Mead vs McCullough Digest

AUTHOR: Enriquez G.R. No. 6217 December 26, 1911 CHARLES W. MEAD, plaintiff-appellant, vs. E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING AND CONSTRUCTION COMPANY,defendant-appellants.

NOTES: Long and old case. Sobrang gulo. Sana magets niyo. Hindi na discuss yung RTC and CA decisions. Pero based doon sa dispositive portion nag affirm ang SC. So talo si Mead sa lower courts. Sabihin na lang siguro natin na same basis ang decision nila o never discussed by the ponente.

TOPIC: The self-dealing director PONENTE: TRENT, J. FACTS: Petitioner Charles Mead, Respondent Edwin McCullough and three others organized the corporation called The Philippine Engineering and Construction Company (PECC). The 4 organizers, except Petitioner Mead, contributed to the majority of the capital stock of PECC, the remaining shares were offered to the public. Petitioner Mead contributed some personal properties and was also assigned as a manager but he resigned when he accepted an engineering job in China. Despite such acceptance, he remained as one of the five directors of the PECC. At that time, the PECC was already incurring losses. Respondent McCullough, the president, proposed that he will buy the assets of the corporation, assume all of its obligation and organize another association (named as Manila Salvage Company). The reason why he organized such association was that PECC’s creditors agreed that if the Respondent McCullough would organize a new association, they would give the new association an extension of time to comply with the contract and would reconsider the question of forfeiture of the money deposited by PECC with a bank. The three other directors then voted in favor of this proposal. Hence, the assets were transferred to Respondent McCullough. Petitioner Mead learned of this and so he opposed it by filing a complaint before the lower court because the personal properties he contributed were also transferred to Respondent McCullough. Mead also argued:    

that under the articles of incorporation of PECC, the board of directors only have ordinary powers (no power of disposition); that the authorization made by the three directors to allow the sale of company assets to McCullough constitutes an act of agency which is invalid because no express commission was made, i.e., no power of attorney was made in favor of the directors. The requirement for a commission can be inferred from Article 1713 of the Civil Code which provides: An agency stated in general terms only includes acts of administration. In order to compromise, alienate, mortgage, or execute any other act of strict ownership an express commission is required. Mead also insists that under their charter, no resolution affecting the administration of the affairs of PECC should be binding upon the corporation unless the unanimous consent of the entire board was first obtained.

ISSUE(S): Whether or not the three directors had the authority to allow the sale/transfer of the company assets to McCullough. HELD: Yes. RATIO: Several factors have to be considered:  

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First is the fact that Mead abandoned his post when he took the job offer to work in China. He knew for a fact that the nature of the job offered is permanent. Second, a close reading of the articles of incorporation of PECC shows that there is no such intention for unanimity when it comes to votes affecting matters of administration. The only requirement is that “At least three of said board must be present in order to constitute a legal meeting.” Which was complied with when the other four directors were present when the decision to transfer the company assets was made. Third is the fact that PECC was in a downhill situation. (Just in case itanong ni sir, ito yung situation nila: The assets of the PECC consisted of office furniture of a value of less than P400, the uncompleted contract for the

construction of the Government warehouses, and the wrecking contract. The liabilities amounted to at least $19,645.74 Mexican currency. $9,645.74 Mexican currency of this amount represented borrowed money, and $10,000 Mexican currency was the deposit with the naval authorities which had been confiscated and which was due the bank. McCullough's profits on the warehouse contract amounted to almost enough to the pay the amounts which the corporation had borrowed from its members. The wrecking contract which had been broken was of no value to the corporation for the reason that the naval authorities absolutely refused to have anything further to do with the PECC. They, the naval authorities, had declined to consider the petition of the corporation for an extension in which to raise the Spanish fleet, and had also refused to reconsider their action in confiscating the deposit.) A corporation is essentially a partnership, except in form. “The directors are the trustees or managing partners, and the stockholders have a joint interest in all the property and effects of the corporation.” McCullough as a director himself and the president can be considered an agent but not the “agent” contemplated in Article 1713 of the Civil Code which was the basis of Petitioner Mead’s argument. The SC said that Article 1713 deals with the broad aspect of agency and in ordinary cases but not in the case of a corporation and its directors. In this case, when the sale or transfer to Respondent McCullough took place, there were four directors present, all of whom gave their consent to that sale or transfer. Petitioner Mead’s express consent to make this transfer or sale was not obtained. He was, before leaving, one of the directors in the PECC, and although he had resigned as manager, he had not resigned as a director. He accepted the position of engineer of the Canton and Shanghai Railway Company, knowing that his duties as such engineer would require his whole time and attention and prevent his returning to the Philippines for at least a year or more. The new position which he accepted in China was incompatible with his position as director in the Philippine Engineering and Construction Company, a corporation whose sphere of operations was limited to the Philippine Islands. These facts are sufficient to constitute an abandoning or vacating of his position as director in said corporation . Consequently, the transfer or sale of the corporation's assets to one of its members was made with the unanimous consent of all the directors of PECC at that time. Also, under its articles of incorporation, the stockholders and directors had general ordinary powers. There is nothing in said articles which expressly prohibits the sale or transfer of the corporate property to one of the stockholders of said corporation. Also, the more appropriate analogy is that PECC, being a losing corporation, has its directors as the trustees. The trusteesdirectors hold the company assets in trust for the beneficiaries, which are the creditors. As trustees, they decided that it is beneficial to sell the company assets to McCullough to at least recover some cash equivalents in the winding up of the corporate affairs. Besides, there is no prohibition against the selling of company assets to one of its directors either from law or from PECC’s articles of incorporation. A majority of the directors, even against the protest of the minority (in this case si Petitioner Mead), have the power to transfer or sell corporate properties especially when the business is a failure and the best interest of the corporation and all the stockholders require it. Also, there is no reason why a director, by authority of the majority of its stockholders or the board, may not deal with the corporation, loan it money, or buy property from it in like manner as a stranger. Especially when such director acts in good faith and pays adequate consideration. In this case, Respondent McCullough’s act of assuming all of PECC’s obligations and organizing the Manila Salvage Company was considered by the SC as acting in good faith. CASE LAW/ DOCTRINE: A majority of the directors, even against the protest of the minority, have the power to transfer or sell corporate properties especially when the business is a failure and the best interest of the corporation and all the stockholders require it. Also, there is no reason why a director, by authority of the majority of its stockholders or the board, may not deal with the corporation, loan it money, or buy property from it in like manner as a stranger. Especially when such director acts in good faith and pays adequate consideration. DISSENTING/CONCURRING OPINION(S):