Batch 6 Consolidated Case Digest

Corporation Law
Atty. Peralta | G01 | A.Y. 2014-2015
112 OTIS &CO.v. PENNSYLVANIA R. CO. et al. AUTHOR: Tan

61 F.Supp. 905 (1945) NOTES:
TOPIC: Duty of Diligence: Business Judgment Rule This secondary, or derivative action was brought by
PONENTE: Kalodner, J. Otis & Co., a stockholder in the Pennsylvania Railroad
Co., against that Company, its officers and directors,
and the Pennsylvania, Ohio and Detroit Railroad Co.,
and certain of its officers and directors. The latter is a
wholly-owned subsidiary of the Pennsylvania Railroad.
The matter is presently before the Court on a motion
for summary judgment for consideration on the merits.
FACTS:
 The Pennsylvania R. R. Co. (hereinafter referred to as P. R. R.) directly or indirectly owns all of the capital
stock of the Pennsylvania, Ohio & Detroit R. R. Co. (hereinafter referred to as P. O. & D.)
 In the Spring of 1943, P. O. & D had outstanding a total of $28,483,000 "Series A" bonds, maturing April 1,
1977, bearing interest at the rate of 4½%, payable semi- annually, and redeemable on any interest payment
date subsequent to April 1, 1932, at 102.5 upon 60 days' notice. This bond issue was guaranteed, both as to
principal and interest, by P. R. R.
 The possibility of refinancing this series of bonds had been under consideration by Mr. Clement, president
of P. R. R., and Mr. Pabst, vice president in charge of finance of P. R. R. and president of P. O. & D., for
approximately a year prior to June, 1943.
 During the latter part of April, 1943, the bond market became so favorable to refinancing that Clement
directed Pabst to contact Kuhn, Loeb & Co. to determine whether it was possible to sell at a price not less
than par, a new issue of P. O. & D. bonds, guaranteed by P. R. R., in the same amount as the Series A bonds
but bearing interest not exceeding 3¾%.
 On June 23, 1943, the directors of P. O. & D. approved a resolution authorizing the sale of the new Series D
3¾% bonds, at the "best obtainable price," and the directors of P. R. R. approved a resolution authorizing a
guarantee agreement.
 On the same day, the bonds were sold to Kuhn, Loeb and Co. at par and accrued interest from July 1, 1943,
to date of settlement, subject to approval by the Interstate Commerce Commission.
 On June 22, 1943, before the action by the directors and before the contract of sale to Kuhn, Loeb & Co.
was executed, a Mr. Claflin, representing Halsey, Stuart & Co., Inc., visited Pabst in an effort to learn
whether there might be a refinancing of the P. O. & D. bonds, but Pabst declined to give any information
and, in response to another question, stated that he did not think it was likely Halsey Stuart & Co. would
have an opportunity to bid if there were a refunding.
 On June 23, 1943, Halsey, Stuart & Co. and Otis & Co. by telegrams to Clement and other directors of P. R.
R. requested an opportunity to submit a competitive bid for the P. O. & D. bonds.
 Clement telegraphed a reply to Otis & Co., acknowledging the joint telegram and advising that the "railroad
has transacted the business referred to in a very satisfactory way, and in what is considered the best interests
of the railroad."
 Halsey, Stuart & Co. and Otis & Co offered to guarantee a price of 101, at a competitive bidding sale, for
3¾% 35-year bonds.
 No reply was made by Pabst or Clement so Halsey, Stuart & Co. and Otis & Co. sent a letter to Pabst
offering to guarantee a minimum bid of 102 at a competitive bidding sale for the Series D bonds, subject to
adjustment of call prices, or a minimum bid of 101 at a competitive sale for 34 or 35 year bonds.
 Application to the Interstate Commerce Commission for approval of the Series D bonds was made by P. R.
R. and P. O. & D.
 Otis & Co., a stockholder of P. R. R., was granted leave to intervene, but such leave was denied Halsey,
Stuart & Co.
 A majority of the Commissioners were not convinced that the applicants received the best possible price,
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however, they determined that competitive bidding was not appropriate. Because of the debt reduction
provisions and because the sale would result in a saving of approximately 9 million dollars which might not
be realized if approval were withheld, it was determined to approve the sale at a price not less than 100¼,
considering the spread of 1¾ to be too great. This price was considered just and reasonable.
 Otis & Co contends
1. That the individual defendants failed and refused to exercise ordinary care and judgment in the sale
of the Series D bonds;
2. That they kept secret the bond issue and refused to deal with any investment house other than Kuhn,
Loeb & Co. Furthermore, it is charged that as a result of failing to "shop around," a half million
dollars was lost, and another half million dollars was lost in failing to put the issue to competitive
bidding; and
3. That certain of the directors were influenced because of their position as directors of several
institutions which had made agreements with Kuhn, Loeb & Co. to purchase and/or sell part of the
bond issue.
 P. R. R. and P. O. & D. contend:
1. The transaction was an honest exercise of judgment;
2. That the procedure followed was similar to that generally pursued by railroads; and
3. That it was particularly desirable here. Adverse interests on
ISSUE(S): Whether the officers and directors of Pennsylvania R. CO. are guilty of negligent mismanagement.
HELD: No. They were in the exercise of their business judgment and they were in good faith.
RATIO:
 In Pennsylvania, the relation of officers and directors to the corporation is stated in the Business
Corporations Law 1933 which provides that:
"Officers and directors shall be deemed to stand in a fiduciary relation to the corporation, and
shall discharge the duties of their respective positions in good faith and with that diligence, care
and skill which ordinarily prudent men would exercise under similar circumstances in their
personal business affairs."
 In view of the Pennsylvania statute it seems that the application of the BUSINESS JUDGMENT RULE
is warranted in the instant case. The rule was succinctly stated by Justice Shientag in Casey v. Woodruff:
"The directors are entrusted with the management of the affairs of the railroad. If in the course of
management they arrive at a decision for which there is a reasonable basis, and they acted in good
faith, as the result of their independent judgment, and uninfluenced by any consideration other
than what they honestly believe to be for the best interests of the railroad, it is not the function of
the court to say that it would have acted differently and to charge the directors for any loss or
expenditures incurred."
 There can be no doubt that the officers and directors of both P. R. R. and P. O. & D. acted honestly, in
good faith, and sought to exercise their judgment for the best interests of the respective railroads. There
is no contention here that fraud was present; indeed, the allegations in the complaint contain only a faint
suggestion of bad faith, calling to the attention of the court that the officers and directors were influenced
because of their position as directors or officers of several companies which had made purchase and sale
agreements with Kuhn, Loeb & Co.
 It was the duty of the officers, in the course of business, to be on the alert for an opportunity for
refunding an outstanding bond obligation in a manner which would result in a saving to their business,
and there is no question that the management of the defendant corporations did seize an opportune time
for the refunding operation.
 That recourse was not had to competitive bidding does not, of itself, afford a basis of liability. It is highly
significant that the Interstate Commerce Commission refused to require competitive bidding, although
plaintiff earnestly urged it to do so. The Court accepts the opinion of the Commission as an expert
department of the government. The defendants unquestionably had the right to negotiate privately with
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Kuhn, Loeb & Co. In dealing with Kuhn, Loeb & Co. the defendants were dealing with a firm in which
they had the confidence of years of satisfactory banking relations and which was well acquainted with
their financial situation, structure and requirements.
 In sum:
1. the bond issue was adequately deliberated and planned, properly negotiated and executed;
2. there was no lack of good faith, no motivation of personal gain or profit;
3. there was no lack of diligence, skill or care in selling the issue at the price approved by the
Commission, and which resulted in a saving of approximately $9,000,000 to the corporations;
4. the various directors were aware of the proposed transaction and its course of conduct;
5. copies of telegrams and letters from Halsey, Stuart & Co., and Otis & Co. were sent to them;
6. in any event they had a right to rely on the information supplied by, and the good faith judgment
of, those in whose hands the conduct of the everyday affairs of the corporation was placed.
CASE LAW/ DOCTRINE:
Requirements for Business Judgment Rule to free the directors of any liability for any loss or expenditures
incurred resulting from the decision:
1. Decision made must have a reasonable basis;
2. Directors must have acted in good faith;
a. Decision made must be the result of the directors’ independent judgment;
b. Decision made must be uninfluenced by any consideration other than what the directors honestly
believed to be for the best interests of the company.
DISSENTING/CONCURRING OPINION(S):
113 Montelibano v. Bacolod-Murcia Milling AUTHOR: Tiglao

[L-15092 // May 18, 1962] NOTES:
TOPIC: Duty of Diligence; Business Judgment Rule
PONENTE: J.B.L. Reyes
FACTS:
 Petitioner Alfredo and Alejandro Montelibano, and the Limited Co-Partnership Gonzaga and Company had
been and are sugar planters adhered to Bacolod-Murcia Milling under identical milling contracts.
 These contracts were stipulated to be in force for 30 years starting with the 1920-21 crop. Further, it
provided that the products should be divided in the ratio of 45% for the mill and 55% for the planters.
 It was then proposed to amend the said milling contracts, increasing the planters’ share to 60% of the
manufactured sugar and resulting molasses, besides other concessions, but extending the operation of the
milling contract from the original 30 years to 45 years.
 To make this effective, a printed Amended Milling Contract was drafted. The Board of Directors of
respondent adopted a resolution granting further concessions to the planters over and above those contained
in the Amended Milling Contract.
 Petitioners initiated this action contending that three (3) Negros Sugar Centrals had already granted
increased participation to their planters and that respondent is obliged to grant similar concessions to the
plaintiffs.
 Respondent resisted this claim by saying that the stipulations contained in the resolution were made without
consideration; that the resolution in question was, therefore, null and void ab initio, being in effect a
donation that was ultra vires and beyond the powers of the corporate directors to adopt.
 CFI: Judgment rendered in favor of respondent. Hence, complaint was dismissed. (No reason was stated as
to why)
 APPEAL DIRECTLY TO THE SUPREME COURT FROM CFI.
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ISSUE:
Was the board resolution an ultra vires act and in effect a donation from the board of directors?
HELD & RATIO:

No. The board resolution was not an ultra vires act.
There can be no doubt that the directors of the appellee company had authority to modify the proposed terms of
the Amended Milling Contract for the purpose of making its terms more acceptable to the other contracting
parties. As the resolution in question was passed in good faith by the board of directors, it is valid and binding,
and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review
them.
Whether the business of a corporation should be operated at a loss during depression, or close down at a smaller
loss, is a purely business and economic problem to be determined by the directors of the corporation and not by
the court. The appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20,
1936, duty bound to grant similar increases to plaintiffs-appellants herein.
CASE LAW/ DOCTRINE:

In relation to the business judgment rule. As the resolution in question was passed in good faith by the board
of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central,
the court has no authority to review them.
114 Litwin vs. Allen AUTHOR: Valera

25 N.Y.S 2d 667 (1940) NOTE:
Duty Of Dilligence
Shientag, J:
FACTS:
 This is a derivative suit by the shareholders of Guarantee Trust Company of NY (Bank/Trust Company) and
its subsidiary now in liquidation, The Guarantee Company of NY (Guarantee Company) and together with
the banking firm of JP Morgan & Co.
 The derivative suit arises from 4 transactions:
1.) The purchase of the Directors from JP Morgan, of common stock owned by Alleghany Corporation
2.) Participation of the Trust Company or the Guarantee Company to the extent of 3 million in a purchase
of Missouri Pacific convertible debenture at 5.5 % bonds at par and interest with a repurchase option in
favor of the seller, Alleghany Corporation within 6 months. The plaintiffs claim that they realized a loss
of 2.25 million because of the transaction
3.) Participation of the Trust Company to the extent of 11 million in a 39 million loan to Veness Company
and Cleveland Terminals Building Company
4.) Sale of Collaterals under loan.
- THE COURT ALREADY RULED IN FAVOR OF THE DEFENDANT IN TRANSACTIONS 1,3
AND 4.
 The plaintiffs have conceded that that in all but the 4 stated transactions the defendants exercised an unusual
degree of care in the management of the company.
 The only transaction in question is the transaction involving the Missouri Pacific convertible debenture
 The debenture was originally owned by the Allegany Corporation which was then transferred to JP Morgan
and then eventually to the Trust corporation
 The Trust corporation in its agreement with JP Morgan chase stipulates that they shall purchase the
debentures at the amount of 10.5 thousand for 3 million. However they agreed on a buy back option in favor
of the seller which was the Alleghany Corporation for 6 months and then if they don’t exercise such option
the Guarantee company would under take such bonds.
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 The Alleghany Corporation did such scheme in order to make it appear that such sale was not a loan n order
to not go over their borrowing limitation. for financing the purchase of terminal properties in Kansas.
 There was a continuous decline in the market at the time the Trust company’s Executive committee
approved the transaction the bonds were at 103-7/8 then on when the BoD of the Trust company approved
it it was on 102-7/8 when the guarantee company approved its undertaking in the event that Alleghany does
not exercise its buy back option the price dropped to 95-7/8 at the end of the option period the bonds sold at
high 86 and at low 81 and then the Guaranty Company took over them at par and accrued interest and
carried them on its books as an investment. There was o evidence to indicate that the defendants acted in
bad faith or profited or attempted to profit or gain personally by reason of any phase in the transaction
 At the course of the transaction the Trust and Guarantee company’s stock holders claim that they realized a
loss of 2.25 million from that transaction on which they fault the very disadvantageous buy back option
hence the derivative suit.
ISSUE(S):
 WON the buy-back option agreed by the trust company’s BoD is an Ultra Vires Act thus they are liable.
HELD:
1.) Yes.
RATIO:
1.) The court viewed in confusion on whether the transaction as that it was a purchase by the Trust Company
with an agreement by the Guaranty Company to repurchase if Alleghany fails to exercise its buy back
option within 6 months or it was a purchase by the guarantee company wth a buy back option to
Alleghany, financed for the frst 6 months by the Trust Corporation.
2.) The court held that its is against public policy where the bank purchases securities and gives the seller a
buy back option at the same price, thereby incurring the entire risk of loss wth no possibility of gain other
than the interest derived from the securities during the period that the bank holds them.
3.) In such case, if the market price falls the seller hoding the option will not exercise ts buy back option and
the bank would sustain the loss. And in any benefit of a shar rise in the price the seller is assured that any
risk of heavy loss is assumed by the bank. It is considered a short sale.
4.) In this case the Trust company on the outset relieved itself form liability to the bond when it had the
guaranty Company assume the bonds. The court held that the buyback option is ultravires.
5.) What sound reason is there for a bank desiring to make an investment to buy securities under an
arrangement whereby any appreciation will insure to the benefir of the seller and any loss will be borne
by the bank. The BoD failed to bestow the care which the situation demanded.
6.) Whichever way we look at the transaction, is it was so improvident, so dangerous, so unusal and so
contrary to ordinary bankng practice as to subject the irectors who approved it to liability in a derivative
suit.
CASE LAW/ DOCTRINE:
115 Albert Walker v. Alrich Man, et al AUTHOR: Acido

253 NYS 458 (1931) NOTES: Only the second cause of action is relevant to
TOPIC: Duty of Diligence: Business Judgments Rule the discussion of the topic. But just in case he asks, I
PONENTE: Collins, J. included the others in less detail haha
FACTS:
 Albert Walker, the trustee in bankruptcy of Frederick Southack Alwyn Ball, Jr., Inc., instituted litigation,
seeking to recover $1,677,411.19 from the defendants, as former directors of the bankrupt corporation, for
dereliction of duty and mismanagement in the conduct of the bankrupt's affairs.
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 The bankrupt was a domestic corporation engaged in the business of managing real properties, as agents for
owners, in New York city, the leasing and renting of real property, the underwriting and selling of corporate
bonds secured by mortgages upon real estate, and other business of a general real estate character. Its by-
laws provided for a board of directors consisting of fifteen members, and that the business affairs of the
bankrupt were managed by a board of directors consisting of fifteen men, or a lesser number, during the
entire period of the carrying on of its business.
 The defendant Man moves for judgment dismissing the amended complaint on the ground generally that it
does not state facts sufficient to constitute a cause of action against him; specifically moves to dismiss the
first, second, third, fourth, seventh, eighth, ninth, tenth and eleventh causes of action…
o 1st cause of action – Defendant Wheeler was employed by the defendant Alwyn Ball under
an agreement whereby Wheeler was to receive 18% of the gross amount of any moneys
received by him or the corporation on account of the sale of the corporation's shares of stock
when the corporation was formed. The agreement was not authorized by any resolution of the
board of directors and that the defendant Alwyn Ball, though purporting to act for the
corporation, acted without any authority of the corporation or the board; that thereafter the
corporation paid to Wheeler $232,000 as commission and for his services in selling $875,210
of the stock; that the board knew that substantial payments were being made to Wheeler "and
knew or ought to have known the approximate amount thereof." TL;DR: Wheeler was
overpaid and the directors didn’t care
o 2nd - In about February, 1925, the bankrupt advanced to one M.H. Avram or M.H. Avram
Co. the sum of $20,000, taking as security therefor the note of M.H. Avram or M.H. Avram
Co. indorsed by one J.D. Lacey; that the loan was not authorized by any meeting of the board
of directors and "was not for the benefit of the corporation or in aid of any business or
business affairs of the corporation;" that this loan item remained on the bankrupt's books
until the bankruptcy as unpaid and appeared as an asset "in various statements issued by said
corporation from time to time." The note was dishonored, and that "no steps or proceedings
were taken by the defendants to have said note protested for nonpayment and said note was
negligently, carelessly or wilfully and fraudulently permitted to remain unprotested and as a
result thereof, the said Lacey, the endorser thereof, who was fully and amply able financially
to meet said obligation, was released and discharged from any obligation arising by virtue of
his endorsement of said note.” Damage in the sum of $20,000 is claimed. TL;DR: Loan was
unauthorized. Directors did not protest the note for non-payment, discharging the
indorser Lacey from his obligation.
o 3rd, 4th, 5th - declaration and payment of dividends in violation of section 58 of the Stock
Corporation Law (payment of dividends out of surplus instead of earnings)
o 7th – BoD voted that the corporation buy from the defendants Ball (also directors) units of
stock; basically conflict of interest
o 8th – corporation incurred losses because of defendants’ negligence
o 9th – mismanagement and excessive construction costs
o 10th – general daw. Needs bill of particulars haha
o 11th – unlawful purchase of worthless stock
ISSUE(S):
Whether or not the amended complaint against Man, et al should be dismissed.
HELD:
No. Motion denied in all respects.
RATIO:
 Directors are charged not only with misfeasance, but with nonfeasance, not only with doing wrongful
acts and committing waste, but with acquiescing in and confirming the wrongdoing of others, and with
doing nothing to retrieve the waste. As directors, these defendants were not only obligated to do nothing
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wrongful themselves, but to attempt to prevent wrongdoing by their fellow directors, and, if wrong be
committed, to seek to rectify it.
 Passivity and disavowal of knowledge alone do not constitute a pass to freedom from responsibility. A
director may not shut off liability by shutting off his hearing and sight. It is his duty to know what is
transpiring. The company's stockholders and creditors, as well as the public, have a right to rely upon the
performance by him of the duties of a director.
 Kavanaugh v. Gould: "The law has no place for dummy directors." "They are bound generally to use
every effort that a prudent business man would use in supervising his own affairs." If at their meetings,
or otherwise, information should come to [directors] them of irregularity in the proceedings of the"
corporation, "they are bound to take steps to correct those irregularities."
 In challenging the sufficiency of the second cause of action, Man urges that there is no allegation that he
was a director at the time of the loan, and that it does not appear that at the time he was a director, Lacey
could have been held by a suit upon the note. However, if knew that an improvident and unauthorized
loan had been made, and took no steps whatever at salvaging the loan, and acquiesced in and confirmed
the original wrongful act, he would be open to the charge of negligence and should account for his
conduct.
CASE LAW/ DOCTRINE:
116 Steinberg v. Velasco AUTHOR: ADRE

52 PHIL. 953 (1929) NOTES: Corporation involved: Sibuguey Trading
TOPIC: Section 31, Corporation Code Company
Duty of Diligence: Business Judgments Rule Plaintiff: C. H. STEINBERG (receiver)
PONENTE: JOHNS, J. Defendants: Gregorio Velasco (President); Felix del
Castillo (VP); Andres L. Navallo
(Secretary-treasurer); and Rufino Manuel (director);
Other directors: Ganzon; Mendaros; Matias; Saavedra.
FACTS:
 Steinberg was the receiver of Sibuguey Trading Company.
 He filed a complaint against Velasco, et.al because at a meeting of the board of directors held on July 24,
1922, they approved and authorized various lawful purchases already made of a large portion of the capital
stock of the company from its various stockholders, thereby diverting its funds to the injury, damage and in
fraud of the creditors of the corporation.
 According to the facts in the case: Sibuguey Trading Company Inc. had an authorized capital stock of
P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was subscribed and
paid. (take note  )
 During the July 24, 1922 meeting of the Board of Directors of said corporation, knowing very well of the
face value of the corporation previously stated, Ganzon along with other officers of the board passed a
resolution authorizing the purchase by the corporation of large portion of its own capital stock in the total
amount of P3,300 for 330 shares, par value at P10 each.
 Details of the purchases made pursuant to the resolution:
o March 31, 1922, the corporation purchased from the defendant S. R. Ganzon 100 shares of
its capital stock of the par value of P10;
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o June 29, 1922, it purchased from the defendant Felix D. Mendaros 100 shares of the par
value of P10;
o July 16, 1922, it purchased from the defendant Felix D. Mendaros 100 shares of the par
value of P10, each;
o April 5, 1922, it purchased from the defendant Dionisio Saavedra 10 shares of the same par
value
o June 29, 1922, it purchased from the defendant Valentin Matias 20 shares of like value.
o Total amount of the capital stock unlawfully purchased was P3, 300.
 During the time the purchase was made, the corporation was indebted in the sum of P13, 807.50, and that
according to its books; it had accounts receivable in the sum of P19, 126.02.
 Then on September 11, 1923, A petition was filed for Sibuguey’s dissolution upon the ground that it was
insolvent:
o Accounts payable amounted to P9,241.19
o Accounts receivable P12, 512.47, or an apparent asset of P3, 271.28 surplus over its
liabilities.
 Seeing this as profits, the board approved the distribution of its dividends in the amount of P3, 000.
 However, the payment of such dividends shall be in installment, so that, according to the Board, the
financial standing of the corporation may not be impaired.
 Such acts by the Board, according to Steinberg, are to the detriment and prejudice of corporation’s
creditors.
 Lower court: Dismissed Steinberg’s complaint, and rendered judgment for the defendants, with costs
against the plaintiff.
 Hence, the appeal by Steinberg.
ISSUE(S): Whether or not the defendant-officers of the corporation acted with gross negligence and therefore
are made liable.
HELD: Yes. The officers acted negligently and are liable. The judgment of the lower court is reversed.
RATIO:
 Creditors of a corporation have the right to assume that so long as there are outstanding debts and
liabilities, the BOD will not use the assets of the corporation to buy its own stock, and will not declare
dividends to stockholders when the corporation is insolvent.
 In this case, it was found that the corporation did not have an actual bona fide surplus from which
dividends could be paid.
 Moreover, the Court noted that the Board of Directors purchased the stock from the corporation and
declared the dividends on the stock at the same Board meeting, and that the directors were permitted to
resign so that they could sell their stock to the corporation.
 Given all of this, it was apparent that the directors did not act in good faith or were grossly ignorant of
their duties.
 Either way, they are liable for their actions which affected the financial condition of the corporation and
prejudiced creditors
CASE LAW/ DOCTRINE: “General Duty to Exercise Reasonable Care. – The directors of a corporation are
duty bound to care for its property and manage its affairs in good faith, and for a violation of these duties
resulting in waste of its assets or injury to the property they are liable to account the same as other trustees. And
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there can be no doubt that if they do acts clearly beyond their power, whereby loss ensues to the corporation, or
dispose of its property or pay away its money without authority, they will be required to make good the loss out
of their private estates.”
If the directors of a corporation do acts clearly beyond their power, by reason of which a loss ensued, or dispose
of its property without authority, they will be required to make good the loss out of their private estate.
other notes from the case:
The court quoted the Ruling Case Law on the matter:
“Want of Knowledge, Skill or Competency. – It has been said that directors are not liable for losses resulting to
the corporation from want of knowledge on their part; or for mistakes of judgment, provided they were honest,
and provided they are fairly within the scope of the powers and discretion confided to the managing body. But
the acceptance of the office of a director of a corporation implies a competent knowledge of the duties assumed,
and directors cannot excuse imprudence on the ground of their ignorance or inexperience; and if they commit an
error of judgment through mere recklessness or want of ordinary prudence or skill, they may be held liable for
the consequences. Like a mandatory, to whom he has been likened, a director is bound not only to exercise
proper care and diligence but ordinary skill and judgment. As he is bound to exercise ordinary skill and
judgment, he cannot set up that he did not possess them.”
117 Barnes, Plaintiff v. Andrews, Defendant AUTHOR: BONDOC

TOPIC: Duty of Diligence: Business judgment rule
PONENTE: Street J.
FACTS:
Earl Barnes, as a receiver of the Liberty Starter Corporation filed a suit against Charles Lee Andrews.
Liberty Starter Corporation was organized under the laws of New York to manufacture starters for Ford motors
and aeroplanes. On October 9, 1919, a year after its organization, defendant took offices as a director, and
served until he resigned on June 21, 1920. During that period over $500,000 was raised by sale of stocks of
company. Officers and employees were hired and a factory was already erected when defendant Andrews took
office. Starter parts were made, but delays were experienced in its production as a “whole”, and the the funds of
the company were depleted by running charges.
During the incumbency of defendant, there had been only 2 meetings of directors, one defendant Andrews was
able to attend, but the other he was forced to be absent due to his mother’s death. Also, defendant was a friend
of the President, who induced him as the largest stockholder to be come a director, and his only attention to the
affairs of the company consisted of talks with the president.
After defendant resigned, the company continued its business. However, when plaintiff was appointed as
receiver he found the company without funds, and realized only a small amount in sale if its assets.
The theory of the bill (in equity) was that defendant failed to give adequate attention to the affairs of the
company, which was conducted incompetently and without regard to the waste of salaries during the period,
before the production. That this period was prolonged by the incompetence of the factory manager, and
disagreement between defendant and the engineer. More money was paid in the engineer that his contract, and
money was spend upon fraudulent circulars to induce the purchase of stocks.
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ISSUE(S):
WON defendant Andrews may be held liable for misprision of office
HELD: Yes.
RATIO:
Defendant cannot be charged with neglect in attending the director’s meeting because there are only 2 meeting
and one of which he was able to attend. His liability only depends upon his failure to keep advised of the
conduct of the corporate affairs.
Directors must give reasonable attention to the corporate business. Directors have individual duty to keep
themselves informed and it is this duty which the defendant failed to perform.
All defendant did was to talk to Maynard (President) as they met. But he did not press him for details as he
should. Andrews was bound to inform himself of what was going on with the company; and if he had done so
he would have learned that there were delays in the production which put the company in serious peril. Having
accepted a post of confidence, he was charged with duty to learn whether the company was moving to
production, and why it was not, and to consider what could be done to avoid conflicts among the personnel or
their incompetence.
However, SC said that Andrews cannot be blame for the collapse of the company. Defendant is not subject to
the burden of proving that the collapse would have happened, whether he has done his duty or not. Because no
man would take an office, if the law imposed upon them the guarantee of the success of their company. Plaintiff
Barnes must show that, had Andrewes done his duty he could have made the company prosper, or at least could
have prevented its fall. Plaintiff must show what sum could have save the company. But this plaintiff failed to
do.
Hence, considering that there is no evidence that defendant’s neglect caused any losses to the company, and that
if there were, the loss cannot be ascertained. Defendant Andrew is not liable for the fall of the company.
The bill is dismissed, without cost.

CASE LAW/ DOCTRINE:
Directors must give reasonable attention to the corporate business. Directors have individual duty to keep
themselves informed and it is this duty which the defendant failed to perform.
118 POOL v. POOL, ET. AL. AUTHOR: Castro

[22 So. 2d 131, 1945] NOTES:
This is an action to recover the amount paid by Robert
TOPIC: Duties of Directors and Controlling Pool, as a stockholder, for federal surtax assessed
Stockholders against the corporation.
PONENTE: OTT, Judge.
Plaintiff – Robert Pool
Defendants – Stephen Pool, Mrs. Farrell, and Mrs.
D’Aquin
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FACTS:
 S. D. Pool Realty Company was a holding corporation consisting of Robert Pool, Stephen Pool, Mrs.
Farrell, Mrs. D’Aquin, and Mrs. Jarreau (siblings-stockholders), each owning 20 percent of the stock of
the Company.
 The charter of the corporation provides that there must be an election of a board of three directors in
January of each year. At the stockholder’s meeting in January 1938, wherein all the stockholders were
present, all five of the stockholders were elected as directors. Robert was elected as the secretary while
Stephen was elected as Vice-President. After the meeting, friction arose among the stockholders,
particularly between Robert and Stephen.
 The domicile of the corporation was fixed in the charter at 2341, Esplanade Avenue, New Orleans. In
1938, Robert, as secretary, wrote to Times Picayune Publishing Company and requested that it send all
future dividends, reports, notices, etc. to him at Ventress, Louisiana. Stephen, as vice-president, also
wrote to Times Picayune asking it to ignore the request of Robert as his action was not authorized by the
board of directors, and requested that all communications to the company be sent to the address of its
domicile.
 As a result, the attorneys for the Times Picayune, to whom the matter had been referred, wrote that in
view of the dispute between Robert and Stephen, the Times Picayune was advised to hold the check
representing the dividend payable July 1st and not to deliver it until the matter had been settled between
the parties or by judgment of court.
 Under these circumstances, no dividend checks were received and distributed by the Pool Company
during the year 1938.
 In 1939, the corporation was assessed with and required to pay a surtax in the amount of $4200 for its
undistributed profits under the Revenue Act of 1938.
 The assessment was made against the stockholders of after the liquidation of the corporation, and
Robert, as stockholder, was forced to pay his pro rata part of the tax.
 Now, Robert seeks to recover the amount he paid from the three defendants.
Trial Court: dismissed the complaint
Robert’s allegation: The defendants’ negligence, ineptness and deceit, caused the assessment of the surtax
against the corporation. According to him, the company received the 1938 dividends in January 1939 and the
directors had until March 1939 to distribute those to avoid surtax.
Defendants’ allegation: Robert’s actions as secretary caused the Times Picayune to withhold the dividends in
1938.
ISSUE:
Whether the defendants as directors failed to act with diligence and therefore liable to Robert for the amount he
paid as a stockholder
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HELD: No. The defendants as directors exercised diligence and acted in good faith.
RATIO:
The defendants as directors were only required to exercise reasonable care and diligence and act in good
faith and with that judgment and discretion which ordinarily prudent men exercise under similar
circumstances. They employed a certified public accountant to make the income tax returns of the Company for
1938 and also had the advice of an attorney in connection with its legal affairs. The defendants did not know that
these dividends had to be distributed before March 15, 1939 (if this could have been done), in order to avoid the
surtax.They had a right to rely on the advice and suggestion of the public accountant and the attorney whom they
had employed to look after these legal and technical matters.
It was the dispute among the directors and stockholders of S.D. Pool Realty Company that caused the dividends
to be withheld by the Times Picayune Publishing Company. The directors have the duty to see that the dividends
due the Company were received and distributed. As Robert was a director and secretary of the company in 1938,
it was also his duty. However, he made no effort to have the controversy settled, and so far as the record shows,
he was as much the cause of the unhappy condition in the company as was any of the other stockholders.
While the plaintiff claims that he knew that these dividends had to be distributed before March 15, 1939, in
order to avoid the surtax, he admits that he never advised any of the defendants of this fact, notwithstanding he
was a stockholder and had as much at stake as any of the defendants. It was to the interest of all the stockholders
to avoid paying this surtax, and it is hardly conceivable that the defendants would have refused to distribute
these dividends had they been advised or had known that a failure to do so would subject them as well as
plaintiff to this loss.
The Court does not deem it necessary to pass on the doubtful question of whether or not, under the above
Section of the Revenue Act of 1938, the Pool Company could have distributed the dividends received from the
Times Picayune at any time before March 15, 1939, and avoided the surtax assessment.
CASE LAW/ DOCTRINE:
The defendants as directors were only required to exercise reasonable care and diligence and act in good faith
and with that judgment and discretion which ordinarily prudent men exercise under similar circumstances.
119 Foster v. Bowen AUTHOR: Miguel M. Consing

[41 NE 2d 181 (1942)] NOTES:
TOPIC: Duty of Diligence; Business Judgements This case was decided by the Massachusetts Supreme
Rule Court
PONENTE: Qua, J. Parties
1. Foster – Minority stockholder of the company
2. Bowen – Current president of the company
3. Cushing – Former treasurer and manager of the
company
4. Baker – Former president of the company
FACTS:
 The Fitchburg and Leominster Street Railway Company (Company) owned an amusement resort known as
the Whalon Park which had a roller skating rink.
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 Cushing was in charge of the leasing of the concession of the park, including the skating rink.
 In 1929, the person who held the lease for the skating rink left. Subsequently, Cushing, on behalf of the
company, leased the rink to himself. He did this with the consent of Baker who agreed to the arrangement
that Cushing would pay 25% of the gross receipts from the rink to the Company.
 In 1934, the entire Whalon Park was leased to Venner, from whom Cushing obtained a sublease of the rink.
Cushing then sublet the rink to Laventure, who agreed to pay Cushing 50% of the gross receipts.
 Thus Cushing was getting 50% of the gross receipts and paid the company 25%. Baker was aware of this
arrangement, but he was not aware of the exact percentage Laventure paid to Cushing, but he still gave his
consent to it.
 In 1935, Bowen became president of the Company. In 1937 that he learned about Cushing’s leases to
himself after Cushing explained the situation and told him that he had Baker’s approval.
 Bowen informed the other directors that the transaction was illegal but they did nothing about it. It was only
in 1938 when the directors learned more about the leases and the amount Cushing was actually making that
they decided to let go of Cushing.
 The Plaintiffs, as minority stockholders, now bring this case against Bowen to recover for the company
losses which are claimed to have been sustained by it in consequence of alleged breaches by the defendant
Bowen of his fiduciary obligations as its president and director.
ISSUE(S):
Is Bowen liable for any damages by reason of alleged breaches of his fiduciary obligation to the Company?
HELD/RATIO:
No. Bowen was held to be not liable because: (1) Cushing's acts were not actually dishonest or fraudulent; (2)
Cushing performed personal work such as keeping the facility in repair which redounded to the benefit of the
company and even increased its income; (3) Bowen did not profit personally through Cushing's lease; and (4)
when the issue of the possible illegality of the lease was put before the Board of Directors, but the Board did not
act on it but instead moved on to the next item on the agenda. Absent any bad faith on Bowen's part, and a
showing that it was a reasonable exercise of judgment to take no action on the lease agreement at the time it was
entered into, Bowen was not liable.
[COROLLARY ISSUES]
Is Bowen liable for causing the Company to lose the benefit of two fidelity bonds through improper
conduct of Cushing?
No. Fidelity bonds are a form of business insurance that offers an employer protection against losses caused by
its employees' fraudulent or dishonest actions. Bowen’s failure to claim proceeds from the fidelity bonds was
based on the belief that Cushing’s acts were not fraudulent as it was sanctioned by the other directors and
therefore, would not come under the protection of the bond for fraud. The Court agreed and held that
jurisprudence has construed these bounds as applying to cases where the conduct of the employee is
intentionally and consciously dishonest and fraudulent. It did not apply where the employee acted in good faith.
#120 Lowell Hoit Co. vs. Detig AUTHOR: DAYOS

320 Ill. App. 179 (Ill. App. Ct. 1943) NOTES: An action against appellees to recover for an
TOPIC: Duty of Diligence: Business Judgments Rule alleged willful conversion of grain belonging to
PONENTE: appellant, and has to do with liabillity of corporate
directors for corporate torts or acts of subordinate
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officers.
FACTS:
 Appellees were directors in a farmers cooperative grain company.
 It operated an elevator under the corporate name of Steward Cooperative Grain Company, the management
and conduct of the elevator business was in charged to Hermann.
 In July 1939, Hermann leased [one dollar and one half of net profits] the elevator bins for storage of oats to
the plaintiff Hoit.
 Subsequently, the company, through Hermann, sold 9,081 of the 12,000 bushels of oats stored in the bins
without knowledge nor consent of Hoit.
 However, it appears that the appellees (directors) had no knowledge of such agreement made by Hermann in
behalf of the corporation.
 Hoit claims that appellee directors should be held liable upon their common law liability; that it was their
legal duty to exercise such supervision as might be required of them in order that they know and have
knowledge of what the agent of the corporation was doing in connection with the corporate business.
 In addition, Hoit alleges that they, as directors of the corporation, by resolution made in September 1939,
ordered and directed the manager Herrmann, to sell all grain on hands.
 On the other hand, Appellee directors contend that they are not liable for the torts of the corporation merely
because they are directors, but that they are liable only for such torts in which they participated, or of
which they had knowledge, authorized or directed.
 Judgment was entered for plaintiff appellant against Claude V. Herrmann, for the amount claimed.
Judgment was also entered in favor of defendant directors, and hence this appeal.
ISSUE(S): W/n appellee directors were negligent insofar as their failure to supervise the affairs of Hermann?
HELD: NO
RATIO:
The court recognizes the right of the directors to entrust immediate corporate governance to its subordinates.
Nothing appears in this case to indicate that appellees did not exercise care and prudence in their selection of the
agent Herrmann. Neither does it appear that they sought to divest themselves of a general supervision of the
conduct of the business.
Further, nothing appears that they had any knowledge of, or had acquiesced in a continuous or repeated conduct
on Hermann’s part.
In this case, single act secreted by the subordinate officer from the directors, with the contract locked up by him
without their knowledge of its existence, and no corporate record to come before them reflecting such
transaction. Under such circumstances, it can hardly be said that appellees in the exercise of ordinary and
reasonable supervision could have detected the wrongdoing of their subordinate officer.
CASE LAW/ DOCTRINE: The mere fact that a person is a director of a corporation does not necessarily
render him liable for the torts of the corporation or its agents.
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For a director to be held liable for the acts of corporate officers, the following conditions must be present:
1. The director must have participated in the act complained of;
2. He must be guilty of lack of ordinary and reasonable supervision; and
3. He must be guilty of lack of ordinary care in the selection of such officer.
121 Bates v Dresser AUTHOR: De Leon

[G.R. No. DATE]
TOPIC: DUTIES OF DIRECTORS AND
CONTROLLING STOCKHOLDERS
PONENTE:
FACTS:
overview
This is a bill in equity brought by the receiver of a national bank to charge its former president and directors with
the loss of a great part of its assets through the thefts of an employee of the bank while they were in power. The
case was sent to a master who found for the defendants; but the District Court entered a decree against all of
them. The Circuit Court of Appeals reversed this decree, dismissed the bill as against all except the administrator
of Edwin Dresser, the president, cut down the amount with which he was charged and refused to add interest
from the date of the decree of the District Court. Dresser's administrator and the receiver both appeal, the latter
contending that the decree of the District Court should be affirmed with interest and costs.
The receiver of a bank seeks to recover from the directors and the president the losses sustained by the bank
through the fraud committed by one of the bank employees during the incumbency of said officers.
Dresser (Defendant) was the president of a small bank in Cambridge. The bank had only a few employees, and
defendant supervised all the work that was done. One of the employees, Coleman, was promoted from
messenger to bookkeeper in 1904. From 1904 until 1907, there were several small shortages in the bank and
indications that an employee was stealing. There was no indication, however, that Coleman was dishonest. In
1907, Coleman began using his access to the books to cover up the thefts he was making. He did this by altering
the records in such a way that the only way he could be caught was to examine the deposit record of all the
deposits. During this time, defendant had several indications that someone at the bank was a thief. He never
attempted to ascertain who the thief was or to examine the books, even though he had the opportunity to do so.
There was no cage in the bank, and in 1904 and 1905 there were some small shortages in the accounts of three
successive tellers that were not accounted for, and the last of them, Cutting, was asked by Dresser to resign on
that ground. Before doing so he told Dresser that someone had taken the money and that if he might be allowed
to stay he would set a trap and catch the man, but Dresser did not care to do that and thought that there was
nothing wrong.
ISSUE(S): Did the failure to take affirmative action to discover the thief amount to a breach of duty to the
corporation?
HELD:
Yes, as far as the president is concerned, but not regarding the directors.
RATIO:
The directors acted reasonably by relying on the information given to them. They had no reason to believe that
there were any irregularities in the bank records.
In the previous semiannual examinations by national bank examiners nothing was discovered pointing to
malfeasance. The cashier was honest and everybody believed that they could rely upon him, although in fact he
relied too much upon Coleman, who also was unsuspected by all.
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The question of the liability of the directors in this case is the question whether they neglected their duty by
accepting the cashier's statement of liabilities and failing to inspect the depositors' ledger. The statements of
assets always were correct.
Their confidence seemed warranted by the semiannual examinations by the Government examiner and they were
encouraged in their belief that all was well by the president, whose responsibility, as executive officer; interest,
as large stockholder and depositor; and knowledge, from long daily presence in the bank, were greater than
theirs.
Dresser’s position was different. He was in the bank daily. He had access to the books at all times. He knew of
shortages and apparent unexplained declines in deposits, yet he failed to make any attempt to discover the
reasons behind these peculiar events.
In 1908 one Fillmore learned that a package containing $ 150 left with the bank for safe keeping was not to be
found, told Dresser of the loss, wrote to him that he could not conclude that the package had been destroyed or
removed by someone connected with the bank, and in later conversation said that it was evident that there was a
thief in the bank. He added that he would advise the president to look after Coleman
In the same year or the year before, Coleman, whose pay was never more than twelve dollars a week, set up an
automobile. There was also some evidence of notice to Dresser that Coleman was dealing in copper stocks. In
1909 came the great and inadequately explained seeming shrinkage in the deposits.
However little the warnings may have pointed to the specific facts, had they been accepted they would have led
to an examination of the depositors' ledger, a discovery of past and a prevention of future thefts.
The continued losses were his fault b/c the warnings that he had should have led him to investigate. Had he
investigated, the losses may have been eliminated b/c he may have discovered the reason behind them. Dresser,
as president, was much closer to the operation of the bank than the directors. He was there every day,
and he supervised the actual operation of the bank. This the directors didn’t do; therefore, Dresser’s
position exposed him to the warning signs, while the directors were not exposed and, therefore, he was
personally liable while the directors were not.
Decree modified by charging the estate of Dresser with interest from February 1, 1916, to June 1, 1918, upon the
sum found to be due, and affirmed.
CASE LAW/ DOCTRINE:

Naka bold
122 PALTING vs SAN JOSE PETROLEUM AUTHOR: DELFIN, K.

G.R. No. L-14441 December 17, 1966 NOTES:
Ang haba nung case guys and medjo madami
TOPIC: SECTION 32 figures, this is what I think is relevant.
PONENTE:
EMERGENCY RECIT:
FACTS:
 SAN JOSE PETROLEUM filed with the Philippine Securities and Exchange Commission a sworn
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registration statement, for the registration and licensing for sale in the Philippines Voting Trust
Certificates representing 2,000,000 shares of its capital stock of a par value of $0.35 a share, at P1.00 per
share.
 It was alleged that the entire proceeds of the sale of said securities will be devoted or used exclusively to
finance the operations of San Jose Oil Company, Inc. which has 14 petroleum exploration concessions in
the provinces of Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo, Cotabato, Davao and Agusan.
 It was the express condition of the sale that every purchaser of the securities shall not receive a stock
certificate, but a registered or bearer-voting-trust certificate from the voting trustees, both living in the
US.
 While this application for registration was pending consideration by the Securities and Exchange
Commission, SAN JOSE PETROLEUM filed an amended Statement on June 20, 1958, for registration of
the sale in the Philippines of its shares of capital stock, which was increased from 2,000,000 to
5,000,000, at a reduced offering price of from P1.00 to P0.70 per share. At this time the par value of the
shares has also been reduced from $.35 to $.01 per share.
 Pedro R. Palting and others, prospective investors in the shares of SAN JOSE PETROLEUM, filed with
the Securities and Exchange Commission an opposition to registration and licensing of the securities on
the grounds that:
1) the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian corporation and SAN JOSE
OIL, a domestic corporation, violates the Constitution of the Philippines, the Corporation Law and
the Petroleum Act of 1949;
2) the issuer has not been licensed to transact business in the Philippines;
3) the sale of the shares of the issuer is fraudulent, and works or tends to work a fraud upon Philippine
purchasers;
4) the issuer as an enterprise, as well as its business, is based upon unsound business principles.
 SAN JOSE PETROLEUM claimed that it was a "business enterprise" enjoying parity rights under the
Ordinance appended to the Constitution, which parity right, with respect to mineral resources in the
Philippines, may be exercised, pursuant to the Laurel-Langley Agreement and they had done so with
SAN JOSE OIL, pursuant to the terms of the parity rights.
 It further alleged that Section 13 of the Corporation Code applies only to foreign corporations doing
business in the Philippines, and it is not doing business here. The mere fact that it was a holding company
of SAN JOSE OIL and that registrant undertook the financing of and giving technical assistance to said
corporation did not constitute transaction of business in the Philippines.
ISSUE:
 Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, a foreign corporation,
and SAN JOSE OIL COMPANY, INC., a domestic mining corporation, is violative of the Constitution,
the Laurel-Langley Agreement, the Petroleum Act of 1949, and the Corporation Law?
HELD:
 Yes, the tie-up is in violation of the Philippine Laws
RATIO:
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 SAN JOSE OIL, is a domestic mining corporation, 90% of the outstanding capital stock of which is
owned by respondent SAN JOSE PETROLEUM, a foreign corporation, which the majority interest is
owned by OIL INVESTMENTS, Inc., another foreign company which owned wholly by another foreign
company in Venezuela.
 SAN JOSE PETROLEUM is an American business enterprise which is not entitled to parity rights in the
Philippines because it is not owned or controlled directly by citizens of the United States, because it is
owned and controlled by another foreign corporation. Neither can it be said that it is indirectly owned and
controlled by American citizens through the Oil Investments, because it is still owned by two other
Venezuelan corporations and even if the stockholders are American citizens, it is still necessary to
establish that the different states of which they are citizens, allow Filipino citizens or corporations or
associations owned or controlled by Filipino citizens, to engage in the exploitation, etc. of the natural
resources of these states.
 SAN JOSE PETROLEUM is essentially a holding company, and as found by the Securities and
Exchange Commissioner, its principal activity is limited to the financing and giving technical
assistance to SAN JOSE OIL.
 The capitalization of San Jose Petroleum without any additional consideration was also questionable. In
addition some of the provisions of the Articles of Incorporation of respondent are in direct opposition to
the Philippine corporation law and corporate practices as below:
(1) the directors of the Company need not be shareholders;
(2) that in the meetings of the board of directors, any director may be represented and may vote
through a proxy who also need not be a director or stockholder; and
(3) that no contract or transaction between the corporation and any other association or
partnership will be affected, except in case of fraud, by the fact that any of the directors or
officers of the corporation is interested in, or is a director or officer of, such other association or
partnership, and that no such contract or transaction of the corporation with any other person or
persons, firm, association or partnership shall be affected by the fact that any director or officer of
the corporation is a party to or has an interest in, such contract or transaction, or has in anyway
connected with such other person or persons, firm, association or partnership; and finally, that all
and any of the persons who may become director or officer of the corporation shall be relieved
from all responsibility for which they may otherwise be liable by reason of any contract entered
into with the corporation, whether it be for his benefit or for the benefit of any other person, firm,
association or partnership in which he may be interested.
 The directors and officers of the company can do anything, short of actual fraud, with the affairs of the
corporation even to benefit themselves directly or other persons or entities in which they are interested,
and with immunity because of the advance condonation or relief from responsibility by reason of such
acts. This and the other provision which authorizes the election of non-stockholders as directors,
completely disassociate the stockholders from the government and management of the business in which
they have invested.
 The Trustees were also given authority to vote the shares represented by the outstanding trust certificates
that work or tend to work fraud to Philippine investors.
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CASE LAW/DOCTRINE:
 On the Constitutional Violation: According to the law, the privilege to utilize, exploit, and develop the
natural resources of this country was granted, by Article XIII of the Constitution, to Filipino citizens or to
corporations or associations 60% of the capital of which is owned by such citizens. With the Parity
Amendment to the Constitution, the same right was extended to citizens of the United States and business
enterprises owned or controlled directly or indirectly, by citizens of the United States.
The right was granted to 2 types of persons: natural persons (Filipino or American citizens) and juridical
persons (corporations 60% of which capital is owned by Filipinos and business enterprises owned or
controlled directly or indirectly, by citizens of the United States). In American law, "citizen" has been
defined as "one who, under the constitution and laws of the United States, has a right to vote for
representatives in congress and other public officers, and who is qualified to fill offices in the gift of the
people.
 On the Corporation Law Side: The impact of these provisions upon the traditional judiciary
relationship between the directors and the stockholders of a corporation is too obvious to escape notice
by those who are called upon to protect the interest of investors. The directors and officers of the
company can do anything, short of actual fraud, with the affairs of the corporation even to benefit
themselves directly or other persons or entities in which they are interested, and with immunity because
of the advance condonation or relief from responsibility by reason of such acts. This and the other
provision which authorizes the election of non-stockholders as directors, completely disassociate the
stockholders from the government and management of the business in which they have invested.
123 G.R. No. 6217 December 26, 1911 AUTHOR: Enriquez
CHARLES W. MEAD, plaintiff-appellant, NOTES: Long and old case. Sobrang gulo. Sana
vs. magets niyo. Hindi na discuss yung RTC and CA
E. C. McCULLOUGH, ET AL., and THE decisions. Pero based doon sa dispositive portion nag
PHILIPPINE ENGINEERING AND affirm ang SC. So talo si Mead sa lower courts. Sabihin
CONSTRUCTION COMPANY,defendant- na lang siguro natin na same basis ang decision nila o
appellants. 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
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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:
 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,
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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
trustees-directors 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.
124 Piccard v. Sperry Corporation AUTHOR: Garcia

[G.R. No. 48 F. Supp. 465 January 11, 1943] NOTES:
TOPIC: self-dealing directors
PONENTE: RIFKIND, District Judge
FACTS:
 The Sperry Corporation demanded of Cowdin and Standard Capital Company $193,000 which the latter had
received from Field Glore and company as a 50% participation in the profits realized by field Glore and
Company out of an agreement between the Sperry Corporation and Field Glore and Company which
Cowdin had negotiated on behalf of Sperry Corporation at a time when Cowdin was a director and
employee of the Sperry Corporation and president and principal stockholder of Standard Capital Company.
 Cowdin and Standard Capital paid Sperry $101,407.05 and received from Sperry a release of its claim.
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 The minority stockholders challenge the release, asserting in substance that it is not the act or deed of the
corporation, its execution and delivery never having been validly authorized by the board of directors.
 The Board consisted of eight members and the by-laws specified that a majority constituted a quorum.
 June 30, 1936 meeting (the meeting at which the settlement was authorized) – the following directors were
present: Morgan, Sanderson, Pierce, Royce, Doe and Cowdin. Cowdin retired from the meeting before the
consideration of the settlement. Only five directors remained and if anyone of them was ineligible to be
counted towards a quorum, no quorum was present.
 Piccard asserts the ineligibility of Morgan on the ground that he was, at the time, a stockholder of Standard
Capital, and Sanderson because his wife was at the time a stockholder of Standard Capital.
 July 28, 1936 meeting (approval and ratification) – the following directors were present and voted to
approve and ratify the settlement: Doe, Hopkins, Morgan, Pierce, Royce and Sanderson. There was clearly a
proper forum at this meeting.
 At the time of the meeting, Morgan was the owner of 50 shares of common and 50 shares of preferred of the
stock of Standard Capital.
ISSUE(S):
Whether or not the settlement is invalid on the ground that there was no board resolution to support it due to
failure to meet the required quorum.
HELD: The settlement was valid.
RATIO:
 There was a quorum because Morgan and Sanderson are eligible. The charter of Sperry contained not
only the usual provisions authorizing transactions in which a director is personally interested but a
provision specifically addressed to the present problem: “Any director whose interest in any such
contract or transaction arises solely by reason of the fact that he is a stockholder, officer or
creditor of such other company*** shall not be deemed interested in such contract or other
transaction under any of the provisions of this paragraph, nor shall any such contract or
transactions be void or voidable, not shall any director be liable to account because of such interest
nor need such interest be disclosed.” Moreover, this quoted language is preceded by the sentence,
“Directors so interested may be counted when present at meetings of the Board of Directors or of
such Committee for the purpose of determining the existence of a quorum.
 The statute of Delaware contains no express prohibition of the provision in question. Thus, they are
eligible.
 The Court also said that the transaction was attended, on the part of the directors, by good faith,
sound business judgment and prudent solicitude for the welfare of the corporation. The mere fact
that this was a transaction between the corporation and one of its directors does not avail to rob
the release of its effectiveness.
CASE LAW/ DOCTRINE:
125 Government of the Philippine Islands v. El AUTHOR: Magsino, Patricia Marie C.

Hogar NOTES: 17 causes of action
G.R. No. L-26649 (July 13, 1927) According to the book, causes of action no. 6 is
TOPIC: Fixing compensation of the directors and relevant to the topic of fixing of compensation of
officers directors and officers
PONENTE: Street, J.
FACTS:
 Original Action in the Supreme Court
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 Quo warranto proceeding by Govt. of the Philippine Islands against El Hogar Filipino – purpose is to
deprive it of its corporate franchise, exclude it from all corporate rights, and privileges, and effect a final
dissolution of the corporation
 El Hogar organized under Sec. 171-190 Act No. 1459, devoted to the subject of building and loan
associations, their organization and administration.
 The capital of the corporation was not permitted to exceed P3M, but Act No. 2092 amended the statute,
permitting capitalization to the amount of ten million
 El Hogar amended its AOI stating that the amount of capital must not exceed what has been stated in Act
No. 2092
 This resulted to El Hogar El Hogar having 5,826 shareholders, 125,750 shares with paid-up value of P8.7M,
the corporation paid P7.16M to its withdrawing stockholders
 The Government of the Philippine Islands filed an action against El Hogar due to the alleged illegal holding
title to real property for a period exceeding five (5) years after the same was bought in a foreclosure sale.
Sec. 13(5) of the Corporation Law states that corporations must dispose of real estate obtained within 5
years from receiving the title (Cause of Action No. 1)
 The Philippine Government now wants that El Hogar be excluded from all corporate rights and privileges
and effect a final dissolution of said corporation
ISSUE(S):
 Do the acts of respondent corporation merit its dissolution or deprivation of its corporate franchise, and
the exclusion from all its corporate rights and privileges
HELD:
 NO. Court will not dissolve but will confine El Hogar to its legitimate purposes.
 “…confine El Hogar Filipino to its legitimate purposes and to force it to eliminate its illegitimate
purposes and The government has made out its case, but the defendant should be permitted a reasonable
time to fulfill the conditions laid down in this decision.”
RATIO: LISTED BELOW ARE THE 17 CAUSES OF ACTIONS AND THE COURTS DECISION AND
RATIO.
1) Alleged illegal holding of real property for a period exceeding five years from receipt of title – NO
MERIT!
o BACKGROUND OF RECORDED MORTGAGE

o El Hogar was the holder of a recorded mortgage on a San Clemente land as security for a
P24K loan to El Hogar, but shareholders and borrowers defaulted in payment so El Hogar
foreclosed the mortgage and purchased the land during the auction sale
o A deed of conveyance in favor of El Hogar was executed and sent to the Register of Deeds of
Tarlac in Dec. 28, 1920 with a request that the certificate of title be cancelled and a new one
be issued in favor of El Hogar from the Register of Deeds of Tarlac
o No reply was received so El Hogar filed a complaint with the Chief of the General Land
Registration Office. The certificate of title to the San Clemente land was received by El
Hogar in May 7, 1921 and a board resolution authorizing Vicente Bengzon (agent of corp) to
find a buyer was issued
o Eventually a certain Alcantara offered to buy the land, he was given extension of time to
make payment but he defaulted so the contract was treated as rescinded. Efforts were made to
find another buyer
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o Finally the land was sold to Felipa Alberto in July 30, 1926
o The interval exceeded 5 years but El Hoga contends that the period did not commence to run
until May 7, 1921 when the register of deeds delivered the new certificate of title
 Court held that El Hogar did not violate the law on disposing real property within 5 years
 El Hogar cannot be faulted for the delay on the part of the register of deeds
2) El Hogar is owning and holding a business lot in excess of its reasonable requirements and in
contravention of subsection 5 of section 13 of Corporation Law – NO MERIT!
 Government alleges that the acquisition of the lot, the construction of a new office building, and the
subsequent renting of it are ultra vires acts on the part of El Hogar
 Government deems that the proper penalty is the dissolution of El Hogar
 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
 The law expressly declares that a corporation may acquire real estate that will be reasonably
necessary to enable them to carry out the corporation’s purpose/s
 Court held that owning a business lot, the construction of a building, and the maintenance of an office
is reasonably necessary for a building and loans association
3) That respondent is engaged in activities different to the purposes for which the corporation was created
and not reasonably necessary to its legitimate purpose – NO MERIT as to 1st and 2nd, finds merit in 3rd!
 Government specifies three different activities which they allege is foreign to the purpose of the
corporation
o First: administration of offices in the El Hogar building and the renting of those offices to the
public – the court held that this was within the powers of the corporation (see cause of action no.
2)
o Second: administration and management of properties belonging to delinquent shareholders of the

association; in case of delinquency on the part of the shareholder in payment of interests,
premiums, and dues, the association will take over and manage the property – the court held that
there was no reason to doubt the validity of a clause giving the association the right to take over
the property and manage it in view of a shareholder’s delinquency
o Third: management of some parcels of improved real estate owned by shareholders; El Hogar
rendered services to shareholders by renting out their land, paying their real estate taxes and
insurance, causing the repairs for the upkeep, and collecting rent due from tenants of those
parcels, in exchange El Hogar will receive compensation in the form of commission upon the
gross receipts from those properties (rates vary from 2.5% - 5%) – the court held that this practice
is unauthorized by law! The administration of property in the manner that El Hogar is doing is
more appropriate for a real estate agent or trust company rather than a building and loan
association
 Despite finding merit in 3rd activity, the court held that dissolution of the corporation is not the proper
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remedy, but it will enjoin the unauthorized activity in the future (referring to 3rd)
4) That the by-laws of the association stating that, “the board of directors by the vote of an absolute
majority of its members is empowered to cancel shares and to return the balance to the owner by reason
of their conduct or any other motive or liquidation” is in direct conflict with Sec. 187 of the Corporation
Law which provides that the board of directors shall not have the power to force the surrender and
withdrawal of unmatured stock except in case of liquidation or forfeiture of stock for delinquency – NO
MERIT!
 There is no provision of law making it a misdemeanor to incorporate an invalid provision in the by-laws
of a corporation; and if there were such, the hazards incident to corporate effort would be largely
increased.
5) Art. 61 of El Hogar’s by-laws states that “attendance in person or by proxy by shareholders owning one-
half plus one of the shareholders shall be necessary to constitute a quorum for the election of directors” is
contrary to Sec. 31 of the Corpo Law which provides that owners of the majority of the subscribed
capital stock entitled to vote must be present either in person or by proxy at all elections of directors –
NO MERIT!
 Corporation is not at fault for failure of the shareholders to attend the annual meetings and their non-
attendance in meeting is not to be interpreted as their assent to the way the corporation is being handled.
Mere failure of a corporation to elect officers does not terminate the terms of existing officers nor
dissolve the corporation. The general rule is to allow the officer to holdover until his successor is duly
qualified.
6) That the directors of El Hogar, instead of receiving nominal pay or serving without pay, have been
receiving large compensation, varying in amount from time to time, out of respondents’ profits –
NO MERIT!
 With the growth of the corporation, the amount paid as compensation to the directors has
increased beyond what would be deemed proper – this can’t be corrected in this court. Nor can it
properly be made a basis for depriving respondent of its franchise or enjoining it from compliance
with the provisions of its own by-laws. The Corporation Law does not undertake to prescribe the
rate of compensation for the directors of the corporation. The power to fix is left to the corporation
to be determined in its by-laws.
7) El Hogar’s promoter and organizer was Mr. Antonio Melian, in the early stages of the organization of the
association, the board of directors authorized the association to make a contract with him the government
alleges that the royalty given to him as founder is “unconscionable, excessive and out of proportion to the
services rendered” – NO MERIT!
 The court held that there is no doubt as to the power of a corporation to enter into a contract for
services rendered and to be rendered by a promoter in connection with organizing and maintaining
the corporation
 The Melian contract was not an ultra vires act by the corporation because corporation has power to
enter into this contract
 The fact that the compensation paid under this contract is in excess of what may be considered
appropriate is not a proper ground for the court to order the dissolution of El Hogar
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8) That Art. 70 of El Hogar’s by-laws, requiring persons elected as board of directors to be holders of shares
of the paid up value of P5,000 which shall be held as security, is objectionable since a poor member or
wage earner cannot serve as a director irrespective of other qualifications – NO MERIT!
 Corporation Law expressly gives the power to the corporation to provide in its by-laws for the
qualification of its directors and the requirement of security from them for the proper discharge of the
duties of their office in the manner prescribed in Art. 70 is highly prudent and in conformity with good
practice.
9) That respondent abused its franchise in issuing “special” shares alleged to be illegal and inconsistent with
the plan and purposes of building and loan associations – NO MERIT!
 The said special shares are generally known as advance payment shares which were evidently created for
the purpose of meeting the condition caused by the prepayment of dues that is permitted.
 Sec. 178 of Corpo Law allows payment of dues or interest to be paid in advance but the corporation shall
not allow interest on advance payment greater than 6% per annum nor for a period longer than one year.
The amount is satisfied by applying a portion of the shareholder’s participation in the annual earnings.
 The mission of special shares does not involve any violation of the principle that the shares must be sold
at par.
 Note: Please see cases – El Hogar Filipino v Rafferty and Severino v. El Hogar Filipino (elaborates on
special shares – not really that important but it will help cause court did not discuss this cause of action
that much anymore)
10) That in making purchases at foreclosure sales constituting as security for 54 of the loans, El Hogar bids
the full amount after deducting the withdrawal value, alleged to be pursuing a policy of depreciating at
the rate of 10 percent per annum, the value of the real properties it acquired and that this rate is excessive
– NO MERIT!
 The board of directors possesses discretion in this matter; there is no 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.
 Art. 74 of its by-laws expressly authorize the board of directors to determine each year the amount to be
written down upon the expenses for the installation and the property of the corporation.
 The court held that it can’t control the discretion of the board of directors about an administrative matter
as to which they have no legitimate power of action
11) That respondent maintains excessive reserve funds – NO MERIT!
 The function of the reserve fund is to insure stockholders against losses, when the reserve becomes
excessive; the remedy is in the hands of the Legislature. No prudent person would be inclined to take a
policy in a company which had conducted its affairs poorly that it only retained a fund barely sufficient
to pay its present liabilities and was in a condition where any change by the reduction of interest upon or
depreciation in the value of securities or increase of mortality would render it insolvent and subject to be
placed in the hands of a receiver.
 Court held that maintaining an excessive reserve fund was not in violation of the law
 Although the Corporation Law does not expressly grant this power, the court held that it is implied
12) That the board of directors has settled upon the unlawful policy of paying a straight annual dividend of
10 percent per centum regardless of losses suffered and profits made by the corporation, in contravention
with the requirements of Sec. 188 of the Corporation law – NO MERIT!
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 The board of directors determines the profits and losses so they exercise the usual discretion in allocating
a portion of the annual profits for the welfare of the corporation.
 The law contemplates distribution of earnings and losses after legitimate obligations have been met.
13) That El Hogar has made loans to the knowledge of its officers which were intended to be used by the
borrowers for other purposes than the building of homes and no attempt has been made to control the
borrowers with respect to the use made of the borrowed funds – NO MERIT!
 There is no statute expressly declaring that loans should be made by associations SOLELY for the
purpose of building homes
 The building of homes in Sec. 171 of Corporation Law is only one among several ends, which building
and loan associations are designed to promote and Sec. 181 authorizes the board of directors of the
association to fix the premium to be charged.
14) That the loans made by defendant for purposes other than building or acquiring homes have been
extended in extremely large amounts and to wealthy persons and large companies – NO MERIT!
 The question of whether the making of large loans constitutes a misuser of the franchise which would
justify the court in depriving the association of its corporate life; is a matter confided to the discretion of
the board of directors.
 The law states no limit as to the size of the loans to be made by the association
 Remedy is in the hands of the legislature because this issue is cannot be fixed by the court
15) That when the franchise expires, supposing the corporation is not reorganized, upon final liquidation of
the corporation, a reserve fund may exist which is out of all proportion to the requirements that may fall
upon it in the liquidation of the company – NO MERIT!
 This matter may be left to the discretion of the board of directors or to legislative action if it should be
more efficient to require the gradual suppression of reserve funds as the dissolution approaches.
 The court held that this is no matter for judicial interference and much less could the resumption of the
franchise be justified on this ground.
16) That various outstanding loans have been made by the respondent to corporations and partnerships and
such entities subscribed to respondents’ shares for the sole purpose of obtaining such loans – NO
MERIT!
 El Hogar has 5,826 shareholders (mentioned:16 corporations, 14 partnerships, other shareholders not
mentioned)
 Sec. 173 of Corporation Law declares that “any person” may become a stockholder in building and loan
associations.
 The phrase any person should be taken in its general sense, person should be understood to include
natural and juridical personalities
17) That in disposing real estate purchased by it, some of the properties were sold on credit and the persons
and entities to which it was sold are not members nor shareholders nor were they made members or
shareholders, contrary to the provision of Corporation Law requiring loans to be stockholders only – NO
MERIT!
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 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 be made upon the terms and conditions approved by the
parties
CASE LAW/ DOCTRINE:
126 Barretto et.al. v. La Previsora Filipina AUTHOR: Mendoza

No. 34719 December 8,1932 NOTES:
TOPIC: Fixing Compensations
PONENTE: J.Ostrand
FACTS:
 1.This is an appeal brought by Laberto Barretto (Barretto), Jose de Amusetagui and Jose Barretto, who had
been directors of the defendant corporation from its incorporation up to the month of March, 1929, to
recover from the defendant, La Previsora Filipina, a mutual building and loan associatio, 1% to each of the
plaintiffs of the net profits of the corporation for the year 1929, under and in accordance with the Article 68-
A of its by-laws, which was made at a general meeting of the stockholders on February 23, 1929.

 2.On September 11,1930, the court rendered its decision in holding that the defendant, by presenting its
motion to dismiss the complaint after the court had already set a hearing for the trial and the plaintiffs had
submitted their evidence, that it had impiedly waived its right to present its evidence.
 The Court ruled in favor of each of the plaintiffs and against the defendant for the sum of P505.25 with legal
interest theron from May 2, 1930, until paid.
 3. The defendant filed an MR and a motion for new trial, on the ground that the decision was contrary to law
and the weight of evidence.
 The Court denied both motions filed by La Previsora.Hence, this appeal to the SC.
ISSUE(S):
Whether or not Article 68-A of its by-laws which provides for the compensation of the directors is valid.
HELD:
No. The SC ruled in favor of La Previsora Filipina stating that its Article 68-A of the amended by-laws upon
which the action is based, does not under the law as applied to the express provisions thereof create any legal
obligation on its part to pay the plaintiffs, such a life gratuity or pension out of its net profits.
RATIO:
 1. A by-law provision of this nature must be regarded as clearly ultra vires or beyond the lawful powers
of a mutual building and loan association, such as La Previsora Filipina.
 2. On the issue that the article in question as contended by the plaintiffs is merely a provision for the
compensation of directors, which is not only consistent with but expressly authorized by section 21 of
the Corporation Law:
2.1. The authority conferred upon corporations in that section refers only to providing compensation for
the future services of directors, officers, and employees thereof after the adoption of the by-law or other
provision in relation thereto, and cannot in any sense be held to authorize the giving, as in this case, of
continuous compensation to particular directors after their employment has terminated for past services
rendered gratuitously by them to the corporation.
2.2.To permit the transaction involved in this case would be to create an
obligation unknown to the law, and to countenance a misapplication of the funds of the defendant
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building and loan association to the prejudice of the substantial right of its shareholders.
2.3.Building and loan associations are peculiar and
special corporations. They are founded upon principles of strict mutuality and equality of benefits and
obligations, and the trend of the more recent decisions is that any contract made or by-law provision
adopted by such an association in contravention of the statute is ultra vires and void.

 3. The article which the plaintiffs rely upon is merely a by- law provision adopted by the stockholders of
the defendant corporation, without any action having been taken in relation thereto by its board of
directors. The law is settled that contracts between a corporation and third persons must be made by or
under the authority of its board of directors and not by its stockholders. Hence, the action of the
stockholders in such matters is only advisory and not in any wise binding on the corporation. (Ramirez
vs. Orientalist Co. and Fer- nandez, 38 Phil., 634.)
There could not be a contract without mutual consent, and
it appears that the plaintiffs did not consent to the provisions of the by- law in question, but, on the
contrary, they objected to and voted against it in the stockholders' meeting in which it was adopted.
CASE LAW/ DOCTRINE:
1.It stands in a trust relation to the contributors in respect to the funds contributed, and there is an implied
contract with its members that it shall not divert its funds or powers to purposes other than those for which it
was created. The fundamental law of building and loan associations organized under the different statutes
turoughout the American Union is that all members must participate equally in the profits and bear the losses, if
any, in the same proportion, and any diversion of their funds to purposes not authorized by the law of their
creation is violative of the principles of mutuality between the members. ( Bertche vs. Equitable Loan etc.
Association)
2.
127 CENTRAL COOPERATIVE EXCHANGE, AUTHOR: PAGCALIWAGAN

INC. V TIBE, SR. NOTES: Review, on certiorari, of a decision of the CA,
G.R. No. L-27972 June 30, 1970 affirming the decision of the CFI of Manila dismissing
TOPIC: Fixing Compensation of Directors and after trial a complaint filed by petitioner against
Officers respondent for the refund of certain amounts received
PONENTE: Reyes, J.B.L., J. by the latter from the corporation while he served as a
member of the BOD of the Exchange.
FACTS:
 Petitioner Central Cooperative Exchange, Inc. (CCE) is a national federation of farmers’ cooperative
marketing associations or FACOMAS, scattered throughout the country
 Its single majority stockholder is the former Agricultural Credit and Cooperative Financing
Administration (ACCFA), now Agricultural Credit Administration (ACA).
 Respondent Tibe, Sr. (TIBE) as a member of CCE’s BOD, representing FACOMAS in Eastern Visayas,
drew and collected from CCE cash advances worth P5,668.
 TIBE had also drawn several sums, worth P14,436.95, representing:
 Commutable per diems for attending meetings of the BOD in Manila,
 Per diems and transportation expenses for FACOMA visitations,
 Representation expenses and commutable discretionary funds
ISSUE(S): WON the BOD of the CCE had the power and authority to adopt various resolutions which
appropriated funds of the corporation for the enumerated expenses for the members of the said board.
HELD: NO.
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RATIO:
The questioned resolutions are contrary to the By-Laws of the federation and, therefore, are not within the power
of the board of directors to enact. The By-Laws, in the aforequoted Section 8, explicitly reserved unto the
stockholders the power to determine the compensation of members of the board of directors, and the
stockholders did restrict such compensation to “actual transportation expenses plus the per diems of
P30.00 and actual expenses while waiting” Even without the express reservation of said power, the directors
are not entitled to compensation, for the law is well-settled that directors of corporations presumptively served
without compensation and in the absence of an express agreement or a resolution in relation thereto, no claim
can be asserted therefor.
Section 28 of the Corporation Law giving the exercise of corporate powers and the control of the corporation's
business and property to the board of directors, or a provision of the by-laws empowering the board with
"general supervision and control of the affairs and property of the
(corporation)" is no justification for the adoption by the board of a resolution providing themselves with
compensation. These provisions of the law and the bylaw pertain to the general powers of the board merely and
do not extend to giving the members of the board the compensation where the matter of providing for the
compensation is specifically withheld from the board of directors and reserved to the stockholders.
CASE LAW/ DOCTRINE:
The By-Laws, in the aforequoted Section 8, explicitly reserved unto the stockholders the power to determine the
compensation of members of the board of directors, and the stockholders did restrict such compensation to
“actual transportation expenses plus the per diems of P30.00 and actual expenses while waiting” Even without
the express reservation of said power, the directors are not entitled to compensation, for the law is well-settled
that directors of corporations presumptively served without compensation and in the absence of an express
agreement or a resolution in relation thereto, no claim can be asserted therefor.
128 Fogelson v. American Woolen Co. AUTHOR: REYES

170 F 2D. 660 (1948) NOTES:
TOPIC:
PONENTE:
FACTS:
 American Woolen Co. sought to implement a “Retirement Income Plan” for their salaried employees.
 The proposed plan fixes the retirement age at 65 and utilizes a “percentage formula” for determining the
retirement income or pension to be paid annually by the corporation to its employees after their retirement.
 The formula takes into account the employee’s salary and length of service both before and after the date of
implementation of the plan, which is on January 1, 1948.
 The plan is to be administered by means of a pension trust and it is proposed to pay into this trust at once
$4, 657, 292.00 to fund that part of the pensions based on the past services of the employees.
 President Pendleton will be eligible for retirement on June 1, 1949, and under the plan will thereafter be
entitled to receive an annual pension of $54, 220.00 for life.
 Two stockholders of the company filed a complaint against American Woolen Co. along with four of its
directors enjoining them from implementing the plan. They argue that the pension is excessive and
unconscionable, that the purpose of funding past service benefits with one single payment instead of
installments is that the corporation wishes to protect the president irrespective of business vicissitudes
which may overtake the company.
 They also argue that this plan is irresponsible because it disregards the fact that the Corporation still has an
outstanding $10, 000,000.00 bank loan.
 Corporation filed its answer, arguing that the directors promulgated the plan in the exercise of their honest
business judgment and that they have the support of both the majority stockholders and the Commissioner
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on Internal Revenue. They then moved for a summary judgment.

 The judge granted the motion and the case was adjudicated on the merits of the pleadings.
ISSUE(S): whether or not the case should have been sent to trial rather than decided summarily.
HELD: Yes, decision overturned, case sent back to be tried in a full-blown trial.
RATIO:
 Courts are properly reluctant to interfere with the business judgment of corporate directors; they do so
only if there has been so clear an abuse of discretion as to amount to legal waste.
 Normally the decision of the directors to fund the pension payment via one lump-sum payment instead of
an installment plan is conclusive. However the nature of the facts in the present case provide a triable
issue.
 The complainants allege that such pension plan is 1. Excessive and unconscionable, 2. That it is simply a
means to assure President Pendleton’s financial stability, and 3. That it goes against the customary
practice of other corporations because it does not place a dollar limitation on the maximum pension
payable under the proposed percentage formula.
 Also, as correctly pointed out by the complainants, the gross disparity between the president’s pension
and that of the nearest officers and employees give a valid cause for the courts to make the inquiry. the
president gets an annual pension support amounting to $54,000.00 while the nearest officer would get
around 7,000.00
 A retirement plan which provides a very large pension to an officer who has served, to within one year of
the retirement age without any expectation of receiving a pension, would seem analogous to a gift or
bonus.
 ROGERS V HILL is invoked because that case held that the size of a bonus may raise a justifiable
inquiry as to whether it amounts to spoliation or waste of corporate property.
 The affidavits of the directors are not sufficient to provide a good justification for the costly intricacies of
the pension payment plan, to be able to debunk complainants accusations and to defend their answer, the
best recourse is to have a full-blown trial where the “sound and honest business judgment” of the
directors can be examined in a proper cross-examination.
CASE LAW/ DOCTRINE:
AUTHOR: S A Y O
NOTES:
129. Kerbs v. California Eastern Airways
The stock option plan provides that 250,000 shares of
July 17, 1952
TOPIC: Fixing Compensation of Directors and the defendant's unissued stock be made subject to
options to purchase at the price of $1 per share, to be
Officers
granted in designated amounts to named executives of
WOLCOTT
the company. Each option to be granted is exercisable
at any time within a period of 5 years from the date of
issuance but not later than 6 months after the
termination of the employment of the executive to
whom it is issued. Each is exercisable for either the full
number of shares subject to the option or for any part
thereof. Each is required to be exercised by the
executive to whom it is granted. Each is non-
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transferrable, except by will. In the event of the death

of the optionee, each is inheritable in accordance with
the applicable laws of descent.
The profit-sharing plan provides that when the

quarterly earnings of the defendant exceed $30,000
before federal income taxes, 10% of any additional
quarterly earnings shall be distributed among named
officers and executive personnel of the defendant in
accordance with a percentage scale. If during any
quarterly period earnings should be less than $30,000,
then the cumulative deficiency plus any operating loss
is to be carried forward to succeeding quarterly
periods. The named beneficiaries of the stock option
plan are also the named beneficiaries of the profit-
sharing plan with substantially the same proportional
interest.
FACTS:
 The defendant is a Delaware corporation engaged in the business of owning, operating and leasing
aircraft.
 In 1946, the defendant lost money in its operations until by the end of 1947 it was in a precarious
financial position.
 In December, 1947, Mr. de Saint-Phalle, the present Chairman of the Board, accepted the office of
president. He made substantial changes in the business and operations of the defendant.
 But, in May of 1948, on his recommendation, the defendant petitioned the United States District
Court of Delaware for an order under Chapter XI of the Bankruptcy Act and was allowed by the
court to continue in possession of its property.
 Immediately thereafter, under the direction of Mr. de Saint-Phalle, the defendant dismissed 85% of
its personnel, stopped operating its aircraft, leased them to other concerns, and converted its air-craft
from freight to passenger carriers.
 By September of 1948, the defendant's operations had become profitable.
 In 1949, the defendant's net profits amounted to $212,435 and in the summer of that year it made a
substantial payment to creditors.
 In May of 1949, a plan of arrangement with creditors, having been approved by the District Court,
Mr. de Saint-Phalle persuaded Messrs. Solomon, Grace and Robinson to become directors of the
defendant. They were elected in August, 1949 and, thereafter, Mr. Solomon became president of the
defendant.

 The aircraft of the defendant were improved so as to make them capable of overseas flights and
when the Korean War broke out and the defendant obtained contracts with the United States for the
use of some of its planes in the Tokyo airlift.
 This operation was extremely profitable and defendant was able to pay all its creditors in full. In
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December, 1950, the defendant was discharged from the Chapter XI proceedings (bankruptcy).
 In September, 1949, the new Board of Directors met and appointed a committee of three to make
salary recommendations to the Board. This report was submitted by disinterested directors to the
Board at a meeting on December 16, 1949 recommending that certain salaries be allowed, but stating
that additional compensation in another form would be the subject of a further report.
 Thereafter, at a meeting of the Board in October, 1950, a stock option plan and a profit-sharing
plan were adopted and a special meeting of stock-holders called for the purpose, among others, of
submitting the stock option plan to the stockholders for ratification.
 A letter was sent to each stockholder giving information concerning both plans. At the special
meeting of stockholders thus called, a majority of the stock of the defendant was voted in favor
of the stock option plan.
 Both the stock option plan and the profit-sharing plan were adopted at a meeting of Directors held
October 24, 1950, at which eight directors were present, of whom five were beneficiaries under the
plans.
 The plaintiffs accordingly attack both plans on the ground that the votes of interested directors were
required for their adoption and that, therefore, the action of the board was illegal.
 A majority of the stockholders, however, at the beforementioned special meeting called for that
purpose ratified the stock option plan.

ISSUE(S):
1. WON Stock option plan is valid
2. WON Profit-sharing plan is valid
HELD:
1. NO
2. YES
RATIO:
ON STOCK OPTION:
 We think that the stock option plan, as adopted by the directors and as ratified by the majority of the
stock, is deficient because it is not reasonably calculated to insure that the defendant will receive the
contemplated benefits.
 It would probably unduly limit legitimate corporate action to attempt to lay down a minimum set of
prescribed requirements that must be contained in every compensatory stock option plan. The payment of
additional compensation by such means is currently fashionable with corporate management.
 In view of the different circumstances of each corporation and of the permissible variations in the objects
sought to be accomplished by stock option plans, the validity of each plan, necessity can be ascertained
only after a full consideration, not only of the terms of the plan itself, but of the surrounding facts and
circumstances as well. No rule of thumb can be devised to test the sufficiency of the conditions which are
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urged as insurance that the corporation will receive the contemplated benefit. The most that can be said is
that in each case there must be some element which, within reason, can be expected to lead to the desired
end. What that element may be can well differ in each case.
 In Holthusen v. Edward G. Budd Mfg. Co., D.C., 52 F. Supp. 125, an option plan was enjoined because
the employee was not obligated to remain in the company's employ, nor was the right to exercise the
option made dependent upon continued employment. Subsequently, an amended plan requiring the
optionee to remain in the company's employ for one year and preventing exercise of the option until one
year after issuance was upheld. See Holthusen v. Edward G. Budd Mfg. Co., D.C., 53 F. Supp. 488, 490.
In Wyles v. Campbell, supra, an option was upheld upon a finding that the optionee was under an
employment contract.
 We think, therefore, that the stock option plan before us is deficient in that there are no conditions
reasonably insuring that the corporation will receive the contemplated benefit.
ON PROFIT-SHARING OPTION
 We turn now to a consideration of the profit-sharing plan. The plaintiffs attack the profit-sharing plan on
three grounds:
1. that it was adopted by the Board of Directors at a time when the defendant was in the process of re-
organization in bankruptcy and was not approved by the District Court having jurisdiction of the
bankruptcy proceeding;
2. that the contemplated payments under the profit-sharing plan bear no reasonable relationship to
service rendered or to be rendered, and
3. that it was not adopted by disinterested directors.
 We think the first reason urged by the plaintiffs against the profit-sharing plan is without merit. At a
time subsequent to the commencement of this action and after payments had been made under the profit-
sharing plan, an application was made to the Federal District Court of Delaware seeking to have the
defendant held in contempt for adopting the plan and for making payments under it. The District Court
held that the defendant was not required to obtain its consent to the adoption of the profit-sharing plan.
See In re California Eastern Airways, Inc., D.C., 97 F. Supp. 847.
 With respect to the objection of the plaintiffs that the value of the services bears no reasonable
relationship to the amounts to be paid under the plan, we cannot say, looking at the scheme of the
profit-sharing plan and the amounts to be paid under it on the basis of past and anticipated earnings, that
those amounts are so large as, in effect, to amount to spoliation or waste of the corporate assets. In view
of the present earnings of the corporation, the amounts to be paid under the plan do not seem shockingly
large. There is nothing in the record before us to demonstrate that the persons to whom the amounts will
be paid will not render services bearing a reasonable relation to those amounts. Cf. Rogers v. Hill, supra.
 The plaintiffs' third objection to the profit-sharing plan, to the effect that it was not adopted by
disinterested directors, is of more substance. The fact is that at the directors meeting of October 24, 1950,
at which the profit-sharing plan was adopted, eight directors were present. Of these eight, all of whom
voted in favor of the plan, five were designated as beneficiaries of the plan. Only three disinterested
directors, therefore, were present at the meeting. Under this circumstance, plaintiffs argue that since it
was impossible to obtain a disinterested majority vote of the directors present, the adoption of the profit-
sharing plan was illegal and should, therefore, be declared void.
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 It is the general rule that the votes of interested directors of a corporation will not be counted in
determining whether proposed action has received the affirmative vote of a majority of the Board of
Directors. Bovay v. H. M. Byllesby & Co., 27 Del.Ch. 381, 38 A.2d 808, 174 A.L.R. 1201; Italo-
Petroleum Corporation of America v. Hannigan, 1 Terry 534, 40 Del. 534, 14 A.2d 401. Consequently,
the fact that the resolution approving the profit-sharing plan would of necessity have received only three
disinterested votes out of a total of eight votes present at the meeting means that the plan failed to receive
a legal majority of the directors' votes in its favor.
 Defendant argues: however, that the plan did in fact receive a requisite number of disinterested directors'
votes by reason of Section 25 of the defendant's by-laws which provides that three directors shall be
sufficient to constitute a quorum for the transaction of business
 The plaintiffs point out: however, that Section 14 of the defendant's by-laws provides for a Board of
Directors of eleven members, and that Section 9 of the General Corporation Law, requires that in no case
may a quorum of the Board of Directors be less than one-third of the total number of directors. Pointing
out that one-third of a Board of eleven is four.
 We think the plaintiffs are correct in this respect, for a by-law which is repugnant to the statute must
always give way to the statute's superior authority.
 It should be noted that the plaintiffs did not call Section 9 of the General Corporation Law to the
Chancellor's attention, but argued solely that the presence of interested directors could not be ignored in
determining whether the plan received a majority favorable vote at the Board's meeting.
 We hold, therefore, that because the votes of interested directors were required to be counted for quorum
purposes at the meeting of October 24, 1950, the profit-sharing plan was not legally adopted, if its
legality depends solely on the action of the Board. As we have pointed out, however, illegal action of a
Board of Directors is absolutely void only when that action is ultra vires, a gift of corporate assets to
directors, illegal in purpose, or fraudulent. If it does not fall within any of these prohibited classifications
the directors' action is voidable only and thus subject to ratification by stockholders. supra. We think the
attempted adoption of the profit-sharing plan by the Board is voidable only.
 Under some circumstances, facts arising subsequent to the taking of an appeal may be shown to the
appellate court for the purpose of having complete justice done but we do not think there are sufficient
facts before us, assuming it is proper to show the facts by affidavit, to enable us to determine
whether or not there has been effective stockholders' ratification of the profit-sharing plan.
 Necessarily, the effectiveness of such ratification depends upon the type of notice sent to the
stockholders and of the explanation to them of the plan itself.We think, however, if there was effective
ratification by the stockholders that the profit-sharing plan is valid.
 A mandate will, therefore, issue reversing the judgment of the Court of Chancery dismissing the action,
and directing the Chancellor:
1. To permanently enjoin the granting of any option or options pursuant to the said stock option plan;
2. To deny the application for an injunction prohibiting the paying or distributing of any money under the
said profit-sharing plan if, after such further proceedings as may be required, the Chancellor finds as a
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fact that the action of the holders of a majority of the defendant's stock at the stockholders meeting held
October 10, 1951, effectively ratified the adoption of said plan by the directors.
CASE LAW/ DOCTRINE:
130 STRONG et al vs. REPIDE AUTHOR: SOLIS

[41 Phil. 947 (1909)] NOTES:
TOPIC: Using inside information
PONENTE:
FACTS:
 This action by REPIDE was due to the negotiations initiated by the government where the latter will
purchase PSEDC’s lands (together with other friar lands) at a price which greatly enhance the value of the
stock.
 Eleanor Erica STRONG was the owner of 800 shares of the capital stock of Philippine Sugar Estate
Development Company (PSEDC). While Guitierrez REPIDE was the owner of three-fourths (3/4) shares of
the PSEDC’s stock, he is also 1 of the 5 directors said company, and was elected by the board as
administrator general.
 REPIDE took steps to purchase the 800 shares owned by STRONG, which REPIDE knew were in the
possession of F. Stuart JONES, the agent of STRONG.
 Instead of seeing JONES, who had an office next door, REPIDE employed KAUFFMAN. KAUFFMANN,
in turn employed SLOAN, a broker, to purchase the stock for him.
 KAUFFMAN told SLOAN that the stock to be purchased was for a member of his wife’s family.
 As a result of the negotiations, JONES, assuming he had the power and without consulting STRONG, sold
the 800 shares.
 STRONG filed a case to recover the shares from REPIDE on the ground that the shares had been sold and
delivered by STRONG’s agent, JONES, without authority to do so and on the ground that REPIDE
fraudulently concealed from STRONG’s agent the facts affecting the value of the stock sold and delivered.
ISSUE(S): Whether it was the duty of REPIDE, acting in good faith, to disclose to the agent of STRONG the
facts bearing upon or which might affect the value of the stock.
HELD: YES.
RATIO:
 The Court ruled that there is no relationship of a fiduciary nature exists between a director and a
shareholder in a business corporation. There are cases, however, where, by reason of special facts, such
duty of a director to disclose to a shareholder the knowledge which he may possess regarding the value
of the shares of the company before he purchase any from a shareholder.
 Some special facts are present in this case such as the fact that REPIDE is not only a director of the
corporation but an owner of ¾ shares of stock. He was the chief negotiator for the sale of all the lands
and was acting substantially as the agent of the shareholders by reason of his ownership of the shares.
Thus, a purchase of stock in a corporation by a director and owner of ¾ of the entire capital stock, who
was also administrator general of the company and engaged in the negotiations which finally led to the
sale of the company’s lands to the government at a price which greatly enhanced the value of the stock,
was fraudulent as procured by insidious machination where he employed an agent to make the purchase,
concealing both his identity as purchaser and his knowledge of the state of the negotiations and their
probable successful result.
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CASE LAW/ DOCTRINE: A director may be accountable directly to the stockholder where the special facts
surrounding the transaction give rise to the obligation to disclose his identity or the inside information he
possesses.
131. Taylor vs Wright AUTHOR: The Taliño

[159 P. 2d 980; 5/29/1945]
NOTES: Emma Foy Taylor (plaintiff) brought this
TOPIC: Fiduciary Duties; Conflict of Interests – action against Marie A. Wright and Allen J. Wright,
Using Inside Information mother and son, and others, to recover damages for
fraud alleged to have been committed by defendants in
PONENTE: Peters, P.J. buying 3,750 shares of stock owned by her in the
Commonwealth Acceptance Corporation at less than its
actual value. The jury returned a verdict for
compensatory damages in the sum of $4,250,
exemplary damages in the sum of $500, and interest in
the sum of $1,912.50. From the judgment based on
these verdicts the Wrights appeal.
FACTS:
 The Commonwealth Acceptance Corporation is a Delaware company with its principal and only office in
Oakland, California. The company was originally organized in 1925 to handle automobile financing.
Later, and starting about 1931, it began to deal in stocks, and ultimately its greatest business was in the
investment field. One of the securities it began to purchase in 1931 was Shell Union stock. By December
of 1935 the Shell stock had appreciated in value over $80,000--that is, had the Shell stock been sold it
would have brought in an $80,000 profit to the company.
 Marie Wright (defendant) had purchased 3,750 shares of stock in the Commonwealth Acceptance
Corporation in 1928 or 1929 for $15,000, from Miss Cousins, who introduced her to Mr. Lester Johnson.
Johnson is a brother-in-law of Allen Wright (defendant). It also appears that Johnson and Allen Wright
were the two executives of the company (President and Secretary, respectively) and actually ran the
company, frequently discussing company affairs. Marie Wright was a large stockholder of the company.
She was a director as was Allen Wright. Allen Wright was also a stockholder. From 1933 through 1936
Mrs. Wright began to buy additional stock in the company, and by the end of 1936 she owned about half
the issued stock.
 The company through its board of directors, the two defendants and Johnson constituting a majority of
the board, stopped paying dividends in 1931, the last dividend being paid in October of 1931.
 In 1935, Marie Wright was the fifth largest stockholder. She had incurred an indebtedness with the
American Trust Company, First Berkeley branch, and in 1931 pledged the 3,750 shares with that bank,
together with other collateral, to secure the loan.
 By 1935 she had reduced the loan to $5,700. The loan, in that year, was what is known as a "distressed
loan," that is, the security was not sufficient to support the loan and respondent was apparently unable to
make the called for payments. The bank had several times tried to ascertain the value of the
Commonwealth stock. The stock was not listed on any exchange and there was no over-the-counter
market. The bank's officers had several times called Johnson or Allen Wright and had been told by them
that there was no market or prospective purchasers for the stock.
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 During the fall of 1935, some of the stockholders of the company became dissatisfied with the way
Johnson and the Wrights were running the company. Some of the stockholders were particularly
disturbed by a transaction whereby another corporation wholly owned by Johnson and the Wrights, and
which owed Commonwealth over $26,000, became a "subsidiary" of Commonwealth, and by this means
apparently the debt was extinguished.
 This then was the condition of the company as it existed in November of 1935. So far as the financial
statements issued to the stockholders are concerned they showed that the company was being operated at
a loss, which was increasing year by year. The only way it could make a profit was to sell some of its
stock.
 Under these circumstances and knowing exactly the financial condition of the company, Allen Wright
hired Ben T. Stowell as an agent for his mother. Wright testified that the main purpose of hiring Stowell
was to have him ascertain the attitudes of the various groups of stockholders. It is admitted, however, that
Wright also authorized Stowell to offer to buy the shares of dissatisfied stockholders who wished to sell.
 The stock at this time had a liquidation value of at least $2.20 per share, and an actual value much higher.
It was apparently Wright's desire to buy as much of the stock as possible at about $1.00 a share and thus
not only make a handsome profit, but also, through his mother, get control of the company. Wright had
an intimate knowledge of the corporation's holdings. He followed the market daily, and although he
testified he thought the liquidation value of the stock was about $1.50 per share, it is a legitimate and
reasonable inference from the evidence that he actually knew it was at least $2.20. All during this period
Wright was in frequent communication with Johnson about corporate affairs, but he testified he did not
tell Johnson about the hiring of Stowell, although Johnson was president of the company and related by
marriage to Wright. According to Wright, Johnson did not know anything about Stowell until after the
Taylor deal was closed.
 Allen Wright gave Stowell a list of some of the stockholders. Mrs. Taylor's name was not on the list. She
had not aligned herself with any of the complaining stockholder groups. On the list furnished by Wright
was the name of Mrs. Taylor's cousin. Stowell, according to his testimony, called on this cousin and from
her learned of the stock holding of Mrs. Taylor. He called upon Mrs. Taylor at her hotel and learned from
her that the stock was pledged with the American Trust Company.
 Stowell then told these facts to Wright, who authorized Stowell to offer $1.00 a share for the stock.
Wright knew the stock had been pledged with the bank and knew the general condition of the loan.
Stowell called upon the officers of the bank and offered them $3,750, that is $1.00 a share, for the stock.
 The bank's officers got in touch with Mrs. Taylor. She refused the offer of $3,750 and went home. The
bank officer then telephoned her and told her the offer had been raised to $4,000. Mrs. Taylor testified
that she felt this price was too low but that she telephoned Johnson and after talking with him agreed to
accept the offer. It was stipulated that Allen Wright was acting as agent for his mother in these various
transactions.
 On December 5, 1935, the bank closed the transaction, and the stock was sold to Stowell for $4,000,
Stowell receiving a commission from Wright of $50. Although this transaction was completed December
5, 1935, Wright did not have the stock certificate changed into his mother's name on the books of the
company until April 28, 1936.
 Mrs. Taylor testified that she did not know Stowell was acting for a director, and that had she known that
fact she would not have sold at such a price. Mrs. Taylor testified that several months after the deal was
closed she heard from a boarder at her home, a law student, rumors that her stock had been bought by an
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"insider." She immediately called Johnson, and after talking with him she did not believe the rumor that
Stowell bought on behalf of a director. Several years later the law student again came to her with this
rumor, and she again called Johnson. Again, after calling him, she did not believe the rumor. It should be
here mentioned that Johnson then knew Stowell had acted on behalf of the Wrights. It was not until she
heard the rumor again in December, 1939, that she really became suspicious, and after investigation,
filed this action.
ISSUE(S): WON directors and officers of a company owe any fiduciary duties at all to stockholders in relation
to transactions whereby the officers and directors buy for themselves shares of stock from the stockholders.
HELD: Yes, they do.

RATIO:
 On this subject there are three rules --the so-called majority rule, the so-called "special facts" rule, and
the so-called minority rule.
 The so-called majority rule is frequently stated to be that directors and officers owe no fiduciary duty at
all to stockholders, but may deal with them at arm's length. No duty of disclosure of facts known to the
director or officer exists. Nondisclosure cannot constitute constructive fraud.
 The so-called minority rule, which recognizes the director's obligation to the stockholders individually as
well as collectively, and refuses to permit him to profit at the latters' expense by the use of information
obtained as a result of his official position and duties. While it is true that a numerical majority of the
decided cases have adopted the legalistic view that a director owes no duty at all to the stockholders, a
substantial minority have adopted the more realistic view that such a duty exists because the stockholders
have placed the directors in a strategic position where they can secure first-hand knowledge of important
developments, and where they can make it appear the shares are much less valuable than they really are.
The astonishing thing is that practically every legal writer in this field has approved the so-called
minority view.
 Although the numerical weight of authority is in favor of the so-called majority rule, the harshness and
obvious unfairness of that rule, has led many of the states that originally aligned themselves with the
majority rule to adopt an exception to that rule to ameliorate its harshness. This exception is referred to
as follows in the American Trust Co. case, "Conceding the absence of a fiduciary relationship in the
ordinary case, some of the states that have adopted the so-called majority view, nevertheless, hold that
where special circumstances or facts are present which make it inequitable for the director to withhold
information from the stockholder, the duty to disclose arises, and concealment is a fraud." The leading
case adopting this "special facts" exception to the so-called majority rule is Strong v. Repide. That case
differs from the present one in many respects, but it is significant that the United States Supreme Court
there held that, among other things there present, it was fraudulent for a director to buy from a
shareholder without disclosing his identity. "Concealing his identity when procuring the purchase of the
stock, by his agent, was in itself strong evidence of fraud."
 In the present case the trial court instructed on the so-called "special facts" doctrine, and no challenge is
made as to the form of the instruction. A fair reading of the American Trust Co. case, indicates that the
Supreme Court, although not directly deciding the point, has indicated a disapproval of the so-called
majority rule, and that when the point is directly presented to it, it will adopt either the "special facts"
doctrine or the minority rule.
 Assuming that the "special facts" doctrine, at least, is applicable, there can be no reasonable doubt
but that the appellants, under the facts, owed respondent a duty, and violated that duty to her
damage. The stock here involved was not sold or traded on any exchange. The appellants actively
and successfully concealed their identity as the purchasers. The appellants, by reason of their
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position as directors, had full knowledge of the actual value of the stock. The appellants were active
in inducing the sale. They sought out the respondent and made no effort to tell her the real value of
her stock, but kept that knowledge, which they had acquired as directors, to themselves. Moreover,
the appellants knew they were buying pledged stock, and that the loan for which the stock was
pledged was "distressed." They knew that the bank's primary interest was to secure enough for the
stock to put the loan in a sound condition. They knew that respondent would find it difficult to
resist their offer should the bank deem it acceptable. Obviously, both the respondent and the bank
would have been suspicious had they known who the true purchasers were. Under such
circumstances the implied findings of the jury that appellants were guilty of fraud within the
meaning of the "special facts" rule are amply supported by the evidence.
CASE LAW/ DOCTRINE:
132 Singer v Carlisle AUTHOR: Tan

27 NYS 2d 19; 1941 NOTES:
TOPIC: Seizing Corporate Opportunity Sorry…Couldn’t find the full text. This is a copy of a
PONENTE: Sheintag digest I found online.
FACTS:
 Plaintiffs are stockholders of the United Corporation which owns all stock of its subsidiary, New York
United Corporation.
 Both companies were engaged in the business of underwriting securities in public utility holding and
operating companies.
 United Corporation was also engaged in the business of owning and holding such securities.
 Defendants (directors of the 2 corporation, officers of the United Corporation, partners of J.P. Morgan &
Co. , partners of Drexel & Co., Morgan, Stanley, Inc., Bonbright & Co., Inc. and two officers and
stockholders of the latter) are engaged in the underwriting business in competition with the Untied and New
York Corporation.
 It is alleged that in 1929, United Corporation acquired substantial blocks of the voting stock of various
holding and operating companies.; that from 1929 to present the corporation obtained funds by public
issuance of securities; that the underwriting business and large ensuing profits were obtained by J.P.
Mogran, Stanley & Co., Inc., as underwriters, and the United Corporation and New York United
Corporation were not permitted to participate.
 Plaintiffs charge that the defendants of the United Corporation and New York United Corporation, who
acted with the defendant bank, to obtain the underwriting business, and that the defendant bank fraudulently
caused the corporations to use their influence and control over their subsidiaries in order to induce the
corporations to award the underwriting business to the defendant bankers.
ISSUE(S): WON defendants utilized their domination and influence in order to control the business for
themselves.
HELD: No, because the allegations in the complaint of conspiracy of directors to obtain corporate opportunity
were deficient.
RATIO:
The directors of the United Corporations and New York United Corporation have the duty to make every effort
consonant with good, honest judgment to obtain for those corporations as much of the underwriting business as
possible, and to make this feild of activity as profitable as it could be. This does not mean that the plaintiffs were
required to do anything detrimental to the affairs of the corporations. They could not lawfully conduct
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themselves in a manner detrimental to the interests of the United Corporation and New York Untied
Corporation.
However, in the case at bar, there was a failure to incorporate the essential allegations which may be corrected
upon amendment. There is no allegation when the securities and what securities were issued and that the same
might have been underwritten by United. Directorship in 2 competing corporations does not in and of itself
constitute a wrong. It is only when a business opportunity arises which places the director in a position of
serving two masters, and when, dominated by one, he neglects his duty to the other, that a wrong has been done.
CASE LAW/ DOCTRINE:
Seizing Corporate Opportunity (Sec. 34)

–If a director acquires for himself, by virtue of his office, a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of the corporation, he must account to the corporation for
all such profits by refunding the same. However, if his act was ratified by 2/3 stockholders' vote, he need not
refund said profits. This provision applies even though the director may have risked his own funds in the
venture.
- Note: This provision is to be distinguished from Sec. 32 on contracts of self-dealing directors: contracts of self-
dealing directors are voidable at the option of the corporation even if it has not suffered any injury; on the other
hand, Sec. 34 applies only if the corporation has been prejudiced by the contract.
133 Irving Trust Co. v. Deutsch et. al. AUTHOR: Tiglao

[79 L. Ed. 1243 (1935)] NOTES: Fiduciary duty applies even if the corporation
TOPIC: Seizing Corporate Opportunity is unable to enter into transaction itself
PONENTE: SWAN, Circuit Judge
FACTS:
 Defendant Bell was employed by Acoustic Products Company, a Delaware Corporation chartered to deal
in musical equipment such as phonographs, radios and similar equipment.
 De Forest Radio Company was in receivership and Reynolds was in control of the company under
contract.
 Acoustic needed the patent to carry out its business. Bell failed in negotiating a deal, but Bell with the
assistance of Biddle was offered participation in the acquisition of De Forest.
 Acoustic tried to raise capital to acquire a minority interest in De Forest but was unable to do so.
 The directors of Acoustic agreed to buy the shares individually and made a large profit out of this. The
trustee of Acoustic in bankruptcy brought suit against the acquiring individuals for the profits.
 The court reversed the district court’s dismissal of the claims against the board members because there
was no basis for the board members’ contention that the prohibition against corporate officers acting on
their own behalf was removed where the corporation itself was financially unable to enter into the
transaction.
 The court further reversed dismissal of the action against the Mr. Deutsh because even if his agency was
disregarded, one he knowingly joined the other board members in their personal venture antagonistic to
their trust, he became jointly and severally liable with them for the profits of the enterprise.
ISSUE:
Is Mr. Deutsch is not liable because he resigned his position as president?
HELD:
No. Mr. Deutsch is liable because he knew of the transactions.
RATIO:
The defendant Bell was Acoustic's agent in the original negotiations with Reynolds, and it is urged by the
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plaintiff that as such agent he was a fiduciary precluded from making profits out of the subject-matter of his
agency. On his behalf it is contended that his agency was ended when he delivered to Acoustic the written offer
of Reynolds & Co. and that his participation in the Biddle syndicate was not by virtue of his former agency
relationship nor because of any information he had obtained as Acoustic's agent; that he stands like any stranger
to whom the syndicate might have offered a participation. But, even if the fact of his agency be disregarded, we
think there is an applicable principle which requires him to account, namely, that one who knowingly joins a
fiduciary in an enterprise where the personal interest of the latter is or may be antagonistic to his trust becomes
jointly and severally liable with him for the profits of the enterprise. Although Bell testified that "My knowledge
of what Acoustic did or intended to do with respect to Reynolds' offer of March 31st was limited to what
Deutsch told me around the 9th of April," and although precisely what he was told does not appear, nevertheless
Bell says that on April 7th or 9th he agreed with Mr. Deutsch that, if the latter was not successful in raising the
purchase money for the stock from his own associates, he would join him to the extent of $25,000. This
agreement, made at a time when the offer was still open for acceptance by the corporation, brings Bell within the
principle above enunciated.
The only directors on the board at the time this release was executed who knew of the De Forest transaction
were the defendants Hammond, Biddle, and Bell. None of the other directors appears to have had any notion
concerning it and Deutsch did not make any disclosure. The company had never made any claim against him on
account of the stock, and no intention to relinquish such a claim can be found. Since Deutsch at the time of the
transaction was in a fiduciary relation to Acoustic, the general release cannot be held to include this transaction
without a full and frank disclosure by Deutsch of the circumstances. The cases on which defendants rely did not
concern fiduciary relations and are distinguishable on that basis.
CASE LAW/ DOCTRINE:
Directors cannot appropriate for themselves the right of the corporation to acquire interest in another
corporation. The allegation of the directors that the corporation was without funds to meet the investment
requirement cannot be a valid reason for them to individually purchase the stocks allocated for the corporation.
As directors, they should have exerted effort to raise the necessary funds for the corporation in order to meet its
commitment to invest in the other corporation that would give patent rights beneficial to its operations.
134 Litwin vs. Allen AUTHOR: Valera

25 N.Y.S 2d 667 (1940) NOTE:
Duty Of Dilligence
Shientag, J:
FACTS:
 This is a derivative suit by the shareholders of Guarantee Trust Company of NY (Bank/Trust Company) and its
subsidiary now in liquidation, The Guarantee Company of NY (Guarantee Company) and together with the banking
firm of JP Morgan & Co.
 The derivative suit arises from 4 transactions:
5.) The purchase of the Directors from JP Morgan, of common stock owned by Alleghany Corporation
6.) Participation of the Trust Company or the Guarantee Company to the extent of 3 million in a purchase of
Missouri Pacific convertible debenture at 5.5 % bonds at par and interest with a repurchase option in favor of the
seller, Alleghany Corporation within 6 months. The plaintiffs claim that they realized a loss of 2.25 million
because of the transaction
7.) Participation of the Trust Company to the extent of 11 million in a 39 million loan to Veness Company and
Cleveland Terminals Building Company
8.) Sale of Collaterals under loan.
- THE COURT ALREADY RULED IN FAVOR OF THE DEFENDANT IN TRANSACTIONS 1,3 AND 4.
 The plaintiffs have conceded that that in all but the 4 stated transactions the defendants exercised an unusual degree of
care in the management of the company.
 The issue in the first transaction in simple is on JP Morgan in disposing 1,250 shares of new common stock of
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Alleghany Corporation. JP MORGAN offered 500k shares to Guaranty corporation to be sold on a commission of $4
per share at $4 per share at $24. Before the actual public offering of these shares by Guaranty, Morgan also offered
the other 759k shares to friends at 20$ Among those receiving the latter stock were some directors of Guaranty, who
took a total of 40k shares. The market in the stock opened at a premium and after waiting until the 30 period of
public sale was over the directors were able to dispose of their stock at a substantial profit.
 The circumstance has given rise to the claim that the profits belong to the Guaranty Company on the “Corporate
Opportunity theory
 The question was raised at the trial why the 40k shares sold to Mr. Potter and his associate were not added to
Guaranty Company’s public offering so as to give it at least 4$ commission to which was supposedly entitled by
virtue of the underwriting agreement on the 500k shares.
 The plaintiff’s point out that the Guaranty Company made a profit form the underwriting of the 500k shares of 1.263
million or an average profit of 2.5$ per share and the plaintiffs contend that the Guaranty Company could profitably
have disposed of the additional 40k shares f they had been offered to the company by the directors and officer within
a reasonably short time after their issue.
ISSUE(S):
 WON the act of the directors in purchasing 40k shares outside the 500k shares offered by JP Morgan is under the
Corporate Opportunity Theory? And in breach of there fiduciary
HELD:
2.) No.
RATIO:
7.) The evidence on this point is unanimous to effect that such an operation would have not been to the advantage of
Guaranty Company
8.) There is no basis that in acquiring stock of Alleghany company through JP Morgan at 20$ a share any of the
defendants were guilty of a breach of fiduciary duty. The common stock purchased by the defendants did not
represent in any sense a business opportunity for the defendant corporation Having fulfilled there duty to the
corporation in accordance with their best judgement the defendant directors were not precluded form a transaction
for their own account and risk.
 In order to permit such theory the plaintiffs are required to establish:
a.) That the shares in contemplation of equity offered to the Guaranty Company
b.) That Guaranty Company had some legitimate right or expectancy in these shares
9.) The opportunity which the defendants are said to have deprived the Guaranty Company to respect the shares
bought by them was a routine piece of business wholly lacking n the unique and special quality which
distinguished the corporate opportunity in other jurisprudence. Where in like cases Guaranty Company bought
none of it. The company was commission to retail 500k shares which it did not want for its own purposes at all.
These facts deprive the instant case of any substantial resemblance to the corporate opportunity cases.
10.) The intesrest of the individuals who bought the stock privately was speculative. They became full owners of the
stock and the possibility of merit would depend upon the course of the market after the 30 day underwriting period
which during which the restriction against resale applied.
11.) There is nothing substantial to the contention that Alleghany stock transaction operated on the minds of the
directors as a favor Clearly these stock purchases had no influence upon the Independent judgement of the
defendant directors in connection with the three remaining transactions complained of.
CASE LAW/ DOCTRINE:
135 Globe Woolen Company v. Utica Gas and AUTHOR: Acido

Electric Company NOTES: Worsteds – According to Google, a fine
121 NE 378 (1918) smooth yarn spun from combed long-staple wool. (???)
TOPIC: Interlocking directors Woolens – soft, light, stretchy yarn.
PONENTE: Cardozo, J.
Medyo poetic yung ratio but basically, since Maynard
is president of Globe Woolen and at the same time a
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director of Utica, he is an interlocking director. He

knew that the contracts were too much in favor of
Globe Woolen and unfair to Utica Gas. He should have
avoided the unfairness even if he is a director in both
contracting companies (fiduciary nature, position of
trust, etc)
FACTS:
 Globe Woolen Company is the owner of two mills in the city of Utica. One is for the manufacture of
worsteds and the other for that of woolens. Utica Gas generates and sells electricity for light and power.
 Background: For many years John F. Maynard has been the plaintiff's chief stockholder, its president and a
member of its board of directors. He has also been a director of the defendant, and chairman of its executive
committee. He received a single share of the defendant's stock to qualify him for office. He returned the
share at once, and he has never held another. His property interest in the plaintiff is large; in the defendant
he has none.
 As early as 1903, one Greenidge, then the superintendent and later the general manager of the defendant's
electrical department, suggested to Mr. Maynard the substitution of electric power.
o 1903, 1904, 1905: Maynard refused; dismissed it as impracticable because of his continued
insistence upon a guarantee of saving in the cost of operation
 1906: The project was renewed by Maynard and Greenidge, who debated it between themselves.
o In the letter signed by Greenidge, the defendant proposed to supply the plaintiff's worsted
mill with electricity at a maximum rate of $.0104 per kilowatt hour, and to guarantee that the
cost for heat and light and power would show a saving each month of $300 as compared with
the cost for the corresponding month in the year previous to the change. There was to be a
trial period ending July 1, 1907. Then, at the plaintiff's option, the contract was to run for five
years, with a privilege of renewal for a like term.
 In a letter signed by Maynard on October 22, 1906, the plaintiff accepted the proposal. At once, the
defendant made preparations to install the new equipment. Six weeks later, on December 1, 1906, Mr.
Maynard laid the contract before the defendant's executive committee.
 Utica’s directors asked whether the contract was a profitable one for the company, and was told by Mr.
Greenidge that it was. Mr. Maynard kept silent. A resolution was moved and carried that the contract be
ratified. Mr. Maynard presided at the meeting, and put the resolution, but was excused from voting.
 1907: Almost the same thing happened for the woolen mill.
o The guarantee of saving for this mill as for the other was to be $300 a month. There were,
however, new provisions to the effect that the contract should apply to "current used for any
purposes in any extensions or additions to the mills," and that in case of shortage of
electricity the plaintiff should be preferred in service over all other customers except the city
of Utica.
 At a meeting of the executive committee, held February 11, 1907, this contract was ratified. The statement
was made by Mr. Greenidge, in the presence of Mr. Maynard, that it was practically a duplicate of the first
contract, except that it related to another mill. Nothing was said about the new provisions. Mr. Maynard
presided and put the resolution, but did not vote.
 It quickly appeared that the defendant had made a losing contract; but only gradually did the extent of the
loss, its permanence and its causes unfold themselves.
o Greenidge had miscalculated the amount of steam that would be required to heat the dye
houses, the expenditure for coal mounted by leaps and bounds, etc.
 In 1909, the defendant became alarmed at the mounting loss. Finally, in February, 1911, the defendant gave
notice of rescission.
o At that time, it had supplied the plaintiff with electricity worth $69,500.75 if paid for at the
maximum rate fixed by the contract, and $60,000 if paid for at the lowest rate charged to any
customer in Utica. Yet not only had it received nothing, but it owed the plaintiff under its
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guarantee $11,721.41. The finding is that a like loss prolonged to the end of the term would
amount to $300,000.
 The plaintiff sues to compel the specific performance of contracts to supply electric current to its mills. The
defendant answers that the contracts were made under the dominating influence of a common director; that
their terms are unfair, and their consequences oppressive; and that hence they may not stand.
 Referee: Sustained the defense (Utica Gas) and annulled the contracts
 Appellate division: Affirmed with modification that the defendant reimburse the plaintiff for the cost of
installation.
ISSUE(S):
Did Maynard’s refusal to vote nullify an influence and predominance exerted without a vote?
HELD:
No. Judgment affirmed.
RATIO:
 The evidence supports the conclusion that the contracts are voidable at the election of the defendant. The
plaintiff does not deny that this would be true if the dual director had voted for their adoption
 But by refusing to vote, he shifted the responsibility to his associates, and may reap a profit from their
errors. One does not divest oneself so readily of one's duties as trustee.
 A dominating influence may be exerted in other ways than by a vote. A beneficiary, about to plunge into
a ruinous course of dealing, may be betrayed by silence as well as by the spoken word.
 There was an influence here, dominating perhaps, and surely potent and persuasive, which was exerted
by Mr. Maynard from the beginning to the end. In all the stages of preliminary treaty, he dealt with a
subordinate, who looked up to him as to a superior, and was alert to serve his pleasure.
 There was no clean-cut cleavage in those stages between his conflicting offices and agencies. No label
identified the request of Mr. Maynard, the plaintiff's president, as something separate from the advice of
Mr. Maynard, the defendant's chairman.
 The members of the committee, hearing the contract for the first time, knew that it had been framed by
the chairman of the meeting. They were assured in his presence that it was just and equitable. Faith in his
loyalty disarmed suspicion. There was, then, a relation of trust reposed, of influence exerted, of superior
knowledge on the one side and legitimate dependence on the other.
 There must be candor and equity in the transaction, and some reasonable proportion between benefits and
burdens. The contracts do not survive these tests. The unfairness is startling, and the consequences have
been disastrous.
o Why the contract was unfair: the defendant has pledged its word that for ten years there will be a
saving of $600 a month, $300 for each mill, $7,200 a year, no matter what happens in ten years
(i.e. increases in costs of coal and fuel). Lugi siya, parang yung case before na may contracts
about bags of cement.
 Maynard may not have known how great the loss would be. He may have trusted the superior technical
skill of Mr. Greenidge to compute with approximate accuracy the comparative cost of steam and
electricity. But he cannot have failed to know that he held a one-sided contract, which left the defendant
at his mercy. He was not blind to the likelihood that in a term of ten years there would be changes in the
business. Yet no word of warning was uttered to Greenidge or to any of the defendant's officers.
 The refusal to vote does not nullify as of course an influence and predominance exerted without a vote.
The constant duty rests on a trustee to seek no harsh advantage to the detriment of his trust, but rather to
protest and renounce if through the blindness of those who treat with him he gains what is unfair.
CASE LAW/ DOCTRINE:
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136 Insuranshares Corporation v. Northern AUTHOR: Adre

Fiscal Corporation NOTES: nowhere in the case was Northern Fiscal
35 F. Supp. 22 (1940) mentioned. 
TOPIC: Duty of Controlling Interest Insuranshares Corporation: is an investment trust,
PONENTE: KIRKPATRICK, District Judge. specializing in shares of small life insurance
companies.
The defendants here are:
1. Management Group
2. Boston Group
SUMMARY: Insuranshares sued the former management group for damages suffered through the looting of
the Boston Group. What happened was that the former management group of Insuranshares sold their
minority, but controlling , interest to the Boston Group. Then the Boston Group upon obtaining control
financed the deal through an unsecured loan, which in turn, was liquidated through corporate assets. Boston
group eventually bought the control of the corporation by paying with corporate assets. The District Court
ruled that the management group was liable for they had the duty to inquire on the sale, which they failed to
discharge, which resulted to the prejudice of Insuranshares.
Doctrine: The owners of control are under a duty not to transfer it to outsiders if the circumstances
surrounding the transfer give rise to a suspicion and may put a prudent man on guard. When they were given
notice of such intention but they failed to make an adequate investigation and harm follows, then they are
liable. But if they were deceived by false representations there might not be liability.
FACTS:
The Parties:
Plaintiff: Insuranshares Corporation of Delaware
Defendants:
MANAGEMENT GROUP BOSTON GROUP
Philadelphia banks (names not mentioned in the Constitutes the following people: Robb, Morris
case), with 23,106 shares, and their agent, and Solomont, who bought control and who, with
Hepburn; their satellites Quint, Stanton, Tracy and Hansell,
looted the corporation.
Blair (the president of the corporation) and his
associates, Simmons, Moore and Burnell (all
former directors) and Ogden, with 24,111 shares
Continental Bank (with 26,569 shares)
Logan, receiver of the Seaboard Continental

Corporation, with 6,647 shares
The board of directors of the corporation was

composed entirely of this management group
THE STORY:
 Insuranshares Corporation of Delaware brought a suit against its former officers, directors, and some of
its former stockholders to recover damages incurred by it as a result of the sale of its control to a group
who rob it of most of its assets.
 On December 21, 1937, the management group transferred the control of the corporation to the Boston
group, none of whom had ever had any interest of any kind in it.
 With the control, went plenary power under the by-laws to sell, exchange, or transfer all of the securities
in the corporation's portfolio, as well as access to and physical possession of them.
 The acquisition of control was the indispensible first step of the scheme, planned by Robb, Morris and
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Solomont with the connivance of Paine, Webber Co. (brokers). The purpose of which was to strip the
corporation of its valuable assets.
 The actual transfer was made in accordance with a program to which the Philadelphia group (the banks)
assented and the steps of which they followed.
 Immediate and complete passing of control was ensured by the successive resignation of the old
directors, each resignation being followed by the election of a new member of the board, on the
nomination of the Boston group.
 At the same time, the management group sold and delivered their stock to the Boston group.
 The act of the management group in selling control to the Boston group was the thing which made
possible the Boston Group’s criminal operations.
 Defense: The defendants have insisted throughout the case that the transfer of December 21, 1937, was
simply a sale of stock, the passing of control being merely a normal concomitant.
ISSUE(S): WON the previous directors were liable for selling their corporate control
HELD: YES. They are under duty not to sell and protect the interest of the corporation.
Pronouncement of Judge: The judgment to be entered here will be for the plaintiff generally. Further
proceedings for the purpose of assessing damages and including the amount in the judgment may be taken
unless an agreement can be reached upon that point.
RATIO:
 Owners of corporate control are liable if under the circumstances, the proposed transfers are such as
to awaken a suspicion or put a prudent man on his guard.
 As in this case, control was bought for so much aside from being warned of selling to parties they
knew little about, and also from fair notice that such outsiders indeed intended to raid the corporation
o Hepburn and the banks were specifically warned at least twice of the danger of carrying out
the deal with parties about whom they knew so little.
o There plainly was a duty upon the sellers to make a genuine effort to obtain and verify such
information as they reasonably could get about the means by which the purchase was to be
financed and the character, aims and responsibility of the purchasers, or, in the absence of
adequate information, to refrain from making the sale
 The transfer of the shares of the stockholders owning controlling interest in the corporation to
outsiders whose main purpose was to divest the corporation of its assets leaving its mere shell to the
remaining stockholders constitute fraud. Such controlling stockholders would be liable to the
corporation and the other stockholders.
CASE LAW/ DOCTRINE: The transfer of the shares of the stockholders owning controlling interest in the
corporation to outsiders whose main purpose was to divest the corporation of its assets leaving its mere shell
to the remaining stockholders constitutes fraud. Such controlling stockholders would be liable to the
corporation and the other stockholders.
DETAILS OF THE SCHEME (baka tanungin):
This case involves more than a question of liability even that of majority stockholders, which these
defendants were not in respect of the sale of corporate stock. What is involved here is a sale of control by a
minority, but controlling, interest. They bought only about 27% of the outstanding issue, and, throughout
their operations, they were never anything but minority stockholders.
o What happened was that the buyers had arranged with Paine, Webber Co. that the latter would
advance the price of the purchase (some $310,000) on an unsecured loan, and that, immediately
after they had obtained control, the portfolio, or as much of it as was necessary, would be pledged
with Paine, Webber Co. as collateral, sold by them from time to time, the proceeds applied to
liquidating the note, and the balance turned over.
o The price is strongly indicative of the true nature of the transaction. The sellers obtained $3.60 a
share at a time when the price of the stock in the over-the-counter market was $1 to $1.25, and
when the book value was $2.25 a figure substantially higher than could have been realized on
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actual liquidation
137 AUTHOR: BONDOC

W. G. PHILPOTTS, petitioner, plaintiff
vs.
PHILIPPINE MANUFACTURING COMPANY
and F. N. BERRY, respondents, defendant
G.R. No. L-15568 November 8, 1919
TOPIC: Who may exercise the right

PONENTE: Street J.
FACTS:
The petitioner, W. G. Philpotts, a stockholder in the Philippine Manufacturing Company (respondent) seeks to
obtain a writ of mandamus to compel the respondents to permit the plaintiff W. G. Philpotts, in person or by
some authorized agent or attorney, to inspect and examine the records of the business transacted by said
company since January 1, 1918. The petition is filed originally in this court under section 515 of the Code of
Civil Procedure. The respondents interposed a demurrer claiming that there is a right of examination in the
stockholder granted under section 51 of the Corporation Law, but this right must be exercised in person.
ISSUE(S):
WON the right of the stockholder to inspect the records can be exercised by a proper agent or attorney of the
stockholder as well as by the stockholder in person.
HELD: Yes.
RATIO:
In this case petitioner desires to exercise the right to inspect through an agent or attorney.
SC applied the 2nd paragraph of section 51 of Act No. 1459 which states –
"The record of all business transactions of the corporation and the minutes of any meeting shall be
open to the inspection of any director, member or stockholder of the corporation at reasonable
hours."
Therefore, the right of inspection given to a stockholder in Sec 51 can be exercised either by himself or by any
proper representative or attorney in fact, with or without the attendance of the stockholder. This is in conformity
with the general rule that what a man may do in person he may do through another; and there is nothing in the
statute that would justify the qualification of the right as suggested by the respondent.
This conclusion is supported by the undoubted weight of authority in the US, where it is held that the provisions
of law allowing the right of inspection to stockholders of corporations are to be liberally construed and that said
right may be exercised through other properly authorized person.
The demurrer is overruled; and it is ordered that the writ of mandamus shall issue as prayed, unless within 5
days from notification hereof the respondents answer to the merits. So ordered.
CASE LAW/ DOCTRINE:
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"The record of all business transactions of the corporation and the minutes of any meeting shall be
open to the inspection of any director, member or stockholder of the corporation at reasonable
hours." – Sec 51 Act 1459
138 PARDO v. HERCULES LUMBER CO. AND AUTHOR: Castro

FERRER NOTES: Petition for Mandamus to compel the
[41 Phil. 965, 1945] respondents to permit Pardo and his duly authorized
agent/representative to examine the records and
business transactions of the company.
TOPIC: Right of Inspection; Unreasonable  Pardo – petitioner

Restriction  Hercules Lumber Co. and Ferrer - respondents
PONENTE: Street, J.
FACTS:
 Antonio Pardo is a stockholder in the Hercules Lumber Company, Inc.
 Ignacio Ferrer, the acting secretary of the company, refused to permit Pardo or his agent to inspect the
records and business transactions of Hercules, at times desired by Pardo.
 Under Article 10 of the By-laws of the corporation, it is declared that "Every shareholder may examine
the books of the company and other documents pertaining to the same upon the days which the board of
directors shall annually fix."
 On February 16, 1924, the board of directors passed a resolution stating: "The board also resolved to
call the usual general (meeting of shareholders) for March 30 of the present year, with notice to the
shareholders that the books of the company are at their disposition from the 15th to 25th of the same
month for examination, in appropriate hours."
Petitioner’s contention: He has a right of inspection as a stockholder.
Respondents’ contentions: The resolution of the board constitutes a lawful restriction on the right conferred by
statute; and as the petitioner has not availed himself of the permission to inspect the books and transactions of
the company within the ten days defined, his right to inspection and examination is lost, at least for this year.
ISSUE:
Is the resolution of the board of directors limiting the right of inspection of shareholders valid?
HELD: No. A resolution of the board of directors of a corporation limiting the right of stockholders to inspect
its records to a period of ten days shortly prior to the annual stockholders' meeting is an unreasonable
restriction on the right of inspection given by section 51 of the Corporation Law.
RATIO:
The general right given by the statute may not be lawfully abridged to the extent attempted in this resolution. It
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may be admitted that the officials in charge of a corporation may deny inspection when sought at unusual hours
or under other improper conditions; but neither the executive officers nor the board of directors have the power
to deprive a stockholder of the right altogether.
A by-law unduly restricting the right of inspection is undoubtedly invalid.
CASE LAW/ DOCTRINE:
Under the law, the right of inspection can be exercised "at reasonable hours." This means that the right of
inspection may be exercised at reasonable hours on business days throughout the year, and not merely during an
arbitrary period of a few days chosen by the directors.
139 Gonzales vs PNB AUTHOR: Miguel M. Consing

[G.R. No. L-33320 May 30, 1983] NOTES:
TOPIC: The Right of Inspection In case sir asks, the letters of credit that PNB extended
PONENTE: Vasquez, J. was for the purpose of the importation of public works
equipment intended for the massive development
program of the President.
FACTS:
 Prior to this action, Gonzales as a taxpayer instituted several cases in the CFI questioning different
transactions entered into by PNB with other parties.
 In one of these cases, Gonzales’ personality to sue the bank and question the letters of credit it extended was
raised.
 In light of this, Gonzales acquired one share of PNB stock from Congressman Montano.
 Gonzales then wrote a letter to the President of PNB requesting that he be allowed to look into the books
and records of the bank to look into the validity of the following transactions:
1. PNB’s guarantee of the obligation of Southern Negros Development Corporation in the purchase of a
US$23 million sugar-mill to be financed by Japanese suppliers and financiers;
2. Its financing of the construction of the Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc, and
the construction of Passi Sugar Mill at Iloilo by the Honiron Philippines, Inc.
 The request was denied on the ground that it was not germane to his interest as a one-share stockholder. His
intention in acquiring the single share of stock was also questioned.
 Gonzales instituted this action for mandamus to compel PNB to allow him to inspect the bank’s records
with regard to the above transactions. He argued that Sec. 51 of the Corporation Law gave him an
unqualified right as a stockholder to inspect the books of the bank at reasonable hours.
ISSUE(S):
Does Gonzales have an unqualified right as a stockholder to inspect the books of the bank at reasonable hours?
HELD/RATIO:
No. Gonzales may no longer insist on his interpretation of Section 51 of the Corporation Law (Act No. 1459)
because it has been replaced by the Corporation Code (BP 68). Under Section 74 of the Corporation Code, The
right of inspection granted to a stockholder has been modified. It is now expressly required that the one
requesting it must not have been guilty of improperly using any information through a prior examination, and
that the person asking for the examination must be “acting in good faith and for a legitimate purpose in
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making his demand.” Gonzales has not proven that he was in good faith and that his purpose was germane to
his interest as a stockholder. In fact his purpose was to arm himself with information he could use against the
bank.
Furthermore, PNB’s charter (RA 1300) provides:

1. The National Bank shall be subject to inspection by the Department of Supervision and Examination of
the Central Bank (Sec. 15)
2. officers designated by law to inspect or investigate the condition of the National Bank, shall not reveal
to any person other than the President of the Philippines, the Secretary of Finance, and the Board of
Directors the details of the inspection or investigation, nor shall they give any information relative to
the funds in its custody, its current accounts or deposits belonging to private individuals, corporations,
or any other entity, except by order of a Court of competent jurisdiction (Sec. 16)
3. Those who violate the provisions of this Act shall be subjected to pay a fine or imprisonment, or both.
(Sec. 30)
PNB, having its own charter, is primarily not governed by the Corporation Code, except in a supplementary
capacity. The right of a stockholder to demand an examination of the books of the corporation under the
Corporation Code may not be reconciled with the above provisions of PNB’s charter. And when there is a
conflict between the Charter and the Corporation Code, the Charter prevails.
CASE LAW/ DOCTRINE:
#140 Veraguth vs. Isabela Sugar Co. AUTHOR: DAYOS

G.R. No. L-37064 October 4, 1932 NOTES: short case
TOPIC: Remedies available if inspection refused Veraguth – stockholder and director
PONENTE: Malcolm, J. Gil Montilla – acting president
Agustin Montilla – secretary
FACTS:
 The directors of Isabela Sugar Co. conducted a special meeting, at which the compensation of the
attorneys of the company was fixed.
 However, Veraguth was not around during the special meeting due to the secretary’s failure to notify him
of the said special meeting.
 Hence, petitioner prays that (1) respondents be required to show cause why they refuse to notify him of
the regular and special meetings of the board of directors, AND to place at his disposal at reasonable
hours, minutes and documents, and books of the corporation, for his inspection as director and
stockholder, and to issue certified copies of documents in connection to the said meeting; (2) w writ
of mandamus be issued against respondents to notify him of all regular and special meetings of the board
of directors and issue certified copies of documents, minutes and books of the corporation or any
documentation in connection with such meetings.
 Respondent answered but it was “too long to be here summarized”
ISSUE(S):
1. W/n there was malicious attempt to keep Director Veraguth from attending special meeting?
2. W/n a director has an unqualified right to inspect books and records of the company?
3. W/n the secretary erred when it refuse to hand over certified copies of the minutes to petitioner?
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HELD:
1. No
2. Yes
3. No
RATIO:
1. The meeting in question is in the past and, therefore, now merely presents an academic question; that no
damage was caused to Veraguth by the action taken at the special meeting which he did not attend, since
his interests were fully protected by the Philippine National Bank; and should he wish to receive
notifications of the meeting sin the future, it is incumbent upon him to give a formal notice to the secretary of his
post-office.
2. Directors of a corporation have the unqualified right to inspect the books and records of the
corporation at all reasonable times. The act of the directors in approving a resolution providing for inspection
of the book and the taking of the copies “by authority of the president of the Corporation previous obtained in
each case” is void. Pretexts may not be put forward by officers of corporations to keep a director or shareholder
from inspecting the books and minutes of the corporation, and the right of inspection is not to be denied on the
ground that the director or shareholder is on unfriendly terms with the officers of the corporation whose records
are sought to be inspected.
However, a director cannot take copies of books and papers as an incident to the right of inspection, without a
court order, outside of the corporation’s premises.
3. Director or stockholder has no absolute right to secure certified copies of the minutes of the corporation until
these have been written up and approved by the directors present during the meeting.
CASE LAW/ DOCTRINE:
141 Gokongwei v. SEC AUTHOR: De Leon

G.R. No. L-45911 April 11, 1979
TOPIC: Inspection
PONENTE: ANTONIO, J.
FACTS:
This is a petition for “declaration of nullity of amended by-laws, cancellation of certificate of filing of
amended by-laws and damages” filed by petitioner John Gokongwei against the majority of the members of the
Board of Directors. He has the ff causes of action:
1. that the Board in amending the by-laws, had no authority to do so because it was based on
the a 1961 authorization and the amendment being contested was in 1976, and the authorization should
have been based on votes made according to the 1976 shares, not the 1961 shares,
2. the authority granted in 1961 had already been exercised in 1962 and 1963, after which
the authority of the Board ceased to exist,
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3. membership of the Board changed since 1961, there are 6 new directors,
4. that prior to the amendment of the by-laws1, he had all the qualifications to be a director
(he was a substantial stockholder) and the aamended by-laws disqualified him and deprived him of a
vested right to be voted,
5. that the corporation has no inherent power to disqualify a stockholder from being elected
and therefore it is an ultra vires and void act.
It was prayed that the amended by-laws be declared null and void and the certificate of filing be cancelled, and
that individual respondents be made to pay damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the Securities and Exchange
Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of
respondent corporation refused to allow him to inspect its records despite request made by petitioner for
production of certain documents enumerated in the request, and that respondent corporation had been attempting
to suppress information from its stockholders despite a negative reply by the SEC to its query regarding their
authority to do so. Among the documents requested to be copied were:
 minutes of the stockholder's meeting field on March 13, 1961,
 copy of the management contract between San Miguel Corporation and A. Soriano Corporation
(ANSCOR);
 latest balance sheet of San Miguel International, Inc.;
 authority of the stockholders to invest the funds of respondent corporation in San Miguel International,
Inc.; and
 Lists of salaries, allowances, bonuses, and other compensation, if any, received by Andres M. Soriano,
Jr. and/or its successor-in-interest.
The Securities and Exchange Commission resolved the motion for production and inspection of documents:
…As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries, allowances, bonuses,
compensation and/or remuneration received by respondent Jose M. Soriano, Jr. and Andres Soriano from San
Miguel International, Inc. and/or its successors-in- interest, the Petition to produce and inspect the same is
DENIED, as petitioner-movant is not a stockholder of San Miguel International, Inc. and has, therefore, no
inherent right to inspect said documents.
ISSUE(S): W/N respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel Corporation
HELD: Yes
RATIO:
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business transactions
of the corporation and minutes of any meeting shall be open to the inspection of any director, member or
stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the
assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property,
whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a ownership.
This right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that
where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him
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with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the
corporation. In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has
to be proper and lawful in character and not inimical to the interest of the corporation.
While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a
matter of law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of
the corporation in which he is a stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do not. It has been held that where a
corporation owns approximately no property except the shares of stock of subsidiary corporations which are
merely agents or instrumentalities of the holding company, the legal fiction of distinct corporate entities may be
disregarded and the books, papers and documents of all the corporations may be required to be produced for
examination, and that a writ of mandamus, may be granted, as the records of the subsidiary were, to all intents
and purposes, the records of the parent even though subsidiary was not named as a party. mandamus was
likewise held proper to inspect both the subsidiary's and the parent corporation's books upon proof of sufficient
control or dominion by the parent showing the relation of principal or agent or something similar thereto.
On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation is a
separate and distinct corporation domiciled and with its books and records in another jurisdiction, and is not
legally subject to the control of the parent company, although it owned a vast majority of the stock of the
subsidiary. Likewise, inspection of the books of an allied corporation by stockholder of the parent company
which owns all the stock of the subsidiary has been refused on the ground that the stockholder was not within the
class of "persons having an interest."
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel
Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the
corporation as extending to books and records of such wholly subsidiary which are in respondent
corporation's possession and control.
CASE LAW/ DOCTRINE:
Naka bold
142 SLAV VS. POLONIA PUBLISHING AUTHOR: DELFIN, K.

NOTES:
TOPIC: SECTION 32 American Case, magulo basta yung
PONENTE: shareholder parang double agent. He wants
access to the books of the publishing so he can
give info to the direct competitor who initiated
the buying of the stock in the first place for
that purpose.
EMERGENCY RECIT:
FACTS:
 Plaintiff (Slay) is the owner of one share of stock in the defendant company (Polonia Pub), petitioned for
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mandamus to compel its officers to permit him to inspect and examine the books and statements of the
corporation basing his right upon the following provision in section 11, chap. 1, pt. 2, Act No. 84, Pub.
Acts 1921 (Comp., Laws Supp. 1922, § 9053 [50]) which states that:
"The books of every corporation containing its accounts shall be kept, and shall at all reasonable times
be open in the city, village or town where such corporation is located, or at the office of the treasurer of
such corporation within this State, for inspection by any of the stockholders of said corporation, and said
stockholders shall have access to the books and statements of said corporation and shall have the right to
examine the same in the said city, village or town or at said office."
 However, before the enactment of this provision, under the common law, a stockholder in a corporation
had the right, in a proper case, and for a proper purpose, to inspect the corporate records but such right is
a qualified, and not an absolute. The motives must be lawful and proper, and that his purpose in securing
the information was to for the interests of the corporation or his personal interest as a holder of corporate
stock.
 The provision in the statute however does not have such limitation. But the assumption is that the that
the request is made for a proper purpose; that the stockholder is acting in good faith and seeking thereby
to protect his own interest or that of the corporation, and therefore his request therefor need not be
accompanied by any statement of his purpose. The statute accords the right to him, and he is entitled to
the privilege for the asking.
 When Slay’s request is denied, he asked for relief. The corporation alleges that his purpose for looking at
the books in not coupled with good faith as but instead is detrimental to the best interests of the
corporation and its other stockholders.
ISSUE:
 Whether or not the right of the shareholder to inspect the books of the corporation is absolute and not
subject to limitations?
HELD:
 No, it is not absolute. It is subject to limitations.
RATIO:
 The supreme court of Wisconsin held that the stockholder may be prevented from using the information
thus secured for an unlawful purpose. And that although the provision in the common law was not
included it is considered assumed. It held that that “the courts will compel the inspection of the bank's
books under all circumstances. In issuing the writ of mandamus the court will exercise a sound discretion
and grant the right under proper safeguards to protect the interests of all concerned. The writ should not
be granted for speculative purposes or to gratify idle curiosity or to aid a blackmailer, but it may not be
denied to the stockholder who seeks the information for legitimate purposes."
 In this case, the direct competitor of the company Louis Wojcik, the owner of Polish Daily News was
losing money and induced one Anthony Glowczawski to buy one stock of Polina Pub in order to gain
access to its books and Slay herein petitioner is the employee of Louis Wojick from whom Anthony
Glowczawski bought the stock from. He has was also an associate of the latter’s business in Detroit
Commerce Corporation and other enterprise.
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 For this reason, the court held that |that the privilege of inspection by him was not sought in good faith
for the protection of the interests of the corporation, or of his own interest as a stockholder; and he was
therefore denied access to the books.
CASE LAW/DOCTRINE:
A stockholder in a corporation right to access the books, in a proper case, and for a proper purpose, to
inspect the corporate records but such right is a qualified, and not an absolute. The motives must be
lawful and proper, and that his purpose in securing the information was to for the interests of the
corporation or his personal interest as a holder of corporate stock.
143 Klein et.al. vs Scranton Life Insurance AUTHOR: Enriquez

Company NOTES:
1940
TOPIC: The Right of Inspection
PONENTE:
FACTS:
 Klein et.al. are stockholders of the Scranton Life Insurance Company (Scranton).
 They stated in a letter a request to examine the books, ascertain the value of their shares and also to copy a
list of the shareholders in order that he might solicit proxies for voting at the annual meeting of the
corporation’s shareholders.
 However, the officers of Scranton refused to do so.
 Hence, Klein et.al. filed a bill in equity (complaint) praying that the officers of Scranton be directed to
permit them to examine the books and records of the corporation and to make a copy of the list of
shareholders for the solicitation of proxies.
 The Court of Common Pleas of Lackwanna County (Lower Court) dismissed the bill in equity (complaint)
on the ground that Klein et.al. are motivated by “some speculative purpose.” That Klein et.al. at no time
have set forth any complaint or averment of mismanagement, wrongdoing, unlawful activity or any
violation of law of sound principle of management.
ISSUE(S): Whether Klein et.al. should be allowed to examine the books of Scranton
HELD: Yes.
RATIO:
 It is not necessary for a stockholder to aver mismanagement or fraud to obtain his right to inspect
corporate records.
 The writ should not be granted for speculative purposes, or to gratify idle curiosity, or to aid a
blackmailer, but it may not be denied to a stockholder who seeks the information for legitimate purposes.
 A stockholder has, without question, the right to inspect the books of the company, at a proper time, and
in a proper way, even though his only object be to ascertain whether the business has been properly
conducted. Such a right is necessary for the protection of stockholders. The books and papers of a
corporation are the common property of all the stockholders
 In this case, there is no evidence to sustain a finding that the examination of the books was sought for
speculative purposes, rather than for the reasons (to make a copy of the list of shareholders for the
solicitation of proxies) averred in the bill in equity (complaint).
CASE LAW/ DOCTRINE:

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144 Pascual v. Del Saz Orozco AUTHOR: Garcia

[G.R. No. 5174 March 17, 1911] NOTES:
TOPIC: Requirements Relating to Derivative Suit
PONENTE: Trent, J.
Emergency Recit
 Del Saz Orozco et al., as members of the board of directors and board of government, during the years
1903-1907, did fraudulently, and to the great prejudice of the bank and its stockholders, appropriate to
their won use from the profits of the bank sums of money. Their immediate predecessors committed the
same fraudulent acts during the years 1899-1902. Pascual became a stockholder during 1903. Lower
Court dismissed the case. Whether or not Pascual has the right to file such case. Court: with regard to the
years 1903-1907 yes, but with regard to 1899-1902 no. Reason: He is already a stockholder in 1903.
FACTS:
 Banco Español-Filipino is a banking corporation, constituted as such by royal decree of the Crown of Spain
in the year 1854, the original grant having been subsequently extended and modified by royal decree of July
14, 1897, and by Act No. 1790 of the Philippine Commission.
 The only compensation contemplated or provided for the managing officers of the bank was a certain
percent of the net profits resulting from the bank’s operations, as set forth in article 80 of its reformed
charter or statutes, which article is as follows: (you can skip this part and move to the next bullet )
“Of the profits or gains which may result from the bank’s operations, after deducting all the expenses of
its administration and the part, if any, which corresponds to the legal reserve fund, there shall be set apart
ten percent for the directors and five percent for the board of government, the distribution of which shall
be made as provided in the regulations. The eighty-five percent remaining shall belong integrally to the
shareholders pro rata the number of shares owned by each.”
 During the years 1903-1907 Del Saz Orozco et al., without the knowledge, consent, or acquiescence of the
stockholders, deducted their respective compensation from the gross income instead of from the net profits
of the bank, thereby defrauding the bank and its stockholders of approximately P20,000 per annum; that
though due demand has been made upon them therefor, defendants refuse to refund to the bank the sums so
misappropriated, or any part thereof; that defendants constitute a majority of the present board of directors
of the bank, who alone can authorize an action against them in the name of the corporation, and that prior to
the filing of the present suit Pascual exhausted every remedy in the premises within this banking
corporation.
 Immediate predecessors in office in this bank during the years 1899-1902, committed the same illegality as
to their compensation as is charged against Del Saz et al.; that in the four years immediately following the
year 1902, they were the only officials or representatives of the bank who could and should investigate and
take action in regard to the sums of money thus fraudulently appropriated by their predecessors…
 Pascual became a stockholder on the 13th of November, 1903.
 The court below sustained the demurrer as to the first and second causes of action on the ground that in
actions of this character the plaintiff must aver in his complaint that he was the owner of stock in the
corporation at the time of the occurences complained of, or else that the stock has since devolved upon him
by operation of law. In suits of this character the corporation itself and not the plaintiff stockholder is the
real party in interest.
ISSUE(S):
1. Whether or not Pascual has the right to file a suit with regard to the fraudulent act allegedly committed
by Del Saz Orozco et al., during the years 1903-1907 against them.
2. Whether or not Pascual has the right to file a suit with regard to the fraudulent act of the immediate
predecessors of Del Saz Orozco et al. during the years 1899-1902 against Del Saz Orozco et al.
HELD:
1. Yes. He was already a stockholder during those years.
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2. No. He was not a stockholder yet during those years.
RATIO:
1. Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or
negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a single
stockholder may institute that suit, suing on behalf of himself and other stockholders and for the benefit
of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to
the stockholders.
The plaintiff was, therefore, a stockholder during all the time for which he seeks recovery in his first
cause of action, except the first six months of the year 1903.
Before the shareholder is permitted, in his own name to institute and conduct a litigation which usually
belongs to the corporation, he should show to the satisfaction of the court that he has exhausted all the
means within his reach to attain within the corporation itself, the redress of his grievances, or action in
conformity to his wishes. He must make an earnest, not a simulated effort, with the managing body of the
corporation, to induce remedial action on their part, and this must be made apparent to the court. If time
permits, or has permitted, he must show, if he fails with the directors, that he has made an honest effort to
obtain action by the stockholders as a body, in the matter of which he complains. And he must show a
case, if this is not done, where it could not be done, or it was not reasonable to require it.
2. Ownership of the stock at the time of the transaction is a fact essential to the maintenance of the suit in
any event. Unless that fact exists no cause of action exits, whether the suit is collusive or not. The weight
of authority seems to be that a person who did not own stock at the time of the transactions complained
of cannot complain or bring a suit to have them declared illegal. A stockholder in a corporation who was
not such at the time of the transactions complained of, or whose shares had not devolved upon him since
by operation of law, cannot maintain suits of this character, unless such transactions continue and are
injurious to the stockholder, or affect him especially and specifically in some other way.
*** Where stock is required for the purpose of bringing suit it has been held that the complainant is a mere
interloper and entitled to no consideration. And stockholder suits not brought in good faith in the interest of the
corporation have been dismissed on that ground.
CASE LAW/ DOCTRINE:
145 Juan D. Evangelista et al. v. Rafael Santos AUTHOR: Magsino, Patricia Marie C.
G. R. No. L-1721 (May 19, 1950) NOTES:
TOPIC: Derivative suits Derivative suit – a suit by a shareholder to
PONENTE: Reyes, J. enforce a corporate cause of action
- a suit brought by one or more
stockholders/members in the name and on
behalf of the corporation to redress wrongs
committed against it (from UP reviewer)
Nominal party – An entity whose involvement

as a defendant/plaintiff in a case has no bearing
on the outcome
* For plaintiffs, only Evangelista was named
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FACTS:
 Action by the minority stockholders (Evangelista et al as plaintiffs) of Vitali Lumber Company, Inc.
against defendant Rafael Santos – a majority stockholder, holding more than 50% of the stocks of
the corporation
 The complaint alleges that Santos, in his triple capacity as President, Manager, and Treasurer
mismanaged the affairs of the corporation causing its properties and assets to disappear, and the
subsequent complete ruin and total depreciation of the corporation stocks
 Complaint prays for the judgment requiring the defendant to render an account of his administration
of the corporate affairs and assets, and to pay the plaintiffs the value of the stocks they each hold
 Defendant Santos filed a motion for the dismissal of the complaint on 2 grounds; (1) improper
venue, and (2) complaint did not state a cause of action in favor of the plaintiffs
 LOWER COURT DISMISSED THE COMPLAINT BASED ON THOSE GROUNDS
 For improper venue – Defendant Santos was served summons at his residence in Pasay but he states
that he is not a resident of that city but actually a resident of Iloilo City
 The plaintiffs, believing that Santos resided in the province of Rizal, brought their action in the CFI
of that province, the lower court found that Santos is not a resident of Rizal but of Iloilo City
 Plaintiffs now appeal to the court as to their right to bring this action for their benefit
ISSUE(S):
 Do the plaintiffs have a right to bring this action for their benefit?
HELD:
 NO. They do not have the right to bring this action for their benefit. The real party in interest is
the corporation, they may not directly claim damages for themselves.
 Lower Court decision is affirmed.
RATIO:
 The complaint shows that the action is for damages resulting form the mismanagement of the affairs, and
assets resulting to the complete ruin of the corporation, and the subsequent loss of the value of its stocks.
Clearly the injury suffered was primarily to the corporation and not to the plaintiffs. The real party in
interest is the corporation.
 The stockholders (Evangelista et al.) cannot directly claim those damages for themselves because it
would result in appropriation and distribution of the corporate assets before the dissolution of the
corporation
 The damages to be recovered should pertain to the corporation, in other words, it is a derivative suit
brought by a stockholder as the nominal party for the benefit of the corporation – the real party in
interest.
 In this case, the plaintiffs brought the action not for the corporation’s benefit but for their own benefit
 The Court finds that the plaintiff’s complaint shows no cause of action in their favor and affirms the
ruling of the lower court dismissing their complaint on that ground
 The Court notes that the action stated in the complaint is susceptible of being converted into a derivative
suit for the benefit of the corporation by a mere change of prayer.
 Since it was filed in the wrong venue, it is not possible now so the complaint has to be dismissed on this
ground as well
 Order appealed from is affirmed, but with no prejudice to the filing of the proper action in the proper
venue.
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CASE LAW/ DOCTRINE:
146 Liken et.al. v. Shaffer et.al. AUTHOR: Mendoza

64 F.Supp.432 (January 26,1946) Northern District of NOTES:
Iowa
TOPIC: Stockholder's Derivative Suit
PONENTE:
FACTS:
 The Shores-Mueller Company, a corporation, was organized under the laws of the State of Iowa and
was engaged in the business of manufacturing pharmaceuticals and other allied products in the city of
Cedar Rapids, Linn County, Iowa. In 1933, certain proceedings were had in the Superior Court of
Cedar Rapids, Iowa, whereby Arthur Barlow was appointed receiver for the corporation. Its assets
were sold at a receiver's sale. The plaintiffs, who are stockholders in the Shores-Mueller Company,
claim that the individual defendants were in 1933 officers and directors of the company, and some of
them were also voting stock trustees of a large amount of stock in the corporation.
 The claim of the plaintiffs is in that the individual defendants despoiled the Shores-Mueller Company
of its assets by means of a collusive and fraudulent receivership and receiver's sale. It is claimed that
as a part of the fraudulent scheme, the defendants caused the defendant, Shores Company, to be
organized as a corporation under the laws of the State of Iowa, and that the Shores Company has the
assets of which the Shores-Mueller Company was despoiled and that the Shores Company is owned
and controlled by certain of the individual defendants.
 It appears that the receiver, Arthur Barlow, filed his final report as receiver on October 5, 1933, and
the receivership has long since been terminated. It further appears that no stockholders' or directors'
meeting has been held since 1933, and that the corporation has been inactive since that time. It was
stipulated by the parties that: "The Shores-Mueller Company, an Iowa Corporation, was legally
incorporated, organized, and existing on January 1, 1931, and at all times subsequent thereto and up
to the present time."
 That the assets of the corporation had been sold at receiver's sale by Barlow and that he made his final report and been
discharged as receiver.The wrong of which the plaintiff complained was that at the time of the sale of the corporate
assets by Barlow as receiver, there has been an unaccounted cash in the amount of $3,241 of the corporation.
 The plaintiff stated that the action filed was brought in behalf of himslef and the other stockholders of the Shores-
Mueller Company. The relief asked for the restoration of the property to the company. The action filed was a
stockholder's derivative suit.
 Barlow countered by filing a demurrer stating that he could not be sued as receiver.
 A motion to dismiss was also filed by Shaffer, Barlow et.al. The lower court granted it and the plaintiff was given ten
days to respond.
 The motion to dismiss was granted by the lower court in favor of the defendants.
ISSUE(S):
Whether or not the filing of the stockholder's derivative suit was proper against the defendants as receivers.
HELD:
The court affirmed the decision of the lower court stating that there was no claim against the defendants.
RATIO:
 In the case , the complaint was dual in character, as to one pahse, it was a stockholder's derivative suit asking relief
in behalf of the company and the other was for personal recovery. The Lower Court denied the plaintiffs any relief.
That denial was not based upon a matter of abatement but upon a matter of bar.That it constituted a bar to any
subsequent suit brought in behalf of the Shores-Muller Company against the defendants upon the same claim.
There was an adjudication in favor of the defendants which stands unreversed.
 The general rule is that a judgment in a stockholder's derivative suit is not ordinarily res judicata as to a right of
action that a stockholder may have in his individual capacity.Also, ordinarily a suitor filing in his individual
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capacity is not barred by an adjudication in an action to which he was not a party. However, in the case, at the time
the lower court stood before it, it was solely an individual and direct suit and not a stockholder's derivative suit
 The Iowa Supreme Court in dealing with a stockholder's derivative suit states: The action is, to all intents and
purposes, the suit of the corporation. And that they did not bring the suit as agents of the corporation but simply in
order to set in motion the judicial machinery. The action was instituted for the benefit of the corporation, and the
relief could have been granted to no other.
 It is well-settled that the appointment of a receiver does not result in the dissolution of a corporation. A
stockholder's derivative suit may be brought against the directors even thought the corporation is in receivership,
where a demand upon the receiver to bring the suit would be useless.
CASE LAW/ DOCTRINE:
1.A stockholder's derivative suit is an invention of the courts of equity and is recognizable only in equity and cannot be
maintained at law. Even if the claim, if sued directly by the corporation, would be an action at law, yet, if enforced by
means of a stockholder's derivative suit, it is prosecuted by an action in equity. When a stockholder institutes a derivative
suit, it is the same in legal effect as if the corporation itself had sued. If the corporation does not have a cause of action,
then there can be no recovery in a stockholder's derivative suit.
2.The general rule is that a judgment for a defendant or defendants in a stockholder's derivative suit
operates as a bar in favor of such defendant or defendants on the same claim or cause of action in a
subsequent stockholder's derivative suit by other stockholders. And where the loss has been caused to a
corporation by the wrongful acts of those managing it, the right of action belongs to the corporation.
3. An unlawful diversion of funds of the corporation is an injury to the corporation.Stockholders may maintain aan action
therefor, if the the directors on demand refuse to do so, but such suit is for the benefit of the corporation and not in their
individual right.
4. Judgment in a stockholder's derivative suit is not res judicata if such action was fraudulent and collusive.
147 KEENAN V ESHLEMAN AUTHOR: PAGCALIWAGAN

23 Del. Ch. 234 (Del. 1938) NOTES:
TOPIC: Requirements Relating to Derivative Suits Keenan – President of Consolidated
PONENTE: Marvin – Secretary of Consolidated
Brewer – Treasurer of Consolidated
The 3 are officers and majority directors of Sanitary.
FACTS:
 H.A. Stone & Company (Stone) is a corporation organized in 1915 for the purpose of financing small
companies in need of financial assistance.
 Stone’s plan was to sell on behalf of any company which it had accepted as a client, an issue of the latter’s
preferred shares, Stone receiving in payment for its services a majority of the common shares.
 Stone organized and owned all the shares of General Stabilizing & Guaranty Fund, Inc. (General), which,
although having no assets, made a practice of undertaking to guarantee the payment of dividends on the
preferred shares of the client companies of Stone.
 Sanitary Company of America (Sanitary) was one of the client companies of Stone and was engaged in the
manufacture of sewer pipe and plumbing supplies.
 Stone and General failed and their assets (consisting shares of common stocks of Sanitary and other
Companies) were taken over by a shareholders’ committee.
 These assets were transferred to Consolidated Management Association (Consolidated) – organized
for the purpose of attempting to salvage something for the shareholders of Stone.
 All the shares of Consolidated were issued to the appellants (Keenan and Brewer) as voting trustees
and controlled Sanitary because Consolidated owned a majority of the voting shares of Sanitary.
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 By resolution of the directors of Sanitary, company agreed to pay $300 a month for management services to
be rendered by Consolidated.
 The total amount paid by Sanitary to Consolidated pursuant to this resolution is $28,800
 This amount was substantially identical with the amount paid by Consolidated to Keenan, Brewer,
and Marvin, who were its only officers and employees, with the exception of a part-time
stenographer.
 During the same period Sanitary paid Keenan and Brewer substantial salaries and bonuses
 Minority shareholders of Sanitary brought a bill for an accounting claiming that in effect Sanitary paid
Keenan and Brewer double compensation for the same services and that Marvin participated in the wrong.
 After 3 years of the pending suit, the majority shareholders of Sanitary voted to ratify and confirm the action
of the directors and officers of Sanitary with respect to the matters complained of.
 The court held that the conduct of the appellants “constituted fraud on the corporation and that it was not in
the power of the majority of the stockholders to deprive the minority of their right to insist upon a
ratification” The remaining question is the issue.
ISSUE(S): WON only those shareholders who had not ratified the appellants’ acts should share in the recovery.
HELD: NO
RATIO:
The question is whether ratification of fraudulent acts by a majority of the stockholders inures to the benefit of
the appellants to the extent that the decree against them should be in such amount as to redress the wrong
suffered by the dissenting stockholders by causing to be paid to them a dividend of the recoverable amount as a
dividend. The misappropriations were a fraud on Sanitary, acts which the directors could not have authorized,
and which the stockholders could not ratify. To allow the defendants to retain a part of the misappropriations in
proportion to the stock interest of the ratifying stockholders would be to permit ratification of illegal acts to that
extent.
In the circumstances it was ultra vires the corporation, its directors and stockholders, to make donations of
corporate assets. To allow the defendants to retain a part of their unlawful gains would constitute a gift.
The action here was a derivative one, brought on behalf of the corporation, and the complaint and the defenses
are to be considered as though the corporation itself were suing the appellants. If such were the action, releases
to the individual defendants by one or more stockholders would be without legal effect, and in a derivative suit,
ratifications or waivers are equally ineffective. To permit the recovery to be diminished by an amount in
proportion to the stock holdings of the ratifying stockholders would tend to encourage fraud.
Generally, where the action is a derivative one, brought for the benefit of a going corporation, equitable
principles demand that the theory of the action be recognized and that the recoverable amount be decreed
to be paid to the corporation, notwithstanding releases, ratifications or waivers after the event.
CASE LAW/ DOCTRINE: Generally, where the action is a derivative one, brought for the benefit of a
going corporation, equitable principles demand that the theory of the action be recognized and that the
recoverable amount be decreed to be paid to the corporation, notwithstanding releases, ratifications or
waivers after the event.
148 Otis and Co. V. Pennsylvania Co. et al. AUTHOR: REYES

[G.R. No. DATE] NOTES:
TOPIC:
PONENTE: District Judge Kalodner
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FACTS:
 The case involved is a derivative action brought by Otis and Co. against Pennsylvania Railroad co. (PRR)
and its wholly-owned subsidiary, Pennsylvania ohio and Detroit Railroad (POD) co.
 Otis being a stock holder in PRR is concerned with the alleged losses PRR suffered from its issuance and
sale of over P28,000,000.00 in bonds which was Guaranteed by POD.
 PRR directly or indirectly owned all the capital stock of POD. In 1943 POD had an outstanding total of
P28,483,000 “series A” bonds maturing on April 1 1977, bearing interest at 4-1/4% payable, semi-annually
and redeemable on any interest payment date subsequent to April 1, 1932. The bonds were guaranteed both
as to principal and interest by PRR.
 Mr. Clement, president of PRR and Mr. Pabst, Vice-president of PRR and president of POD were
contemplating on how to refinance the series A bonds.
 When the bond market became lucrative during April of 1943, Clement and was enticed so much so that he
directed Pabst to seek out the financing house of Kuhn, Loeb and co. to explore the idea of selling at a price
not less than par a new issue of POD bonds guaranteed by PRR in the same amount as the series a bonds but
bearing an interest not exceeding 3-3/4%.
 After lengthy negotiations, the directors of POD authorized a board resolution authorizing the sale of the
new series D 3-3/4% bonds “at the best obtainable price” they were sold on the same day to Kuhn, Loeb and
co. at par and accrued interest. This transaction took place on June 22, 1943.
 The series D bonds contained a sinking provision ( the sinking provision allowed for the bonds to be
redeemed at an earlier date than the date of maturity and for a premium), the sinking provision did not exist
in the series A bonds.
 JUNE 22 1943 A DAY BEFORE THE SALE TO KUHN ET AL. A certain Mr. Claflin who represented
Halsey, Stuart, and co. visited Pabst and inquired if he could their house could refinance the POD series A
bonds. Pabts was unresponsive and implied that should there be s refinancing, Halsey would not be able to
bid.
 The Halsey house along with Otis and co. sent telegrams to Clements and other directors and officers of
POD and PRR. They offered to bid competitively. The defendants would later on say that they recived such
telegram on June 24th, after their transaction had already been completed.
 On june 28, the Halsey House and Otis and co. sent another telegram, criticizing the technical aspects of the
deal with Kuhn and they should be given the chance to present their proposal. They also scheduled a
conference to discuss changes in terms and conditions and that the Intestate commerce commission was
invited to weigh in
 The findings of the ICC showed that they felt that the applicants for the bonds approval (PRR and POD) did
not receive the best price and that the negotiations were not done properly but merely at an “arm’s length.”
 An action was brought against PRR and POD accusing them of negligence and failing to shop around for
the best offer which resulted in a half a million dollar loss.
 Defendants moved for a summary judgment arguing that it was done with an honest exercise of judgment
and that they followed a procedure normally done by other railroad companies.
ISSUE
Whether or not the individual defendants ( Clement and Pabst and the officers and directors of PRR) are liable
for the losses suffered by POD.
HELD: No, defendants motion for summary judgment is granted.

RATIO:
 Because PRR is incorporated in Pennsylvania, the statute of Pennsylvania regarding the relations of
officers and directors to the corporation is deemed as the operative law.
 According to Penn Statute: the officers and directors shall be deemed to stand in a fiduciary relation to
the corporation, and shall discharge the duties of their respective positions in good faith and with that
diligence, care, and skill which ordinarily prudent men would exercise under similar circumstances in
their personal business affairs.
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 Applying the Business Judgment rule and reconciling it with the rule on negligence, courts do not
intervene in the decisions of directors because it presumed that reasonable judgment is always being
exercised. Negligence to be a basis for court intervention must be proven clearly. Mistakes or errors in
the exercise of honest business judgment do not subject the officers and directors to liability for
negligence in the discharge of their appointed duties.
 It is not the function of the courts to say “had the directors decided in this manner, they would have
averted mistake” because they are entrusted with the management of the affairs of the corporation and
are thus given wide latitude.
 Fraud could not be proven to have existed, no conflict of interest was shown when the defendants dealt
with Kuhn et al. Kuhn did not even reveal their agents or underwriters to PRR and POD nor did they
even discuss matters regarding railroad interests.
 The court finally said that upon examination of the facts, the transactions were not attended by bad faith
or negligence. But rather were carefully planned out.
CASE LAW/ DOCTRINE:
AUTHOR: S A Y O
NOTES:
149. REPUBLIC BANK v.
MIGUEL CUADERNO, BIENVENIDO DIZON, Direct appeal from an order of the Court of First
PABLO ROMAN, Instance of Manila, in its civil case No. 53936,
THE BOARD OF DIRECTORS OF THE dismissing the petitioner's complaint on the ground of
REPUBLIC BANK AND THE MONETARY failure to state cause of action.
BOARD OF THE CENTRAL BANK OF THE
PHILIPPINES
G.R. No. L-22399

March 30, 1967
TOPIC: Derivative Suit
REYES, J.B.L., J.
FACTS:
 Damaso Perez, a stockholder of the Republic Bank instituted a derivative suit for and in behalf of said
Bank, against Miguel Cuaderno, Bienvenido Dizon, the Board of Directors of the Republic Bank, and the
Monetary Board of the Central Bank of the Philippines.
 Damaso Perez had complained to the Monetary Board of the Central Bank against certain frauds
allegedly committed by defendant Pablo Roman, in that being chairman of the Board of Directors of the
Republic Bank, and of its Executive Loan Committee "in grave abuse of his fiduciary duty and taking
advantage of his said positions and in connivance with other officials of the Republic Bank"
 Roman had fraudulently granted or caused to be granted loans to fictitious and non-existing persons and
to their close friends, relatives and/or employees, who were in reality their dummies, on the basis of
fictitious and inflated appraised values of real estate properties; that said loans amounted to almost 4
million pesos
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 Acting upon the complaint, Miguel Cuaderno (then Governor of the Central Bank) and the Monetary
Board ordered an investigation, which was carried out by Bank Examiners; that they and the
Superintendent of Banks of the Central Bank reported that certain mortgage loans amounting to
P2,303,400.00 were granted in violation of sections 77, 78 and 88 of the General Banking Act;
 that acting on said reports, the Monetary Board, of which defendant Cuaderno was a member, ordered a
new Board of Directors of the Republic Bank to be elected, which was done, and subsequently approved
by the Monetary Board;
 The Monetary Board accepted the offer of Pablo Roman to put up adequate security for the questioned
loans made by the Republic Bank, and such security was made a condition for the resumption of the
Bank's normal operations
 The Central Bank through its Governor, Miguel Cuaderno, referred to special prosecutors of the
Department of Justice the banking frauds and violations of the Banking Act, reported by the
Superintendent of Banks, for investigation and prosecution, but no information was filed up to the time
of the retirement of Cuaderno in 1961;
 That other similar frauds were subsequently discovered; that to neutralize the impending action against
him, Pablo Roman engaged Miguel Cuaderno as technical consultant and selected Bienvenido Dizon
as chairman of the Board of Directors of the Republic Bank
 The Board of Directors composed of individuals personally selected and chosen by Roman, connived and
confederated in approving the appointment and selection of Cuaderno and Dizon
 That such action was motivated by bad faith and without intention to protect the interest of the Republic
Bank but were prompted to protect Pablo Roman from criminal prosecution
 That the appointment of Cuaderno and his acceptance of the position of technical consultant are immoral,
anomalous and illegal, and his compensation highly unconscionable because court actions involving the
actuations of Cuaderno as Governor and Member or Chairman of the Monetary Board are still pending in
court.
 That as member of the Monetary Board from 1961 to 1962, Bienvenido Dizon exercised supervision over
the Republic Bank; that the selection of Dizon as chairman of the Board of the Republic Bank after he
was forced to resign from the presidency of the Philippine National Bank and from membership of the
Monetary Board and within one year thereafter is in violation of option 3, sub-paragraph (d) of the Anti-
Graft and Corrupt Practices Act.
 The complaint, therefore, prayed for a writ of preliminary injunction against the Monetary Board to
prevent its confirmation of the appointments of Dizon and Cuaderno.
 The Monetary Board filed an answer with denials, admissions and affirmative defenses; but the other
defendants filed separate motions to dismiss on practically the same grounds: no valid cause of action
against the individual movants; lack of legal capacity of plaintiff-relator to sue; and non-exhaustion of
intra-corporate remedies.
 Trial Court: "taking into consideration the grounds alleged in the motions to dismiss and the opposition
for the issuance of a writ of preliminary injunction and the affirmative defenses filed by the defendants
and the arguments in support thereof", and "that there are already eight cases pending in the different
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branches of this court between practically the same parties", denied the petition for a writ of preliminary
injunction and dismissed the case. The court in effect suggested that the matter at issue in the case may
be presented in any of the pending eight cases by means of amended and supplemental pleadings.
ISSUE(S): WON the lower court erred in dismissing complaint (i.e. WON Damaso Perez has legal capacity)
HELD: Yes (Yes he has legal capacity)
RATIO:
 Respondents controverted the right of plaintiff to question the appointment and selection of defendants
Cuaderno and Dizon, which they contend to be the result of corporate acts with which plaintiff, as
stockholder, cannot interfere. Normally, this is correct, but Philippine jurisprudence is settled that an
individual stockholder is permitted to institute a derivative or representative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the
officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia
Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388).
 Plaintiff-appellant's action here is precisely in conformity, with these principles. He is neither alleging
nor vindicating his own individual interest or prejudice, but the interest of the Republic Bank and the
damage caused to it. The action he has brought is a derivative one, expressly manifested to be for and in
behalf of the Republic Bank, because it was futile to demand action by the corporation, since its
Directors were nominees and creatures of defendant Pablo Roman (Complaint, p. 6). The frauds charged
by plaintiff are frauds against the Bank that redounded to its prejudice.
 The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of
Bienvenido Dizon to head the Board of Directors of the Republic Bank, were made only to shield Pablo
Roman from criminal prosecution and not to further the interests of the Bank, and avers that both men
are Roman's alter egos. There is no denying that the facts thus pleaded in the complaint constitute a cause
of action for the bank: if the questioned appointments were made solely to protect Roman from criminal
prosecution, by a Board composed by Roman's creatures and nominees, then the moneys disbursed in
favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate funds, since the
Republic Bank would have no interest in shielding Roman, and the directors in approving the
appointments would be committing a breach of trust; the Bank, therefore, could sue to nullify the
appointments, enjoin disbursement of its funds to pay them, and recover those paid out for the purpose,
as prayed for in the complaint in this case (Angeles vs. Santos, supra.).
 In view of the foregoing, the order dismissing the complaint is reversed and set aside. The case is
remanded to the court of origin with instructions to overrule the motions to dismiss and require the
defendants to answer the complaint. Thereafter, the case shall be tried and decided on its merits. Costs
against defendants-appellees. So ordered.
CASE LAW/ DOCTRINE:
Philippine jurisprudence is settled that an individual stockholder is permitted to institute a derivative or

representative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold
the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with
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the corporation as the real party in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia
Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388).
150 REYES vs. TAN AUTHOR: SOLIS

[G.R. No. 16982, September 30, 1961] NOTES: Friends, classmates, I tried. If hindi nyo na
TOPIC: Derivative Suits gets digest pls refer to the full text or refer sa book
PONENTE: Labrador, J. which is page 854. 
FACTS:
 The corporation, Roxas-Kalaw Textile Mills, Inc., was organized on 5 June 1954 by defendants Cesar K.
Roxas, Adelia K. Roxas, Benjamin M. Roxas, Jose Ma. Barcelona and Morris Wilson, for and on behalf of
the following primary principals with the following shareholdings: Adelia K. Roxas, 1200 Class A shares; I.
Sherman, 900 Class A shares; Robert W. Born, 450 Class A shares and Morris Wilson, 450 Class A shares;
that respondent holds both Class A and Class B shares and number and value thereof are as follows: Class
A—50 shares, Class B—1,250 shares.
 On 8 May 1957, the Board of Directors approved a resolution designating one Dayaram as co-manager and
Morris Wilson was likewise designated as co-manager with responsibilities for the management of the
factory only.
 An office in New York was opened for the purpose of supervising purchases, which purchases must have
the unanimous agreement of Cesar K. Ramos, New York resident member of the board of directors, Robert
Born and Wadhumal Dalamal or their respective representatives.
 Several purchases aggregating $289.678.86 were made in New York for raw materials and shipped to the
Philippines, which shipment were found out to consist not of raw materials but already finished products,
for which reasons the Central Bank of the Philippines stopped all dollar allocations for raw materials for the
corporation which necessarily led to the paralyzation of the operation of the textile mill and its business.
ISSUE(S): Whether or not a derivative suit will prosper.
HELD: NO.
RATIO:
 The claim that respondent JUSTINIANI did not take steps to remedy the illegal importation for a period
of two years is without merit. During that period of time respondent had the right to assume and expect
that the directors would remedy the anomalous situation of the corporation brought about by their own
wrong doing. Only after such period of time had elapsed could respondent conclude that the directors
were remiss in their duty to protect the corporation property and business. The fraud consisted in
importing finished textile instead of raw cotton for the textile mill; the fraud, therefore, was committed
by the manager of the business and was consented to by the directors, evidently beyond reach of
respondent as treasurer for that period.
 The directors permitted the fraudulent transaction to go unpunished and nothing appears to have been
done to remove the erring purchasing managers. In a way the appointment of a receiver may have been
thought of by the court below that the dollar allocation for raw material may be revived and the textitle
mill placed on an operating basis.
CASE LAW/ DOCTRINE:
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151. Chase vs CFI of Manila AUTHOR: The Taliño
[G.R. No. L-20457; 10/29/1966] NOTES: Straightforward case 
TOPIC: Derivative Suits
PONENTE: Dizon, J.
FACTS:
 On August 20, 1960, petitioner, a minority stockholder of AMPARTS, filed a derivative suit in the Court
of First Instance of Manila against Dr. Victor Buencamino Sr., Victor Buencamino, Jr., Dolores A.
Buencamino and Julio B. Francia, Jr., majority stockholders and corporate directors of AMPARTS
charging them with breach of trust; praying for their removal as directors and, if necessary, for the
dissolution and liquidation of said corporation. Attached to the complaint was an application for the
appointment of a receiver of AMPARTS.
 Respondents opposed the application for receivership and subsequently filed their answer to the
complaint. After a hearing on the application, the court issued an order dated denying the same, but
requiring respondents to file bond in the amount of P100,000.00 to answer for whatever damages
petitioner might suffer by reason of the denial. Petitioner's motion for reconsideration was likewise
denied.
 After trial on the merits, the court rendered judgment finding Dr. Buencamino guilty of mismanagement
and condemning him to pay Amparts the sum of P1,970,200 with legal interest from date of the filing of
the complaint; he is also prohibited from collecting any interest on the sum of Php 300,000.00 paid by
him on the 15th July, 1955 on the initial subscription, and such interest as has already been paid to him is
ordered refunded with legal interest from the date of the filing of the complaint
 On May 8, 1962, petitioner filed a motion for the appointment of Lawrence Moran as receiver of
Amparts until the full amount of the above judgment against respondent Buencamino is fully satisfied or
until the dissolution or liquidation of said corporation.
 On May 12, 1962, the court, presided by Hon. Magno S. Gatmaitan issued the following order:
o Mr. Chase shall have free access to AMPARTS and its records personally and/or through
representative duly authorized; and
o Decisions of Dr. Buencamino and/or management of AMPARTS shall be made known to Chase
who shall have the right to object and if so, the matter shall be notified to the Court which shall
resolve the difficulties; in the interim, pending the objection, the decision shall not be enforced or
made operative.
 Supplementing the above-quoted order, the respondent court, now presided by the Hon. Jesus De Veyra,
issued the following order of August 27, 1962:
“As for the appointment of a receiver, Judge Gatmaitan decided on the temporary measure of
giving petitioner a veto right, appealable to this Court, on all decisions of management.
Considering that up to the present, the Buencaminos own 2/3 of the stock of the corporation, the
solution is equitable and must be allowed to continue subject to the condition that once a decision
of management is made known to plaintiff, he must make known his objection thereto to the
Court within five days from receipt of said decision, otherwise he shall be deemed to have waived
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any objection to the decision.”
ISSUE(S): WON the CFI of Manila committed a grave abuse of discretion in failing to appoint a receiver.
HELD: No, it did not.

RATIO:
 It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust
and intracorporate remedy is futile, the minority stockholders may resort to the courts for
appropriate relief and, incidentally, ask for the appointment of a receiver for the protection of
their rights. In such case, however, the appointment of a receiver is a matter addressed to the
sound discretion of the court, and it has been frequently held that such discretion to appoint a
receiver who would take over the administration of the corporate business should be exercised with
great caution and only when the necessity therefor is clear.
 The facts of the present case show that, in connection with the order of June 10, 1961, which denied
petitioner's application for the appointment of a receiver, the court required respondents herein to file a
bond in the amount of P100,000.00 to answer for whatever damages petitioner might suffer by reason of
the denial. Again, perhaps by reason of the judgment rendered against Dr. Buencamino finding him
guilty of mismanagement etc., the respondent court, through the Hon. Jesus de Veyra, issued the order of
August 27, 1962 whose pertinent portion is quoted above.
CASE LAW/ DOCTRINE:
152 HOLMES v. CAMP AUTHOR: LAST NAME

180 App. Div. 409 (N.Y. App. Div. 1917) NOTES:
TOPIC: Requirements Relating to Derivative Suit
PONENTE: Scott, J.
FACTS:
 The respondents are the executors of the last will and testament of Dwight A. Jones who was, until
November 15, 1904, a vice-president of the Doe Run Lead Company, and also an officer and
director of the St. Joseph Lead Company and so continued until his death in December, 1913.
 It is alleged that on or about October 31, 1902, the Doe Run Lead Company acquired a large number
of shares of the capital stock of the St. Joseph Lead Company, of which, as it is said, a part were
held by and in the name of said Jones and another individually, and a part in the names of said Jones
and another as trustees, but all of said stock was so held in trust for the use and benefit of the Doe
Run Lead Company, which was the real owner thereof.
 The gravamen of the complaint is that said Jones and another, having secret knowledge that the St.
Joseph Lead Company's stock was of much greater value than was commonly known and that the
company was about to declare large future dividends, conspired together to buy from the Doe Run
Lead Company the stock of the St. Joseph Lead Company then held by and for it, and thereby
committed a fraud upon the Doe Run Lead Company.
 The purpose of the action is to compel those who thus defrauded the Doe Run Lead Company as it is
alleged, to return to that company the stock which they acquired from it, or if they have parted with
the stock to account for its value.
 Plaintiffs were, prior to December, 1913, stockholders of the Doe Run Lead Company, but in that
month they exchanged this stock for shares of stock of the St. Joseph Lead Company, which they
now own, Robert Holmes individually being the only one of the plaintiffs who now holds any of the
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stock of the Doe Run Lead Company, of which stock ninety-seven per cent is held by the St. Joseph
Lead Company.
 As has been said, Robert Holmes individually is a stockholder in the Doe Run Lead Company as
well as in the St. Joseph Lead Company, while all the other plaintiffs are stockholders only in the St.
Joseph Lead Company. They all sue, however, in the right and on behalf of the Doe Run Lead
Company to compel restitution to that company.
ISSUE(S): Whether stockholders of a holding company may maintain a representative action for the benefit and
in the behalf of the subsidiary company, the directors of both companies having refused, after due request, to
institute an action in the name of either company.
HELD: YES
RATIO:
 Representative actions by stockholders are unique in that they are not prosecuted by the stockholder
plaintiff for his own direct benefit, or in his own direct right, or because any right of his has been directly
violated or because he is entitled individually to the relief sought.
 Such actions are, as they are commonly designated, purely representative, the plaintiff being permitted to
maintain the action, notwithstanding his lack of direct interest, solely to set the machinery of justice in
motion, and to prevent what would otherwise be a complete failure of justice.
 The part which a stockholder plays in such an action is merely that of an instigator. The cause of action is
that of the corporation, and the recovery must run in its favor. Under these circumstances it is not easy to
see why a stockholder in a holding company may not maintain such an action for the benefit of the
subsidiary company, and thus indirectly for the advantage of the holding company.
 What the defendants are called upon to do in this action is to answer to the Doe Run Lead Company, not
to these plaintiffs nor to any other stockholder of either company, and it can work no possible prejudice
to the defendants who sets the machinery of justice in motion, so long as that person has an ultimate
interest in the matter.
CASE LAW/ DOCTRINE:
153 Gamboa v. Victoriano AUTHOR: Tiglao

[L-40620 // May 5, 1979] NOTES: Basically, you file a derivative suit on behalf
TOPIC: Derivative Suits of the corporation. Here, the court ruled that a
PONENTE: J. Concepcion derivative suit was improper because the right being
vindicated was not of the corporation’s but of the
individual.
FACTS:
 Petitioners were sued by respondents to nullify the issuance of 823 shares of stock of the Inocentes de la
Rama, Inc. in favor of the petitioners.
 Basically, the respondents are the owners of 1,328 shares of stock of the said domestic corporation with an
authorized capital stock of 3,000 shares (par value: 100/share), 2,177 subscribed and issued; 823 shares
unissued.
 Respondent was to acquire the shares of stock by the then President and Vice President of the corporation.
In order to forestall the takeover by the respondents of the corporation, the petitioners (being the remaining
members of the board of directors) passed a resolution authorizing the sale of 823 unissued shares of the
corporation to the petitioners.
 Respondents argue that the the sale of the unissued 823 shares of stock of the corporation was in violation of
their pre-emptive rights and made without the approval of the board of directors representing 2/3 (only 3
board members were left) of the outstanding capital stock, and is in disregard of the strictest relation of trust
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existing between respondents and petitioners, as stockholders. Lastly, petitioners were not legally elected to
the board of directors of the corporation.
 Hence, respondents prayed for a writ of preliminary injunction restraining the defendants from committing,
or continuing the performance of an act tending to prejudice, diminish or otherwise injure the respondents’
rights in the corporate properties and funds of the corporation, and from disposing, transferring, selling, or
otherwise impairing the value of the 823 shares of stock illegally issued by the petitioners. They also pray
that a receiver be appointed to preserve and administer the property and funds of the corporation and that
the petitioners be declared as usurpers/intruders into the office of director in the corporation and to be able
to recover damages.
 The judge issued the preliminary injunction restraining the defendants and/or their representatives, agents,
or persons acting in their behalf from the commission or continuance of any act tending in any way to
prejudice, diminish or otherwise injure respondents rights in the corporate properties and funds of the
corporation.
 Afterwards, the respondents entered into a compromise agreement with petitioners whereby the contracting
parties withdrew their respective claims against each other and the petitioners waive and transfer their rights
and interests over the 823 shares of stock. This was then approved by the trial court.
 As a result, the petitioners filed a motion to dismiss the complaint on the ground that the respondents cause
of action had been waived or abandoned; and that they were estopped from further prosecuting the case
since they have, in effect, acknowledged the validity of the issuance of the 823 shares of stock. This motion
was denied.
 Petitioners then filed an MR on the ground that the court has no jurisdiction to interfere with the
management of the corporation by the board of directors and the enactment of a resolution by the
petitioners, as members of the board of directors of the corporation, allowing the sale of the 823 shares of
stock to the defendants was purely a management concern which the courts could not interfere with.
 CFI: MR was denied. No reason was given. Petitioners directly files certiorari to SC.
ISSUE:
Does the court have jurisdiction over the said case?
HELD:
Yes, the petition is without merit.
RATIO:
The questioned order denying the petitioners’ motion to dismiss the complaint is merely interlocutory and
cannot be the subject for certiorari. The proper procedure to be followed in such a case is to continue with the
trial of the case on the merits and, if the decision is adverse, to reiterate the issue on appeal.
The judge was correct in finding that the petitioners have not waived their cause of action by entering into a
compromise agreement since the agreement contained the provision that “shall not in any way constitute or be
considered a waiver or abandonment of any claim or cause of action against the other defendants.”
It it a well known rule that courts cannot undertake to control the discretion of the board of directors about
administrative matters as to which they have legitimate power of action, and contracts intra vires entered into by
the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so
unconsciable and oppressive as to amount to a wanton destruction of the rights of the minority.
Here, the respondents aver that the petitioners have concluded a transaction among themselves as will result to
serious injury to the interests of the plaintiffs, so that the trial court has jurisdiction over the case.
Petitioners contend that the proper remedy of the respondents was to institute a derivative suit against the
petitioners in the name of the corporation in order to secure a binding relief after exhausting all the possible
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remedies available within the corporation.
Relevant Ruling. An individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued or hold the control of the corporation.
However, in the present case, the respondents are alleging and vindicating their own individual interests or
prejudice and not that of the corporation. Hence, a derivative suit is not in order.
CASE LAW/ DOCTRINE:
154 San Miguel Corp vs. Khan AUTHOR: Valera

Derivative Suits NOTE:
Narvasa, J:
FACTS:
 In 1983 33 thousand shares of the outstanding capital stock of san Miguel corporation were acquired by 14
other corporations and were placed under a Voting Trust Agreement in favor of Andres Soriano Jr,
 When Soriano died Eduardo Cojuangco was elected as the substitute trustee with power to delegate the
trusteeship to Andres Soriano III.
 After the EDSA revolution Cojuangco left the country amid “persistent reports that hug and unusual cash
disbursement from the funds of SMC had been irregularly made which were used extensively for the
campaign of Marcos during the Snap elections
 In March a986 Andres Soriano III entered into an agreement between the 14 corporations for the sale of the
33k shares of stock for the price of 3 billion pesos
 The agreement revoked the voting trust and expressed the desire of the 14 corporations to sell the shares of
stock to pay certain outstanding and unpaid debts.
 Soriano III purchased the stocks to institutionalize and stabilize the management of SMC
 Soriano alleged that the buyer of the shares is actually a foreign corporation named Neptunia Corp a wholly
owned subsidy of San Miguel international which in turn is a subsidy of SMC and it was Neptunia who
made the down payment of 500k
 However, the 33thousand shares were sequestered by the PCGG in furtherance of EO 1 & 2 stating that the
stock belonged to Cojuangco who was considered a Marcos dummy and the sale of such stocks were in
contravention of the stated EO
 The sequestration was lifted and the sale was allowed to proceed on representations by SMC that the shares
were actually owned by 1.3 million coconut farmers and Cojuangco only owned 2 shares.
 The sequestration was soon re-imposed by the PCGG and forbade the SMC corporate secretary to register
any transfer or encumbrance of any stock w/o PCGG’s prior written authority
 SMC the suspended payment of the other installments of the price to the 14 seller corp. the 14 then sued of
rescission and damages
 Then the PCGG directed SMC to issue qualifying shares to 7 individuals including one Delos Angeles from
the sequestered shares registered as street certificates under ANSCOR-HAGEDORN SECURITIES to be
held intrust by the stated 7 people for benefit of Anscor and or who shall be determined to be the owners of
such shares.
 In December of 1986, the SMC board issued a resolution and they decided to assume the loans incurred by
Nepunia for the Down payment.
 In the meeting following the resolution Delos Angeles, one of the PCGG representatives in the SMC board
questioned the resolution stating that the resolution merely approved the study of the adoption of the loan.
 Delos Angeles also pointed out some negative effects in the event of such assumption of liability but the
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BoD overruled hm.

 When Delos Angeles’ efforts to seek relief within SMC he then turned to the PCGG which was also futile
he went to the SEC wherein he filed a derivative Suit against 10 of the 15 BoD who voted for the
questioned resolution
 The suit prayed for injunctions against the execution or consummation of any agreement causing SMC to
purchase the shares in question or entailing the use of its corporate funds or assets for the said assumption
and agaisnt SORIANO III from further disposing of the funds of the corporation for his obligations and the
nullification of the SMC resolution
 Ernest khan a director of the Neptunia Corporation moved to dismiss DELOS ANGELE’s derivative suits
on the following grounds:
- DELOS ANGELES has no Legal capacity because
 He was merely imposed by the PCGG as a director of SMC thus he has no standing to bring a
minority derivative suit
 He only holds 20 shares thus cannot fairly and adequately represent the minority
 He has not come to court with clean hands
 The SEC has no jurisdiction since the matters are exclusively within the business judgement of the
BOD
 Khans MtD was denied by the SEC officer Paz stating ruling the ff:
 The fact that DELOSANGELES was a PCGG is irrelevant because in law, ownership of even 1
share is enough to qualify a person to bring a derivative suit.
 Its is apparent that the derivative suit was bought upon for the benefit of the corporation and all the
other stockholders
 That DELOS ANGELES was a stockholder at the time of the commission of the acts complained of,
the number of shares owned by him being immaterial
 There is no merit in the assertion that he had come to court with unclean hands, it not having been
shown that he participated in the act.
 Where the business judgement transgresses the law, the SEC has competence to inquire in such
situation
 Khan filed a petition for certiorari and prohibition with the CA to annul the ruling of the SEC
 The CA ruled that DELOSANGELES has no legal capacity to institute a derivative suit stating the ff
reasons:
 That a party to a derivative suits should adequately represent the interests of the minority stock
holders
 That since he only has 20 shares he cannot simply represent the interests of the minority
 Delos Angeles has not met this conflict of interest argument, that his position as PCGG nominated
director is inconsistent with his assumed role of representative of minority stockholders, not having
elected by the minority his voting would expectedly consider the interest of the entity which placed
him in the board.
 In his defense DELOS ANGELES made the following points:
- That he has obliged with the 3 requirements of a derivative suits:
 That the party bringing suit should be a shareholder that the time of act complained of
 That he has exhausted intra corporate remedies
 That the cause of action actually devolves on the corporation, the wrong doing having been caused
to the corporation and not to particular stockholders bringing the suit
ISSUE(S):
 WON DELOS ANGELES has the capacity to initiate a derivative suit.?
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HELD:
3.) Yes, The theory that DELOS ANGLES has no personality to bring this suit in behalf of the corporation
because his stockholding is miniscule and there’s a conflict of interest between him and the PCGG
cannot be sustained.
RATIO:
12.) The implicit argument that a stockholder, to be considered as qualified to bring a derivative suit
must hold a substantial or significant block of stock finds no support whatever in law
13.) The requisites for a derivative suits are as follows:
a.) The party bringing suit should be a shareholder at the time of the act of complained of, the number of
his shares are irrelevant
b.) He has tried to exhaust intra-corporate remedies has made a demand on the BD for the appropriate
relief but the latter has failed or refused to heed his plea
c.) The cause of action actually devolves on the corporation, the wrong doing or harm having been, or
being cause to the corporation and not to the particular stockholder bringing the suit.
14.) The bone fide ownership by a stock holder of stock in his own right suffices to invest with him
with standing to bring a derivative suit for the benefit of the corporation. The number of his shares is
immaterial since is not suing in his own behalf, or for the protection or vindication of his person right or
the redress of a wrong committed against him, individually but in behalf and for the benefit of the
corporation
15.) Neither can the conflict of interest theory be upheld. From the premise that DELOS ANGELES
now sits in the SMC Bod because of the PCGG does not follow that he is legally obliged to vote as the
PCGG would have him do.
CASE LAW/ DOCTRINE:
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Corporation Law

Atty. Peralta | G01 | A.Y. 2014-2015

112 OTIS &CO.v. PENNSYLVANIA R. CO. et al. AUTHOR: Tan

113 Montelibano v. Bacolod-Murcia Milling AUTHOR: Tiglao

HELD & RATIO:

CASE LAW/ DOCTRINE:

114 Litwin vs. Allen AUTHOR: Valera

115 Albert Walker v. Alrich Man, et al AUTHOR: Acido

CASE LAW/ DOCTRINE:

116 Steinberg v. Velasco AUTHOR: ADRE

117 Barnes, Plaintiff v. Andrews, Defendant AUTHOR: BONDOC

WON defendant Andrews may be held liable for misprision of office

The bill is dismissed, without cost.

118 POOL v. POOL, ET. AL. AUTHOR: Castro

Trial Court: dismissed the complaint

CASE LAW/ DOCTRINE:

119 Foster v. Bowen AUTHOR: Miguel M. Consing

#120 Lowell Hoit Co. vs. Detig AUTHOR: DAYOS

121 Bates v Dresser AUTHOR: De Leon

CASE LAW/ DOCTRINE:

122 PALTING vs SAN JOSE PETROLEUM AUTHOR: DELFIN, K.

(1) the directors of the Company need not be shareholders;

123 G.R. No. 6217 December 26, 1911 AUTHOR: Enriquez

TOPIC: The self-dealing director

124 Piccard v. Sperry Corporation AUTHOR: Garcia

HELD: The settlement was valid.

125 Government of the Philippine Islands v. El AUTHOR: Magsino, Patricia Marie C.

o BACKGROUND OF RECORDED MORTGAGE

o Second: administration and management of properties belonging to delinquent shareholders of the

11) That respondent maintains excessive reserve funds – NO MERIT!

CASE LAW/ DOCTRINE:

126 Barretto et.al. v. La Previsora Filipina AUTHOR: Mendoza

127 CENTRAL COOPERATIVE EXCHANGE, AUTHOR: PAGCALIWAGAN

128 Fogelson v. American Woolen Co. AUTHOR: REYES

on Internal Revenue. They then moved for a summary judgment.

transferrable, except by will. In the event of the death

The profit-sharing plan provides that when the

130 STRONG et al vs. REPIDE AUTHOR: SOLIS

131. Taylor vs Wright AUTHOR: The Taliño

HELD: Yes, they do.

132 Singer v Carlisle AUTHOR: Tan

Seizing Corporate Opportunity (Sec. 34)

133 Irving Trust Co. v. Deutsch et. al. AUTHOR: Tiglao

134 Litwin vs. Allen AUTHOR: Valera

135 Globe Woolen Company v. Utica Gas and AUTHOR: Acido

director of Utica, he is an interlocking director. He

136 Insuranshares Corporation v. Northern AUTHOR: Adre

Continental Bank (with 26,569 shares)

Logan, receiver of the Seaboard Continental

The board of directors of the corporation was

137 AUTHOR: BONDOC

TOPIC: Who may exercise the right

CASE LAW/ DOCTRINE:

138 PARDO v. HERCULES LUMBER CO. AND AUTHOR: Castro

TOPIC: Right of Inspection; Unreasonable  Pardo – petitioner

 Antonio Pardo is a stockholder in the Hercules Lumber Company, Inc.

Petitioner’s contention: He has a right of inspection as a stockholder.

A by-law unduly restricting the right of inspection is undoubtedly invalid.

CASE LAW/ DOCTRINE:

139 Gonzales vs PNB AUTHOR: Miguel M. Consing

Furthermore, PNB’s charter (RA 1300) provides:

#140 Veraguth vs. Isabela Sugar Co. AUTHOR: DAYOS

 Respondent answered but it was “too long to be here summarized”