty; it does not lie to require anyone to fulfill contractual obligations or compel a course of conduct, nor to control or review the exercise of discretion.
ESTEFANIA R. VDA. DE PIROVANO, vs. DE LA RAMA STEAMSHIP CO., INC., July 31, 1958 Facts; Plaintiff seeks to recover from the defendant P221,975.45, balance of the amount of dividends at P100 per share, declared by Resolution No. 50-127 of December 1950, to which she is entitled as the registered owner of 3,424 shares after deducting the sum of P120,424.55 she received from the defendant for advances made to her after the death of the late Esteban de la Rama. Defendant avers that although the plaintiff is entitled to the dividends, she is indebted to the defendant as of December 1950 for P444,202.52. The Court dismissed both the complaint and the counterclaim. The plaintiff has appealed. Appellant's theory is that the cash advances to her in the US during the Pacific War for her personal expenses were assumed by Esteban de la Rama, as set forth in his letter to appellee and the Hijos de I. de la Rama & Co., Inc., approved by both corporations. The advances were debited against the account of Hijos de I. de la Rama & Co., Inc., another corporation owned by Esteban de Ia Rama; and the only sum appellee may deduct is P120,424.55 which she received after the death of her father Esteban de la Rama and was not assumed by him; in fact the Hijos de I. de la Rama & Co., Inc., filed a claim charging the estate with the aforesaid advances. Appellee resists upon the ground that the assumption by Esteban de la Rama was never consented to by the appellee and hence not binding upon it; and that the accounting method by which the withdrawals were charged against the Hijas de I. de la Rama & Co., Inc. was to circumvent the prohibition imposed upon the appellee to declare dividends, agreed upon in the deed of trust executed by the appellee and the National Development Company. Issue; WON De La Rama Steamship liable Held / ratio; No, denied / affirmed The determination of the controversy hinges on whether the assumption made by the Esteban de la Rama of all the advances by the appellee to the appellant was binding upon it. Because of the prohibition that no dividends could be declared by the appellee, advances to the stockholders would constitute a violation of the deed of trust. For that reason it was made to appear that such advances were made to the Hijos de I. de la Rama & Co., Inc. and debited the same against the latter in the books of the appellee, and in the books of the Hijos de I. de la Rama & Co., Inc. the said advances were debited against the individual the stockholders, the stockholders of both corporations being the same. The pivotal point is whether the assumption by Esteban de la Rama of the advances was consented to by the appellee to constitute a novation. Express consent by the creditor is necessary to substitute another for the debtor. Such consent does not appear to have been given by the board of directors of the appellee. Corporate acts of a corporation must appear in its books or records. No such consent appears in the books or records of the appellee. Aside from the letter of Esteban de la Rama, appellant relies upon the financial statements and books of the appellee where the withdrawals were entered in the account of Hijos de I. de la Rama & Co., Inc. or transferred to the account of
Esteban de la Rama. The entries on the withdrawals by the appellant entered in the account of Hijos de I. de la Rama & Co., Inc. or transferred to the account of Esteban de la Rama were done so in order to circumvent the prohibition on dividends. As to the inclusion of the withdrawals in the claim of the Hijos de I. de la Rama & Co., Inc. filed against the estate of the late Esteban de la Rama, such act does not bind the appellee. Appellee disclaimed any interest in the claim filed by the Hijos de I. de la Rama & Co., Inc. against the estate of the late Esteban de la Rama. Resolution No. 50-127 of the board of directors does not suffer from any legal infirmity. The segregation from the account of Hijos de I. de la Rama & Co., Inc. and the setting up in the books of the De la Rama Steamship Co., Inc. of withdrawals made by the stockholders of the appellee as accounts receivable due from said stockholders was even suggested by the President of Hijos de I. de la Rama & Co., Inc. There is no room for the application of the in pari delicto principle because the appellee and the Hijos de I. de la Rama & Co., Inc. have committed no violation of law, but a violation of the deed of trust. However, the National Development Company chose not to avail itself of its right.
FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf and in that all other stockholders of the Balatoc Mining Company, etc., vs. BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY, H. E. RENZ, JOHN W. JAUSSERMANN, and A. W. BEAM March 18, 1933 Facts; This was originally instituted by F. M. Harden, in behalf of all other stockholders of the Balatoc Mining Co. to annul a certificate covering 600,000 shares of the stock of the Balatoc Mining Co., issued to the Benguet Consolidated Mining Co., and to secure restoration of a large sum of money unlawfully collected by the Benguet Consolidated Mining Co., Prior to the institution of this lawsuit, the Benguet Consolidated Mining Co., transferred to H. E. Renz, as trustee, the certificate for 600,000 shares of the Balatoc Mining. This was done to facilitate the splitting up in the course of the sale or distribution. This explains the connection of Renz with the case. The other defendants are officials of the Benguet Consolidated Mining Co. The trial court dismissed the complaint. Plaintiffs appealed. The Benguet Consolidated Mining Co. was organized in June, 1903, as a sociedad anonima in conformity with the provisions of Spanish law; while the Balatoc Mining Co. was organized in December 1925, in conformity with the Corporation Law (Act No. 1459). Both entities were organized for the purpose of engaging in the mining of gold in the Philippines, and their properties are located only a few miles apart in Benguet. The capital stock of the Balatoc Mining Co. consists of one million shares of the par value of one peso (P1) each. When the Balatoc Mining Co. was organized its properties were undeveloped; the stockholders were unable to supply the means for profitable operation. For this reason, the board ordered a suspension of work, effective July 1926. In November of the same year a general meeting of the stockholders appointed a committee for the purpose of interesting outside capital. The committee approached A. W. Beam, then president of the Benguet Company, to secure the capital. A contract, was executed on March 1927, the principal features of which were that the Benguet Company was to proceed with the development and construct a milling plant for the Balatoc mine. The Benguet Company also agreed to erect a power plant and other buildings. In return, Benguet Company should receive Balatoc Company shares of a par value of P600,000, in payment for the first P600,000 be thus advanced to it by the Benguet Company. By May 1929, the Benguet Company had spent P1,417,952.15. As compensation, a certificate for six hundred thousand shares of the stock of the Balatoc Company has been delivered to the Benguet Company, and the excess of P817,952.15 has been returned to the Benguet Company in cash. Meanwhile dividends of the Balatoc Company have been enriching its stockholders, and at the time of the filing of the complaint the value of its shares had increased in the market from a nominal valuation to more than eleven pesos per share. The legal point upon which the action is planted is that it is unlawful for the Benguet Company to hold any interest in a mining corporation and that the contract by which the interest here in question was acquired must be annulled, with the consequent obliteration of the certificate issued to the Benguet Company and the corresponding enrichment of the shareholders of the Balatoc Company. When the Philippines passed to the sovereignty of the US, the attention of the Philippine Commission was drawn to the fact that there is no entity in Spanish law exactly corresponding to the notion of the corporation; and in the Philippine
Bill, approved 1902, the US inserted provisions, under the head of Franchises, which were intended to control the lawmaking power in the Philippine Islands in the matter of granting of franchises. These provisions are found in section 74 and 75 of the Act. In section 75 there is a provision referring to mining corporations, which still remains the law, as amended. This provisions, in its original form, reads as follows: "... it shall be unlawful for any member of a corporation engaged in agriculture or mining and for any corporation organized for any purpose except irrigation to be in any wise interested in any other corporation engaged in agriculture or in mining." The Philippine Commission entered upon the enactment of a general law authorizing the creation of corporations embodied in Corporation Law (Act No. 1459 of the Philippine Commission). The purpose was to introduce the American corporation into the Philippine Islands and to hasten the day when the sociedad anonima would be obsolete. The sociedad anonima is like the English joint stock company, with features resembling those of both the partnership is shown in the fact that sociedad, the generic component of its name in Spanish, is the same word that is used in that language to designate other forms of partnership, and in its organization it is constructed along the same general lines as the ordinary partnership. In drafting the Corporation Law the Philippine Commission inserted in subsection (5) of section 13 of that Act (No. 1459) the words from section 75 of the Act of Congress of July 1, 1902 (Philippine Bill). As it was the intention to stimulate the introduction of the American Corporation it was necessary to make certain adjustments resulting from the continued co-existence, for a time, of the two forms of commercial entities. Accordingly, in section 75 of the Corporation Law, a provision is found making the sociedad anonima subject to the provisions of the Corporation Law "so far as such provisions may be applicable", and giving to the sociedades anonimas option to continue business as such or to reform and organize under the provisions of the Corporation Law. Section 75 of the Act Congress of July 1, 1902 (Philippine Bill), prohibiting corporations engaged in mining and members of such from being interested in any other corporation engaged in mining, was amended by section 7 of Act No. 3518 approved March 1929. The amendment was in the direction of liberalization. Thus, the inhibition was so modified as merely to prohibit any such member from holding more than fifteen per centum of the outstanding capital stock of another such corporation. The Corporation Law (Act No. 1459) did not contain any clause penalizing the act of a corporation, a member of a corporation , in acquiring an interest contrary to paragraph (5) of section 13 of the Act. The Philippine Legislature undertook to remedy this situation in section 3 of Act No. 2792 but this provision was declared invalid by this court in Government of the Philippine Islands vs. El Hogar Filipino for lack of an adequate title. Subsequently the Legislature reenacted substantially the same penal provision in section 21 of Act No. 3518, under a title sufficiently broad to comprehend the subject matter. This provision was inserted as a new section in the Corporation Law, forming section 1990 (A) of said Act as it now stands. Omitting the proviso, which seems not to be pertinent to the present controversy, said provision reads as follows: SEC. 190 (A). Penalties. — The violation of any of the provisions of this Act …shall be punished by a fine of not more than five thousand pesos and by imprisonment for not more than five years …. If the violation is committed by a corporation, the same shall, …be dissolved by quo warranto proceedings instituted by the Attorney-General …
Issue; WON Benguet may acquire interest over Balatoc Held / ratio; Yes, denied / affirmed There are two fundamental questions involved in this controversy. The first is whether the plaintiffs can maintain an action based upon the violation of law supposedly committed by the Benguet Company in this case. The second is whether, assuming the first question to be answered in the affirmative, the Benguet Company, which was organized as a sociedad anonima, is a corporation within the meaning of the language used by the Congress of the United States, and later by the Philippine Legislature, prohibiting a mining corporation from becoming interested in another mining corporation. The provision referred to was adopted by the lawmakers with a sole view to the public policy that should control in the granting of mining rights. The penalties imposed in section 190 (A) of the Corporation Law can be enforced only by a criminal prosecution or by an action of quo warranto. But these proceedings can be maintained only by the AttorneyGeneral in representation of the Government. What room then is left for the private action which the plaintiffs seek to assert in this case? The defendant Benguet Company has committed no civil wrong against the plaintiffs, and if a public wrong has been committed, the directors of the Balatoc Company, and the plaintiff Harden himself, were the active inducers of the commission of that wrong. The contract, has been performed on both sides. There is no possibility of undoing what has been done. Nobody would suggest the demolition of the mill. Also, to mulct the Benguet Company in many millions of dollars in favor of individuals who have not the slightest equitable right to that money in a proposition to which no court can give a ready assent. The most plausible presentation of the case of the plaintiffs proceeds on the assumption that only one of the contracting parties has been guilty of a misdemeanor, namely, the Benguet Company, and that the other party, the Balatoc Company, is wholly innocent to participation in that wrong. The plaintiffs would then have us apply the second paragraph of article 1305 of the Civil Code which declares that an innocent party to an illegal contract may recover anything he may have given, while he is not bound to fulfill any promise he may have made. But, supposing that the first hurdle can be safely vaulted, the remedy supplied in article 1305 of the Civil Code cannot be invoked where an adequate special remedy is supplied in a special law. Much more is that idea applicable to the situation now before us, where the special provisions give ample remedies for the enforcement of the law by action in the name of the Government, and where no civil wrong has been done to the party here seeking redress. A corporation limited by the law or by its charter has, until the State acts, every power and capacity that any other individual capable of acquiring lands, possesses. The corporation may exercise every act of ownership over such lands; it may sue in ejectment or unlawful detainer and it may demand specific performance. It has an absolute title against all the world except the State after a proper proceeding is begun in a court of law. ... The Attorney General is the exclusive officer in whom is confided the right to initiate proceedings for escheat or attack the right of a corporation to hold land.
J. F. RAMIREZ vs. THE ORIENTALIST CO., and RAMON J. FERNANDEZ September 24, 1918 Facts; The Orientalist Company is engaged in the business of maintaining a theatre in Manila.. J. F. Ramirez was a resident of Paris and was engaged in the business of marketing films. Plaintiff was represented in Manila by his son, Jose Ramirez. In July, 1913, the Orientalist discovered that plaintiff had control of the agencies for two different marks of films, , the "Eclair Films" and the "Milano Films;" negotiations were begun for the purpose of placing the exclusive agency of these films in the Orientalist. Ramon J. Fernandez, one of the directors and its treasurer, was chiefly active in this. Near the end of July, Jose Ramirez gave an offer to Ramon Fernandez. Fernandez had an informal conference with all the members of the board and addressed a letter to Jose Ramirez, accepting the offer. These communications were signed twice by R. J. Fernandez, as an individual, and in the capacity of treasurer. The Orientalist Company instructed him to make a contract in the capacity of attorney-in-fact for the Orientalist. This idea was never given effect; J. F. Ramirez himself procured the films upon his own. During February to April 1914, there arrived in Manila several remittances of films from Paris, and it is these shipments which have given occasion for the present action. All of the drafts were drawn, upon the Orientalist Company; and all were accepted in the name of B. Hernandez (president), except the last, which was accepted by Hernandez individually. None of the drafts were taken up by the drawee or by B. Hernandez when they fell due. This action was instituted by the plaintiff against the Orientalist Company, and Fernandez. The trial court declared the Orientalist Company to be a principal debtor and Ramon J. Fernandez was declared to be liable subsidiarily as guarantor. Issue; WON Corporation liable Held / ratio; Yes, affirmed We shall consider, first, the question of the liability of the corporation and, secondly the question of the liability of Ramon J. Fernandez. As to the liability of the corporation, it was incumbent upon the corporation, if it desired to question the authority of Fernandez to bind it, to deny the due execution of said contracts under oath. In the case of Merchant vs. International Banking: The failure of the defendant to deny the genuineness and due execution of this guaranty under oath was an admission not only of the signature of Brown, but also his authority to make the contract in behalf of the defendant and of the power the contract in behalf of the defendant and of the power of the defendant to enter into such a contract.” Pleading lack of authority in an officer of a corporation to bind it by a contract executed by him in its name is a defense which should be specially pleaded.
In dealing with corporations the public at large is bound to rely to a large extent upon outward appearances. Whether a particular officer actually possesses the authority which he assumes to exercise is frequently known to very few, and the proof of it usually is not readily accessible to the stranger. It is reasonable that the corporation should be required, if it denies his authority, to state such defense in its answer. We shall now consider the liability of the defendant company. Ramon Fernandez, as treasurer, had no independent authority to bind the company. Corporate power shall be exercised, and all corporate business conducted by the board of directors. The fact that the power to make corporate contract is thus vested in the board of directors does not signify that a formal vote of the board must always be taken before contractual liability can be fixed upon a corporation. The authority of the subordinate agent of a corporation often depends upon the course of dealings which the company or its director have sanctioned. It may be established sometimes without reference to official record of the proceedings of the board, by proof of the usage which the company had permitted to grow up in business, and of the acquiescence of the board charged with the duty of supervising and controlling the company's business. The board convened in special session in the office of Fernandez. There were present the four members who already signified their consent. At the suggestion of Fernandez it was decided to call a special meeting of the stockholders to consider the matter. The stockholders meeting was convoked upon September 1913. The possibility that the corporation might lack funds and in such contingency the four directors "would continue importing said films at their own account and risk”. In view of this statement, the stockholders adopted a resolution accepting the offer. It appears that the board had already recognized the contract as being in existence. Suggestive is the direction given for the publication of announcements in the newspapers to the effect that the company was engaged in importing films. Hence the contracts were thus inferentially approved by the company's board and that the company is bound unless the subsequent failure of the stockholders to approve said contracts had the effect of abrogating the liability. It is clear that the action of the stockholders must be ignored. The functions of the stockholders are of a limited nature. The stockholders may have all the profits but shall turn over the complete management of the enterprise to the directors. Contract between a corporation and third person must be made by the director and not by the stockholders. It results that where a meeting of the stockholders is called for the purpose of passing on the propriety of making a contract, its resolutions are at most advisory and not in any wise binding on the board. If a corporation knowingly permits one of its officer, or any other agent, to do acts within the scope of an apparent authority, and thus hold him out to the public as possessing power to do those acts, the corporation will as against any one who has in good faith dealt with the corporation through such agent, be estopped from denying his authority; and where it is said "if the corporation permits" this means the same as "if the thing is permitted by the directing power of the corporation." It being determined that the corporation is bound by the contract in question, it remains to consider the character of the liability of Fernandez.
It is clear, from the testimony of both Ramirez and Fernandez, that the responsibility of the latter was that of guarantor. Fernandez would have us believe that his name was signed as a guaranty that the contract would be approved by the corporation, while Ramirez says it was for the purpose of guaranteeing performance. We are convinced that the latter was the real intention.
SALVADOR P. LOPEZ, President of the UP; BOARD OF REGENTS, UP; and OSEAS DEL ROSARIO, Officer-in-Charge, College of Education, UP vs. HON. VICENTE ERICTA, Judge, and DR. CONSUELO S. BLANCO June 29, 1972 Facts; The first ad interim appointment was extended on April 27, 1970, "effective May 1, 1970 until April 30, 1971, unless sooner terminated and subject to the appproval of the Board of Regents and to pertinent University regulations." The provisions of the U.P. Charter (Act No. 1870) on the question read as follows: SEC. 7. A quorum …shall consist a majority of all the members holding office at the time the meeting of the Board is called. All processes against the Board …shall be served on the president or secretary. SEC. 10. The body of instructors of each college shall constitute its faculty, and as presiding officer of each faculty, there shall be a dean elected from the members of such faculty by the Board …on nomination by the President …. Article 78 of the Revised Code of the University provides: Art. 78. For each college or school, there shall be a Dean or Director who shall be elected by the Board …from the members of the faculty …, on nomination by the President …. The Board of Regents met on May 1970, and President Lopez submitted to it the ad interim appointment of Dr. Blanco. The Board voted to defer action on the matter in view of the objections cited by Regent Kalaw based on the petition against the appointment. The next meeting of the Board of Regents was held on July 1970. The minutes show that Dr. Blanco had not obtained the necessary number of votes. The roll-call voting gave the following results: five (5) votes in favor of Dr. Blanco's ad interim appointment, three (3) votes against, and four (4) abstentions — all the twelve constituting the total membership. Dr. Blanco protested the appointment of Oseas A. del Rosario as Officer-in-Charge. Later, Dr. Blanco went to the Court of First Instance which ruled in his favor. Issue; WON Dr. Blanco was duly elected Dean of the College of Education Held / ratio; No, reversed Petitioners contend that if the abstentions were considered as affirmative votes a situation might arise wherein a nominee (for the office of Dean as in this case) is elected by only one affirmative vote with eleven members of the Board abstaining. Respondent contend that according to the prevailing view "an abstention vote should be recorded in the affirmative on the theory that refusal to vote indicates acquiescence in the action of those who vote;"
An abstention, according to the respondents' citations, is counted as an affirmative vote insofar as it may be construed as an acquiescence. This is based on what is deemed to be a presumption as to the intent of the one abstaining, namely, to acquiesce, but which prima facie presumption would not hold in the face of clear evidence to the contrary. It is pertinent, therefore, to inquire into the facts and circumstances which attended the voting. From the record of the meeting it is very clear: (1) that the Personnel Committee was for recommending that it be rejected; (2) that the rejection should be done in a diplomatic way "to avoid any embarrassment on the part of both the appointee and the President;" and (3) that the "final decision" of the committee was to ask the President of the University to talk to Dr. Blanco "for the appointment to be withdrawn." The votes of abstention, viewed in their setting, can in no way be construed as votes for confirmation of the appointment. No inference can be drawn from this that the members of the Personnel Committee, by their abstention, intended to acquiesce in the action taken by those who voted affirmatively. Neither, for that matter, can such inference be drawn from the abstention that he was abstaining because he was not then ready to make a decision. All arguments on the legal question of how an abstention should be treated become academic and purposeless in the face of the fact that respondent Dr. Blanco was clearly not the choice of a majority of the members. This fact cannot be ignored simply because the Chairman, in submitting the question to the actual vote, did not frame it as accurately as the preceding discussion called for, such that two of the Regents present (Silva and Kalaw) had to make some kind of clarification. In any event, the Board resolved, to cancel the result of the voting, and "to return the case to its original status." In effect the Board has not acted on the confirmation either adversely or favorably, but that the ad interimappointment has terminated."
EXPERTRAVEL & TOURS, INC vs. COURT OF APPEALS and KOREAN AIRLINES May 26, 2005 Facts; Korean Airlines (KAL)’s general manager in the Philippines is Suk Kyoo Kim, while its appointed counsel was Atty. Aguinaldo and his firm. On September 1999, KAL, filed a Complaint against ETI with the Regional Trial Court for the collection of P260,150.00, plus damages. ETI filed a motion to dismiss on the ground that Atty. Aguinaldo was not authorized to execute the verification and certificate of non-forum shopping. Atty. Aguinaldo claimed that he had been authorized to file the complaint through a resolution of the KAL Board of Directors. KAL submitted an Affidavit executed by its general manager alleging that the board conducted a special teleconference which approved a resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping and to file the complaint. Suk Kyoo Kim alleged, however, that the corporation had no written copy of the resolution. The trial court denied the motion to dismiss. ETI then filed a petition for certiorari and mandamus in the CA. The CA rendered judgment dismissing the petition. Issue; WON certificate of non forum shopping validly accomplished Held / ratio; No, reversed The requirement to file a certificate of non-forum shopping is mandatory. The certification is personal responsibility of the party. 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, 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. In this case, the petitioner assailed the authority of Atty. Aguinaldo. It was, thus, incumbent upon the respondent, as the plaintiff, to establish that Atty. Aguinaldo had such authority. The respondent, however, failed to do so. There was no allegation that Atty. Aguinaldo had been authorized to execute the certificate; moreover, no such board resolution was appended thereto. While Atty. Aguinaldo is the resident agent of the respondent, this does not mean that he is authorized to execute the requisite certification. Under Section 127, in relation to Section 128 of the Corporation Code, the authority of the
resident agent of a foreign corporation with license to do business in the Philippines is to receive, for and in behalf of the foreign corporation, services and other legal processes in all actions and other legal proceedings against such corporation. Atty. Aguinaldo was not specifically authorized to execute a certificate of non-forum shopping. The respondent knew this and attempted to show its compliance by submitting a resolution purporting to have been approved by its Board during a teleconference. The RTC took judicial notice that because of the onset of modern technology, persons in one location may confer with other persons in other places, and concluded that Aguinaldo had a teleconference with the respondent’s Board. Matters of judicial notice have three material requisites: (1) the matter must be one of common and general knowledge; (2) it must be well and authoritatively settled and not doubtful or uncertain; and (3) it must be known to be within the limits of the jurisdiction of the court. Judicial notice is limited to facts evidenced by public records and facts of general notoriety. Moreover, a judicially noticed fact must be one not subject to a reasonable dispute in that it is either: (1) generally known within the territorial jurisdiction of the trial court; or (2) capable of accurate and ready determination by resorting to sources whose accuracy cannot reasonably be questionable. In this age of modern technology, the courts may take judicial notice that business transactions may be made through teleconferencing. But, the Court is not convinced that one was conducted; even if there had been one, the Court is not inclined to believe that a board resolution was duly passed. The respondent announced the holding of the teleconference only during the hearing; Atty. Aguinaldo then prayed for ten days within which to submit the resolution. The respondent, however, failed and prayed for 15 more days. In his affidavit, Suk Kyoo Kim declared that the respondent "do[es] not keep a written copy of the aforesaid Resolution". The respondent gave the trial court the impression that it needed time to secure a copy of the resolution kept in Korea, only to allege later (via the affidavit of Suk Kyoo Kim) that it had no such written copy. Moreover, Suk Kyoo Kim stated that the resolution was embodied in the Secretary’s/Resident Agent’s Certificate signed by Atty. Aguinaldo. However, no such resolution was appended to the said certificate. The respondent’s allegation that its board of directors conducted a teleconference is incredible, given the additional fact that no such allegation was made in the complaint. Worse still, it appears that as early as January 1999, Atty. Aguinaldo had signed a Secretary’s/Resident Agent’s Certificate alleging that the board of directors held a teleconference. No such certificate was appended to the complaint, which was filed on September 1999. More importantly, the said certificate was signed by Atty. Aguinaldo as early as January 1999, and yet was notarized one year later (on January 2000); It also did not explain its failure to append the said certificate to the complaint.
CITIBANK, N.A, vs. HON. SEGUNDINO G. CHUA, SANTIAGO M. KAPUNAN and LUIS L. VICTOR, ASSOCIATE JUSTICES OF THE COURT OF APPEALS, HON. LEONARDO B. CANARES, Judge, and SPOUSES CRESENCIO AND ZENAIDA VELEZ March 17, 1993 Facts; Petitioner is a foreign banking corporation licensed to do business in the Philippines. Private respondents, spouses Velez, were clients of petitioner branch in Cebu. Respondents alleged that the petitioner bank extended to them credit lines secured with mortgages. They claim that petitioner offered them special additional accommodation of P5,000,000 to be availed of in the following: "a. Defendant would purchase checks from plaintiffs by exchanging it with defendant's manager's check b. on the following day, defendant's manager's check, will be deposited by the plaintiffs with their other banks to cover the check or checks previously issued by the plaintiffs mentioned above; Respondents tried to exchange six checks amounting to P3,095,000 but petitioner bank refused. Instead, petitioner bank suggested to restructure the amount. Respondents agreed. For failure of bank to comply with this restructuring private respondents sued for specific performance. Petitioner bank has a different version: ". . . Respondent 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 assuring the bank officer that his personal checks were fully funded. Cresencio Velez would then deposit and at the same time withdraw sums 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 banks to cover his previously deposited unfunded personal checks with petitioner bank. 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. On March 1986, he deposited various unfunded personal checks totalling P3,095,000 and at the same time withdrew 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, Cresencio Velez's personal checks in the total aggregate amount of P3,095,000.00 bounced” Subsequently, petitioner bank filed a criminal complaint for violation of Bouncing Checks Law and estafa. During pre-trial, counsel for petitioner bank appeared, presenting a special power of attorney executed by Citibank officer Florencia Tarriela in favor of petitioner bank's counsel, the J.P. Garcia & Associates, to represent and bind petitioner bank at the pre-trial conference of the case at bar. Private respondents orally moved to declare petitioner bank as in default on the ground that the special power of attorney was not executed by the Board. Respondent judge issued an order declaring petitioner bank as in default. Petitioner bank then filed a petition for certiorari with the Court of Appeals. The Court of Appeals dismissed the petition. Issue; WON JP Garcia & Associates may represent petitioner during trial Held / ratio;
Yes, reversed Petitioner bank contends that no board resolution was necessary because petitioner bank's by-laws grant to its Executing Officer and Secretary Pro-Tem the power to delegate to a Citibank officer, in this case William W. Ferguson, the authority to represent and defend the bank and its interests. Private respondents assail the authority on two grounds, namely: first, that the authority did not come from the Board; and second, that the authority granted to the Executing Officer in the by-laws was ineffective because the same were not approved by the SEC. There are two issues in this case. First, whether a resolution of the board is always necessary for granting authority to an agent to represent the corporation in court cases. And second, whether the by-laws of the petitioner foreign corporation which has license to do business in the Philippines, are effective in this jurisdiction. In the corporate hierarchy, there are three levels of control: (1) the board, 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. 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. Although as a general rule, all corporate powers are to be exercised by the board of directors, exceptions are made where the Code provides otherwise. 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. 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. Every delegation of authority, whether general or special, carries with it, unless the contrary be expressed, 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 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 clothing him with authority to direct and manage corporate affairs. This brings us to the second query: whether petitioner bank's by-laws are effective. A corporation can submit its by-laws, prior to incorporation, or within one month after receipt of official notice of the issuance of its certificate of incorporation by the SEC. But even more important, said provision starts with the phrase "Every corporation formed under this Code", which can only refer to corporations incorporated in the Philippines.
Hence, Section 46, in so far as it refers to the effectivity of corporate by-laws, applies only to domestic corporations and not to foreign corporations. On the other hand, Section 125 requires that a foreign corporation applying for a license to transact business in the Philippines must submit, a copy of its articles of incorporation and by-laws, certified in accordance with law. Unless these documents are submitted, the application cannot be acted upon by the SEC. It follows that when it decides to issue such license, it is satisfied that the applicant's by-laws, among the other documents, meet the legal requirements. This, in effect, is an approval of the foreign corporations by-laws. Therefore, petitioner bank's by-laws, though originating from a foreign jurisdiction, are valid and effective in the Philippines.
PRIME WHITE CEMENT CORPORATION vs. APPELLATE COURT and ALEJANDRO TE March 19, 1993 Facts; On July, 1969, plaintiff and defendant corporation thru its President, Zosimo Falcon and Justo C. Trazo, as Chairman of the Board, entered into a dealership agreement whereby plaintiff was the exclusive distributor of defendant corporation’s cement products in Mindanao for 5 years. Right after the plaintiff entered into the dealership, he placed an advertisement in a newspaper of his being the exclusive dealer. Plaintiff entered into a written agreement with several hardware stores which would enable him to sell his allocation of 20,000 bags regular supply. He informed the corporation that he is making the preparation for the opening of the letter of credit to cover the price of the initial delivery. The corporation replied that the board decided to impose the following conditions: … b. Only 8,000 bags of white cement per month for only a period of three (3) months will be delivered; … Plaintiff was constrained to cancel his agreement with third parties. The defendant corporation then entered into an exclusive dealership agreement with Napoleon Co hence, this suit. The trial court adjudged the corporation liable. The appellate court affirmed the said decision. Issue; WON corporation liable under the contract Held / ratio; No, reversed All corporate powers shall be exercised by the Board of Directors, except as otherwise provided by law. Although it cannot completely abdicate its power to act for the juridical entity, the Board may expressly delegate specific powers to its President or any of its officers. In the absence of such delegation, a contract entered into by its President may still bind the corporation if the board should ratify the same expressly or impliedly. Furthermore, even in the absence of express or implied authority by ratification, the President as such may, as a general rule, bind the corporation by a contract in the ordinary course of business, provided the same is reasonable under the circumstances. They apply where the President or other officer, purportedly acting for the corporation, is dealing with a third person, i. e., a person outside the corporation. The situation is different where a director is dealing with his own corporation. Respondent Te was a member of the Board of Directors and Auditor of the corporation as well. He is a "self-dealing" director. A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage. Directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "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."
On the other hand, a director's contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made. Granting arguendo that the "dealership " would be enforceable, the fact that the other party to the contract was a Director and Auditor of the petitioner corporation changes the whole situation. First, the contract was neither fair nor reasonable. Te is a businessman himself and must have known, that at that time, prices of commodities in general, and white cement in particular, were expected to rise. Despite this, no provision was made to allow for an increase in price. He was guilty of disloyalty; he was attempting to enrich himself at the expense of the corporation. There is no showing that the stockholders ratified the "dealership " or that they were fully aware of its provisions. The contract was therefore not valid.
REBECCA BOYER-ROXAS and GUILLERMO ROXAS, vs. COURT OF APPEALS and HEIRS OF EUGENIA V. ROXAS, INC July 14, 1992 Facts; In two (2) separate complaints for recovery of possession against Rebecca Boyer-Roxas and Guillermo Roxas respectively, respondent Heirs of Eugenia V. Roxas, Inc., prayed for the ejectment of the petitioners from buildings inside the Hidden Valley Springs Resort located at Laguna owned by the corporation. The corporation alleged that Rebecca’s occupancy on the two (2) houses was only upon the tolerance of the respondent corporation. The corporation also alleged that Guillermo occupies a house built during the time when Guillermo's father was still living and was the general manager and that Guillermo's possession was only upon the tolerance of the corporation. It also alleged that the petitioners never paid rentals and that they ignored the demand for them to vacate. Petitioners state that they are heirs of Eugenia V. Roxas and therefore, co-owners of the Resort. Heirs of Eugenia V Roxas, Incorporated, was incorporated with the purpose of engaging in agriculture to develop the properties inherited from Eugenia Roxas. The Articles was amended to allow it to engage in the resort business. The incorporators were all members of the same family; that accordingly, the plaintiff put up a resort known as Hidden Valley Springs Resort; that the house occupied by Rebecca B. Roxas was originally intended as staff house but later used as the residence of Eriberto Roxas, deceased husband of Rebecca Boyer-Roxas and father of Guillermo Roxas; that the building presently occupied by Guillermo Roxas was originally intended as a recreation hall but later converted as a residential house; that the conversion was not objected to by any of the Board of Directors; After the death of Eriberto Roxas, the defendants committed acts that impeded the plaintiff's expansion. On August 1983, the Board of Directors adopted Resolution authorizing the ejectment of the defendants. Issue; WON ejectment proper Held / ratio; Yes, affirmed Petitioners maintain that their possession must be respected in view of their ownership of an aliquot portion of all the properties of the respondent corporation being stockholders thereof. They propose that the veil of corporate fiction be pierced. The respondent is a bona fide corporation. As such, it has a juridical personality of its own separate from the members composing it. 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 stockholder is not a co-owner or tenant in common of the corporate property.
The petitioners point out that their stay was with the blessings of Eufrocino Roxas, the husband of Eugenia V. Roxas, who was the majority stockholder. The Board of Directors did not object. The corporation transacts its business only through its officers or agents. Whatever authority these officers or agents may have is derived from the board unless conferred by the charter. An officer's power as an agent of the corporation must be sought from the statute, charter, the by-laws or in a delegation of authority to such officer, from the acts of the board of directors, formally expressed or implied from a habit or custom of doing business. The petitioners' stay was merely by tolerance. Eufrocino Roxas' actions could not have bound the corporation forever. In the absence of any existing contract between the petitioners and the respondent corporation, the corporation may elect to eject the petitioners at any time it wishes for the benefit and interest of the respondent corporation. The petitioners' suggestion that the veil of the corporate fiction should be pierced is untenable. The separate personality of the corporation may be disregarded only when the corporation is used "as a cloak or cover for fraud or illegality, or to work injustice, or where necessary to achieve equity or when necessary for the protection of the creditors. The circumstances in the present cases do not fall under any of the enumerated categories.
EPG CONSTRUCTION COMPANY, INC., and EMMANUEL P. DE GUZMAN vs. COURT OF APPEALS (17th Division), (Republic of the Philippines), UNIVERSITY OF THE PHILIPPINES June 22, 1992 Facts; EPG Construction Co., Inc. and the University of the Philippines, entered into a contract for the construction of the UP Law Library Building for P7,545,000. Upon its completion, the building was turned over. UP issued a certification of acceptance dated January 1983. Sometime in July, 1983, the private respondent complained to the petitioner that 6 air-conditioning units on the third floor were not cooling properly. After inspection, EPG agreed to shoulder the expenses for their repair. The repair was never undertaken. UP repeated its complaints. Finally, it made UP a written offer to repair the system for P194,000. UP insisted that EPG was obligated to repair the defects at its own expense under the guarantee provision in their contract. UP then contracted with another company, which repaired the defects for P190,000. The private respondent subsequently demanded from EPG reimbursement of the said amount. When the demand was rejected, UP sued EPG and its president, Emmanuel P. de Guzman. Judgment was rendered requiring both defendants severally to pay the plaintiff P190,000. The Court of Appeals sustained the trial court. Issue; WON Corporation and president both liable Held / ratio; No, de Guzman absolved from liability The petitioners argue that by issuing the certificate of acceptance, UP waived the guarantee and is now estopped. The argument is absurd. All UP certified to was that the building was in good condition at the time it was turned over. It did not thereby relieve the petitioners of liability for any defect that might arise or be discovered later. The petitioners bolster their argument by quoting Article 1719 of the Civil Code, "Acceptance of the work by the employer relieves the contractor of liability . . . " and stopping there. The Article reads in full as follows: Art. 1719. Acceptance of the work by the employer relieves the contractor of liability for any defect in the work, unless: (1) The defect is hidden and the employer is not, by his special knowledge, expected to recognize the same; or (2) The employer expressly reserves his rights against the contractor by reason of the defect. The defects complained against were hidden and the employer was not expected to recognize them at the time the work was accepted. Moreover, there was an express reservation by UP of its right to hold the contractor liable for the defects during a period of one year.
The petitioners' contention that the defects were caused by force majeure as a result of the frequent brown-outs is not meritorious. The real cause of the problem was poor workmanship. Among the detects noted were improper interlocking of the electrical system; wrong specification of the time delay relay; incorrect wiring connections on the oil pressure switches; improper setting of the pressure switches; and many missing parts like bolts and screws of panels. The petitioners also claim that the breakdown was caused by the failure to do maintenance work. We do not see how mere maintenance work could have corrected the above-mentioned defects. The final point is that Emmanuel P. de Guzman has a separate legal personality from EPG Construction Co., Inc. and should not be held solidarity liable with it. The trial court did not explain why Emmanuel de Guzman was held solidarity liable with EPG Construction Co., Inc. Notably, when Emmanuel de Guzman moved to dismiss the complaint as to him, UP said in its opposition to the motion that it was suing him "in his official capacity and not in his personal capacity." His inclusion as President was therefore superfluous, as De Guzman correctly contended, because his acts as such were corporate acts imputable to EPG itself as his principal. It is settled that; …The general manager of a corporation therefore should not be made personally answerable for the payment of the employee's backwages unless he had acted maliciously or in bad faith in terminating the services of the employee. The exception noted is where the official "had acted maliciously or in bad faith," in which event he may be made personally liable for his own act. That exception is not applicable in the case at bar.
BENGUET ELECTRlC COOPERATIVE, INC vs. NATIONAL LABOR RELATIONS COMMISSION, PETER COSALAN and BOARD OF DIRECTORS OF BENGUET ELECTRIC COOPERATIVE, INC May 18, 1992 Facts; Peter Cosalan was the General Manager of Benguet Electric Cooperative, Inc. ("Beneco"). On November 1982, Cosalan received Audit Memorandum No. 1 issued by the Commission on Audit ("COA"). This Memorandum noted that cash advances received by officers of Beneco of P129,618 had been virtually written off in the books. The COA directed Beneco to secure the approval of the National Electrification Administration ("NEA") before writing off. COA issued another Memorandum addressed to Cosalan, inviting attention to the fact that the per diems and allowances received by the Board showed substantial inconsistencies with the directives of the NEA. Petitioner Beneco received the COA Audit Report which enumerated irregularities in the utilization of funds amounting to P37 Million released by NEA to Beneco. Cosalan initiated implementation of the remedial measures recommended by COA. The Board reacted by adopting a series of resolutions which abolished the housing allowance of Cosalan; reduced his salary and allowances; and struck his name out as a principal signatory to transactions of Beneco. Beneco Board members adopted another series of resolutions which resulted in the ouster of Cosalan as General Manager and as well as the withholding of his salary and allowances. Cosalan filed a complaint with the NLRC. The Labor Arbiter rendered a decision confirming Cosalan's reinstatement. NLRC modified the award by declaring that petitioner Beneco alone, and not respondent Board members, was liable for respondent Cosalan's backwages and allowances. Issue; WON Beneco & the Board are both liable Held / ratio; Yes, reversed 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 good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts, Those acts, when they are such a nature and are done under such circumstances, are properly attributed to the corporation alone and no personal liability is incurred by such officers and Board members. Respondent Board members responded to the efforts of Cosalan to take seriously and implement the Audit Memoranda. They wanted to get rid of Cosalan and acted, "with indecent haste" in removing him from his position and denying him substantive and procedural due process. Respondent Board members had illegally suspended and
dismissed Cosalan precisely because he was trying to remedy the financial irregularities and violations of NEA regulations. Section 31 of the Corporation Code is applicable in respect of Beneco. Section 4 of the Corporation Code renders the provisions of that Code applicable in a supplementary manner to all corporations, including those with special or individual charters so long as those provisions are not inconsistent with such charters. We find no provision in P.D. No. 269, as amended, that would exclude expressly or by necessary implication the applicability of Section 31 of the Corporation Code in respect of members of the boards of directors of electric cooperatives. Indeed, P.D. No. 269 expressly describes these cooperatives as "corporations:"
WOODCHILD HOLDINGS, INC vs. ROXAS ELECTRIC AND CONSTRUCTION COMPANY, INC August 12, 2004 Facts; Roxas Electric and Construction Company, Inc. (RECCI), was the owner of two parcels of land. A portion of Lot 1 was a dirt road accessing to the Sumulong Highway, Rizal. At a special meeting on May 1991, the respondent's Board approved a resolution authorizing the corporation, through its president, Roberto B. Roxas, to sell Lot 2. Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy the Lot 2 on which it planned to construct its warehouse and a portion of Lot 1, so that its 45-foot container van would be able to readily enter the property. WHI President Jonathan Y. Dy offered to buy Lot 2 for P7,213,000. One of the terms in Dy's offer was: 5. …that the area …of the subject property already includes the area on which the right of way traverses from the main lot (area) towards the exit to the Sumulong Highway …. Furthermore, in the event that the right of way is insufficient …the seller agrees to sell additional square meter from his current adjacent property … Roxas accepted. A month later, Roxas and Dy executed a contract to sell. On September 1991, a Deed of Absolute Sale was issued under the following terms: The Vendor agrees that in the event that the right of way is insufficient for the Vendee's use (ex entry of a 45foot container) the Vendor agrees to sell additional square meters …. WHI complained to Roberto Roxas that the vehicles of RECCI were parked on a portion of the property over which WHI had been granted a right of way. Dy and Roxas discussed the need of the WHI to buy a 500-square-meter portion of Lot 1 as provided for in the deed of absolute sale. Later, Roxas died. The WHI demanded that the RECCI sell a portion of Lot 1. RECCI rejected the demand. On June 1992, the WHI filed a complaint for specific performance. RECCI alleged that it never authorized its president, Roberto Roxas, to grant the beneficial use of any portion of Lot 1, nor agreed to sell any portion thereof or create a burden thereon. It alleged that it merely authorized Roxas to sell Lot 2. As such, the agreement to sell a portion of Lot 1 is ultra vires. The trial court rendered judgment in favor of the WHI. The CA reversed. Issue; WON WHI entitled to specific performance Held / ratio; No, denied Petitioner contends that when the respondent sold Lot 2, it (respondent) was well aware of its obligation to provide the petitioner with a means of ingress to or egress. It contends that the respondent never objected to Roxas' acceptance. The petitioner claims that it acted in good faith, and contends that after having been benefited by the said sale, the respondent is estopped from assailing its terms.
The respondent posits that Roxas was not so authorized under the Resolution. Hence, the respondent was not bound by such provisions contained in the deed of absolute sale. Besides, the respondent contends, the petitioner cannot enforce its right to buy a portion of the said property since there was no agreement in the deed of absolute sale on the price as well as the specific portion and area to be purchased. We agree with respondent. A corporation may act only through its board of directors or, when authorized either by its by-laws or by its board resolution, through its officers or agents in the normal course of business. The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, by-laws, or relevant provisions of law. 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. Persons dealing with an assumed agency, whether the assumed agency be a general or special one, are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it. Roxas was not specifically authorized under the said resolution to grant a right of way or to agree to sell a portion thereof. Under paragraph 12, Article 1878 of the New Civil Code, a special power of attorney is required to convey real rights over immovable property. Article 1358 of the New Civil Code requires that contracts which have for their object the creation of real rights over immovable property must appear in a public document. The rule is that if the act of the agent is one which requires authority in writing, those dealing with him are charged with notice of that fact. 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 was not obtained; hence, the assailed provisions are not binding on it. We reject the petitioner's submission that the respondent gave him apparent authority. Absent estoppel or ratification, apparent authority cannot remedy the lack of the written power required under the statement of frauds. 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; 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. The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent. For the principle of apparent authority to apply, petitioner was burdened to prove: (a) the acts of the respondent justifying belief in the agency; (b) knowledge by respondent which is sought to be held; and, (c) reliance thereon by the petitioner consistent with ordinary care. Petitioner's contention that by receiving the P5,000,000 purchase price, the respondent impliedly ratified the grant of a right of way is barren of merit. Respondent had the right to retain the P5,000,000. 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.
YU CHUCK, MACK YUENG, and DING MOON vs. KONG LI PO December 3, 1924 Facts; The defendant is a corporation engaged in the publication of a Chinese newspaper Kong Li Po. Its articles and by-laws provide for a president whose duty it is to "sign all contracts and other instruments of writing." No provision is made for a general manager. In 1919, Chen was appointed general business manager. In December, he entered into an employment agreement with plaintiffs by which the latter was bound to do the printing for the newspaper. Plaintiffs worked until January 1921, when they were discharged by the new manager, Tan Tian Hong. The plaintiffs brought the present action alleging that their contract of employment was for a term of three years and that they had been discharged without just cause. Defendant avers that Chen was not authorized to execute such contract. The trial court found that the contract had been impliedly ratified by the defendant and rendered judgment in favor of the plaintiffs. Issue; WON employment contract binding against the company Held / ratio; No, reversed It is conceded that Chan had no express authority to bind the company, but the evidence is conclusive that he was general business manager and had charge of the printing of the paper. Plaintiff maintains that he had implied authority and that the corporation is bound. The general rule is that the power to bind a corporation by contract lies with its board of directors or trustees, but this power may either expressly or impliedly be delegated to other officers or agents of the corporation, and except where the authority of employing servants and agent is expressly vested in the board of directors or trustees, 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 agent and employees as are usual and necessary in the conduct of such business. But the contracts of employment must be reasonable. In the absence of express limitations, a manager has authority to hire an employee for such a period as is customary. But unless he is either expressly authorized, or held out as having such authority, he cannot make a contract of employment for a long future period, such as for three years, although the contract is not rendered invalid by the mere fact that the employment extends beyond the term of the manager's own employment. Chen, as general manager, had implied authority to bind the corporation by a reasonable contract of employment but we do not think that the contract here in question can be so considered.
Not only is the term of employment unusually long, but the conditions are otherwise so onerous to the defendant that the possibility of the corporation being thrown into insolvency thereby is expressly contemplated in the same contract. Plaintiff had no right to presume that he or any other single officer or employee of the corporation had implied authority to enter into a contract of employment which might bring about its ruin. Neither do we think that the contention that the corporation impliedly ratified the contract is supported by the evidence. The contention is based principally on the fact that the president of the corporation admitted on the witness stand that he saw the plaintiffs work as printers. He denied, however, any knowledge of the existence of the contract. 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 have been shown here. Moreover, a ratification by him would have been of no avail; in order to validate a contract, a ratification by the board of directors was necessary. The fact that the president was required to sign the documents evidencing contracts, does not mean that he had power to make the contracts.
LAPULAPU FOUNDATION, INC. and ELIAS Q. TAN, petitioners, vs. COURT OF APPEALS and ALLIED BANKING CORP January 29, 2004 Facts; In 1977, petitioner Elias Q. Tan, then President of Lapulapu Foundation, Inc., obtained four loans from respondent Allied Banking Corporation covered by four promissory notes in the amounts of P100,000 each. As of January 1979, the entire obligation amounted to P493,566.61 and despite demands, the petitioners failed to pay. The Bank filed a complaint seeking payment by the petitioners, jointly and solidarily. The petitioner Foundation denied incurring indebtedness alleging that the loans were obtained by Tan in his personal capacity. The Foundation maintained that it never authorized petitioner Tan to co-sign in his capacity as its President any promissory note and that the Foundation never benefited therefrom. The Foundation then interposed a cross-claim against Tan. Tan admitted that he contracted the loans in his personal capacity. The parties, however, agreed that the loans were to be paid from the proceeds of Tan’s common stocks in the Lapulapu Industries Corporation, a real estate firm. The loans were automatically renewable (“rolled-over”) every year until such time as Tan was able to pay. According to Tan, the Bank’s employee required him to affix two signatures on every promissory note. However, after he signed, these were filled out in a manner not in accord with their agreement, such that the Foundation was included as party. The court a quo rendered judgment holding Tan and the Foundation solidarily liable to the Bank. The CA affirmed. Issue; WON promissory notes binding against the Foundation Held / ratio; Yes, affirmed In disclaiming any liability for the loans, the Foundation maintains that these were contracted by petitioner Tan in his personal capacity and that it did not benefit therefrom. On the other hand, Tan avers that he had an unwritten agreement with the respondent Bank that these loans would be renewed on a year-to-year basis and paid from the proceeds of his shares of stock in the Lapulapu Industries Corp. These contentions are untenable. The Court finds as incredulous 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 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. Moreover, the application for credit accommodation, the signature cards of the two accounts in the name of Foundation, as well as New Current Account Record, all accompanying the promissory notes, were signed by Tan for and
in the name of the Foundation. These documentary evidence categorically establish that the loans were solidarily contracted. As a corollary, the parol evidence rule likewise constrains this Court to reject petitioner Tan’s claim regarding the purported unwritten agreement between him and the respondent Bank on the payment of the obligation. The promissory notes are the law between the petitioners and the respondent Bank. Nowhere was it stated therein that they would be renewed on a year-to-year basis or “rolled-over”. Accordingly, this purported unwritten agreement could not be made to vary or contradict the terms and conditions in the promissory notes. Evidence of a prior or contemporaneous verbal agreement is generally not admissible to vary, contradict or defeat the operation of a valid contract. While parol evidence is admissible to explain the meaning of written contracts, it cannot serve the purpose of incorporating into the contract additional contemporaneous conditions which are not mentioned at all in writing, unless there has been fraud or mistake. Finally, the appellate court did not err in holding the petitioners solidarily liable as it applied the doctrine of piercing the veil of corporate entity. Per its Secretary’s Certificate, the Foundation had given its President, Tan, ostensible and apparent authority to deal with the Bank. Accordingly, the Foundation is estopped from questioning Tan’s authority. 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.
THE BOARD OF LIQUIDATORS representing THE GOVERNMENT vs. HEIRS OF MAXIMO M. KALAW, JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO GARCIA, and LEONOR MOLL August 14, 1967 Facts; The National Coconut Corporation (NACOCO) was a governmental organization chartered on May 1940 by CA 518 for the development of the coconut industry. NACOCO's charter was amended [Republic Act 5] to grant it the express power "to buy, sell, …and in any other manner deal in, coconut, copra, and dessicated coconut…". The amendment was enacted to secure advantageous prices to farmers. Board chairman was Maximo Kalaw; defendants Juan Bocar and Casimiro Garcia and Leonor Moll were members of the Board. Amongst the contracts executed by Kalaw are the disputed contracts for the delivery of copra. Four devastating typhoons visited the Philippine in 1947. Coconut trees suffered extensive damage. When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board. On January 1948, the board met again with Kalaw, Bocar, Garcia and Moll in attendance. They unanimously approved the contracts. NACOCO failed to perform its obligations under the contracts. The buyers threatened damage suits. Some of the claims were settled. All the settlements sum up to P1,343,274.52. In this suit, NACOCO seeks to recover the P1,343,274.52 from Maximo Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under Article 2176, new Civil Code; and defendant board members, with bad faith for having approved the contracts. The lower court dismissed the complaint. Issue; WON heirs of Kalaw may be subject of the action WON contracts entered into by Kalaw (as GM) bind the company WON board liable to the company for the losses incurred from the contracts From whom can the corporation recover Held / ratio; Yes, No, No, None, affirmed WON heirs of Kalaw may be subject of the action - YES Heirs of Kalaw say that the controlling statute is Section 5, Rule 87, of the 1940 Rules of Court which provides that "[a]ll claims for money against the decedent, arising from contract, express or implied", must be filed in the estate proceedings. We disagree. The suit involve negligent acts of Kalaw. The present case is not a mere action for the recovery of money. The suit involves tortious acts. And the action is embraced in suits filed "to recover damages for an injury to person or property, real or personal", which survive.
WON the board of directors is liable to the company for the damages arising from the contracts mentioned – NO Plaintiff avers that Kalaw entered into the contracts without the prior approval as required by the by-laws. A corporate officer "intrusted with the general management and control of its business, has implied authority to make any contract or do any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation. "He may, without any special authority from the Board perform all acts of an ordinary nature, which by usage or necessity are incident to his office, and may bind the corporation by contracts in matters arising in the usual course of business. The problem is whether the case is to be taken out of the general concept of the powers of a general manager, given the provision of the NACOCO by-laws requiring prior directorate approval. Ordinary in this enterprise are copra sales for future delivery. Known in business parlance as forward sales, it is concededly the practice of the trade. This short-selling was inevitable at the time in the light availability of vessels, the quantity required before being accepted for loading, the labor needed to prepare and sack the copra for market. Copra contracts had to be executed on short notice. To be appreciated then is the difficulty of calling a formal meeting of the board. Long before the contracts came, Kalaw contracted — by himself alone as general manager — for forward sales of copra. So pleased was NACOCO's board of directors that it voted to grant him a special bonus to him. The contracts prove that NACOCO board met the difficulties attendant to forward sales by leaving the adoption of means to end, to the discretion of Kalaw. There are also instances of contracts (e.g., lease, sale) executed by the general manager and submitted to the board after their consummation, not before. Where similar acts have been approved by the directors as a matter of general practice, custom, and policy, the general manager may bind the company without formal authorization of the board of directors. Existence of such authority is established, by proof of the course of business, the usage and practices of the company and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. So also, authority to act for and bind a corporation may be presumed from acts of recognition in other instances where the power was in fact exercised. Thus, when, in the usual course of business of a corporation, an officer has been allowed in his official capacity to manage its affairs, his authority to represent the corporation may be implied from the manner in which he has been permitted by the directors to manage its business. In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra activities without prior board approval. If the by-laws were followed, the board should give its stamp of prior approval on all contracts. But that board itself, by its acts and through acquiescence, practically laid aside the by-law requirement. But if more were required, we need but turn to the board's ratification of the contracts. "ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority;" and that " [t]he corporation and the other party to the transaction are in precisely the same position as if the act or contract had been authorized at the time."
By corporate confirmation, the contracts executed by Kalaw are purged of whatever vice or defect they may have. WON board liable to the company for the losses incurred from the contracts – NO Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes of the nature of fraud. Applying this precept to the given facts herein, we find that there was no fraud. Nor was it intimated that the directors acted for personal reasons, or to serve their own private interests. Bad faith contemplates a "state of mind affirmatively operating with furtive design or with some motive of self-interest or ill will or for ulterior purposes." Profit or loss resulting from business ventures is no justification for turning one's back on contracts entered into. The truth, then, of the matter is that — in the words of the trial court — the ratification of the contracts was "an act of simple justice and fairness to the general manager and the best interest of the corporation whose prestige would have been seriously impaired by a rejection by the board of those contracts which proved disadvantageous." Who is liable then? NONE This is a case of damnum absque injuria. Conjunction of damage and wrong is here absent. There cannot be an actionable wrong if either one or the other is wanting. Kalaw could not have been an insurer of profits. He could not be expected to predict the coming of unpredictable typhoons. And even as typhoons supervened Kalaw was not remissed in his duty. He exerted efforts to stave off losses. "They (the directors) hold office charged with the duty to act for the corporation according to their best judgment, and in so doing they cannot be controlled in the reasonable exercise of such duty. Whether the business of a corporation should be operated at a loss during a business depression, or closed down, is a purely business problem to be determined by the directors, and not by the court. Questions of policy are left solely to the decision of directors, and the court is without authority to substitute its judgment; the board is the business manager of the corporation, and solong as it acts in good faith its orders are not reviewable by the courts."
ZAMBOANGA TRANSPORTATION COMPANY, INC., vs. THE BACHRACH MOTOR CO., INC G.R. No. L-27694 THE BACHRACH MOTOR CO., INC., vs. ZAMBOANGA TRANSPORTATION COMPANY, INC G.R. No. L-27997 October 24, 1928 Facts; The complaint filed by the Zamboanga Transportation seeks the annulment of a chattel mortgage executed by the plaintiff's president and general manager. The complaint filed by the Bachrach Motor Co seeks the foreclosure of said chattel mortgage. For ten years the two associations have had business relations, the Zamboanga Transportation purchasing trucks, and accessory parts from the Bachrach Motor secured by chattel mortgages. Jose Erquiaga, one of the directors of Zamboanga Transportation was also its legal adviser. In 1924, he was appointed general manager, and in 1925 was elected president. Zamboanga Transportation was in financial straits and appealed to Mons. Jose Clos, Bishop of Zamboanga for loans. As he was leaving for Rome, additional agreements were entered between Mons. Clos and Bachrach Motor. It provided that the mortgages in favor of the Mons. will be cancelled and a new mortgage will be executed in favor of Bachrach Motors in exchange for reduced payment terms in favor of Zamboanga Transportation. A new chattel mortgage was executed. Erquiaga submitted the mortgage deed to the board who expressed their satisfaction. Later, Erquiaga interviewed E.M. Bachrach, president of Bachrach Motor, in order to secure his consent to the sale of trucks included in the mortgage in order to apply the proceeds to the unpaid debt. E.M. Bachrach denied his request saying that they did not care whether the board approved the mortgage. After this, the mortgagor's board met and rejected the mortgage. At that time, the mortgagee had registered the chattel mortgage. This discovery was the cause of the resolution by the board of Zamboanga Transprotation directing its attorney to institute an action for the annulment of said mortgage. Issue; WON chattel mortgages binding against Zamboanga Transportation Held / ratio; Yes, affirmed Erquiaga is one of the largest stockholders of the Zamboanga Transportation. In addition to this office, he acted as general manager, auditor, and legal adviser. In this manifold capacity, Erquiaga entered into the chattel mortgage and Zamboanga Transportation availed itself fo these advantages. While it is true that said chattel mortgage contract was not approved by the board ( as required by the by-laws), the broad powers vested in Erquiaga; the approval of his act with which two other directors expressed satisfaction, one of which is also one of the largest shareholders, who together with the president constitute a majority;
the payments made under said contract with the knowledge of said three directors are equivalent to a tacit approval by the board. In truth and in fact Erquiaga, in his multiple capacity, was and is the factotum of the corporation and may be said to be the corporation itself. Where the chief officers of a corporation are in reality its owners, holding nearly all of its stock, and are permitted to manage the business by the directors, who are only interested nominally or to a small extent, and are controlled entirely by the officers, the acts of such officers are binding on the corporation, which cannot escape liability as to third persons dealing with it in good faith on the pretense that such acts were ultra vires. We conclude that when the president, who is one of the principal stockholders and general manager, auditor, legal adviser, is empowered by its by-laws to enter into chattel mortgage contracts, subject to the approval of the board, and enters into such with the tacit approval of two other members of the board of directors, one of whom is also a principal shareholder, both of whom, together with the president, form a majority, and said corporation takes advantage of the benefits afforded by said contract, such acts are equivalent to an implied ratification of said contract by the board.
THE BOARD OF DIRECTORS AND ELECTION COMMITTEE OF THE SMB WORKERS SAVINGS AND LOAN ASSOCIATION, INC., ET AL vs. HON. BIENVENIDO A. TAN, ETC., ET AL March 31, 1959 Facts; On January 1957, John Castillo et al., commenced a suit to declare null election of the members of the board of the SMB Workers Association. The Court rendered judgment declaring the election void. In compliance with the judgment, the election committee set the meeting for the election after 2 days. Plaintiff filed a motion alleging that the committee is composed of the same members that had conducted the previous election and that the election would not be held in accordance with the by laws providing for five days notice. The Court ordered the election scheduled cancelled. It also constituted a committee to supervise the election to be composed of: Candido C. Viernes as representative of the Court and to act as Chairman; and one representative each from the plaintiffs and defendant, as members. Issue; WON court acted in grave abuse of discretion in creating the election committee Held / ratio; No, denied Section 3, article III, of the constitution and by-laws the association provides: Notice of the time and place of holding of any annual meeting, or any special meeting, the members, shall be given either by posting the same in a postage prepaid envelope…at least (5) days before the date set for such meeting. . . . In lieu of addressing or serving personal notices to the members, notice of the members, notice …may be given by posting copies of said notice at the different departments and plants of the San Miguel Brewery Inc., not less than five (5) days prior to the date of the meeting. Notice of a special meeting of the members should be given at leasts five days before the meeting. Therefore, the five days previous notice would not be complied with. As regards the creation of a committee, the Court in the exercise of its jurisdiction may appoint such committee, it having been shown that the Election Committee provided for the by-laws that conducted the election annulled if allowed to act as such may jeopardise the rights of the respondents. A court for equity may direct the holding of a stockholders' meeting under the control of a special master, and the action taken at such a meeting will not be set aside because of a wrongful use of the court' interlocutory decree, where not brought to the attention of the court prior to the meeting. A court of equity may, on showing of good reason, appoint a master to conduct and supervise an election of directors when it appears that a fair election cannot make directions contrary to statute and public policy with respect to the conduct of such election.
LOGAN JOHNSTON et., al., vs. LOUIS JOHNSTON 1965 Facts; Parties are stockholders of Johnston Lumber, Inc., a family corporation. Its by-laws require the annual meeting of stockholders to be held every April in its principal office in Zamboanga City. In April 1963, the annual meeting was held for the purpose of electing a new set of Board. The corporate secretary made a determination of the stocks represented in the meeting to determine quorum. Several proxies were presented. Logan Johnston then asked to vote for the shares of the Silos Family which he earlier acquired. He also asked to vote for the shares of Albert Johnston, a deceased stockholder, as the estate administrator. Both requests were denied by the Chair Louis Johnston. At this point, Logan Johnston and his companions walked out of the room. Logan Johnston has 1,242 of the 2,462 total outstanding shares. Those who remained in the meeting elected themselves as directors and officers. Later, a special meeting was held upon Logan’s request on July 1963. After roll was called and quorum declared, Logan moved for the election of a new board and proceeded with the nomination and casting of votes despite the Chair’s overruling of the motions. After being elected as directors, petitioners convened to elect its officers. After the election, petitioners demanded for the turnover of records and office but the respondents denied the same. Issue; WON April election valid WON July election valid Held / ratio; No, yes APRIL ELECTION Before a quorum was declared in the meeting, the majority stockholders walked out. Those left represented minority holding only. The law requires quorum in the election of directors. Hence, the election is void. It also follows that the election of officers proceeding from it is likewise void because it was convened by a void set of directors. Louis contends that stockholders present at a meeting cannot without justifiable reasons break the quorum by withdrawing and so defeat the elections of those directors desired by the majority. This is untenable. Logan’s withdrawal is justified. Logan must be allowed to vote the Solis shares which he validly purchased. The excuse by Louis that it must first be registered in the books is unreasonable considering that a request prior to the meeting for the registration of said shares has already been made. Likewise, Logan must be allowed to vote the Albert Johnston shares because he continues to be the estate administrator since the settlement proceedings are yet to terminate. JULY ELECTION Quorum was declared before election was made. This was despite several attempts by the Chair to stop the election by jumping to the other agenda of the meeting (FS, status report, proposals to the Pres). Petitioners held majority shares. Respondents’ inaction does not invalidate the election. The will of the majority, properly expressed, shall govern.
Finally, Louis contends that the election was not one of the agenda for the meeting. This is untenable. Meetings should be conducted with good faith towards all who are entitled to participate. Ordinary parliamentary usage apply to corporate meetings including appeals from decisions of the chair and displacing the president by vote. Moreover, the notice for the special meeting stated that it was called at the instance of Logan. The stockholders then knew that Logan will move for the election of a new board and were prepared for such a scenario.
DOMINGO PONCE AND BUHAY L. PONCE, vs. DEMETRIO B. ENCARNACION, Judge, and POTENCIANO GAPOL November 28, 1953 Facts; This is a petition to annul an order of the respondent court granting Potenciano Gapol authority to call and preside a meeting of the stockholders of the Dagunoy Enterprises, Inc. until after the majority of the stockholders shall have chosen one of them to act as presiding officer. The petitioners aver that on April 1951 at a meeting, the voluntary dissolution of the corporation and the appointment of Gapol as receiver were agreed. However, instead of filing for voluntary dissolution, Potenciano Gapol, who is the largest stockholder, filed a complaint to compel petitioners to render an accounting of the funds and to reimburse it such sum as may be found after the accounting rendered to have been missappropriated by Domingo Ponce. Later, Potenciano Gapol filed a petition praying for an order directing him to a call a meeting of the stockholders. Two days later, without notice to the petitioners, respondent court issued the order. Issue; WON court may validly issue the assailed order Held / ratio; Yes, affirmed The only question is whether under section 26 of Act No. 1459, known as the Corporation law, the respondent court may issue the order complained: — Whenever, from any cause, there is no person authorized to call a meeting, or when the officer authorized to do so refuses, fails or neglects to call a meeting, any judge of a Court of First Instance on the showing of good cause therefor, may issue an order to any stockholder or member of a corporation, directing him to call a meeting of the corporation by giving the proper notice required by this Act or by-laws; and if there be no person legally authorized to preside at such meeting, the judge of the Court of First Instance may direct the person calling the meeting to preside at the same until a majority of the members or stockholders representing a majority of the stock members or stockholders presenting a majority of the stock present and permitted by law to be voted have chosen one of their number to act as presiding officer for the purposes of the meeting. This showing of good cause exists when the court is apprised of the fact that the by-laws of the corporation require the calling of a general meeting of the stockholders to elect the board of directors but call for such has not been done. Article 9 of the by-laws of the Daguhoy Enterprises, provides: The Board …shall compose of five (5) members who shall be elected by the stockholders in a general meeting called for that purpose … Article 20 of the by-laws in part provides: . . . Regular general meetings are those which shall be called for every even year, . . . . The requirement 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. It may be likened to a writ of preliminary injunction or of attachment which may be issued ex-parte upon compliance with the requirements of the rules and upon the court being satisfied
that the same should be issue. Such provisional reliefs have not been deemed and held as violative of the due process of law clause of the Constitution. Petitioners claim that they have been deprived of their right without due process. They had no right to continue as directors unless reflected by the stockholders in a meeting called for that purpose. They had no right to a hold-over brought about by the failure to perform the duty incumbent upon one of them. If they felt that they were sure to be reelected, why did they fail, neglect, or refuse to call the meeting to elect the members? The alleged illegality of the election of one member of the board of directors at the meeting called by Gapol cannot affect the validity of the order. If it be true, the remedy of an aggrieved party would be quo a warranto. Also, the alleged previous agreement to dissolve the corporation does not affect or render illegal the order issued by the respondent court.
JOHN GOKONGWEI, JR., vs. SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA G.R. No. L-45911 April 11, 1979 Facts; The instant petition arose out of two cases filed by petitioner with the SEC: SEC case 1375 On October 1976, petitioner, as stockholder of San Miguel Corporation, filed a petition for declaration of nullity of amended by-laws of San Miguel. He alleges that: (1) the amendment in 1976 was based on a resolution in 1961 when the capital stock was still P70million compared to P301million in 1976. (2) the resolution has been exercised in 1962 and 1963, (3) the amendment deprived him of his right to be elected as director. SEC case 1423 Petitioner alleges that respondent corporation has been investing corporate funds in other corporations and businesses outside of the primary purpose clause of the corporation, in violation of section 17 of the Corporation Law. Issues; WON amended by-laws of SMC of disqualifying a competitor from nomination or election to the Board of Directors of SMC are valid and reasonable — Held / ratio; Yes Petitioner claims that the amended by-laws are invalid because they deprive petitioner of his "vested right" to be voted for and to vote for a person of his choice as director. Upon the other hand, respondents contend that exclusion of a competitor from the Board is legitimate corporate purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided Loyalty to the corporation. Petitioner is the president and substantial stockholder of Universal Robina Corporation and CFC Corporation whice engaged in businesses directly and substantially competing with the businesses of San Miguel Corporation. According to respondent, the areas of competition affecting SMC involved product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. It cannot be said 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 are not regarded as trustees, their character is that of a fiduciary insofar as the corporation is concerned. 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.
An amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid. 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. 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. There is another important consideration in determining whether or not the amended by-laws are reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair competition. Article 186 of the Revised Penal Code also provides against Monopolies and combinations in restraint of trade. The election of petitioner to the Board of respondent Corporation can bring about an illegal situation. This is because an express agreement is not necessary for the existence of a combination or conspiracy in restraint of trade. It is enough that a concert of action is contemplated and that the defendants conformed to the arrangements, and what is to be considered is what the parties actually did and not the words they used.
DETECTIVE & PROTECTIVE BUREAU, INC vs. THE HONORABLE GAUDENCIO CLORIBEL, Judge, and FAUSTINO S. ALBERTO November 29, 1968 Facts; The complaint filed by Detective and Protective Bureau, Inc., against Fausto S. Alberto for accounting and receivership, alleged that defendant was managing director of plaintiff from 1952 until January 1964; In June, 1963, defendant illegally seized all the assets as well as the records of the corporation from the accountant and refused to allow any member of the corporation to see and examine the same. On January 1964, the stockholders removed defendant as managing director and elected Jose de la Rosa. Defendant refused to vacate his office and to deliver the assets and books to Jose de la Rosa. Defendant was required to render an accounting of his administration but failed to do so. Plaintiff prayed that a preliminary injunction be issued restraining defendant from exercising the functions of managing director and from disbursing its funds. The court granted the preliminary injunction but was later dissolved upon filing of a counterbond. Issue; WON lifting of injunction proper Held / ratio; Yes, affirmed Petitioner contends that the setting aside was contrary to law because public interest required that the writ be not set aside because respondent had arrogated unto himself all the powers of petitioning corporation, to the irreparable damage of the corporation. This assertion, was disputed by Alberto who stated that Jose de la Rosa could not be elected managing director because he did not own any stock in the corporation. There is no showing that de la Rosa owned a share of stock in the corporation. If he did not own any share, certainly he could not be a director pursuant to the mandatory provision of Section 30 of the Corporation Law. Sec. 30. Every director must own in his own right at least one share of the capital stock of the stock corporation of which he is a director, which stock shall stand in his name on the books of the corporations.... If he could not be a director, he could also not be a managing director, pursuant to Article V, Section 3 of the By-Laws of the Corporation. If the managing director-elect was not qualified to become managing director, respondent Alberto could not be compelled to vacate his office because the by-laws of the corporation provides in Article IV, Section 1 that "Directors shall serve until the election and qualification of their duly qualified successor."
BALDOMERO ROXAS, ENRIQUE ECHAUS and ROMAN J. LACSON vs. Honorable MARIANO DE LA ROSA, Judge, AGUSTIN CORUNA, MAURO LEDESMA and BINALBAGAN ESTATE, INC November 16, 1926 Facts; The Binalbagan Estate, Inc., is a corporation engaged in the manufacture of raw sugar from canes in Negros Occidental. In 1924, the majority of the shares formed a voting trust composed. The total outstanding shares is over 5,500, while the number of shares controlled by the trust is less than 3,000. On February 1926, the annual meeting of the shareholders took place, at which Mr. J. P. Heilbronn appeared as representative of the trust. Heilbronn was able to elect a board to his own liking. After the board had been elected, they chose a set of officers. The present trustees are desirous of ousting said officers, without awaiting the termination of their terms. In other to effect this purpose, the petitioners called for a special meeting of shareholders “for the election of the board of directors” Agustin Coruña and Mauro Ledesma instituted a civil action for the purpose of enjoining the said meeting. The judge issued the restraining order. Issue; WON injunction proper Held / ratio; Yes, affirmed Under the law, the directors can only be removed from office by a vote of the stockholders representing at least twothirds of the subscribed capital stock; while vacancies in the board, when they exist, can be filled by mere majority vote. Moreover, the law requires that when action is to be taken at a special meeting to remove the directors, such purpose shall be indicated in the call. While the trust controls a majority, it does not have a clear two-thirds majority. It was impolitic for the petitioners in forcing the call for the meeting to come out frankly and say in the notice that one of the purpose of the meeting was to remove the directors. Instead, the call was limited to the election of the board, it being the evident intention of the voting trust to elect a new board as if the directorate had been then vacant. But the complaint asserts that the members of the present directorate were regularly elected; and if that assertion be true, the proposal to elect another directorate would result in the election of a rival set of directors. That the trial judge had jurisdiction to forestall that step is a matter which there cannot be doubt. The law contemplates and intends that there will be one of directors at a time and that new directors shall be elected only as vacancies occur in the directorate by death, resignation, removal, or otherwise.
CAMPBELL vs. LEOW’S, INC. 1957 Facts; This is an injunction case filed by Campbell to prevent the voting of certain proxies. Two factions are vying for control of Leow: Tomlinson Faction & Vogel Faction. The latter is headed by Vogel, the current President. Each faction has 6 directors. A 13th neutral director was elected as a compromise. Later, 2 of 6 Vogel directors and the 13th director resigned. The Tomlinson faction asked for a special meeting to fill the vacancies. However, 1 of them resigned before the meeting. Still the 5 met and elected 2 directors. This election was declared void in a separate decision of the court. The day prior to this meeting, Vogel gave notice for a special meeting to (1) fill the vacancies, (2) increase directors from 13 to 19, and (3) remove two Tomlinson directors. This notice was accompanied by a proxy statement in favor of Vogel. Hence, this action by plaintiff. Issue; WON president may call the meeting WON procedure to remove the directors proper Held / ratio; Yes, no 1st issue: Campbell argues that the president has no authority to call the meeting. However, the Company’s by-laws expressly states the President’s power to call special stockholders’ meetings. This does not impinge upon the powers of the board to manage the corporation since only matters for stockholders’ action are embraced. Also, the power is broad enough to cover filling of vacancies and newly created directorships. Campbell also argues that directors may not be removed even for cause. This is untenable because this power is deemed implied considering that a director may be guilty of violation of his duty. The foregoing proves that the meeting is validly called by the president. 2nd issue: Campbell argues that removal of directors for cause requires: (1) service of specific charges, (2) adequate notice, and (3) full opportunity of meeting the accusation. He asserts that no specific charge was made against them and that no reasonable opportunity was provided. First, on the charges. The notice to the stockholders included a letter from the President stating the reasons for the removal: (1) they desired takeover of control and (2) they engaged in harassment to the detriment of the corporation. Such notice is sufficient compliance as corporate matters need not be conducted with the same formality as judicial proceedings. Moreover, while the first charge is not enough reason for their ouster, the second charge is. Their actions became deliberately obstructive – they called for records 20 years back and were rude to the personnel.
However, no reasonable opportunity was given to them. The corporation refused to let them do so. Only the Vogel accusations were included in the proxy letters which deprives the stockholders the opportunity to consider both sides before they vote or before they assign their proxy. Hence, the procedural sequence is contrary to law. Injunction is issued.
RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA SALAS, PAZ SALAS and PATRIA SALAS, heirs of Magdalena Salas vs. MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS. RAMON S. ARANETA, ROMUALDO M. ARANETA, and RAMON A. YULO G.R. No. L-17504 & L-17506 February 28, 1969 Facts; This was a derivative suit by four minority stockholders against the Ma-ao Sugar Central Co., Inc. and J. Amado Araneta and three other directors. The complaint alleged ultra-vires acts consisting of unauthorized investments and gross mismanagement. They allege that that in 1950 the Ma-ao Sugar Central Co., Inc., through its President, subscribed for P300,000.00 worth of capital stock of the Philippine Fiber without board resolution authorizing the investment; and that it was only on November 1951, that the President was so authorized. Plaintiffs-appellants also contend that even assuming that the said Board Resolutions are valid, the transaction, is still wanting in legality, no resolution having been approved by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power, as required in Sec. 17-½ of the Corporation Law. On the other hand, the defendants invoked Sec. 13, par. 10 of the Corporation Law: SEC. 13. — Every corporation has the power: xxx xxx xxx (9) To enter into any obligation or contract essential to the proper administration of its corporate affairs or necessary for the proper transaction of the business or accomplishment of the purpose for which the corporation was organized; (10) Except as in this section otherwise provided, and in order to accomplish its purpose as stated in the articles of incorporation, to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities and other evidences of indebtedness of any domestic or foreign corporation. Issue; WON investment in Philippine Fiber valid Held /ratio; Valid In his work entitled "The Philippine Corporation Law," Professor Sulpicio S. Guevara of the University of the Philippines, College of Law, reconciled these two apparently conflicting legal provisions, as follows: j. Power to acquire or dispose of shares or securities. — A private corporation, in order to accomplish its purpose as stated in its articles of incorporation, and subject to the limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of the stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary. 40. Power to invest corporate funds. — A private corporation has the power to invest its corporate funds in any other corporation or business, or for any purpose other than the main purpose for which it was organized,
provided that 'its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a proposal at a stockholders' meeting called for that purpose,' and provided further, that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation. When the investment is necessary to accomplish its purpose or purposes as stated in it articles of incorporation, the approval of the stockholders is not necessary. We agree that the investment in question does not fall under the purview of Sec. 17- ½ of the Corporation Law.
JOHN GOKONGWEI, JR vs. SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA G.R. No. L-45911 April 11, 1979 Facts; The instant petition arose out of two cases filed by petitioner with the SEC: … SEC case 1423 Petitioner reiterates his contention that respondent corporation invested corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the Corporation Law, and alleges that respondent SEC should have investigated the charge, being a statutory offense, instead of allowing ratification of the investment by the stockholders. Issue; WON investments violate Sec 17 of Corporation Law Held / ratio; No The purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least twothirds of the voting power is necessary. Assuming that the Board of Directors of SMC had no authority, there is no question that a corporation may ratify and thereby render binding upon it the originally unauthorized acts of its officers. "Mere ultra vires acts", said this Court in Pirovano, "or those which are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders.
IN RE: GIANT PORTLAND CEMENT CO. 1941 Facts; In a stockholders meeting in 1941, 9 directors were to be elected and 2 tickets were nominated – management ticket & opposition ticket. 4 of those nominated were from both tickets, hence elected without question. 5 opposition nominees were also declared elected. Petitioners question their election. Petitioners allege that certain votes for the opposition should not be counted based on their by-laws providing that: no share shall be voted on any election which has been transferred on the books within 20 days preceding the election. The Board closed the stock transfer books of the corporation 20 days prior to the elections. Certain shares were sold by the record owners. This resulted in 5,472 votes casted improperly in favor of the opposition. Issue; WON election valid Held / ratio; Yes Based on their by-laws, stocks transferred within 20 days prior to election are temporarily disenfranchised and cannot be voted. However, this case falls under the exceptions to this rule. Based on the the Corporation Law, when the stock transfer books are closed, stockholders of record on that date shall be entitled to vote. This rule allows the corporation to ascertain from its records who its members are. So far as it is concerned, until such a by-law is complied, the record owner must be regarded as the real owner with the right to vote. From a legal standpoint, there is no privity of contract between a mere transferee and the corporation and he is not a real member until the transfer is recorded. The legal rights of the holder are of an inchoate nature. Hence, the record owner may merely be a nominal owner, but he is still the stockholder who has the right to vote. A mere nominal owner naturally owes duties to the real beneficial owner. If the vendor exercises his legal right to vote as to injuriously affect the rights of the vendee, he is answerable in damages to the latter. However, as in this case, in the absence of an objection, consent is presumed.
STATE EX REL. EVERETT TRUST & SAVINGS BANK VS. PACIFIC WAXED PAPER CO., ET. AL., 1945 Facts; Jordan owned all the capital stock of Paine-Mitchel Co and 1 preferred share of Pacific Waxed. Engle was a common stockholder of Pacific Waxed. The combined shares of Paine-Mitchel and Engle in Pacific Waxed is more than majority. In 1931, Engle and Pain-Mitchel agreed to give each other an exclusive option to purchase each other’s shares for a period of 25 years. In 1932, Engle and Jordan agreed that in case of death of one of them, the other shall be allowed to vote the shares of the other and shall be deemed the irrevocable proxy for the shares in Pacific Waxed. In 1942, Jordan died. Everett Trust was appointed executor and dissolved Paine-Mitchell. It tried to vote at a meeting in 1943 but was denied because of the proxy in favor of Engle. Issue; WON proxy in favor of Engle revocable Held / ratio; Irrevocable General rule is that a proxy is revocable. Exceptions are (1) when the proxy is coupled with interest and (2) when the proxy is given part of a security of is necessary to effectuate such security. For the first exception, power coupled with interest is power to do an act connected with an interest in the subject matter or thing upon which power is to be exercised. For the 2nd exception, the purpose is to afford the agent protection for money advanced or obligations incurred by him. For the first exception, interest may be upon the thing which is the tangible shares or upon the subject matter which are the voting rights and incidental control. Based on their proxy agreement, the parties intended that the stocks shall be used so that the policies of the respondent can be controlled. By such control, their interest are made more secure. Hence, Engle has an interest in the subject matter of the power given to him.
ALEJANDRINO VS. DE LEON 1943 Facts; Petitioner want the annulment of the election of any one of the respondents as directors and to be declared as elected thereto. The corporation involved is the Pasudeco (Pampanga Sugar Dev’t Co). The election was held in 1943 and the 9 respondents were elected. They all received more than 19,000 votes each. Petitioner has 14,000 votes. However, he holds proxies given to him representing 6,000 votes. He offered to vote these proxies but was denied by the chairman because said proxies were previously granted in favor of the president pursuant to a pledge agreement in the latter’s favor. The pledge was made as security for loans obtained by stockholders of Pasudeco from Pambul, Inc. Petitioner contends that the proxy clause in the pledge is void for being contrary to public policy. He alleges that: (1) Pambul is merely an alter ego of De Leon which is merely created to enable it to monopolize the directorship (2) Pambul was organized by Pasudeco. The latter then distributed the shares of Pambul to the Pasudeco stockholders. (3) Only Pambul members may avail of the laon offered with lenient terms (interest of 7%, etc.). (4) As a result, only 2 families owning 30% of the shares monopolized the directorship Issue; WON proxy void Held / ratio; Valid The right to vote is inherent to stock ownership. It is a private right and it is not sacrosanct nor inalienable. The owner may dispose of the property itself or he may also dispose of the right to manage it. There is nothing immoral about the proxy arising from the pledge. What seems more immoral is to allow the pledgor to revoke the proxy without paying for the loan. Also, no intimation of fraud or error is made. The alleged peculiar circumstances are not sufficient to vitiate the proxies. In the first place, monopoly is not actionable per se. Moreover, said 2 families only control 30% of the shares – the organization of Pambul was accomplished by a majority vote of Pasudeco. Moreover, the Pambul stockholders (who are also the Pasudeco stockholders) are free to vote their stocks and elect the directors they want; the board of Pambul is free to change the terms of the pledge (and the proxy) in question. If the alleged minority of Pasudeco cannot elect a candidate, the cause must be traced in their own doorsteps. Nobody forced them to pledge their stocks.
ABERCROMBIE vs. DAVIES 1957 Facts; American Independent Oil Co. was organized and subscribed to by several oil companies. It has 150,000 outstanding shares. The by-laws provide that the Board shall consist of 15 directors that should be elected by cumulative voting. Davies is the president of the company. No one stockholder holds majority. In 1950, six stockholders took step to form a coalition. They hold 54%. They are represented by 8 of 15 directors. Their agreement named “Agents” who are these directors. The purpose of this agreement was to obtain control of the company. The agreement provides the following: 1. The shareholders will endorse in blank their shares to the Agents who will issue receipts 2. Said shares will be deposited in an escrow 3. The agents shall exercise the voting powers of the shares for 10 years irrevocably 4. In case of disagreement among the agents, an arbiter shall be appointed In 1954, Abercrombie filed this suit. He asserts that the agreement is void as it is a voting trust which does not follow the provision of the voting trust statute. Among others, it requires that the copy of such agreement be filed in the principal office of the company. It also requires that the same be entered in the books of the issuing coporation. Issue; WON the “pooling agreement” is a voting trust WON the same is void Held / ratio; Voting trust, Void An essential feature of voting trust is the separation of voting rights of the stock from other attributes of ownership. Additionally, the voting rights should be assigned irrevocably for a definite period and that the principal object of the trust is the voting control. Applying these in the case, we can find that there is a voting trust. The statute requires that the shares be transferred on the books and that a copy be filed in the principal office. These provisions are for the benefit of the other stockholders and directors who are entitled to know who has voting control. For failure to accomplish these, the agreement is a secret voting trust which is illegal. Defendants insist that a mere pooling agreement is formed by citing the case of Ringling Bros. Said case involves a true pooling agreement – 2 stockholders acting jointly in voting and without need to assign the rights to a fiduciary. This is not the case here. Moreover, calling the trustees “agents” and the trust certificates “receipts” will not change the nature of the agreement.
EVERETT, ET AL vs. ASIA BANKING CORPORATION 1926 Facts; Plantiffs are the principal stockholders of Teal & Co. which is engaged in the merchandise of automobiles and trucks. It has principal office in Manila and was organized in 1919. Asia Banking is a foreign bank with principal office in Manila. Defendants are its officers, agents, and employees. In 1921, Teal & Co was indebted to Peabody & Co for P300,000, the price of tractors it ordered. The Bank held drafts accepted by the Teal & Co. for which it was able to pay P150,000 through the bank. Later, said trucks were returned as they became unsalable due to depression. In another transaction w/ Smith, Kirkpatrick, & Co., Teal & Co. rescinded the sale but the trucks were nevertheless delivered. Hence, Teal & Co. was forced to accept the shipment. The Bank persuaded Teal & Co. and its creditors, Peabody & Smith to enter in an agreement to not enforce the debts within 2 years. In 1922, Teal & Co. was indebted to the Bank for P750,000 secured by mortgages on its properties. The Bank convinced them to enter in a Voting Trust in favor of the Bank so that the latter can obtain control of the company and avoid interference by other creditors. It promised to finance the company and later terminate the voting trust when it becomes successful. The plaintiffs agreed. Shortly after, the voting trustee (the Bank) removed all the Board members and replaced them with the Bank’s employees. The said employees do not own a single share in the company. The new directors then removed the Secretary and the managers of the company. Later, the defendants gave mortgages to the Bank and allowed the latter to foreclose the same. Finally, the defendants organized the Phil. Motors Corp. and assigned therein all the assets of the Teal & Co. – all to the prejudice of the real owners. The lower court dismissed the suit saying that Teal & Co must be brought as a plaintiff. Issue; WON action may prosper Held /ratio; Yes The defendants invoked the rule that suits for wrongs done to the corporation must be brought by the Board, not the stockholders. However, this rule is not without exception. Teal & Co. is under the complete control of the principal defendant, the Bank. It is obvious that a demand upon the Board is a useless act.
MACKIN ET AL vs. NICOLLET HOTEL INC ET AL 1928 Facts; The Nicollet Hotel Inc. was organized to provide hotel accommodation in Minneapolis. The cost of the hotel is to be raised from sale of $1.8M bonds and $1.2 preferred shares. In 1923, the Minnesota Loan & Trust Co. accepted the application for loan of $1.8M by Nicollet secured by bonds and a trust deed covering the hotel. The loan further provided for a voting trust agreement covering all common shares for 10 years. This is intended to protect the preferred shareholders by depositing the common stocks in the voting trust. Mackin is an owner of a trust certificate. He asks for the annulment of the voting trust alleging that the trustees have mismanaged the company. Issue; WON voting trust is valid Held / ratio Valid Modern businesses conducted by large corporations with thousands of stockholders in different parts of the country makes a meeting of said stockholders impracticable and impossible. As such, voting trusts developed. Voting trusts are NOT illegal per se. Instances wherein the court invalidated them involve circumstances such as: want of consideration, voting power not coupled with interest, fraud, or illegal purposes. None of these exist in this case. Voting power is coupled with interest because one of the trustees in also a substantial common stockholder. The purpose is likewise legitimate – the continuity of management for 10 years or until such time the business would have a successful financial future. It would be unjust to the other preferred stockholders and bondholders to invalidate the trust upon the strength of which they invested.
NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, EUSEBIO VILLATUYA MARIO Y. CONSING and ROBERTO S. BENEDICTO vs. HON. BENJAMIN AQUINO, Judge, BATJAK INC., GRACIANO A. GARCIA and MARCELINO CALINAWAN JR., G.R. No. L-34192 June 30, 1988 G.R. No. L-34213 June 30, 1988 Facts; Batjak, (Basic Agricultural Traders Jointly Administered Kasamahan) is engaged in the manufacture of coconut oil and copra cake for export. In 1965, Batjak's became bankrupt. As of that year, Batjak's indebtedness to banks and to the Philippine National Bank (PNB) amounted to P12,000,000. As security for its shipments, Batjak mortgaged its three (3) coco-processing oil mills in Davao. In need for additional operating capital, Batjak applied for loan to PNB. In 1965, an Agreement was submitted by PNB. It provided: 1) That NIDC shall invest P6,700,000 in preferred shares to liquidate Batjak’s accounts with the other banks; 2) That Batjak shall mortgage its properties in favor of PNB; 3) That a voting trust agreement for five (5) years over 60% of the oustanding shares shall be executed in favor of NIDC; 4) The number of the Directors shall be increased to seven (7), three (3) from Batjak and four (4) from the PNB-NIDC; 5) That PNB shall grant batjak an export advance of P3 million In 1967, due to insolvency of Batjak, PNB foreclosed against the oil mills. Subsequently, PNB transferred the ownership of the oil mills to NIDC which was a wholly-owned PNB subsidiary. In 1970, Batjak asked for a complete accounting of the assets of Batjak preparatory to turn-over and transfer to its stockholders upon termination of the Voting Trust. NIDC replied and said that it had no intention to comply. Upon motion by Batjak, the lower court appointed a receiver to preserve its assets. Issue; WON receivership proper Held / ratio; Yes, valid trust A receiver may be appointed when it appears that the party applying for the appointment has an interest in said property. The right must be present and existing. PNB acquired ownership of the oil mills by virtue of mortgage foreclosures. NIDC acquired ownership of the third oil mill also under a foreclosure. NIDC not only has possession of, but also title to the oil mills formerly owned by Batjak. The interest of Batjak ceased upon the issuance of the certificates of title to PNB and NIDC. Batjak premises its right to possession of the mills on the Voting Trust, claiming that under it, NIDC was constituted as trustee of the assets and that due to its expiration, NIDC should tum over the assets. A voting trust transfers only voting or other rights pertaining to the shares subject of the agreement.
The acquisition by PNB-NIDC of the properties was not made under the capacity of a trustee but as a foreclosing creditor. Moreover, it is necessary in granting the relief of receivership that the property be in danger of loss, removal or material injury. In the case at bar, Batjak failed to present any evidence to establish the requisite condition that the property is in danger of being lost, removed or materially injured unless a receiver is appointed to guard and preserve it.
TRIPLEX SHOE CO. V. RICE & HUTCHINS, INC. NO PAR VALUE STOCK CANNOT BE REGARDED AS VALID AND OUTSTANDING UNLESS THE CONSIDERATION THEREFOR WAS FIXED AS REQUIRED BY LAW. The stocks issued to the Dillman faction were no-par value shares, the consideration for which were never fixed as required by law. Hence, its issuance was void. The certificate of incorporation did not confer upon the Board of Directors authority to fix the consideration for no par value stock, and therefore, the consideration could be fixed only by the stockholders as provided by the statute. The stockholders never fixed the consideration for any of the no par value stock issued by the corporation after its organization, and there is no escape from the conclusion that all such stock was invalid at the tine of the election I question and not entitled to be voted. FUTURE SERVICES ARE NOT LAWFUL CONSIDERATION FOR THE ISSUANCE OF STOCK. Moreover, the stocks were issued to the Dillmans in consideration for services rendered in organizing the company and in agreeing to serve the company at a much smaller compensation. Clearly, the stocks were issued not for services rendered but for services yet to be rendered, and are therefore, invalid for having no valid consideration. The Dillman faction, therefore, cannot vote the invalid stocks they hold and the directors they elected into office cannot be held to be validly elected. The Hutchison faction, on the other hand, who holds preferred stock but the preference of which was not stated , was held to be validly elected into office although the amended certificate of incorporation provided that “ The sole voting power shall reside in the holders of the common stock.” The court interpreted the provision to mean that if there is any common stock legally issued and outstanding, that is entitled to vote, the preferred stock cannot vote, but if there is no such common stock, the situation is the same as would be if no common stock had been issued at all.
McCarty v. Langdeau (Texas, 1960) Pres. McCarty of the Corporation bought stocks from the Corporation with a promissory note as payment ($379,280). Texas constitution prohibits the purchase of stock through a promissory note. Corporation was placed under receivership. Corporation’s receiver (Langdeau) files a suit against McCarty for the recovery of the sum ($379,280). McCarty’s defense: the contact between him and the Corporation was void since it was against the Texas constitution, hence the receiver cannot recover from him. HELD:
Receiver can recover! Contract was not void.
If court agreed w/ McCarty, the subscription would have been divisible.
Rhode v. DOCK-HOP COMPANY et al (California, 1920) This is an action by the judgment creditor of a Corporation against certain of its stockholders, seeking to collect from them what are claimed to be unpaid balances on the par value of their shares. Said stockholder only paid 25cents for a 1$ on the par value of the of stocks. Defense: they were not subscribers. ISSUE: WON the defendants are required, because of the creditor’s claim, to make up any difference which may exist between what was actually paid on their stock and its par value. HELD: Stockholder not liable! The transferee of watered stock who takes it in ignorance of its real character is not required, even at the suit of a creditor of the company, to pay in anything more upon it. Creditor went after transferee.
MIGUEL VELASCO, assignee of The Philippine Chemical Product Co. (Ltd.) vs. JEAN M. POIZAT March 15, 1918 Facts; Plaintiff, as assignee in insolvency of "The Philippine Chemical Product Company" (Ltd.) is seeking to recover of the defendant, Jean M. Poizat, the sum of P1,500, upon a subscription made by him to the stock of said company. The corporation was originally organized by several residents of Manila, with a capital of P50,000, divided into 500 shares. The defendant subscribed for 20 shares and paid in upon his subscription the sum of P500, the par value of 5 shares . Defendant was a stock holder in the company from the inception of the enterprise, and for sometime its treasurer and manager. While serving in this capacity he called in and collected all subscriptions to the capital stock of the company, except the aforesaid 15 shares subscribed by himself and another 15 shares owned by Jose R. Infante. On July 1914, a meeting of the board was held. Two resolutions were adopted. The first was a proposal that the directors should make good by new subscriptions, in proportion to their respective holdings, 15 shares which had been surrendered by Infante. Infante had already paid 25% of his subscription upon 20 shares, leaving 15 shares unpaid for, and an understanding by which he was to be released from the obligation, it being understood that what he had already paid should not be refunded. Accordingly the directors present at this meeting subscribed P1,200, leaving a deficiency of P300 to be recovered by voluntary subscriptions. The other proposition was that Poizat should be required to pay his unpaid subscription. Upon learning of this, Poizat, in a letter, stated that he was to be relieved from his subscription upon the terms conceded to Infante; and he added: …In consequence, I prefer to lose the whole of the 25 per cent I have already paid rather than to continue investing more money in what I consider to be ruinous proposition. The company soon went into voluntary insolvency, Velasco being named as the assignee. The answer of the defendant consisted of a general denial and a special defense. The principal contention is that the call made by the board on July 1914 , was not made pursuant to the requirements of sections 37 and 38 of the Corporation Law (Act No. 1459), and in particular that the action was instituted before the expiration of the 30 days specified in section 38. Judgment was rendered in favor of the defendant. Issue; WON Poizat liable for the unpaid subscription Held / ratio; Yes, granted, reversed Poizat is liable.
A stock subscription is a contract between the corporation on one side, and the subscriber on the other, and courts will enforce it for or against either. A subscription does not require an express promise to pay, as the law implies a promise to pay on the part of the subscriber. Section 36 of the Corporation Law clearly recognizes that a stock subscription is subsisting liability, since it requires the subscriber to pay interest unless he is relieved from such liability by the by-laws. The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt. The Corporation Law (Act No. 1459) gave recognition of two remedies for the enforcement of stock subscriptions. The first and most special remedy consists in permitting the corporation to put up the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. The other remedy is by action in court. The statutory right to sell the subscriber's stock is merely a remedy in addition to that which proceeds by action in court; The ordinary legal remedy by action exists even though no express mention thereof is made in the statute. There is another reason why the plaintiff must prevail. That reason is this: When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind up, all unpaid stock subscriptions become payable on demand, and are at once recoverable. This rule had origin in a recognition of the principle that a court of equity, having jurisdiction of the insolvency proceedings, could, make the call itself, in its capacity as successor. A further rule gained recognition to the effect that the receiver or assignee, in an action, could himself proceed to collect the subscription without the necessity of any prior call whatever. It is insisted that the plaintiffs cannot recover because the suit was not preceded by a call. In a suit by a solvent going corporation to collect a subscription this would be true; but it is now settled that when the corporation becomes insolvent, no call is necessary before the institution of suits to collect unpaid balances on subscription. If the corporation must be treated still an active entity, and this action should be dismissed for irregularity in the making of the call, other steps could be taken by the board to cure the defect and another action could be brought; but where the company is being wound up, no such procedure would be practicable. The better doctrine is that when insolvency supervenes all unpaid subscriptions become at once due and enforceable. In releasing Infante the board transcended its powers, and he no doubt still remained liable. The corporation has no legal capacity to release an original subscriber to its capital stock from the obligation of paying for his shares, in whole or in part. Defendant is liable for P1,500, the amount of his subscription upon the unpaid shares. He is also liable for interest at the lawful rate from the date of his subscription, unless relieved from this liability by the by-laws of the company.
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., vs. IRINEO BALTAZAR June 30, 1953 Facts; Lingayen Gulf Electric Power Company has authorized capital stock of P300,000 divided into 3,000 shares with a par value of P100 per share. Baltazar subscribed for 600 shares and paid upon the organization of the corporation P15,000. After incorporation, the defendant made further payments, leaving a balance of P18,500, which amount, the plaintiff now claims in this action. On July 1946, stockholders adopted resolution No. 17. It was agreed by the stockholders to call the balance of all unpaid subscribed stock as of July 1946, the first 50% payable within 60 days beginning August 1946, and the remaining within 60 days beginning October 1, 1946. After the expiration of 60 days' grace which would be on December 1, 1946 and on February 1, 1947, all remaining unpaid would revert to the corporation. Defendant asked the corporation that he be allowed to pay by February 1947. On April 1948, the Board adopted Resolution No. 17 which set aside the stockholders resolution on the ground that said resolution was void, and because the corporation was not in a financial position to absorb the unpaid balance. The directors decided to call 50% of the unpaid subscription within 30 days from April 1948, payable within 60 days from receipt of notice from the Secretary. It also authorized counsel of the company to take legal steps for the collection. The call of the Board was not published in a newspaper of general circulation as required by the Corporation Law. On September 1949, the counsel of the corporation wrote the defendant demanding payment. Defendant ignored the said demand. Hence this action. The defendant, disclaims liability on the following grounds: 1. That the plaintiffs' action is premature because there was no valid call; and 2. That granting that there was a valid call, he was released from the obligation of the balance of his subscription by stockholders' resolution No. 17 and No. 4. By way of counterclaim, the defendant also claims from the plaintiff a reasonable compensation at the rate of P700 per month as president of the company. Issue; WON Balatazar liable for his unpaid subscription Held / ratio; No, denied, affirmed The only questions are as follows: 1. Was the call valid? 2. Was the defendant released by virtue of stockholders' resolution Nos. 17 and 4? 3. Is defendant entitled to compensation as president? The law requires that notice of any call for the payment of subscription should be made not only personally but also by publication. This is clear from the provisions of section 40 of the Corporation Law, Act No. 1459:
SEC. 40. Notice of call for unpaid subscriptions must be either personally served upon each stockholder or deposited in the post office…. The notice must also be published once a week for four successive weeks in some newspaper of general circulation devoted to the publication of general news published at the place where the principal office of the corporation is established or located… Section 40 is mandatory as regards publication, using the word "must". The reason for the mandatory provision is not only to assure notice to all subscribers, but also to assure equality and uniformity in the assessment on stockholders. In the case of Velasco vs. Poizat, the corporation involved was insolvent, in which case all unpaid stock subscriptions become payable on demand and are immediately recoverable in an action instituted by the assignee. When the corporation is a solvent concern, the rule is: It is again insisted that plaintiffs cannot recover because the suit was not proceeded by a call or assessment against the defendant as a subscriber, and that until this is done no right of action accrues. In a suit by a solvent going corporation to collect a subscription, and in certain suits provided by statute this would be true;. . . . . (Id.) Going to the claim of defendant that Resolution No. 17 of 1946 released him, in order to effect the release, there must be unanimous consent of the stockholders of the corporation. The general rule is that a valid and binding subscription for stock of a corporation cannot be cancelled so as to release the subscriber from liability thereon without the consent of all the stockholders or subscribers. Furthermore, a subscription cannot be cancelled by the company. Exceptions: In particular circumstances, as where it is given pursuant to a bona fide compromise, or to set off a debt due from the corporation, a release, supported by consideration, will be effectual as against dissenting stockholders and subsequent and existing creditors. A release which might originally have been held invalid may be sustained after a considerable lapse of time. In the present case, the release claimed by defendant does not fall under the exception. The release attempted in Resolution No. 17 of 1946 was not valid for lack of a unanimous vote. As regards the compensation of President claimed by defendant, it is clear that he is not entitled to the same. The bylaws of the company are silent as to the salary of the President.
ARNALDO F. DE SILVA vs. ABOITIZ & COMPANY, INC March 31, 1923 Facts; Plaintiff subscribed for 650 shares of the corporation for P500 each, there remaining 450 shares unpaid, for which he was indebted to the corporation for P225,000. On April 1922, he was notified by the secretary of a resolution adopted by the board declaring the unpaid subscriptions to have become due and payable on the following May 31st at the office thereof, the payment to be made to the treasurer and stating that in case of nonpayment, all such shares will be declared delinquent and sold in a public auction. Plaintiff filed a complaint against the corporation decreeing that in prescribing another method of paying the subscription different from that provided in article 46 of its by-laws, in declaring the aforesaid 450 shares delinquent, and in directing the sale thereof, the corporation had exceeded its executive authority. The plaintiff alleged as the grounds of his petition: (1) That, according to article 46 of the by-law, all the shares subscribed that were not paid for at the time of the incorporation, shall be paid out of the 70 per cent of the profit obtained, the same to be distributed among the subscribers, who shall not receive any dividend until said shares were paid in full; (2) that in declaring the plaintiff's unpaid subscription to have become due and payable on May 31st, and in publishing the aforesaid notice declaring his unpaid shares delinquent, the defendant corporation has violated the aforesaid article; (3) that the aforesaid acts of the corporation were in excess of its powers. Issue; WON under article 46 of the by-laws of the corporation, the latter may declare the unpaid shares delinquent, or collect their value by another method different from that prescribed in the aforecited article Held / ratio; Yes, denied, affirmed ART. 46. The net profit resulting from the annual liquidation shall be distributed as follows: Ten per cent (10%) for the Board of Directors and in the manner prescribed in article twenty-six (26) of these by-laws; ten per cent (10%) for the general manager; ten per cent (10%) for the reserve fund, and seventy per cent (70%) for the shareholders in equal parts; Provided, however, That from this seventy per cent dividend the Board of Directors may deduct such amount as it may deem fit for the payment of the unpaid subscription to the capital stock and not pay any dividend to the holders of the said unpaid shares until they are fully paid;… It authorizes the board to collect the value of the shares not fully paid by deducting from the 70 per cent, such amount as may be deemed convenient, to be applied on the payment of the said shares, and not to pay the subscriber until the same are fully paid up. It is discretionary on the part of the board of directors to do whatever is provided in the said article relative to the application of a part of the 70 per cent of the profit distributable in equal parts on the payment of the shares subscribed to and not fully paid; It is the board of directors and not the delinquent subscriber that may and must judge and decide whether or not such value must be paid out of a part of the 70 per cent of the profit distributable in equal parts among
the shareholders, as provided in the first part of the said article. It lies therefore, within the discretion of the board of directors to make use of such authority. If the board of directors does not wish to make, or does not make, use of said authority it has two other remedies for accomplishing the same purpose. As was said by this court in the case of Velasco vs. Poizat: The first …put the unpaid stock for sale and dispose of it for the account of the delinquent subscriber…The other remedy is by action in court … In the instant case the board elected to avail itself of the first remedy, and, complying strictly with the provisions of sections 37 to 49 of the Corporation Law, which is binding upon it and its stockholders. It is alleged by the appellant that the by-law being of the nature of a contract between it and its stockholders, and article 46 of the by-laws of the said corporation providing an operative method for the payment of stock subscriptions continuously until the full amortization, application cannot be made in the present case of the provisions above cited of the Corporation Law for the purpose contemplated by the defendant, as the provision of said article must prevail against that law. As it is only to the board that said articles gives the authority or right to apply on the payment of unpaid subscriptions, it cannot be maintained that the said article has prescribe an operative method for the payment of said subscription for, in the first place, the adoption of that method lies within the discretion of the board; and, in the second place, there is also the discretionary power granted the same board to avail itself, for the same purpose, to either of the two remedies prescribed in sections 38 to 49, inclusive, of the aforecited Corporation Law. The corporation, through its board of directors, made use of its discretionary power, taking advantage of the first of the two remedies. Plaintiff has no right under article 46 of the said by-laws to prevent the board of directors from following, any other method than that mentioned in the said article, for the very reason that the same does not give the stockholders any right. Defendant corporation has not violated any right of the plaintiff recognized by the said by-laws, nor exceeded its authority, nor abused its discretion when it performed the acts mentioned in the complaint.
THE NATIONAL EXCHANGE CO., INC vs. I. B. DEXTER February 25, 1928 Facts; This action was instituted by the National Exchange Co., Inc., as assignee (through the PNB) of C. S. Salmon & Co., for the purpose of recovering from I. B. Dexter a balance of P15,000, the par value of 150 shares of C. S. Salmon & co. The trial judge gave judgment for the plaintiff to recover the amount. Defendant appealed. On August 1919, defendant subscribed to the stock of C. S. Salmon & Co. in the following form: I hereby subscribe for 300 shares …of C. S. Salmon and Company, payable from the …dividends declared …until the full amount of this subscription has been paid. P15,000 was paid in January, 1920, from a dividend declared by the company, supplemented by money supplied personally by him. Beyond this nothing has been paid and no further dividend has been declared. Issue; WON the stipulation contained in the subscription to the effect that the subscription is payable from the first dividends declared on the shares has the effect of relieving the subscriber from personal liability in an action to recover the value of the shares Held / ratio; No, affirmed, denied In the absence of restrictions in its character, a corporation has the power to accept subscriptions upon any special terms not prohibited by positive law or contrary to public policy, provided they are not such as to require the performance of acts which are beyond the powers conferred upon the corporation by its character, and provided they do not constitute a fraud upon other subscribers or stockholders, or upon persons who are or may become creditors of the corporation. The Philippine Commission inserted in the Corporation Law, enacted March 1906, the following provision: ". . . no corporation shall issue stock or bonds except in exchange for actual cash paid to the corporation or for property actually received by it at a fair valuation equal to the par value of the stock or bonds so issued." (Act No. 1459, sec. 16 as amended by Act No. 2792, sec. 2.) The prohibition against the issuance of shares by corporations except for actual cash or its full equivalent in property is enshrined in both the organic and statutory law of the Philippines. If it is unlawful to issue stock otherwise than as stated it is self-evident that a stipulation such as that now under consideration, in a stock subcription, is illegal. In the contingency that dividends are not paid, there is no liability at all. This is discrimination in favor of the particular subscriber hence unlawful. Nor has a corporation the power to receive a subscription upon such terms as will operate as a fraud upon the other subscribers or stockholders by subjecting the particular subscriber to lighter burdens, or by giving him greater rights and privileges, or as a fraud upon creditors of the corporation by withdrawing or decreasing the capital. As a general rule, an agreement between a corporation and a subscriber, by which the subscription is not to be payable, or is to be payable in part only, whether it is for the purpose of pretending that the stock is really greater than it is, or for
the purpose of preventing the predominance of certain stockholders, or for any other purpose, is illegal and void as in fraud of other stockholders or creditors, or both, and cannot be either enforced by the subscriber or interposed as a defense in an action on the subscription. The rule is that "Conditions attached to subscriptions, which, if valid, lessen the capital of the company, are a fraud upon the grantor of the franchise, and upon those who may become creditors of the corporation, and upon unconditional stockholders." Attention is called to the third headnote of Bank vs. Cook (125 Iowa, 111), where it is stated that a collateral agreement with a subscriber to stock that his subscription shall not be collectible except from dividends on the stock, is valid as between the parties. A careful perusal of the decision will show that the rule stated in the headnote is not justified by anything in the decision. Moreover, even if the decision had been to the effect supposed, it could have no weight in a jurisdiction like this where there is a statutory provision prohibiting such. The law in force in this jurisdiction makes no distinction, in respect to the liability of the subcriber, between shares subscribed before incorporation is effected and shares subscribed thereafter. All like are bound to pay full value in cash or its equivalent, and any attempt to discriminate in favor of one subscriber by relieving him of this liability wholly or in part is forbidden. We have reference primarily to subcriptions to shares that have not been previously issued. The power of the corporation to make terms with the purchaser would be greater where the shares which are the subject of the transaction have been acquired by the corporation in course of commerce, after they have already been once issued. But the shares with which are here concerned are not of this sort.
BONIFACIO LUMANLAN vs. JACINTO R. CURA, ET AL., DIZON & CO., INC., ETC March 21, 1934 Facts; The appellant is a corporation with office in Manila. The plaintiff-appellee Lumanlan, on July 1922, subscribed for 300 shares of said corporation at a par value of P50 or a total of P15,000. Julio Valenzuela, Pedro Santos and Francisco Escoto, creditors of this corporation, filed suit against it praying that a receiver be appointed, as the corporation had no assets except credits against those who had subscribed for shares. As Lumanlan had only paid P1,500 of the P15,000, the receiver on August 1930, filed a suit against him. In that case Lumanlan was sentenced to pay the corporation. Lumanlan appealed. Pending this appeal, the creditors and stockholders agreed that subscribers in default should pay the creditors; Lumanlan was designated to pay the debt to Julio Valenzuela; at that time the corporation owed Valenzuela P8,000. Lumanlan agreed to assume this obligation and in turn the corporation agreed that if Lumanlan would dismiss his appeal the corporation would collect only 50% of the amount subscribed by him, provided that in case the 50% was insufficient to pay Valenzuela he should pay an additional amount which should not exceed the amount of the judgment against him in that case. Lumanlan withdrew his appeal and paid Valenzuela P11,840 including interest and thereby was subrogated. The creditors then asked that the receiver be dismissed which the court granted. Disregarding this agreement, the corporation asked for the execution of the sentence in case No. 37492. The sheriff levied upon two parcels of land in Tarlac belonging to Lumanlan. Issue; WON Lumanlan liable for entire value of the unpaid subscription Held / ratio; No, granted, compensation between the unpaid subscription of P15,000 and the assumed debt of P11,800 proper In the promissory note given by the corporation to Valenzuela, the Corporation obligated itself to pay P8,000 with interest at 12%, upon failure to pay which, 25% of the principal as judicial costs may be collected. By virtue of these, Lumanlan is entitled to a credit against the judgment in case No. 37492 for P11,840 and an additional sum of P2,000, or receive credit for the sum which he had paid Valenzuela for and in place of the corporation, or a total of P13,840. This leaves a balance due Dizon& co., Inc., of P1,269 on that judgment. During the trial, BPI appeared as assignee in the "Involuntary Insolvency of Dizon& Co., Inc. This being the case that corporation has a right to collect all unpaid stock subscriptions. Subscriptions to the capital of a corporation constitute a fund to which the 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 its debts. The judgment of the trial court is modified and Dizon & Co., Inc., is ordered to credit Lumanlan with the sum of P13,840 against the judgment for P15,109, in case No. 37492; to issue to Lumanlan 300 shares upon payment by him of the sum of P1,269 with interest thereon at 6%.
FUA CUN (alias TuaCun), vs. RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the City of Manila, and the CHINA BANKING CORPORATION, March 27, 1923 Facts; On August 1920, one Chua Soco subscribed for 500 shares of defendant Corporation at a par value of P100, paying P25,000, one-half of the subscription, in the following terms: …Upon receipt of the balance …duly executed certificates for said five hundred shares of stock will be issued to the order of the subscriber. …shares specified in this receipt is subject to sale by theChina Banking Corporation for the payment of any unpaid subscriptions, should the subscriber fail to pay …upon 30 days' notice issued therefor by the Board of Directors. On May 1921, Chua Soco executed a promissory note in favor of FuaCun for P25,000 payable in ninety days @1% interest per month, securing the note with a chattel mortgage on the shares. Chua Soco appears to have become indebted to the China Banking for P37,731.68 for dishonored acceptances of commercial paper. In an action against him, Chua Soco's interest in the shares was attached and the receipt seized by the sheriff. FuaCun brought the present action maintaining that by virtue of the payment of the one-half of the subscription price Chua Soco in effect became the owner of two hundred and fifty shares and praying that his lien on said shares, by virtue of the chattel mortgage, be declared to hold priority. The trial court favored plaintiff. Issue; WON plaintiff has priority lien Held / ratio; Yes, affirmed, denied Though the court below erred in holding that Chua Soco became the owner of two hundred and fifty shares BUT the judgment is in the main correct. The claim of the defendant was for the non-payment of drafts accepted by Chua Soco and had no direct connection with the shares of stock in question. A corporation has no lien upon the shares for any indebtedness to the corporation. Ssection 120 of the Corporation Act provides that "no bank organized under this Act shall make any loan or discount on the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares… It has been held in various decisions of the United States Supreme Court that a bank can have no lien on its own stock for the indebtedness of the stockholders even when the by-laws provide that the shares shall be transferable only on the books of the corporation and that no such transfer shall be made if the holder of the shares is indebted to the corporation.
If banking corporations were given a lien on their own stock for the indebtedness of the stockholders, the prohibition against granting loans or discounts upon the security of the stock would become largely ineffective. It is argued that the interest held by Chua Soco was merely an equity which could not be made the subject of a chattel mortgage. An equity in shares of stock is of such an intangible character that it is somewhat difficult to see how it can be treated as a chattel and mortgaged in such a manner that the recording of the mortgage will furnish constructive notice to third parties. These certificates of stock are in the pockets of the owner, and go with him where he may happen to locate, as choses in action, or evidence of his right, without any means on the part of those with whom he proposes to deal on the faith of such a security of ascertaining whether or not this stock is in pledge or mortgaged to others. But a determination of this question is not essential in the present case. There can be no doubt that an equity in shares of stock may be assigned and that the assignment is valid as between the parties and as to persons to whom notice is brought. Such an assignment exists here. The defendant bank had no lien unless by virtue of the attachment. But the attachment was levied after the bank had received notice of the assignment of Chua Soco's interests to the plaintiff and was therefore subject to the rights of the latter. It follows that as against these rights the defendant bank holds no lien whatever.
IRINEO S. BALTAZAR vs. LINGAYEN GULF ELECTRIC POWER, CO., INC., DOMINADOR C. UNGSON, BRIGIDO G. ESTRADA, MANUEL L. FERNANDEZ, BENEDICTO C. YUSON and BERNARDO ACENA ----------------------------G.R. No. L-16237 MARVIN O. ROSE vs. LINGAYEN GULF ELECTRIC CO., INC., DOMINADOR, C. UNGSON, BRIGIDO G. ESTRADA, MANTEL L. FERNANDEZ, BENEDICTO C. YUSON and BERNARDO C. ACENA ----------------------------G.R. No. L-16238 IRINEO S. BALTAZAR and MARVIN O. ROSE vs. BERNARDO ACENA Facts; The Lingayen Gulf Electric Power Co., Inc., has authorized capital stock of P300.000.00 divided into 3,000 shares of voting stock at P100.00 par value. Plaintiffs Baltazar and Rose were among the incorporators, having subscribed to 600 and 400 shares of the capital stock. It is alleged that it has always been the practice of the Corporation to issue certificates of stock to its subscribers for unpaid shares. Of the 600 shares by Baltazar, he had fully paid 535 shares, and the Corporation issued certificates corresponding to the 535. Of the 400 shares of stock by Rose, he had 375 shares covered by certificates. The respondents Ungson, Estrada, Fernandez and Yuson were small stockholders, all holding a total number of fully paid-up shares of not more than 100 shares and the defendant Acena, was likewise an incorporator, holding 600 shares was the largest individual stockholder. Defendants Ungson, Estrada, Fernandez and Yuzon, constituted the majority of the seven-member Board. Let the first group be called the Ungson group and the second, the Baltazar group. The meeting was held on May 1955, principally for the purpose of electing new officers. The fight for control of the corporation was close and keen. The Ungson group in order to continue control, over the objection of three majority members of the Board, passed three (3) resolutions. • Resolution No. 2 (Exh. A), declared all watered stocks issued to Acena, Baltazar, Rose and Jubenville, "of no value and consequently cancelled from the books. • Resolution No. 3 (Exh. B) resolved that "... all unpaid subscriptions should bear interest annually … All shares of stock issued to and in favor of any stockholder or stockholders of the Lingayen Gulf Electric Power Co., Inc., on account of payments on unpaid subscriptions …shall be declared of no value and cancelled from its books… • Resolution No. 4 (Exh. C) resolved that "any and all shares of stock of the Lingayen Gulf Electric Power Co., Inc., issued as fully paid-up to stockholders whose subscription to a number of shares have been declared delinquent …are hereby incapacitated to utilize or avail of the voting power until such delinquency with the accrued interest is fully paid up. In their complaint, Baltazar and Rose prayed that said three resolutions declared illegal and invalid. The defendants, allege that the three resolutions were merely functional instruments to bolster the faith in the assets of the defendant Corporation and did not deprive the plaintiffs of their property without due process of law. A tentative amicable settlement was submitted.
Defendants filed a motion for reconsideration, alleging that the decision was partly against the spirit and intention of the parties to the agreement and portions of the decision, carried "prejudicial eventualities," and asking that the same be amended. Issues; 1. If a stockholder subscribes and pays only partially, for which he is issued certificates of stock, is he entitled to vote the latter, notwithstanding the fact that he has not paid the balance of his subscription, which has been called for payment or declared delinquent? 2. If a stockholder subscribes and makes partial payment only and declared delinquent as to the rest, with interest, should previous payments on account of the capital, be first applied to interest, thus diminishing the voting power of the shares of stock already paid? In other words, if the entire subscribed shares of stock are not paid, will the paid shares of stock be deprived of the right to vote, until the entire subscribed shares of stock are fully paid, including interest? 3. Has estoppel or waiver, by virtue of the settlement agreement, set in? Held / ratio; Yes, No, No, denied, affirmed Defendants-appellants invoke in the FuaCun v. Summers. In the absence of special agreement to the contrary, a subscriber for a certain number of shares of stock does not, upon payment of one-half of the subscription price, become entitled to the issuance of certificates for onehalf of the number of shares subscribed for; the subscriber's right consists only in equity entitling him to a certificate for the total number of shares subscribed for by him upon payment of the remaining portion of the subscription price. The cited case connotes the principle that a partial payment of a subscription does not entitle the stockholder to a certificate for the total number of shares subscribed by him; his right consists only in equity to a certificate of the total number of shares subscribed for, upon payment of the remaining portion of the subscription price. In other words, it is contended, as in the present case, that if Baltazar subscribed to 600 shares of stock in a single subscription, and he merely paid for 300 shares, for which he was given fully paid certificates for 300 shares, he cannot vote said 300 shares, in any meeting of the Corporation, until he shall have paid the remaining 300 shares of stock. The saving clause in the quoted pronouncement, "in the absence of special agreement to the contrary," reveals that the doctrine is not mandatory, but merely directory, which is not violative of law. The cases at bar do not come under the aegis of the principle enunciated in the FuaCun v. Summers case, because it was the practice and procedure, since the inception of the corporation, to issue certificates of stock to its individual subscribers for unpaid shares of stock and gave voting power to shares of stock fully paid. Also, there is the law, which renders the said case of FuaCun-Summers, obsolescent. Section 37 of the Corporation Law, provides: SEC. 37. ... . No certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof, or the full subscription in the case of no par stock, has been paid by him to the corporation. Subscribed shares not fully paid up may be voted provided no subscription is unpaid and delinquent.
Section 37 makes payment of the "par value" as prerequisite for the issuance of certificates and makes payment of the "full subscription" as prerequisite for the issuance of certificates of no par value stocks. The present law requires as a condition before a share holder can vote his shares, that his full subscription be paid in the case of no par value stock; and in case of stock corporation with par value, the stockholder can vote the shares fully paid by him only, irrespective of the unpaid delinquent shares. As well-observed by the trial court, a corporation may now, in the absence of provisions in their by-laws to the contrary, apply payment made by , subscribers-stockholders, either as: "(a) full payment for the corresponding number of shares of stock, the par value of each of which is covered by such payment; or (b) as payment pro-rata to each and all the entire number of shares subscribed for" (amended decision). In the cases at bar, the defendant-corporation had chosen to apply payments by its stockholders to definite shares of the capital stock of the corporation and had fully paid capital stock shares certificates for said payments; its call for payment of unpaid subscription and its declaration of delinquency for non-payment of said call affecting only the remaining number of shares of its capital stock for which no fully paid capital stock shares certificates have been issued, "and only these have been legally shorn of their voting rights by said declaration of delinquency" (amended decision). The third paragraph of the settlement agreement relates to interest on the unpaid balance of subscription to the capital stock. The second paragraph of resolution No. 3 declared as of no value and cancelled all shares certificates issued as fully paid up when interests on unpaid subscription from date of subscription were not previously and/or then and there paid. Defendants-appellants, invoking Art. 1253 NCC (Art. 1173 of the Old Civil Code) which provides that "if the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered," claim that said unilateral nullification was valid. This provision of law only applies in the absence of verbal or written agreement, to the contrary; it is likewise merely directory, and not mandatory. (Art. 1252 NCC). Corporation had applied the payments to the full par value instead of the interest. Application of payments must be deemed to have been agreed upon. The Corporation Law and the by-laws do not contain any provision, prohibiting the application of payments to the full par value ahead of the accrued interest.
RICARDO A. NAVA vs. PEERS MARKETING CORPORATION, RENATO R. CUSI and AMPARO CUSI November 25, 1976 Facts; This is a mandamus case, Teofilo Po as an incorporator subscribed to 80 of Peers Marketing Corporation at P100.00 a share or a total par value of P8,000.00. Po paid P2,000 or 25%. No certificate was issued. On April 1966 Po sold to Nava for P2,000, 20 of his 80 shares. Po represented that he was "the absolute and registered owner of twenty shares". Nava requested the officers of the corporation to register the sale in the books of the corporation. The request was denied because Po has not paid fully the amount. Nava was informed that Po was delinquent and that the corporation had a claim on his entire subscription. Nava filed this mandamus action to compel the corporation and Renato R. Cusi and AmparoCusi, its executive vicepresident and secretary, respectively, to register the said twenty shares. The trial court dismissed the petition. Nava appealed on the ground that the decision "is contrary to law ". His sole assignment of error is that the trial court erred in applying the ruling in FuaCun vs. Summers. Nava contends that the FuaCun case was decided under section 36 of the Corporation Law. It is now section 37. Section 37 provides that "no certificate of stock shall be issued to a subscriber as fully paid up until the full par valuethereof, or the full subscription in case of no par stock, has been paid by him to the corporation". Issue; WON the officers of Peers Marketing Corporation can be compelled by mandamus to enter in its stock and transfer book the sale made by Po to Nava Held / ratio; No, denied, affirmed The transfer made by Po to Nava is not the "alienation, sale, or transfer of stock" that is supposed to be recorded in the stock and transfer book, as contemplated in section 52 of the Corporation Law. The shares which may be alienated are those which are covered by certificates of stock. SEC. 35. The capital stock of stock corporations shall be divided into shares for which certificatessigned by the president or the vice-president, countersigned by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the, parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred. As prescribed in section 35, shares of stock may be transferred by delivery of the certificate. "Title may be vested in the transferee by delivery of the certificate with a written assignment or indorsement thereof".
The usual practice is for the stockholder to sign the form on the back of the stock certificate. The certificate may thereafter be transferred from one person to another. If the holder of the certificate desires to assume the legal rights of a shareholder to enable him to vote at corporate elections and to receive dividends, he fills up the blanks in the form by inserting his own name as transferee. Then he delivers the certificate to the secretary of the corporation so that the transfer may be entered in the corporation's books. The certificate is then surrendered and a new one issued to the transferee. That procedure cannot be followed in the instant case because, as already noted, the twenty shares in question are not covered by any certificate. Moreover, the corporation has a claim on the said shares for the unpaid balance. A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to demand payment is no less incontestable. A corporation cannot release an original subscriber from paying for his shares without a valuable consideration or without the unanimous consent of the stockholders. Nava argues that under section 37 a certificate of stock may be issued for shares the par value of which have already been paid for although the entire subscription has not been fully paid. Nava relies on Baltazar v Lingayen Gulf Electric Power Co. There is no parallelism. In the Baltazar case the stockholder, an incorporator, was the holder of a certificate. The issue was whether the said shares had voting rights. That is not the issue in this case. In this case no stock certificate was issued to Po. Without stock certificate, which is the evidence of ownership of corporate stock, the assignment of corporate shares is effective only between the parties to the transaction. The delivery of the stock certificate, which represents the shares to be alienated , is essential for the protection of both the corporation and its stockholders.
CHARLES H. ELLINGWOOD, Complainant Below, Appellant, vs. WOLF'S HEAD OIL REFINING COMPANY, INCORPORATED, a corporation of the State of Delaware, EUGENE W. CHASE, ARTHUR W. SCOTT, FREDERICK FAIR, EDWARD G. GNADE, BAYARD H. WATERBURY, EVERETT E. BELLEN, JOHN T. CARPENTER, J. ROLAND STEVENSON, PAUL M. GRIMM and GEORGE M. MCINTOSH, Defendants Below, Appellees April 26, 1944 Facts; This case was brought by appellant, as common stockholder of Wolf's Head Oil Refining Company, Incorporated, which was incorporated in October, 1929. The charter provided for both preferred and common stock. The right of the corporation to redeem the preferred stock, and the respective rights of both the preferred and common stock in the event of dissolution of the corporation are in Article IV of the certificate of incorporation. Likewise the dividend and voting rights of both are in Article V. "Article V. … "…the holders of the common stock shall exclusively possess voting power for the election of directors, and for all other purposes, and the holders of the preferred stock shall have no voting power; provided however, that if @ any time the corporation shall be in default in respect to the declaration and payment of dividends in the amount of two years' dividends on the preferred stock, then the holders of a majority of the preferred stock shall have an election to exercise the sole right to vote for the election of directors and for all other purposes, to the exclusion of any such right on the part of the holders of the common stock until the corporation shall have declared and paid for a period of a full year a 6% dividend on the preferred stock, when the right to vote for the election of directors, and for all other purposes, shall revert to the holders of the common stock. … From organization in 1929, various arrearages of dividends accrued on the preferred stock. When a majority of the preferred stockholders finally decided to exercise their sole right to vote dividends had accrued in the amount of 37 1/2% of the par value. Dividends paid amounted to 15% leaving unpaid dividends on said preferred stock in May, 1936 amounting to 22 1/2% of the par value. They continued to exercise that right until May, 1943, @ which time the common stockholders claimed that the sole right to vote had reverted to them. They relied upon the fact that during the year 1942, and for the period of a full year prior to May 3, 1943, a six per cent dividend had been paid on the preferred stock. In April, 1943, the holders of a majority of the preferred stock again gave notice to the corporation of their election to exercise the sole right to vote giving as their reason that the corporation was in default in regard to the declaration and payment of dividends in the amount of two years' dividends on the preferred stock. Consequently @ the annual meeting on May 1943, a majority of the preferred stockholders elected a board of seven directors. Likewise certain common stockholders, including the appellant, elected a board of seven directors. The appellant instituted this proceeding before the Chancellor to determine which of said elections was valid and who constituted the board of directors of the corporation. Issue; Voting rights of each class Held / ratio;
Denied, affirmed A certificate of incorporation may contain provision with respect to the stock to be issued and the voting rights to be exercised by said stock, provided that the provision agreed to is not against public policy. The rights of stockholders are contract rights and that it is necessary to look to the certificate of incorporation to ascertain what those rights are. Nothing is to be presumed in favor of preferences attached to stock, and when a corporate charter attempts to confer preferences the same should be expressed in clear language. The instrument should be considered in its entirety, and all of the language reviewed together in order to determine the meaning intended to be given. The charter of Wolf's Head Oil Refining evidences an intention to make provision for the protection of the preferred stockholders. The appellant contends that the wording of article, "until the corporation shall have declared and paid for a period of a full year a 6% dividend on the preferred stock," restricts the duration of the time when the preferred stockholders have the right to elect to exercise the sole right to vote. This ignores the rights of the preferred stockholders if the corporation is still in default in the payment of dividends on said preferred stock in the amount of two years' dividends. This also loses sight of the fact that the plain words of the charter are, "if @ any time the corporation shall be in default"; We agree that when a six per cent dividend is paid, the sole right to vote reverts, notwithstanding the fact that dividends in the amount of two years are due on the preferred stock. If the preferred stockholders failed to again elect to exercise the sole right to vote, by giving notice to the corporation of their decision to exercise such right, as the charter requires them to do, the common stockholders would be entitled to exercise the right. But if the corporation is still in default in the payment of two years' dividends on the preferred stock, when a six per cent dividend is paid on preferred stock, said preferred stockholders can still avail themselves of the right to vote. The language used in the charter describing the conditions under which the preferred stockholders obtain the right to vote has nothing to say about the time when the arrearage in dividends on said stock shall have accrued. If arrearage in dividends must have accrued after the right to vote had reverted to the common stock, the preferred stockholders would be deprived of the right to vote no matter how great the arrearage in dividends might be, until additional dividends should accrue. In 1936, the dividends accrued and unpaid on the preferred stock amounted to 22 1/2%. From 1936 to May 3, 1943, additional dividends accrued amounting to 40 1/2%, and that the dividends paid amounted to 25 1/2%. Therefore on May 3, 1943, dividends amounting to 37 1/2% were accrued and unpaid on the preferred stock. In view of this situation preferred stockholders were entitled to vote.
Raymond M. Hay et al., Respondents, v. Edward T. Hay, Individually and as Administrator, Appellant May 1, 1951 Facts; Appeal from a judgment of the superior court for Spokane county, declaring that preferred stockholders of a corporation, upon its liquidation, were entitled to receive accrued dividends from its assets. The liquidating trustees of The Big Bend Land Company, instituted this action to secure a declaratory judgment construing Article VI of its amended articles. The question presented is whether the holders of cumulative preferred stock upon liquidation of the corporation are entitled to be paid accrued dividends from the corporate assets before the common stockholders become entitled to participate in the distribution thereof, the corporation having no earned surplus or net profits. Prior to December 1921, the capital stock of The Big Bend Land Company consisted entirely of common stock. On that date Article VI was amended: "Amended Article VI … "(d) In the event of any liquidation, dissolution or winding up of the Corporation the holders of the preferred stock shall be entitled to be paid in full the par value thereof, and all accrued unpaid dividends thereon before any sum shall be paid to or any assets distributed among the holders of the common stock, but after payment to the holders of the preferred stock of the amounts payable to them as hereinbefore provided, the remaining assets and funds of the Corporation shall be paid to and distributed among the holders of the common stock." There are no corporate creditors. The holders of the preferred stock have received the par value. No dividends on the cumulative preferred stock have ever been declared. No surplus profits are available with which to pay the accumulated dividends. There is a substantial amount of assets on hand, but they would all be absorbed if they should be applied in payment of accrued dividends on the preferred stock. Appellant takes the position that the phrase "all accrued unpaid dividends" means that before there can be a dividend there must be surplus profits, and that, since none ever existed, the right to such dividends never accrued. On the other hand, it is the contention of respondents that that subdivision (d) authorizes the payment of accumulated and unpaid dividends even though there be no surplus profits available. They argue that, the corporation being in the process of liquidation, there can be no impairment of its capital and, therefore, there is no longer any purpose in restricting the payment of dividends to surplus profits. Issue; WON entitled to accrued dividends Held / ratio; Denied, affirmed The two classes of stockholders contracted between themselves with respect to the division of the assets in case of liquidation. Their agreement was that the preferred stockholders should receive the par value of their stock plus an amount equal to "all accrued unpaid dividends thereon" before any assets should be distributed to the common stockholders.
The articles contain no condition to the effect that the surplus profits must be equal to, or greater than, the total of all accrued unpaid dividends before such distribution could be made. The parties were contracting with reference to a possible future liquidation, a situation where the statutory prohibition against declaration of dividends out of capital had no application. Appellant's construction is contrary to the fundamental concept of the law of corporations. Appellant's construction of subparagraph (d) is based upon a failure to recognize the vital distinction between a corporation which is a going concern and one which is in liquidation. The reference to "all accrued and unpaid dividends" in subparagraph (d) is the only practical yardstick by which the total share of the assets (which the preferred stockholders were to receive upon liquidation) could be measured. It stated the method by which the amount distributable to the preferred stockholders could be computed in the event of a liquidation in the future. "The object to be achieved in the issuance of preferred stock is ordinarily twofold. First, the investor is to be assured of a continued or periodical return, or dividend or dividends from the profits of the corporation without the uncertainty attendant upon the ownership of common stock; and secondly, the investor is to be assured, as an additional inducement to invest, that in the event of dissolution and distribution of the assets of the corporation between the two classes of stockholders, if the anticipated profits have proved insufficient to produce such a dividend or return upon its capital stock, then he shall receive it upon such distribution of the capital assets in preference to any distribution to the holders of the common stock. Reference has previously been made to Rem. Rev. Stat., § 3823, which was in effect when the articles of incorporation here involved were amended. This statute provides: "It shall not be lawful for the trustees to make any dividend except from the net profits arising from the business of the corporation, nor divide, withdraw, or in any way pay to the stockholders, or any of them, any part of the capital stock of the company, nor to reduce the capital stock of the company unless in the manner prescribed in this chapter, or the articles of incorporation or by-laws; … Provided, that this section shall not be construed to prevent a division and distribution of the capital stock of the company which shall remain after the payment of all its debts upon the dissolution of the corporation or the expiration of its charter. . . This enactment forbidding the declaration of dividends except from net profits specifically provides that it shall not be construed to prevent a distribution of assets upon a dissolution after the payment of corporate debts. Appellant construes this statute as applying to the very situation to which the statute says it shall have no application. Being of the opinion that Rem. Rev. Stat., § 3823, expressly provides that it has no application to this case and also that, according to the great weight of authority, respondents are entitled under the provisions of subparagraph (d) to receive a sum equal to all accrued unpaid dividends as well as the par value of their cumulative preferred stock in the liquidation of this corporation before appellants shall be entitled to participate therein, we affirm.
AUGUSTA TRUST COMPANY vs. AUGUSTA, HALLOWELL & GARDINER RAILROAD CO., ET ALS. AND HENRY LEWIS, ET ALS. vs. AUGUSTA, WINTHROP & GARDINER RAILWAY, ANDROSCOGGIN & KENNEBEC RAILWAY, AUGUSTA TRUST CO., AND AUGUSTA TRUST CO., TRUSTEE. August 11, 1936 Facts; Appeals from decrees of a single Justice sitting in equity. Appeal sustained, and the cases remanded for entry of decrees modifying the original decrees in accordance with the opinion The Augusta Trust Company, a banking corporation in Maine, is the Trustee named in the General Convertible Mortgage which the Augusta, Hallowell & Gardiner Railroad Co., a street railway corporation, gave on June 18, 1901, to secure its issue of serial coupon bonds maturing July 1951, and amounting to $ 250,000of which $ 55,000 are outstanding, together with preferred stock $ 195,000 which was issued in exchange for the bonds in accordance with the terms of the mortgage, which gave to the holders of the bonds the right of converting the same into preferred stock of the Company secured under the mortgage both as to principal and dividends equally and ratably with the bonds. Both the bonds and preferred stock were callable on or after July 1911, and redeemable @ par on July 1951, with accrued interest and dividends. All the franchises, lands, incomes, revenues and other property of every kind then owned or thereafter acquired were included in the conveyance to the Trustee and subjected to the lien of the mortgage. The certificates of preferred stock by the same authority each bore on its face the inscription, "This stock is part of an issue limited to two hundred and fifty thousand dollars par value. The holder is entitled to receive and the Company is bound to pay hereon a fixed yearly dividend of four per centum, payable halfyearly on January 1 and July 1. … By authority of a vote of its stockholders, the Augusta, Hallowell & Gardiner Railroad Co. conveyed all its properties, rights, privileges and franchises to the Augusta, Winthrop & Gardiner Railway, which assumed the payment of all debts of the old Company. The Augusta, Winthrop & Gardiner Railway, on May 1902, named the Augusta Trust Company as Trustee in its convertible first mortgage for $ 150,000 given to secure an issue of bonds and convertible into preferred stock of the Corporation @ the option of the holder on substantially the same terms as those abovedescribed, which remained a senior incumbrance. On April 1907, the Lewiston, Augusta & Waterville Street Railway, under legislative authority acquired the consolidated properties, franchises and rights of the Augusta, Winthrop & Gardiner Railway and thereafter operated the same until, by decree in foreclosure proceedings all its propertieswere sold to a new corporation organized by the bondholders known as the Androscoggin & Kennebec Railway Company. On July 1932, the street railway systems were abandoned. Part of the physical properties was sold. The action of Augusta Trust Company v. Augusta, Hallowell & Gardiner Railroad Co., et als., is brought primarily to foreclose the several mortgages. The Androscoggin & Kennebec Railway Company, denies liability for any part of the debts secured by these mortgages. Intervening bondholders, deny the right of the owners of preferred stock to share equally and ratably in the security of the mortgages. Issue;
WON preferred shareholders may share ratably in the mortgages Held / ratio; No, denied, affirmed It is within the power of the legislature, to prescribe that corporations may issue certificates of preferred stock, socalled, making the holders creditors of the corporation as well as stockholders, and giving them a lien upon the property of the corporation with a priority over other creditors. It is held, however, that a statute conferring this extraordinary power upon corporations must be clear and definite in its terms. And of such preferred stock it is said that it is not ordinary preferred stock, nor technically is it preferred stock @ all. It is sui generis, not governed by the ordinary rules, but by the provisions of the statutes by which it is authorized. Suffice it to say that the preferences given the holders of the preferred stock in the conversion agreements here in controversy were not authorized by statute when made. The stock was not statutory preferred stock of the kind just described. The argument is advanced that the certificates of preferred stock issued in exchange for bonds were in fact certificates of indebtedness and not stock. We cannot concur. It is true that preferred stock, so-called, may be issued in such a way and under such terms as to make the certificates thereof merely evidence of indebtedness and the holders creditors of the corporation and not stockholders. All facts and circumstances convincingly characterize the preferred stock issued by the street railway companies as preferred stock. In each instance, the stockholders voted increases in the capital stock by the creation of preferred stock. The certificates delivered to the holders of the bonds exchanged therefor designated the stock as preferred stock and certified that the holders were entitled to the number of shares therein enumerated in the "full paid preferred capital stock" of the companies. The holders of this stock had a right to vote in the election of directors and were entitled to receive fixed yearly dividends payable semi-annually @ the times therein specified. The certificates contain every essential feature of a certificate of preferred stock and none of a contract creating the relation of a creditor of the corporation. The holders of the preferred stock contend, however, that, if their conversion agreements and the preferences therein created were unauthorized when made, their illegality has been removed by subsequent curative legislation. They call attention to Section 16, Chapter 203, Private and Special Laws 1907, which reads: "So far as the consent of the state is essential thereto, all the acts and doings of the Augusta, Winthrop and Gardiner Railway …are ratified, confirmed and approved." The act does not clearly and definitely confer validity upon the agreements. Furthermore the validity of the conversion agreement depends upon the law existing when they were made. A contract of a corporation, if illegal and void when made because contrary to public policy, is not validated by a subsequent statute authorizing it. "If an agreement was illegal by statute or on the grounds of public policy when made, it is not, according to the great weight of authority, rendered legal by repeal of the statute or by a subsequent change in public or legislative policy." It must be held, therefore, that by surrendering their bonds and taking in lieu thereof preferred stock, the bondholders ceased to be creditors and became mere stockholders. Those who have not made the exchange and hold their bonds are entitled to the security of the mortgages shorn of the illegal conversion agreements. The preferred stockholders are not entitled to share in the assets of the companies until all creditors have been paid in full.
TIRSO GARCIA, in his capacity as receiver of the Mercantile Bank of China, plaintiff-appellee, vs. LIM CHU SING, defendant-appellant. February 24, 1934 Facts; Appeal by Lim Chu Sing from the judgment sentencing the defendant to pay the sum of P9,105.17. The parties submitted the following stipulation of facts: 1. The defendant admits the facts alleged in the complaint. 2. The plaintiff admits the allegations in the answer, particularly that the defendant is the owner of two hundred shares @ a par value of fifty pesos (P50) each, that is (Pl0,000). The facts alleged in the complaint are as follows: On June 20, 1930, Lim Chu Sing delivered to the Mercantile Bank of China promissory note for the sum of P19,605.17 with interest @ 6 per payable monthly. One of the conditions is that in case of defendant's default, the unpaid balance together with interest shall become due. The defendant had been making several partial payments leaving an unpaid balance of P9,105.17. However, he defaulted. The facts alleged in the answer are as follows: The debt was not really an indebtedness of the defendant but of Lim CuanSy, who had an account with the plaintiff bank in the form of "trust receipts" guaranteed by the defendant as surety and with chattel mortgage securities. The bank, without consent of the defendant, foreclosed the chattel mortgage and privately sold the property. Inasmuch as Lim CuanSy failed to comply with his obligations, the plaintiff required the defendant, as surety, to sign a promissory note. The defendant is the owner of shares of stock of the plaintiff Mercantile Bank of China amounting to P10,000. The plaintiff bank is now under liquidation. The proceeds of the sale of the mortgaged chattels together were applied to the amount of the promissory note leaving the balance which the plaintiff now seeks to collect. Issue; WON compensation between Lim Chu Sing’s P10,000 stocks and the bank’s P9,000 credit may occur Held / ratio; No, denied, affirmed A share of stock is not an indebtedness to the owner nor evidence of indebtedness and, therefore, it is not a credit. Stockholders, are not creditors of the corporation. The capital stock of a corporation is a trust fund to be used more particularly for the security of creditors of the corporation, who presumably deal with it on the credit of its capital stock. Therefore, Lim Chu Sing not being a creditor of the Mercantile Bank of China, although the latter is a creditor of the former, there is no sufficient ground to justify a compensation.
WALLACE v. ECLIPSE POCAHONTAS COAL CO. etals. February 4, 1919 Facts; Suit for specific performance of contract by J. S. Wallace against the Eclipse Pocahontas Coal Company and others.Decree for defendants, and plaintiff appeals. The contract was made in December 1916, between plaintiff and the defendants Perkins and Griffith, the latter acting for themselves and their associates O'Keeffe and Weller, promoters of the defendant corporation, organized for the purpose of operating a tract of about 600 acres of coal in McDowell county, an option for a lease on which was then owned by the plaintiff. In consideration that plaintiff would transfer said lease, first to Griffith, trustee, for himself and associates, and by him to the corporation when formed, the said Perkins, Griffith, O'Keeffe and Weller would advance money to pay the purchase price for said lease, $ 2,500.00, and to fully equip said property for operation for coal under the said lease, and when so equipped and ready for operation, plaintiff was to have and receive in stock enough to represent a one-fifth interest fully paid up in the corporation. And it is also alleged that of the $ 25,000.00 capital stock authorized, plaintiff was entitled to receive @ least fifty shares of the stock of the defendant corporation, while but five shares had ever been issued to him. The bill further alleges full and complete performance of the contract by plaintiff on his part and failure and refusal of the defendant company and of its promoters, officers and agents to execute the contract on their part. The answers deny the contract as alleged and put in issue the material facts, and the answer of Weller and O'Keffe deny authority of Griffith and Perkins to bind them and want of notice of the alleged rights of Wallace. The decree appealed from, adjudged as the only practicable relief that plaintiff recover of the defendants W. F. Perkins, H. C. Weller, T. J. Griffith and James O'Keeffe, respectively, the sum of one thousand and seventy-five dollars ($ 1075.00) each, aggregating the sum of $ 4,300.00, which the court found to be the value of forty-three shares of stock of which he had been deprived, being one-fifth of the shares issued less the five shares delivered to him and two shares contributed by him to another stockholder according to an agreement which has no material bearing on the issues here presented. Issue; WON Wallace entitled to shares of stocks of Eclipse Pocahontas Held / ratio; Yes, granted, reversed The evidence shows that the first meeting of the stockholders of the corporation after obtaining the charter was held on February 20, 1917. Thereupon the three present, namely Weller, Ayers and Perkins, proceeded to consider a preamble and resolution, the manifest purpose of which was to resolute plaintiff as far as possible out of his interest in the property and stock of the corporation. "AND WHEREAS, it is represented to the meeting that the said J. S. Wallace claims to have had @ one time an option upon the property covered by the Deed of Lease from said McDowell Pocahontas [***6] Coal Company from the said T. [*325] J. Griffith, the Assignee of said leasehold estate but which option, if such was ever in existence, had expired and terminated before the purchase thereof by the parties contributing the said Twenty Five Hundred Dollars ($ 2500.00) …
NOW, THEREFORE, BE IT RESOLVED, … said five shares hereby directed to be issued to the said J. S. Wallace having been paid for by the other parties herein named by contributing the sum of One Hundred and twentyfive dollars ($ 125.00) on account thereof, and that said five shares of stock so issued to the said Wallace shall be received by him in full and complete satisfaction of any and all claims whatsoever he may have upon any stock of this corporation. … This whole proceeding is manifestly fraudulent, and in the light of the other evidence in the case we have no hesitancy in so characterizing it and putting upon it our seal of condemnation. Plaintiff contends that he was erroneously limited to money decrees instead of a decree against the corporation, either (1) upon the entire property and plant of the corporation as a trust therein his one-fifth undivided interest, or (2) a decree requiring the defendant corporation and the other parties to the contract to issue and deliver to him forty-three additional shares, or (3) to a decree against the corporation and the other promoters not for the par value but the actual value of the shares. Perkins, Griffith, Weller and O'Keeffe are liable jointly and severally for the stock to which plaintiff is entitled, and if it is possible for them to do so, to respond in stock; but is the corporation also liable? The corporation as well as the promoters is liable to plaintiff. As a general rule promoters of a corporation not yet organized, especially when their contracts are made for and on behalf of the corporation, are regarded as the agents of the corporation, and such contracts become binding upon them as well as upon the corporation after organization and acceptance thereof by it. It is argued that the corporation and the other subscribing stockholders had no notice of the contract as made. This is untenable, not only did the corporation have notice of plaintiff's right through its corporators and agents, but all the stockholders of the corporation participating in the first meeting of stockholders, including Stover, had notice that plaintiff had @ least some interest or claim. As a prerequisite to a final adjudication of plaintiff's rights it becomes necessary to determine two questions; first, what is the status or relation of the plaintiff to the corporation under his contract; and, second, what was reasonably contemplated in the provision of the contract for "a one-fifth interest in the property fully equipped?" Plaintiff's position was that of a subscriber. His contract was to convey to the corporation the leasehold and to accept in payment fully paid up stock to the value of the property when fully equipped. One who has paid his subscription to the capital stock of a corporation may compel the issuance of proper certificates therefor. When shares of stock have some peculiar value to a purchaser and cannot be purchased on the market, or their value is not ascertainable with any degree of certainty, the purchaser may require specific performance of his contract. The second question is, what was comprehended in the provision of the contract "a one-fifth interest in the property fully equipped." The subject of the contract was a lease of coal, which required operation and production to keep it alive. The parties must have contemplated @ least one operation and all the necessary equipment such as tipple, track, haulway, cars, and all necessary machinery. Plaintiff contend that he is entitled under his contract to have issued to him
one share for every five shares of stock issued. We do not think this could have been reasonably within the minds of the contracting parties when entering into the contract. Clearly his contract was to take in payment stock in the corporation which he helped to organize and to which he caused the lease to be conveyed. We are clearly of opinion however that the court was in error in limiting him to a money decree severally against the promoting shareholders. While they are no doubt liable jointly as well as severally, so is the corporation liable, as already indicated, either for the number of shares to which plaintiff may be entitled under the contract as now construed, if ascertainable or obtainable, if not, a money decree should be given against the corporation and Griffith, Perkins, Weller and O'Keeffe jointly for the value of the one-fifth of the property equipped for one operation as already stated. Our conclusion is to reverse the decree and remand to ascertain the value of the plant and if the capital stock then authorized and unissued or issued and outstanding and held by the said Griffith, Perkins, Weller and O'Keffe is sufficient to represent in value such one-fifth interest in said property such number of shares shall be decreed to be issued or transferred on the books of the corporation to plaintiff and if not, then the plaintiff shall be decreed against the corporation and said stockholders jointly a money decree.
SOFRONIO T. BAYLA, ET AL., petitioners, vs. SILANG TRAFFIC CO., INC., respondent. SILANG TRAFFIC CO., petitioner, vs. SOFRONIO BAYLA, ET AL., respondents. May 1, 1942 Facts; Petitioners instituted this action against Silang Traffic Co., Inc. to recover certain sums of money they had paid on account of shares of stock they individually agreed to take and pay for. AGREEMENT FOR INSTALLMENT SALE OF SHARES IN THE "SILANG TRAFFIC COMPANY, INC.," THIS AGREEMENT, made and entered into between Mrs. Josefa Naval, of legal age, married and resident of the Municipality of Silang, Province of Cavite, Philippine Islands, party of the First Part, hereinafter called the subscriber, and the "Silang Traffic Company, Inc.," a corporation duly organized and existing by virtue of and under the laws of the Philippine Islands, with its principal office in the Municipality of Silang, Province of Cavite, Philippine Islands, party of the Second Part, hereinafter called the seller, WITNESSETH: That the subscriber promises to pay personally or by his duly authorized agent to the seller @ the Municipality of Silang, Province of Cavite, Philippine Islands, the sum of one thousand five hundred pesos (P1,500), Philippine currency, as purchase price of FIFTEEN (15) shares of capital stock, said purchase price to be paid as follows, to wit: five (5%) per cent upon the execution of the contract, the receipt whereof is hereby acknowledged and confessed, and the remainder in installments of five per cent, payable within the first month of each and every quarter thereafter, commencing on the 1st day of July, 1935, with interest on deferred payments @ the rate of SIX (6%) per cent per annum until paid. That the said subscriber further agrees that if he fails to pay any of said installment when due, or to perform any of the aforesaid conditions, or if said shares shall be attached or levied upon by creditors of the said subscriber, then the said shares are to revert to the seller and the payments already made are to be forfeited in favor of said seller, and the latter may then take possession, without resorting to court proceedings. Petitioners' action for the recovery is based on a resolution by the board of directors of the respondent corporation on August 1, 1937. The respondent corporation set up the following defenses: (1) That the resolution is not applicable to the petitioners because on the date thereof "their subscribed shares of stock had already automatically reverted and the installments paid had already been forfeited"; and (2) that said resolution of August 1, 1937, was revoked and cancelled by a subsequent resolution. The trial court absolved the defendant and declared forfeited the shares. It held that the resolution of August 1, 1937, was null and void, citing Velasco vs. Poizat, wherein this Court held that "a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation to pay for shares; and any agreement to this effect is invalid" Plaintiffs appealed which modified of the trial court as follows: That part of the judgment dismissing plaintiff's complaint is affirmed, but that part thereof declaring their subscription canceled is reversed. Both parties appealed. Petitioners insist that they have the right to recover the amounts while the respondent contends that said amounts have been automatically forfeited.
Issue; WON petitioners entitled to refund / respondents to forfeiture of shares Held / ratio; Yes/No, reversed The parties have interpreted the said agreement as a contract of subscription. Whether a particular contract is a subscription or a sale of stock is a matter of construction and depends upon its terms and the intention of the parties. A subscription to stock in an existing corporation is, as between the subscriber and the corporation, simply a contract of purchase and sale. It seems clear from the terms of the contracts in question that they are contracts of sale and not of subscription. "A subscription, properly speaking, is the mutual agreement of the subscribers to take and pay for the stock of a corporation, while a purchase is an independent agreement between the individual and the corporation to buy shares of stock from it @ stipulated price." Rules governing subscriptions and sales of shares are different. For instance, the provisions of our Corporation Law regarding calls for unpaid subscription and assessment of stock do not apply to a purchase of stock. Likewise the rule that corporation has no legal capacity to release an original subscriber to its capital stock from the obligation to pay for his shares, is inapplicable to a contract of purchase of shares. The next question is whether failure of the purchaser to pay any of the quarterly installments automatically gave rise to the forfeiture of the amounts already paid and the reversion of the shares to the corporation. The respondent corporation contends that when the petitioners failed to pay the installment which fell due on or before July 31, 1937, forfeiture automatically took place, without the necessity of any demand and that the resolution of August 1, 1937, authorizing the refund of the installments already paid was inapplicable to the petitioners, who had already lost any and all rights under said contract. The contention is, untenable. The provision regarding interest on deferred payments would not have been inserted if it had been the intention of the parties to provide for automatic forfeiture and cancelation. Moreover, the contract did not expressly provide that the failure of the purchaser to pay any installment would give rise to forfeiture and cancelation without the necessity of any demand; and under article 1100 of the Civil Code persons obliged to deliver or do something are not in default until the moment the creditor demands of them judicially or extrajudicially. The contract in question being one of purchase and not subscription, we see no legal impediment to its rescission. According to the resolution of August 1, 1937, the rescission was made in order to terminate the then pending civil case involving the validity of the sale of the shares. Petitioners agreed, as shown by their demand for the refund. Said civil case was subsequently dismissed, and that the purchasers of shares of stock, other than the herein petitioners, who were mentioned in said resolution were able to benefit by said resolution. It would be an unjust discrimination to deny the same benefit to the herein petitioners. The attempted revocation of said rescission by the resolution of August 1937, was invalid, it not having been agreed to by the petitioners.
DATU TAGORANAO BENITO, petitioner, vs. SECURITIES AND EXCHANGE COMMISSION and JAMIATUL PHILIPPINE-AL ISLAMIA, INC., respondents. July 25, 1983 Facts; On February 1959, the Articles of Incorporation of Jamiatul Philippine-Al Islamia, Inc. were filed with the SEC and approved on December 1962. The corporation had an authorized capital stock of P200,000.00 divided into 20,000 shares. Of the authorized stock, 8,058 shares were subscribed and fully paid. petitioner Benito subscribed to 460 shares. On October 1975, the corporation filed a certificate of increase of its capital from P200,000.00 to P1,000,000.00. P191,560.00 worth of shares were represented in the stockholders' meeting @ which time the increase was approved. Thus, P110,980.00 worth of shares were issued from the unissued portion of the authorized capital stock. Of the increased capital stock of P1,000,000.00, P160,000.00 worth of shares were subscribed by Mrs. Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in Alonto. On November 1976, petitioner filed with SEC a petition alleging that the additional issue (worth P110,980.00) was made in violation of his pre-emptive right to said additional issue and that the increase in the authorized capital stock of the corporation from P200,000.00 to P1,000,000.00 was illegal considering that the stockholders of record were not notified of the meeting wherein the proposed increase was in the agenda. SEC ruled: (a) That the issuance by the corporation of its unissued shares was validly made and was not subject to the pre-emptive rights of stockholders, including the petitioner, herein; (b) That there is no sufficient legal basis to set aside the certificate issued by this Commission authorizing the increase in capital stock. Considering, however, that petitioner has not waived his pre-emptive right to subscribe to the increased capitalization, respondent corporation is hereby directed to allow petitioner to subscribe thereto, @ par value, proportionate to his present shareholdings… Hence, this petition, petitioner contending that (1) the issuance of the 11,098 shares is null and void; (2) the increase in the authorized capital stock from P200,000.00 to P1,000,000.00 without the consent or express waiver of the stockholders, is null and void; Issue; WON issuance of 11,000 shares void / WON increase in capital void Held / ratio; No / No, affirmed, denied The issuance of the unsubscribed portion of the capital stock worth P110,980.00 is ' not invalid even if assuming that it was made without notice to the stockholders. The power to issue shares of stocks in a corporation is lodged in the board of directors and no stockholders' meeting is necessary to consider it because additional issuance of shares of stocks does not need approval of the stockholders. The by-laws of the corporation itself states that 'the Board of Trustees shall, in accordance with law, provide for the issue and transfer of shares of stock of the Institute and shall prescribe the form of the certificate of stock of the Institute. Petitioner bewails the fact that in view of the lack of notice, he was not able to exercise his right of pre-emption. However, the general rule is that pre-emptive right is recognized only with respect to new issue of shares, and not with respect to additional issues of originally authorized shares. This is on the theory that when a corporation @ its inception
offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed are later re-offered, he cannot therefore claim a dilution of interest. With respect to the claim that the increase in the authorized capital stock was without the consent, it was the finding of the SEC that a stockholders' meeting was held on November 1975 and, among the many items taken up then were the change of name of the corporation, the increase of its capital stock, and the increase of the number of its Board of Trustees from five to nine. The petitioner had not sufficiently overcome the evidence of respondents that such meeting was in fact held. What petitioner successfully proved was the fact that he was not notified of said meeting and that he never attended the same as he was out of the country @ the time. The documentary evidence of petitioner conclusively proved that he was attending the Mecca pilgrimage when the meeting was held. While petitioner doubts the authenticity of the alleged minutes of the proceedings, the SEC notes with significance that said minutes contain numerous details of various items taken up therein that would negate any claim that it was not authentic. Another thing that petitioner was able to disprove was the allegation in the certificate of increase that all stockholders who did not subscribe to the increase of capital stock have waived their pre-emptive right to do so. As far as the petitioner is concerned, he had not waived his pre-emptive right to subscribe as he could not have done so for the reason that he was not present @ the meeting and had not executed a waiver, thereof. Findings of facts of administrative bodies will not be interfered with by the courts in the absence of grave abuse of discretion or unless the aforementioned findings are not supported by substantial evidence.
William E. D. Stokes, Appellant, v. Continental Trust Company of the City of New York, Respondent November 13, 1906 Facts; Appellant stockholder challenged a decision in favor of appellee corporation from the Appellate Division of the Supreme Court asserting that appellee was required to dispense new stock in greater value to prior stockholders. This action was brought by a stockholder to compel his corporation to issue to him @ par such a proportion of an increase made in its capital stock as the number of shares held by him before such increase bore to the number of all the shares originally issued, and in case such additional shares could not be delivered to him for his damages in the premises. The defendant is a domestic banking corporation in New York, organized in 1890, with a capital stock of $ 500,000, consisting of 5,000 shares of the par value of $ 100 each. The plaintiff was one of the original stockholders and owns 221 shares in all. On January, 1902, the defendant had a surplus of $ 1,048,450.94, which made the book value of the stock @ that time $ 309.69 per share. Blair & Company, an influential firm of private bankers, made the following proposition: "If your stockholders @ the special meeting to be called for January 1902, vote to increase your capital stock from $ 500,000 to $ 1,000,000 you may deliver the additional stock to us as soon as issued @ $ 450 per share ($ 100 par value), it being understood that we may nominate ten of the 21 trustees" The directors of defendant authorized a meeting of the stockholders for the purpose of voting upon the proposed increase and the acceptance of the offer. A resolution to increase the stock was adopted. Plaintiff demanded the right to subscribe for 221 shares of the new stock @ par, and offered to pay immediately but was refused. A resolution directing a sale to Blair @ $ 450 a share was then adopted by a vote of 3,596 shares to 241. The plaintiff voted for the first resolution but against the last, and before the adoption of the latter he again demanded the right to subscribe and pay for the same, but the demand was refused. The stock was increased, and was sold to Blair & Company. Plaintiff renewed his demand but it was refused. The market price of the stock had increased from $ 450 to $ 700 per share during trial. Prior to the special meeting, by authority of the board a letter was sent to each stockholder giving notice of the proposition and recommending that it be accepted. Thereupon plaintiff notified the defendant that he wished to subscribe for his proportionate share and @ no time did he waive his right. Before the meeting, he had not been notified that he could not receive his proportionate part but was informed that his proposition would "be taken under consideration." Issue; WON plaintiff had the legal right to subscribe for and take the same number of shares of the new stock that he held of the old? Held / ratio; Yes, granted, reversed
The leading authority is Gray v. Portland Bank, decided in 1807. The court held that stockholders who held old stock had a right to subscribe for and take new stock in proportion to their respective shares. The court said: "A share in the stock or trust when only the least sum has been paid in is a share in the power of increasing it when the trustee determines or rather when the cestuisquetrustent agree upon employing a greater sum. A vote to increase the capital stock, if it was not the creation of a new and disjointed capital, was in its nature an agreement among the stockholders to enlarge their shares in the amount or in the number to the extent required to effect that increase. If from the progress of the institution and the expense incurred in it any advance upon the additional shares might be obtained in the market, this advance upon the shares relinquished belonged to the whole, and was not to be disposed of @ the will of a majority of the stockholders to the partial benefit of some and exclusion of others." "When the capital stock of a corporation is increased by the issue of new shares each holder of the original stock has a right to offer to subscribe for and to demand from the corporation such a proportion of the new stock as the number of shares already owned by him bears to the whole number of shares before the increase. This pre-emptive right of the shareholders in respect to new stock is well recognized. The corporation cannot compel the old stockholders upon their subscription for new stock to pay more than par value therefor. They are entitled to it without extra burden or price beyond the regular par value. An attempt to deprive the stockholder of this right will be enjoined in the absence of laches or acquiescence. What is the nature of the right acquired by a stockholder through the ownership of shares of stock? What rights can he assert against the will of a majority of the stockholders and all the officers and directors? He has an inherent right to his proportionate share of any dividend declared, or of any surplus arising upon dissolution, and he can prevent waste or misappropriation of the property of the corporation by those in control. He has the right to vote directors and upon all propositions subject by law to the control of the stockholders, and this is his supreme right and main protection. Stockholders have no direct voice in transacting the corporate business, but through their right to vote they can select those to whom the law intrusts the power of management and control. So long as the management is honest, within the corporate powers and involves no waste, the stockholders cannot interfere, even if the administration is feeble and unsatisfactory, but must correct such evils through their power to elect other directors. Hence, the power of the individual stockholder to vote in proportion to the number of his shares, is vital and cannot be cut off or curtailed. In the case before us the new stock came into existence through the exercise of a right belonging to the stockholders. As the right to increase the stock belonged to them, the stock when increased belonged to them also, as it was issued for money and not for property or for some purpose other than the sale for money. By the increase of stock the voting power of the plaintiff was reduced one-half, and while he consented to the increase he did not consent to the disposition of the new stock by a sale to Blair. The increase and sale involved the transfer of rights belonging to the stockholders as part of their investment. The new stock belonged to the stockholders as an inherent right by virtue of their being stockholders, to be shared in proportion upon paying its par value or the value per share fixed by vote of a majority of the stockholders, or ascertained by a sale @ public auction. If so situated that he could not take it himself, he was entitled to sell the right to one who could. A majority of the stockholders, may attach reasonable conditions to the disposition thereof. They cannot, however, dispose of it to strangers against the protest of any stockholder who insists that he has a right to his proportion.
Otherwise the majority could deprive the minority of their proportionate power in the election and of their proportionate right to share in the surplus, each of which is an inherent, preemptive and vested right of property. It is inviolable and can neither be taken away nor lessened without consent, or a waiver implying consent. When the new stock is issued in payment for property purchased by the corporation, the stockholders' right is merged in the purchase, and they have an advantage in the increase of the property of the corporation in proportion to the increase of stock. When the new stock is issued for money, while the stockholders may provide that it be sold @ auction or fix the price @ which it is to be sold, each stockholder is entitled to his proportion of the proceeds of the sale @ auction, after he has had a right to bid @ the sale, or to his proportion of the new stock @ the price fixed by the stockholders. We are thus led to lay down the rule that a stockholder has an inherent right to a proportionate share of new stock issued for money only and not to purchase property for the purposes of the corporation or to effect a consolidation, and while he can waive that right, he cannot be deprived of it without his consent except when the stock is issued @ a fixed price not less than par and he is given the right to take @ that price in proportion to his holding, or in some other equitable way that will enable him to protect his interest by acting on his own judgment and using his own resources. This rule is just to all and tends to prevent the tyranny of majorities which needs restraint, as well as virtual attempts to blackmail by small minorities which should be prevented. The remaining question is whether the plaintiff waived his rights by failing to do what he ought to have done, or by doing something he ought not to have done. He did not consent. He protested in due time, and the sale was made in defiance of his protest. If he had remained silent and had made no request or protest he would have waived his rights, but after he had given notice that he wanted his part and had protested against the sale thereof, the defendant was bound to offer it to him @ the price fixed by the stockholders. By selling to strangers without thus offering to sell to him, the defendant wrongfully deprived him of his property and is liable for such damages as he actually sustained. The learned trial court, however, did not measure the damages according to law. The plaintiff was not entitled to the difference between the par value of the new stock and the market value thereof, for the stockholders had the right to fix the price @ which the stock should be sold. They fixed the price @ $ 450 a share, and for the failure of the defendant to offer the plaintiff his share @ that price we hold it liable in damages. His actual loss, therefore, is $ 100 per share, or the difference between $ 450, the price that he would have been obliged to pay had he been permitted to purchase, and the market value on the day of sale, which was $ 550.
DECOURCY W. THOM ET AL. v. BALTIMORE TRUST COMPANY. January 15, 1930 Facts; Appellant stockholders sought review of an order from the Circuit Court which held that appellants' pre-emptive right to purchase certain shares from appellee trust company was not enforceable At a meeting of stockholders of the Baltimore Trust Company, approval was given to a plan recommended by its directors to merge its interests with those of the National Union Bank of Maryland. According to the plan the trust company would issue 15,000 shares of its stock, @ $ 112 per share, to acquire 10,000 shares of the National Union Bank stock @ $ 168 per share. The contract was to be consummated only in the event that @ least 70% of the bank stock could be delivered upon the agreed terms. The requisite increase of the trust company's capital stock was authorized by a charter amendment. A contemporaneous amendment provided: "Upon any increased issue of stock, the stockholders shall have the pro rata preferential right to subscribe therefor @ such price and on such terms as the board of directors may in each instance fix. In the event of the issue of any additional stock of the company for the purpose of accomplishing the merger with or of acquiring any other bank or trust company or other property, the directors may issue said stock without preferential subscription rights to stockholders or with preferential subscription rights to such extent and on such terms as the board may in each instance deem proper." As the owner of 6,416 of the 70,000 shares, plaintiffs protested against the merger which involved a disregard of the privilege of proportional purchase. Issue; WON appellants are entitled to exercise the right to purchase a due proportion of a supplemental issue of its capital stock Held / ratio; No, denied, affirmed The right of pre-emption claimed by plaintiffs is said to be inherent in their stock ownership, and also to be conferred by the charters of certain corporations from the consolidation of which the Baltimore Trust Company derived its existence. Baltimore Trust Company owed its origin to the union of two corporations. The charter of one of the constituent made no provision for a pre-emptive right of stockholders with respect to additional issues of stock, and neither of the consolidation agreements. It was accorded in the charters of the two corporations which united under the first consolidation, but in one there was an important limitation, which the other did not contain, in regard to the exercise of the right. If the holders of stock of the Baltimore Trust Company were entitled to refer to the charters of the former companies for the ascertainment of their rights, it would be impossible to find in those charters any support for the pre-emptive option as exercisable equally by all owners of the present company's stock. The effect of the successive consolidations was to end the existence of the constituent corporations and to vest in the new corporation all of their property, powers and liabilities, and, while consistent privileges of stockholders conferred by the superseded charters may presumably
continue as incidents of the consolidated stock ownership, there could be no such survival of rights traceable to only one of the charters, or subject in one to a special limitation, because the uniform and equal recognition of the right in all the stockholders of the consolidated company is impossible under such conditions. Independently of the charters, the stockholders of a corporation have a preferential right to purchase new issues to the proportional extent of their respective interests in the capital stock then outstanding. The right inheres in stock ownership as an essential means of enabling a stockholder to maintain the existing ratio of his proprietary interest and voting power in the corporation. It is an option which is capable useful exercise when new stock is to be issued for money needed to increase the company's cash assets. To that extent the right is well recognized, but to such stock issues it is generally restricted. In transactions involving the acquisition of property by corporations in exchange for shares of their stock, the determining consideration to the owners of the property may be the advantage of sharing as stockholders in the profits of the corporation with which they are contracting. Every stockholder of the National Union Bank, was to receive one and one-half shares of Baltimore Trust Company stock. It would not be feasible to consummate a transfer based upon such a consideration if the pre-emptive right asserted in this suit were to be held enforceable with respect to every new issue of stock regardless of the object of its disposition. Within the limits just indicated, the pre-emptive rights of the plaintiffs are recognized and protected by the new charter amendment. In declaring the right as to sales of stock for cash, and in restricting it as to issues of stock for accomplishing a merger or acquiring property, the amendment is in valid accord with the principles we have stated. It is argued for plaintiffs that Baltimore Trust Company had no power to issue its stock for property, and that, under the agreement, the new stock of the trust company was in fact to be issued for cash. In regard to the latter, it is sufficient to say that the agreement provided for the exchange of trust company stock for the assets and stock of the bank, and the valuations and methods adopted for the transfer affected only the form and not the substance of the transaction. A corporation may receive in payment for its shares of stock any property which it may lawfully purchase. The general Code provisions relating to banks and trust companies include in the grant of all such powers as shall be usual in carrying on the business of banking, an authorization to purchase stocks and other securities. It was therefore legally competent for the Baltimore Trust Company to purchase stock of another banking institution. There is no charter or statutory restriction upon its right to pay for such stock with its own shares, and it is expressly authorized to amend its charter." In regard to amendments increasing the capital stock, it is provided, by the section just cited: "Unless the required surplus will permit, no increase of capital shall be valid until the amount thereof has been subscribed and actually paid in." The surplus of the trust company is largely in excess of the amount by which its stock would be augmented by the new issue for which the recent amendment of its charter provides, and hence no resulting impairment of its capital is involved. The last quoted clause indicates by its terms that the restriction intended to be imposed upon capital stock additions should not apply when the surplus is sufficient to admit of an increase of the stock consistently with the continued integrity of the capital; and such a financial condition is here shown to exist.
ROSS TRANSPORT, INC., et al. v. CHARLES T. CROTHERS, et al. January 9, 1946 Facts; Appellant directors sought review of decree from Circuit Court directing appellant stockholders to repay appellant corporation dividends received on the stock declared to have been illegally issued. This is a derivative suit by a stockholder. The original plaintiff was Charles T. Crothers. The defendants (appellants here) are the corporation, Ross Transport, Inc., directors, and other stockholders. The purpose of the suit is to set aside the issuance of 40 shares of stock to Elizabeth B. Williams, 100 shares of stock to Corrine Williams, 100 shares of stock to Lois Williams Young and 125 shares of stock to William B. Ross. Corporation was organized on January 1942, to operate a fleet of buses to transport employees of Triumph Explosives, Inc., to and from its plant @ Maryland. Williams was President and Ross as General Manager. The authorized stock was 5000 shares of no par value. A resolution was passed authorizing the sale of 1500 shares. The original subscriptions to stock, to be as follows: March 25th -- To Wallace Williams 50 shares March 25th To Wallace Williams, Jr. 100 shares March 25th To Elizabeth B. Williams 200 shares March 25th To Edmund W. Crothers 100 shares March 25th To William B. Ross 25 shares March 25th To James W. Hughes 150 shares April 2nd To F. DuPont Thomson 150 shares April 2nd To Bessie F. Whitelaw 10 shares April 20th To Charles T. Crothers 50 shares April 27th To Gervase R. Sinclair 50 shares April 27th To Jean W. Sinclair 150 shares Total
In July, 1942, after the death of Mr. Sinclair, Charles T. Crothers purchased the Sinclair stock. On August 1942, the stock complained of was issued to the wife and daughters of Wallace Williams and to William B. Ross, totaling 365 shares in all, increasing the outstanding stock to 1400 shares. As a result, Williams and Ross, had the controlling interest. Williams testified that the stock was sold under the directors' resolution. The sale of this additional stock without any further authority than the original resolution, and without opportunity to buy given to other stockholders, is sought to be justified on the ground that it was originally planned, and that the money was needed to purchase additional buses. The facts, however, show no such need. The company was an immediate financial success. It was engaged in a special business, of which it had a monopoly. The loan by Triumph Explosives, was paid in June. On August, the directors authorized salary payments dating back to February. On November 1942, a dividend of $ 5 a share was declared. Another dividend of $ 5 a share was declared payable June 1943.
The appellants contend that the company was not in the claimed good financial condition in August, because no allowance had been made for taxes. We still find the company with a net surplus of $ 15,000, 75% of the original investment. The appellees give two reasons for their contention that the stock sales were void: First, they deprive them of their pre-emptive rights and, second, because, in selling to themselves, Williams and Ross have abused their trust as officers and directors. Issue; WON issuance of 365 shares valid Held / ratio; No, denied, affirmed The doctrine known as the pre-emptive right of shareholders is a judicial interpretation of general principles of corporation law. Existing stockholders are the owners of the business, and are entitled to have that ownership continued in the same proportion. But in the succeeding years, corporations grew and expanded. Changes in the corporate structure made it impossible always to follow the simple doctrines earlier decided. Exceptions grew, and were noted in the decisions. Only one of these exceptions is involved in the present case. Pre-emptive rights do not exist where the stock about to be issued is part of the original issue. This exception is based upon the fact that the original subscribers took their stock on the implied understanding that the incorporators could complete the sale of the remaining stock to obtain the capital thought necessary to start the business. But this gives rise to an exception to the exception, where conditions have changed since the original issue. The stock sold the Williams family was part of the original issue, and it is claimed by the appellants that it comes within the exception, and the appellees and the other stockholders have no pre-emptive rights. The appellees, contend that changed conditions made it unnecessary to use the remaining unsold stock to obtain capital, and pre-emptive rights exist. It is unnecessary for us to decide which of these two conflicting points of view applies because another controlling consideration enters. The doctrine of pre-emptive right is not affected by the identity of the purchasers of the issued stock. What it is concerned with is who did not get it. But when officers and directors sell to themselves, and thereby gain an advantage, both in value and in voting power, another situation arises, which it does not require the assertion of a pre-emptive right to deal with. Trustees cannot purchase @ their own sale, and trustees include directors of corporations. Such a transaction is entirely voidable @ the option of a party interested. Affairs of corporations are generally intrusted to the exclusive management and control of the board of directors; and there is an inherent obligation, implied in the acceptance of such trust, not only that they will use their best efforts to promote the interest of the shareholders, but that they will in no manner use their positions to advance their own individual interest as distinguished from that of the corporation, or acquire interests that may conflict with the fair and proper discharge of their duty." The transaction may not be ipso facto void, but it is not necessary to establish that there has been actual fraud or imposition practiced by the party holding the confidential or fiduciary relation; -- the onus of proof being upon him to establish the perfect fairness, adequacy, and equity of the transaction; and that too by proof entirely independent of the instrument under which he may claim." Such
a transaction is not absolutely voided @ the option of the interested parties, but shifts the burden of proof upon the directors to establish its fairness. The burden placed upon the two directors has not been met. They have not shown that the company needed the money so badly and was in such a financial condition that the sale of the additional stock to themselves was the only way the money could be obtained. On the contrary, the corporation appears to have been in a very good financial condition. It is probable that any necessary financing of any buses could easily have been arranged through some financial institution, and Williams and Ross benefited greatly by their action in selling the stock to themselves. Nor is there any corroboration of Williams' statement that it was all arranged in the beginning, who was to get this additional stock. None of the other incorporators or directors were called to testify about this, and Ross himself, as we have noted, did not testify @ all. We conclude, therefore, that the sale must be set aside as a constructive fraud upon the other stockholders.
MERRITT-CHAPMAN & SCOTT CORP. v. NEW YORK TRUST CO. November 8, 1950 Facts; Appellant trustee sought review of the decision of a District Court, which granted appellee corporation's motion in a declaratory judgment action interpreting a trust deed Appellee corporation issued stock purchase warrants (in bearer form) in 1928 pursuant to a trust deed made with The New York Trust Company as trustee. The trust deed specified a basic purchase price of $ 30, subject to a downward revision, and provided for the delivery of 40,000 shares to appellant trustee to insure the availability of stock. Further, the trust deed stated that appellee would not pay common stock dividends, unless it deposited with appellant stock certificates representing an amount equal to the stock dividend. On July 1950, the corporation, declared a 40% no par common stock dividend payable on October 1950 from unissued shares as of September 1950.' The resolution fixed the price for the shares @ $ 20.00 per share. The resolution also directed the proper officers to give to warrant holders outstanding under the trust deed and to The New York Trust Company as trustee the 60 day notice required. Following the declaration of the stock dividend a controversy arose between the corporation and the trustee. The corporation contends that a warrant holder must exercise his warrant before September 1950 in order to share in the dividend. The trustee contends that the corporation must deposit with the trustee stock certificates in an amount equal to 40% of the certificates now on deposit with the trustee, and that whenever a warrant holder may elect to exercise his warrant, he will be entitled to receive 1.4 shares upon paying the 'basic purchase price'. In 1950, appellee declared a stock dividend and notified the outstanding warrant holders that they would have to exercise their options in order to receive the stock dividend. Issue; WON New York Trust’s interpretation is proper Held / ratio; Yes, granted, reversed We think their position is well taken. The warrants gave the holders privilege, unlimited in time, to purchase an aggregate of 40,000 unissued shares. When the warrants were issued, a definite number of common shares were outstanding. Had the warrant holders exercised their option, they would have acquired a definite percentage of the common stock. A stock dividend does not change the proportional interest of each shareholder in the corporate enterprise; it changes only the evidence which represents that interest. It is a mere 'watering' of outstanding shares. If the corporation were at liberty to declare stock dividends without making provision for warrant holders, if they thereafter purchased the shares subject to warrants, could be reduced practically to the point of extinction. Of course part of the injustice could be avoided by reducing the price to be paid for each share purchased under the warrants, but the privilege the warrant holders originally had of acquiring a definite proportional interest in the common stock capital of the corporate enterprise would be lost without recourse unless their contract with the corporation contained some provision to protect it.
By this covenant the corporation recognized the possibility that a stock dividend might be declared before the warrants had been exercised, and promised in that event to deposit with the trustee stock certificates representing that proportion of the dividend shares which the shares subject to the warrants bore to all the common shares, and that the trustee would deliver such dividend shares 'without additional consideration,' together with the purchasable shares, when the warrant holder pays for the latter. There is no suggestion in the language of section 7 to set any limit on the time when the warrant holders must exercise their unlimited option to purchase common shares. The appellee points to section 10, as setting such a limit. By it the corporation merely promised to give the warrant holders and the trustee a sixty day notice. The notice tells warrant holders that if they exercise their warrants by the record date they will have the rights of stockholders. But the warrant holders are not claiming that right; what they are insisting upon are the rights promised by section 7. The appellee contend that the notice provision is for the purpose of giving the warrant holders notice that unless they exercise their warrants by the record date, they will forfeit those promised rights. Certainly the language of section 10 is not aptly chosen to express such a forfeiture; It is suggested that the meaning appellants ascribe to section 7 is inconsistent with the face of the warrants, which limits the holder to the stated number of shares of common stock 'as it may exist at the time of such purchase,' and indicates an intent to confer on the holder only the right to buy on an 'as is ' basis. But so construed the warrant provision contradicts section 7 and 8, which contemplate changes resulting from stock dividends, recapitalization, merger, etc. It is more consistent to read the quoted words as referring to such possible changes. That is to say, one share may, by reason of a stock dividend, mean 1.4 shares of stock 'as it may exist at the time of the purchase.' Finally, it is urged that section 6 of Article III provides for a reduction in the basic purchase price in case of a stock dividend. The argument is that a stock dividend is covered by clause (b) which provides for a reduction in the basic purchase price if shares are 'issued for a consideration, other than money, valued by the Board of Directors at the time of the acquisition thereof, at a net amount less than the basic price of the common stock of the Corporation at the time in effect.' These words are certainly not apt language to denote a transfer on the company's books from the Surplus Account to the Capital Stock Account. 4. 'Section 10. In case '(a) the Corporation shall pay any stock dividend upon any outstanding common stock, or make any distribution other than a cash dividend to the holders of its common stock; or '(b) the Corporation shall offer for subscription to the holders of its stock (of any class) any additional common stock or any stock (of any class) of the Corporation or any other securities; or '(c) of any capital reorganization or reclassification of the capital stock of the Corporation; or '(d) of the consolidation or merger of the Corporation with another corporation; or '(e) of the dissolution, liquidation or winding up of the Corporation or sale of all or substantially all of its assets (whether voluntary or involuntary); 'then in any one or more of said cases, the Corporation shall give to the Trustee and to the holders of the Warrants outstanding hereunder at least sixty days' prior written notice of the date on which (aa) the books of the Corporation shall close for such stock dividend, distribution or subscription rights, or (bb) such reclassification, reorganization, consolidation, merger, dissolution, liquidation, winding up or sall shall take place, as the case may be, and such notice shall also specify the date as of which stockholders of record shall be entitled to participate in such dividend, distribution or subscription rights, or to exchange their shares of stock for other stock of the Corporation, pursuant to such reclassification or reorganization or for stock of the corporation resulting from such consolidation, or to receive their respective distributive shares in the event of such dissolution, liquidation, winding up or sale, as the case may be; to the end that, during such period of sixty days, the holders of Warrants outstanding hereunder may purchase stock in accordance with such Warrants and be entitled in respect of shares so purchased to all of the rights of the other holders of similar stock of the Corporation. The notice herein required to be given to the holders of the Warrants shall be sufficiently given if the Corporation shall publish such notice on at least three different days (during said period of sixty days) in a daily newspaper of general circulation printed in the English language in the Borough of Manhattan, The City and State of New York, and shall also mail a copy of such notice to the Trustee.'
JORDAN CO. v. ALLEN, Collector of Internal Revenue August 4, 1949 Facts; Plaintiff brought a complaint against defendant to recover a refund under 26 U.S.C.S. § 23(b) of alleged interest payments to holders of plaintiff's debenture stock. The Jordan Company is organized for the purpose of engaging in real estate. The Company was incorporated on October 8, 1903 with authorized capital stock of $ 100,000. The original charter contained the following provision: '…the corporation requests the power to issue a form of obligation in the nature of certificates of indebtedness to the extent of One Hundred Thousand Dollars, which shall be known as 'Debenture Stock', …without authority to participate in the management or control of the affairs of the corporation except as specifically set forth in this section. 'The debenture stock hereby authorized to be issued shall be and remain an obligation of the corporation, repayable at the expiration of the corporate existence, and entitled mean time to interest at a rate not exceeding six per centum per annum, payable quarter-yearly as an expense of the business from and out of the profits of the company, before any dividend can be declared or paid on the stock or share capital. No payment of interest can or shall be made on such debenture stock which will impair the capital, nor unless the amount paid shall have been [**3] actually earned by the company. 'The holders of debenture stock shall not be entitled to demand or sue for the interest payable upon the obligations held by them, unless such interest was actually earned by the Company, in which event the amount earned shall be distributed amongst and paid to the holders of debenture stock in proportion to their holdings, but the unpaid interest shall, notwithstanding, become and remain an obligation of the Company payable out of any future profits to the full extent of the amount represented by the outstanding certificates, before any dividend can be declared or paid on the stock or share capital. 'In the event of the dissolution or winding up of the Company, the holders of debenture stock or certificate representing the ownership thereof, shall rank paripassu with other unsecured creditors of the corporation, and shall be entitled to receive in full out of the assets of the company the amounts represented by the outstanding certificates of indebtedness or debenture stock, in priority of the claims of stockholders to be paid any amount with respect to such shares. 'Neither the Company nor its shareholders shall have power to mortgage the property [**4] or franchises of the Company, except by the written consent of the registered owners of at least nine-tenths in amount of the outstanding debenture stock, except the Company may, without such consent, purchase property subject to mortgage, and may assume payment of such mortgages, or may execute purchase money mortgages on specific property acquired by it.'
On June 18, 1940, the first meeting of stockholders was held. At this same meeting the shareholders authorized the directors to issue $ 40,000 of debenture stock. Whereas the charter provided that the holders of debenture stock should rank paripassu with general creditors upon dissolution, the certificate as set out in the by-laws (and as subsequently issued to the holders thereof) provided that upon dissolution the holders of debenture stock should rank after the general creditors, equally with each other and prior to the holders of common stock. At a stockholders' meeting on February 13, 1918, it was reported that 74 shares of debenture stock were held by persons other than owners of common stock in the Company. In view of the fact that the war eliminated any reasonable 'hope for early use of its funds as loans to builders', it was decided to retire the debenture stock. In accordance with the resolution so adopted, the entire issue of debenture stock outstanding was retired in 1918. The Company paid the 'interest' on the debenture stock regularly. The company paid to the holders of said debenture stock amounts aggregating $ 5,826. The Company deducted the sum of $ 5,826 as interest paid on outstanding obligations for each of the taxable years ending December 31, 1940, 1941, 1942, 1943 and 1944. These deductions were disallowed by the Commissioner on the grounds that they were payments of dividends rather than payments of interest and the deficiency assessments resulting from such disallowance were made. On December 27, 1946 the corporation filed its claim for refund. Six months having elapsed without action by the Commissioner, the Company filed this suit.
Issue; WON payments on stock debentures deductible as interest expenses Held / ratio; No (cumulative preferred stock), denied, affirmed Because of the aforementioned provisions of the Internal Revenue Code, the application of the appropriate label to these hybrid securities has assumed significance. As would be expected, many cases have turned on precisely this question. The courts consistently stated that each such case must turn on its own peculiar facts. Consequently, no single hair-line rule has or can be used for the determination of the issue here involved. The cases hold that the answer depends on what the payments in fact are, not what the payments are called. Though the courts have refused to lay down a precise formula to be applied, they have repeatedly set forth certain factors or criteria which they considered significant in arriving at the true nature of the securities involved. While most courts stress the same factors, no one has been relied on as a determinative factor. Those usually considered include: 1. Treatment by the parties; 2. Maturity date and right to enforce collection; 3. Rank on dissolution; 4. Uniform rate of interest payable or income payable only out of profits; 5. Participation in management and the right to vote. The criteria above listed, are not of equal importance. The question of voting rights and a voice in the management of the company has never been stressed in determination of the issue. The absence is of little probative value, since it is common both to bonds and preferred stock. The next factor to be considered is the treatment accorded the issue by parties. The Company itself treated the debenture stock as an obligation and the payments thereon as interest. Admitting, that the parties so treated it, this cannot be sufficient . This factor alone is not sufficient. The other facts to be considered are the ones generally held to be of the greatest significance. All of them clearly indicate that the issues here involved were cumulative preferred stock and not bonds or obligations. The holders of obligations are general or secured creditors of the corporation and rank as such on dissolution. The holders of the debenture stock ranked ahead of the other stockholders but inferior to general creditors. It was urged by the taxpayer that this provision was not controlling in view of charter provisions that the holders of debenture stock should rank paripassu with the general creditors. This position, however, is not tenable. We look to the charter merely to ascertain whether the corporation had the authority to issue such. While not of itself decisive, this is one factor strongly indicating that the holders were sharing in the risk of the venture in a manner more compatible with the status of stockholders. One of the most important considerations is whether the right to share in the assets of the corporation in case of dissolution is subject to the rights of creditors. If subject to such right, there is a strong presumption that the interest in question is that of a stockholder.' This is further fortified by the provisions for the payment of interest at a prescribed rate to be paid only out of profits. It is true that the unpaid interest was cumulative. This fact, however, loses much of its significance when considered in
connection with the provision that holders of debenture stock should rank inferior to general creditors. These provisions with respect to the payment of interest are those usually included in preferred stock certificates. Finally, and of utmost significance, is the question of maturity date and the right to enforce payment of the principal sum by some appropriate legal remedy. The existence of a fixed maturity date for the principal sum, together with a right to enforce payment, is the most significant, if not the essential feature of a debtor and creditor as opposed to a stockholder relationship. In this case, the obligation clearly had no maturity date. There was no time set forth at which the holders could demand payment of the principal sum. Nor was there any method provided by which such payment could be forced. They were at the mercy of the company's fortunes and payment was merely a way of distributing profits.' The company testified that the debenture stock matured after twenty years. This is not significant. Mere opinion of corporate officials cannot override the provisions of the certificates themselves and the charter authorizing this issue. There is still another argument against the theory that the debenture stock matured after twenty years and was so considered by the officers. The second issue was authorized in 1925 and matured in 1945. Yet, when this issue was retired, after the corporate officers considered it matured, they retired it at a premium. Payment of premiums is certainly more consistent with retirement of stock than with payment of past due obligations. The claim that by the terms of the certificate the obligation matured upon the termination of the corporate existence and, therefore, had a 'maturity date' is also untenable. Corporate existence could be renewed for successive periods. While no court has squarely held the absence of a maturity date to be absolutely controlling, there is an abundance of authority to the effect that the absence of a maturity date, the obligation to pay income only out of profits, and the subordination of the holders of debenture stock to the general creditors renders payments made thereon more like dividends on preferred stock than interest on bonds.
ALADDIN HOTEL CO. v. BLOOM January 2, 1953 Facts; This was a class action in which Josephine Loeb Bloom as plaintiff sought for herself and other minority bondholders of the Aladdin Hotel Company to obtain an adjudication of claims which affected specific property involved in the action. On September 1938, the Aladdin Hotel Company executed 647 bonds aggregating in principal amount of $250,000. The bonds were payable September 1, 1948, with interest at 5 per cent payable only out of net earnings and with interest at 8 per cent from maturity until paid. The Company to secure payment mortgaged certain real estate. The bonds contained provision empowering the bondholders of not less than two-thirds principal amount, by agreement with the Hotel Company to extend the date of payment of said bonds. The bondholders entered into an agreement with the Hotel Company on June 1948 to extend the maturity date of said bonds from September 1948 to September 1958. However no notice of said application for change in the due date of the bonds was given to the mortgage bondholders and that plaintiff did not consent to the modification. She then alleged that the modifications were invalid because not made in good faith but were made for the benefit of the defendants and such modification deprived plaintiff and the other mortgage bondholders of their rights and property. On trial the court held that all bondholders were entitled to notice of any proposed amendments. The decree, however, should be limited to a money judgment because that would grant plaintiff full relief. In seeking reversal the Hotel Company in substance contends that the modification of the provisions of the trust deed extending the time of maturity of the bonds was effected in strict compliance with the provisions of the contract of the parties and hence was binding on all the bondholders. Issue; WON extension of maturity w/o notice valid Held / ratio; Invalid, affirmed, denied The modification here under consideration was made in strict compliance with the provisions contained in the trust deed and by reference embodied in the bonds. That contract made no provision for notice. It required that such application have the approval of those holding two-thirds or more in face value of the bonds. The only other limitation was to the effect that "such modification, change, alteration or extension shall affect all of the outstanding bonds similarly." It was effected to benefit the financial standing and operating efficiency of the hotel. It does not follow, however, that such modification was prejudicial to the bondholders. The rights of the bondholders, are to be determined by their contract and courts will not make or remake a contract merely because one of the parties thereto may become dissatisfied with its provisions. There is no question that the provision in the trust deed and bonds violated no principle of public policy nor private right. The sole ground for holding the modification void is that no notice was given the minority bondholders.
No notice was required so far as the parties to the contract were concerned. Their rights must be determined by their contract and not by any equitable doctrine, and notice to the other bondholders could have served no possible purpose. Litigants have no standing in a court of equity where a remedy at law is available. The holders of more than two-thirds of the face value of the bonds could not have been prevented from approving the proposed change even had notice been given and the acts of the parties must be determined in relation to the terms of their contract. It follows that no prejudice could have been suffered by plaintiff or her grantors by the fact that notice of the proposed change or modification was not given them. We find no substantial evidence warranting a finding of bad faith, fraud, corruption or conspiracy of the Joneses. The Hotel Company paid the interest to all bondholders in 1944 and the interest has been paid each year since. Numerous improvements were made in the hotel property at an expense of over $300,000. The changes made in the provisions of the trust deed were made before plaintiff acquired her bonds. The bonds on their face were past due when she purchased them. Her predecessors were given notice that changes had been made. They also knew that they had not had notice of the application to modify the provisions of the trust deed. If any equities were infringed by reason of the modifications it occurred while these bonds were owned and in possession of plaintiff's grantors. It is, however, urged that plaintiff, by securing an assignment of the bonds, also acquired whatever equitable right of action had vested in her assignors. Plaintiff sought equitable remedies for alleged acts affecting the rights of her assignors. We think she did not, by securing an assignment of these bonds, secure the right to maintain such a suit. Plaintiff's assignors were given notice of the change. They not only did not repudiate the action taken but they acquiesced therein by sending in their bonds so that the change might be noted. In addition to this they received interest payable only under the provisions of the bond and deed of trust as changed. The plaintiff likewise, with notice of the change made, and with knowledge that she had had no notice of the application for such change, made no effort to repudiate it until she brought this suit, but accepted interest payable. If the Joneses as holders of the majority of the outstanding bonds became trustees for all bondholders, then in consenting to the change they were acting as agents for all bondholders. Ratification of an alleged unauthorized act by the agent may be expressed as spoken or written words, or it may be implied from any act. It is clear that the altered contract was not void but voidable only, and plaintiff's assignors, with knowledge that the change was made without notice to them, made no protest but acquiesced therein, the unequivocal acts showing that they treated the altered contract as their own. The acts of plaintiff's assignors were such as to ratify the change complained of and plaintiff was bound by that ratification. It remains to consider the contention that plaintiff in her individual capacity could not maintain this action. The deed of trust provides that, "No holder of any bond hereby secured shall have any right to institute any suit or other action hereunder unless the Trustee shall refuse to proceed within thirty (30) days after written request thereto of the holders of not less than twenty per cent (20%) in face value of the bonds then outstanding and after tender to it of indemnity satisfactory to the Trustee."
We think plaintiff could not maintain this action in her individual capacity without first having complied with the provisions of the deed of trust which vests in the trustee the right to maintain such an action.