CASE #19

[ G.R. No. 157479, November 24, 2010 ]

PHILIP TURNER AND ELNORA TURNER, PETITIONERS, VS. LORENZO SHIPPING CORPORATION,
RESPONDENT.

FACTS
The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation
engaged primarily in cargo shipping activities. In June 1999, the respondent decided to amend its
articles of incorporation to remove the stockholders' pre-emptive rights to newly issued shares
of stock. Feeling that the corporate move would be prejudicial to their interest as stockholders,
the petitioners voted against the amendment and demanded payment of their shares at the rate
of P2.276/share based on the book value of the shares, or a total of P2,298,760.00.
The respondent found the fair value of the shares demanded by the petitioners
unacceptable. It insisted that the market value on the date before the action to remove the pre-
emptive right was taken should be the value, or P0.41/share (or a total of P414,100.00),
considering that its shares were listed in the Philippine Stock Exchange, and that the payment
could be made only if the respondent had unrestricted retained earnings in its books to cover the
value of the shares, which was not the case.
The disagreement on the valuation of the shares led the parties to constitute an appraisal
committee pursuant to Section 82 of the Corporation Code, each of them nominating a
representative, who together then nominated the third member who would be chairman of the
appraisal committee. Thus, the appraisal committee came to be made up of Reynaldo Yatco, the
petitioners' nominee; Atty. Antonio Acyatan, the respondent's nominee; and Leo Anoche of the
Asian Appraisal Company, Inc., the third member/chairman.
On October 27, 2000, the appraisal committee reported its valuation of P2.54/share, for
an aggregate value of P2,565,400.00 for the petitioners.
Subsequently, the petitioners demanded payment based on the valuation of the appraisal
committee, plus 2%/month penalty from the date of their original demand for payment, as well
as the reimbursement of the amounts advanced as professional fees to the appraisers.
In its letter to the petitioners dated January 2, 2001, the respondent refused the
petitioners' demand, explaining that pursuant to the Corporation Code, the dissenting
stockholders exercising their appraisal rights could be paid only when the corporation had
unrestricted retained earnings to cover the fair value of the shares, but that it had no retained
earnings at the time of the petitioners' demand, as borne out by its Financial Statements for Fiscal
Year 1999 showing a deficit of P72,973,114.00 as of December 31, 1999.
Upon the respondent's refusal to pay, the petitioners sued the respondent for collection
and damages in the RTC in Makati City on January 22, 2001.
In the stockholders' suit to recover the value of their shareholdings from the corporation,
the Regional Trial Court (RTC) upheld the dissenting stockholders, herein petitioners, and ordered
the corporation, herein respondent, to pay. Execution was partially carried out against the
respondent. On the respondent's petition for certiorari, however, the Court of Appeals (CA)
corrected the RTC and dismissed the petitioners' suit on the ground that their cause of action for
collection had not yet accrued due to the lack of unrestricted retained earnings in the books of
the respondent.
ISSUE: Whether or not the Corporation shall made the payment to any dissenting stockholder
even it has no unrestricted retained earning in its books to cover such payment
Whether the Trust Fund Doctrine protects the capital stock, property and assets of a Corporation

SUPREME COURT RULING

A corporation can purchase its own shares, provided payment is made out of surplus
profits and the acquisition is for a legitimate corporate purpose. In the Philippines, this new rule
is embodied in Section 41 of the Corporation Code, to wit:
Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or purposes, including but not
limited to the following cases: Provided, that the corporation has unrestricted retained earnings
in its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under
the provisions of this Code.

Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder

unless the corporation has unrestricted retained earnings in its books to cover the payment. In
case the corporation has no available unrestricted retained earnings in its books, Section 83 of
the Corporation Code provides that if the dissenting stockholder is not paid the value of his shares
within 30 days after the award, his voting and dividend rights shall immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted retained earnings to
fund the payment of the shares of stocks of the withdrawing stockholders. Under the doctrine,
the capital stock, property, and other assets of a corporation are regarded as equity in trust for
the payment of corporate creditors, who are preferred in the distribution of corporate assets.
The creditors of a corporation have the right to assume that the board of directors will not use
the assets of the corporation to purchase its own stock for as long as the corporation has
outstanding debts and liabilities. There can be no distribution of assets among the stockholders
without first paying corporate debts. Thus, any disposition of corporate funds and assets to the
prejudice of creditors is null and void.

Legaspi Towers 300 v Amelia Muer, et al.

G.R. No. 170783, 18 June 2012

Digested by: ROSARIO, Hannah Jezel I.

FACTS:
 Pursuant to the by-laws of Legaspi Towers 300, Inc., petitioners Lilia Marquinez
Palanca, Rosanna D. Imai, Gloria Domingo and Ray Vincent, the incumbent Board of Directors,
set the annual meeting of the members of the condominium corporation and the election of
the new Board of Directors for the years 2004-2005 on April 2, 2004 at 5:00 p.m. at the lobby
of Legaspi Towers 300, Inc.
Out of a total number of 5,723 members who were entitled to vote, 1,358 were
supposed to vote through their respective proxies and their votes were critical in determining
the existence of a quorum, which was at least 2,863 (50% plus 1). The Committee on Elections
of Legaspi Towers 300, Inc., however, found most of the proxy votes, at its face value,
irregular, thus, questionable; and for lack of time to authenticate the same, petitioners
adjourned the meeting for lack of quorum.
Petitioners filed a Complaint for the Declaration of Nullity of Elections with Prayers for
the lssuance of Temporary Restraining Orders and Writ of Preliminary Injunction and
Damages against respondents with the RTC of Manila.
Petitioners filed a motion to amend complaint to implead Legaspi Towers 300, Inc. as
plaintiff. This was denied by the RTC. The Court of Appeals affirmed the same and held that
as the right to vote is a personal right of a stockholder of a corporation, such right can only
be enforced through a direct action; hence, Legaspi Towers 300, Inc. cannot be impleaded as
plaintiff in this case.
ISSUE:
Is derivative suit proper in this case?
RULING:
NO. Since it is the corporation that is the real party-in-interest in a derivative suit, then
the reliefs prayed for must be for the benefit or interest of the corporation. When the reliefs
prayed for do not pertain to the corporation, then it is an improper derivative suit.
The requisites for a derivative suit are as follows:
a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on
the board of directors for the appropriate relief but the latter has failed or
refused to heed his plea; and
c) the cause of action actually devolves on the corporation, the wrongdoing
or harm having been, or being caused to the corporation and not to the
particular stockholder bringing the suit.
In this case, petitioners, as members of the Board of Directors of the condominium
corporation before the election in question, filed a complaint against the newly-elected
members of the Board of Directors for the years 2004-2005, questioning the validity of the
election held on April 2, 2004, as it was allegedly marred by lack of quorum, and praying for
the nullification of the said election.
Petitioners’ complaint seek to nullify the said election, and to protect and enforce their
individual right to vote. Petitioners seek the nullification of the election of the Board of
Directors for the years 2004-2005, composed of herein respondents, who pushed through
with the election even if petitioners had adjourned the meeting allegedly due to lack of
quorum. Petitioners are the injured party, whose rights to vote and to be voted upon were
directly affected by the election of the new set of board of directors. The party-in-interest are
the petitioners as stockholders, who wield such right to vote. The cause of action devolves on
petitioners, not the condominium corporation, which did not have the right to vote. Hence,
the complaint for nullification of the election is a direct action by petitioners, who were the
members of the Board of Directors of the corporation before the election, against
respondents, who are the newly-elected Board of Directors. Under the circumstances, the
derivative suit filed by petitioners in behalf of the condominium corporation in the Second
Amended Complaint is improper.

BITONG VS CA

Facts:
Petitioner Bitong allegedly acting for the benefit of Mr. & Ms. Co. filed a derivative suit before
the SEC against respondent spouses Apostol, who were officers in said corporation, to hold them
liable for fraud and mismanagement in directing its affairs. Respondent spouses moved to dismiss
on the ground that petitioner had no legal standing to bring the suit as she was merely a holder-
in-trust of shares of JAKA Investments which continued to be the true stockholder of Mr. & Ms.
Petitioner contends that she was a holder of proper stock certificates and that the transfer was
recorded. She further contends that even in the absence of the actual certificate, mere recording
will suffice for her to exercise all stockholder rights, including the right to file a derivative suit in
the name of the corporation. The SEC Hearing Panel dismissed the suit. On appeal, the SEC En
Banc found for petitioner. CA reversed the SEC En Banc decision.
Issue:
Whether or not petitioner is the true holder of stock certificates to be able institute a derivative
suit.
Ruling: NO.
Sec 63 of the Corporation Code envisions a formal certificate of stock which can be issued only
upon compliance with certain requisites. First, the certificates must be signed by the president
or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal
of the corporation. A mere typewritten statement advising a stockholder of the extent of his
ownership in a corporation without qualification and/or authentication cannot be considered as
a formal certificate of stock. Second, delivery of the certificate is an essential element of its
issuance. Hence, there is no issuance of a stock certificate where it is never detached from the
stock books although blanks therein are properly filled up if the person whose name is inserted
therein has no control over the books of the company. Third, the par value, as to par value shares,
or the full subscription as to no par value shares, must first be fully paid. Fourth, the original
certificate must be surrendered where the person requesting the issuance of a certificate is a
transferee from a stockholder.

The certificate of stock itself once issued is a continuing affirmation or representation that the
stock described therein is valid and genuine and is at least prima facie evidence that it was legally
issued in the absence of evidence to the contrary. However, this presumption may be rebutted.
Aside from petitioner’s own admissions, several corporate documents disclose that the true
party-in-interest is not petitioner but JAKA. It should be emphasized that JAKA executed, a deed
of sale over 1,000 Mr. & Ms. shares in favor of respondent Eugenio D. Apostol. On the same day,
respondent Apostol signed a declaration of trust stating that she was the registered owner of
1,000 Mr. & Ms. shares covered by a Certificate of Stock. And, there is nothing in the records
which shows that JAKA had revoked the trust it reposed on respondent Eugenia D. Apostol.
Neither was there any evidence that the principal had requested her to assign and transfer the
shares of stock to petitioner. In fine, the records are unclear on how petitioner allegedly acquired
the shares of stock of JAKA.

Thus, for a valid transfer of stocks, the requirements are as follows: (a) There must be delivery of
the stock certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or
other persons legally authorized to make the transfer; and, (c) to be valid against third parties,
the transfer must be recorded in the books of the corporation. At most, in the instant case,
petitioner has satisfied only the third requirement. Compliance with the first two requisites has
not been clearly and sufficiently shown.

*The basis of a stockholder’s suit is always one in equity. However, it cannot prosper without first
complying with the legal requisites for its institution. The most important of these is the bona
fide ownership by a stockholder of a stock in his own right at the time of the transaction
complained of which invests him with standing to institute a derivative action for the benefit of
the corporation.
AGDAO LANDLESS RESIDENTS ASSOCIATION INC., ET. AL v. ROLANDO MARAMION,
ET. AL
G.R. No. 188642 & 189425, OCTOBER 17, 2016
Facts:

Petitioners are Agdao Landless Residents Association, Inc. (ALRAI), a non-

stock, non-profit corporation duly organized and existing under and by virtue of
the laws of the Republic of the Philippines; through its board it transferred 46 titled
lots to different members and non-members of the corporation. The respondent
members of the corporation were removed as members of the corporation by
the board for absences in the meetings regarding the transfer of said lots.
Respondents question the validity of their removal as members and the transfer
of said lots through individual suits filed with the court.
Issues:

1. Whether or not the members were removed validly

2. Whether or not the individual suits are proper
3. Whether or not the transfer of the lots are valid

Held:

1. Section 91 58 of the Corporation Code of the Philippines (Corporation Code)

provides that membership in a non-stock, non-profit corporation (as in
petitioner ALRAI in this case) shall be terminated in the manner and for the
cases provided in its articles of incorporation or the by-laws. Agdao’s
constitution provides that in the removal of members “The Secretary shall give
or cause to be given written notice of all meetings, regular or special to all
members of the association at least three (3) days before the date of each
meetings either by mail or personally.” For failing to meet said notice
requirements the removal of the respondents as members is invalid.

2. Individual suits are filed when the cause of action belongs to the stockholder
personally, and not to the stockholders as a group, or to the corporation, e.g.
denial of right to inspection and denial of dividends to a stockholder. If the
cause of action belongs to a group of stockholders, such as when the rights
violated belong to preferred stockholders, a class or representative suit may
be filed to protect the stockholders in the group. A derivative suit, on the other
hand, is one which is instituted by a shareholder or a member of a corporation,
for and in behalf of the corporation for its protection from acts committed by
directors, trustees, corporate officers, and even third persons. Even though the
 action should have been brought up through a derivative suit, the individual
suits are treated as individual suits based on the following:

a. The RTC, where the case was originally filed, has jurisdiction over the
controversy;
b. Petitioners did not object to the institution of the case (on the ground
that a derivative suit should have been lodged instead of an individual
suit) in any of the proceedings before the court a quo or before the CA.
c. a reading of the complaint shows that respondents do not pray for
reliefs for their personal benefit; but in fact, for the benefit of the
corporation.

3. Javonillo, as a director, signed the Board Resolutions133 confirming the transfer

of the corporate properties to himself, and to Armentano. Petitioners cannot
argue that the transfer of the corporate properties to them is valid by virtue of
the Resolution 134 by the general membership of Agdao confirming the
transfer for tJ-iree reasons.

“Sec. 32. Dealings of directors, trustees or officers with the corporation. - A

contract of the corporation with one or more of its directors or trustees or
officers is voidable, at the option of such corporation, unless all of the
following conditions are present:

1. That the presence of such director or trustee in the board meeting

in which the contract was approved was not necessary to constitute
a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances;
and
4. That in case of an officer, the contract has been previously
authorized by the board of directors.”

Section 32 requires that the contract should be ratified by a vote representing

at least two-thirds of the members in a meeting called for the purpose. Records
of this case do not show whether the Resolution was indeed voted by the
required percentage of membership. There is also no showing that there was
full disclosure of the adverse interest of the directors involved when the
Resolution was approved. Full disclosure is required under the aforecited
 Section 32 of the Corporation Code. Section 32 requires that the contract be
fair and reasonable under the circumstances. As previously discussed, the
transfer of the corporate properties to the individual petitioners is not fair and
reasonable for ( 1) want of legitimate corporate purpose, and for (2) the
breach of the fiduciary nature of the positions held by Javonillo and
Armentano. Lacking any of these (full disclosure and a showing that the
contract is fair and reasonable), ratification by the two-thirds vote would be of
no avail.

Intra-corporate controversy; fraud. It is essential for the complaint to show on its face what are
claimed to be the fraudulent corporate acts if the complainant wishes to invoke the court’s
special commercial jurisdiction. This is because fraud in intra-corporate controversies must be
based on “devises and schemes employed by, or any act of, the board of directors, business
associates, officers or partners, amounting to fraud or misrepresentation which may be
detrimental to the interest of the public and/or of the stockholders, partners, or members of any
corporation, partnership, or association,” as stated under Rule 1, Section 1 (a)(1) of the Interim
Rules. The act of fraud or misrepresentation complained of becomes a criterion in determining
whether the complaint on its face has merits, or within the jurisdiction of special commercial
court, or merely a nuisance suit. Simny G. Guy, Geraldine G. Guy, Gladys G. Yao and the Heirs of
the late Grace G. Cheu vs. Gilbert Guy/Simny G. Guy, Geraldine G. Guy, Gladys G. Yao and the
heirs of the late Grace G. Cheu vs. The Hon. Ofelia C. Calo, in her capacity as Presiding Judge of
the RTC-Mandaluyong City-Branch 211 and Gilbert Guy G.R. No. 189486/G.R. No. 189699.
September 5, 2012
Gokongwei vs. SEC Case Digest
Facts: [SEC Case 1375] On 22 October 1976, John Gokongwei Jr., as stockholder of San Miguel
Corporation, filed with the Securities and Exchange Commission (SEC) a petition for "declaration
of nullity of amended by-laws, cancellation of certificate of filing of amended by-laws, injunction
and damages with prayer for a preliminary injunction" against the majority of the members of
the Board of Directors and San Miguel Corporation as an unwilling petitioner. As a first cause of
action, Gokongwei alleged that on 18 September 1976, Andres Soriano, Jr., Jose M. Soriano,
Enrique Zobel, Antonio Roxas, Emeterio Buñao, Walthrode B. Conde, Miguel Ortigas, and Antonio
Prieto amended by bylaws of the corporation, basing their authority to do so on a resolution of
the stockholders adopted on 13 March 1961, when the outstanding capital stock of the
corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share
and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the
outstanding and paid up shares totalled 30,127,043, with a total par value of P301,270,430.00.

It was contended that according to section 22 of the Corporation Law and Article VIII of the by-
laws of the corporation, the power to amend, modify, repeal or adopt new by-laws may be
delegated to the Board of Directors only by the affirmative vote of stockholders representing not
less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should
have been computed on the basis of the capitalization at the time of the amendment. Since the
amendment was based on the 1961 authorization, Gokongwei contended that the Board acted
without authority and in usurpation of the power of the stockholders. As a second cause of
action, it was alleged that the authority granted in 1961 had already been exercised in 1962 and
1963, after which the authority of the Board ceased to exist. As a third cause of action, Gokongwei
averred that the membership of the Board of Directors had changed since the authority was given
in 1961, there being 6 new directors. As a fourth cause of action, it was claimed that prior to the
questioned amendment, Gokogwei had all the qualifications to be a director of the corporation,
being a substantial stockholder thereof; that as a stockholder, Gokongwei had acquired rights
inherent in stock ownership, such as the rights to vote and to be voted upon in the election of
directors; and that in amending the by-laws, Soriano, et. al. purposely provided for Gokongwei's
disqualification and deprived him of his vested right as afore-mentioned, hence the amended by-
laws are null and void. As additional causes of action, it was alleged that corporations have no
inherent power to disqualify a stockholder from being elected as a director and, therefore, the
questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while
representing other corporations, entered into contracts (specifically a management contract)
with the corporation, which was avowed because the questioned amendment gave the Board
itself the prerogative of determining whether they or other persons are engaged in competitive
or antagonistic business; that the portion of the amended by-laws which states that in
determining whether or not a person is engaged in competitive business, the Board may consider
such factors as business and family relationship, is unreasonable and oppressive and, therefore,
void; and that the portion of the amended by-laws which requires that "all nominations for
election of directors shall be submitted in writing to the Board of Directors at least five (5)
working days before the date of the Annual Meeting" is likewise unreasonable and oppressive. It
was, therefore, prayed that the amended by-laws be declared null and void and the certificate of
filing thereof be cancelled, and that Soriano, et. al. be made to pay damages, in specified
amounts, to Gokongwei. On 28 October 1976, in connection with the same case, Gokongwei filed
with the Securities and Exchange Commission an "Urgent Motion for Production and Inspection
of Documents", alleging that the Secretary of the corporation refused to allow him to inspect its
records despite request made by Gokongwei for production of certain documents enumerated
in the request, and that the 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.

The motion was opposed by Soriano, et. al. The Corporation, Soriano, et. al. filed their answer,
and their opposition to the petition, respectively. Meanwhile, on 10 December 1976, while the
petition was yet to be heard, the corporation issued a notice of special stockholders' meeting for
the purpose of "ratification and confirmation of the amendment to the By-laws", setting such
meeting for 10 February 1977. This prompted Gokongwei to ask the SEC for a summary judgment
insofar as the first cause of action is concerned, for the alleged reason that by calling a special
stockholders' meeting for the aforesaid purpose, Soriano, et. al. admitted the invalidity of the
amendments of 18 September 1976. The motion for summary judgment was opposed by Soriano,
et. al. Pending action on the motion, Gokongwei filed an "Urgent Motion for the Issuance of a
Temporary Restraining Order", praying that pending the determination of Gokongwei's
application for the issuance of a preliminary injunction and or Gokongwei's motion for summary
judgment, a temporary restraining order be issued, restraining Soriano, et. al. from holding the
special stockholders' meeting as scheduled. This motion was duly opposed by Soriano, et. al. On
10 February 1977, Cremation issued an order denying the motion for issuance of temporary
restraining order. After receipt of the order of denial, Soriano, et. al. conducted the special
stockholders' meeting wherein the amendments to the by-laws were ratified. On 14 February
1977, Gokongwei filed a consolidated motion for contempt and for nullification of the special
stockholders' meeting. A motion for reconsideration of the order denying Gokongwei's motion
for summary judgment was filed by Gokongwei before the SEC on 10 March 1977.

[SEC Case 1423] Gokongwei alleged that, having discovered that the corporation has been
investing corporate funds in other corporations and businesses outside of the primary purpose
clause of the corporation, in violation of section 17-1/2 of the Corporation Law, he filed with SEC,
on 20 January 1977, a petition seeking to have Andres M. Soriano, Jr. and Jose M. Soriano, as well
as the corporation declared guilty of such violation, and ordered to account for such investments
and to answer for damages. On 4 February 1977, motions to dismiss were filed by Soriano, et. al.,
to which a consolidated motion to strike and to declare Soriano, et. al. in default and an
opposition ad abundantiorem cautelam were filed by Gokongwei. Despite the fact that said
motions were filed as early as 4 February 1977, the Commission acted thereon only on 25 April
1977, when it denied Soriano, et. al.'s motions to dismiss and gave them two (2) days within
which to file their answer, and set the case for hearing on April 29 and May 3, 1977. Soriano, et.
al. issued notices of the annual stockholders' meeting, including in the Agenda thereof, the
"reaffirmation of the authorization to the Board of Directors by the stockholders at the meeting
on 20 March 1972 to invest corporate funds in other companies or businesses or for purposes
other than the main purpose for which the Corporation has been organized, and ratification of
the investments thereafter made pursuant thereto." By reason of the foregoing, on 28 April 1977,
Gokongwei filed with the SEC an urgent motion for the issuance of a writ of preliminary injunction
to restrain Soriano, et. al. from taking up Item 6 of the Agenda at the annual stockholders'
meeting, requesting that the same be set for hearing on 3 May 1977, the date set for the second
hearing of the case on the merits. The SEC, however, cancelled the dates of hearing originally
scheduled and reset the same to May 16 and 17, 1977, or after the scheduled annual
stockholders' meeting. For the purpose of urging the Commission to act, Gokongwei filed an
urgent manifestation on 3 May 1977, but this notwithstanding, no action has been taken up to
the date of the filing of the instant petition.

Gokongwei filed a petition for petition for certiorari, mandamus and injunction, with prayer for
issuance of writ of preliminary injunction, with the Supreme Court, alleging that there appears a
deliberate and concerted inability on the part of the SEC to act.

Issue:
Whether the corporation has the power to provide for the (additional) qualifications of its
directors.
Whether the disqualification of a competitor from being elected to the Board of Directors is a
reasonable exercise of corporate authority.
Whether the SEC gravely abused its discretion in denying Gokongwei's request for an
examination of the records of San Miguel International, Inc., a fully owned subsidiary of San
Miguel Corporation.
Whether the SEC gravely abused its discretion in allowing the stockholders of San Miguel
Corporation to ratify the investment of corporate funds in a foreign corporation.
Held:
1. It is recognized by all authorities that "every corporation has the inherent power to adopt by-
laws 'for its internal government, and to regulate the conduct and prescribe the rights and duties
of its members towards itself and among themselves in reference to the management of its
affairs.'" In this jurisdiction under section 21 of the Corporation Law, a corporation may prescribe
in its by-laws "the qualifications, duties and compensation of directors, officers and employees."
This must necessarily refer to a qualification in addition to that specified by section 30 of the
Corporation Law, which provides that "every director must own in his right at least one share of
the capital stock of the stock corporation of which he is a director." Any person "who buys stock
in a corporation does so with the knowledge that its affairs are dominated by a majority of the
stockholders and that he impliedly contracts that the will of the majority shall govern in all
matters within the limits of the act of incorporation and lawfully enacted by-laws and not
forbidden by law." To this extent, therefore, the stockholder may be considered to have "parted
with his personal right or privilege to regulate the disposition of his property which he has
invested in the capital stock of the corporation, and surrendered it to the will of the majority of
his fellow incorporators. It can not therefore be justly said that the contract, express or implied,
between the corporation and the stockholders is infringed by any act of the former which is
authorized by a majority." Pursuant to section 18 of the Corporation Law, any corporation may
amend its articles of incorporation by a vote or written assent of the stockholders representing
at least two-thirds of the subscribed capital stock of the corporation. If the amendment changes,
diminishes or restricts the rights of the existing shareholders, then the dissenting minority has
only one right, viz.: "to object thereto in writing and demand payment for his share." Under
section 22 of the same law, the owners of the majority of the subscribed capital stock may amend
or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that Gokongwei has a
vested right to be elected director, in the face of the fact that the law at the time such right as
stockholder was acquired contained the prescription that the corporate charter and the by-law
shall be subject to amendment, alteration and modification.

2. Although in the strict and technical sense, directors of a private corporation are not regarded
as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the
corporation and the stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the stockholders, "they occupy a
fiduciary relation, and in this sense the relation is one of trust." "The ordinary trust relationship
of directors of a corporation and stockholders is not a matter of statutory or technical law. It
springs from the fact that directors have the control and guidance of corporate affairs and
property and hence of the property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are ultimately the only
beneficiaries thereof." A director is a fiduciary. Their powers are powers in trust. He who is in
such fiduciary position cannot serve himself first and his cestuis second. He cannot manipulate
the affairs of his corporation to their detriment and in disregard of the standards of common
decency. He cannot by the intervention of a corporate entity violate the ancient precept against
serving two masters. He cannot utilize his inside information and strategic position for his own
preferment. He cannot violate rules of fair play by doing indirectly through the corporation what
he could not do so directly. He cannot violate rules of fair play by doing indirectly through the
corporation what he could not do so directly. He cannot use his power for his personal advantage
and to the detriment of the stockholders and creditors no matter how absolute in terms that
power may be and no matter how meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it may not be exercised for the
aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the
cestuis. The doctrine of "corporate opportunity" is precisely a recognition by the courts that the
fiduciary standards could not be upheld where the fiduciary was acting for two entities with
competing interests. This doctrine rests fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of an opportunity for his own personal
profit when the interest of the corporation justly calls for protection. It is not denied that a
member of the Board of Directors of the San Miguel Corporation has access to sensitive and
highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget
for expansion and diversification; (c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with other firms. It is obviously to
prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who
is also the officer or owner of a competing corporation, from taking advantage of the information
which he acquires as director to promote his individual or corporate interests to the prejudice of
San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was
made. Certainly, where two corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge effectively his duty, to
satisfy his loyalty to both corporations and place the performance of his corporation duties above
his personal concerns. The offer and assurance of Gokongwei that to avoid any possibility of his
taking unfair advantage of his position as director of San Miguel Corporation, he would absent
himself from meetings at which confidential matters would be discussed, would not detract from
the validity and reasonableness of the by-laws involved. Apart from the impractical results that
would ensue from such arrangement, it would be inconsistent with Gokongwei's primary motive
in running for board membership — which is to protect his investments in San Miguel
Corporation. More important, such a proposed norm of conduct would be against all accepted
principles underlying a director's duty of fidelity to the corporation, for the policy of the law is to
encourage and enforce responsible corporate management.

3. 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 quasi-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 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. The "general rule that stockholders are entitled to full information as to the
management of the corporation and the manner of expenditure of its funds, and to inspection
to obtain such information, especially where it appears that the company is being mismanaged
or that it is being managed for the personal benefit of officers or directors or certain of the
stockholders to the exclusion of others." 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. Stockholders are entitled to inspect the books and records of
a corporation in order to investigate the conduct of the management, determine the financial
condition of the corporation, and generally take an account of the stewardship of the officers
and directors. herein, considering that the foreign subsidiary is wholly owned by 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 owned
subsidiary which are in the corporation's possession and control.

4. Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it was
organized" provided that its Board of Directors has been so authorized by the affirmative vote of
stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If
the investment is made in pursuance of the corporate purpose, it does not need the approval of
the stockholders. It is only when the purchase of shares is done solely for investment and not to
accomplish the purpose of its incorporation that the vote of approval of the stockholders holding
shares entitling them to exercise at least two-thirds of the voting power is necessary. As stated
by the corporation, the purchase of beer manufacturing facilities by SMC was an investment in
the same business stated as its main purpose in its Articles of Incorporation, which is to
manufacture and market beer. It appears that the original investment was made in 1947-1948,
when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong
Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat.
Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda
as a tax free reorganization. Assuming arguendo that the Board of Directors of SMC had no
authority to make the assailed investment, there is no question that a corporation, like an
individual, may ratify and thereby render binding upon it the originally unauthorized acts of its
officers or other agents. This is true because the questioned investment is neither contrary to
law, morals, public order or public policy. It is a corporate transaction or contract which is within
the corporate powers, but which is defective from a purported failure to observe in its execution
the requirement of the law that the investment must be authorized by the affirmative vote of
the stockholders holding two-thirds of the voting power. This requirement is for the benefit of
the stockholders. The stockholders for whose benefit the requirement was enacted may,
therefore, ratify the investment and its ratification by said stockholders obliterates any defect
which it may have had at the outset. Besides, the investment was for the purchase of beer
manufacturing and marketing facilities which is apparently relevant to the corporate purpose.
The mere fact that the corporation submitted the assailed investment to the stockholders for
ratification at the annual meeting of 10 May 1977 cannot be construed as an admission that the
corporation had committed an ultra vires act, considering the common practice of corporations
of periodically submitting for the ratification of their stockholders the acts of their directors,
officers and managers.

G.R. No. 93695 February 4, 1992 lee vs ca

Lessons Applicable: Voting Trust Agreements (Corporate Law)

FACTS:
 November 15, 1985: a complaint for a sum of money was filed by the International
Corporate Bank, Inc. (ICB) against the private respondents

 March 17, 1986: private respondents, in turn, filed a 3rd-party complaint against
ALFA and ICB

 September 17, 1987: petitioners filed a motion to dismiss the third party complaint
- denied

 July 12, 1988: trial court issued an order requiring the issuance of
an alias summons upon ALFA through the DBP

 consequence of the petitioner's letter that ALFA management was transferred to

DBP

 July 22, 1988: DBP claimed that it was not authorized to receive summons on behalf
of ALFA

 August 4, 1988: trial court issued an order advising the private respondents to take
the appropriate steps to serve the summons to ALFA

 September 12, 1988: petitioners filed a motion for reconsideration submitting that
Rule 14, section 13 of the Revised Rules of Court is not applicable since they were
no longer officers of ALFA and that the private respondents should have availed of
another mode of service under Rule 14, Section 16 of the said Rules, i.e., through
publication to effect proper service upon ALFA - denied
 January 19, 1989: 2nd motion for reconsideration was filed by the petitioners
reiterating their stand that by virtue of the voting trust agreement they ceased to
be officers and directors of ALFA

 attached a copy of the voting trust agreement between all the stockholders of ALFA
and the DBP whereby the management and control of ALFA became vested upon the
DBP

 April 25, 1989: trial court reversed itself by setting aside its previous Order dated
January 2, 1989 and declared that service upon the petitioners who were no longer
corporate officers of ALFA cannot be considered as proper service of summons on
ALFA

 October 17, 1989: trial court (NOT notified of the petition for certiorari) declared
final its decision on April 25, 1989

ISSUE: W/N the voting trust agreement is valid despite being contrary to the general
principle that a corporation can only be bound by such acts which are within the scope
of its officers' or agents' authority

HELD:
 voting trust

 trust created by an agreement between a group of the stockholders of a corporation

and the trustee or by a group of identical agreements between individual
stockholders and a common trustee, whereby it is provided that for a term of years,
or for a period contingent upon a certain event, or until the agreement is
terminated, control over the stock owned by such stockholders, either for certain
purposes or for all purposes, is to be lodged in the trustee, either with or without a
reservation to the owners, or persons designated by them, of the power to direct
how such control shall be used (Ballentine's Law Dictionary)

 Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may
create a voting trust for the purpose of conferring upon a trustee or trustees the
right to vote and other rights pertaining to the share for a period rights pertaining to
the shares for a period not exceeding 5 years at any one time: Provided, that in the
case of a voting trust specifically required as a condition in a loan agreement, said
voting trust may be for a period exceeding 5 years but shall automatically expire
upon full payment of the loan. A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions thereof. A certified copy of
such agreement shall be filed with the corporation and with the Securities and
Exchange Commission; otherwise, said agreement is ineffective and unenforceable.
The certificate or certificates of stock covered by the voting trust agreement shall be
cancelled and new ones shall be issued in the name of the trustee or trustees
stating that they are issued pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the name of the trustee or trustees
is made pursuant to said voting trust agreement.
 VILLAVERDE VS AFRICA

FACTS:
 February 27, 1996: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo
Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago,
Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa were elected as BOD
during the Annual Stockholders’ Meeting of petitioner Valle Verde Country Club,
Inc. (VVCC)
 1997 - 2001: Requisite quorum could not be obtained so they continued in a hold-
over capacity
 September 1, 1998: Dinglasan resigned, BOD still constituting a quorom elected Eric Roxas
(Roxas)
 November 10, 1998: Makalintal resigned
 on March 6, 2001: Jose Ramirez (Ramirez) was elected by the remaining BOD
 Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and
Ramirez as members of the VVCC Board with the Securities and Exchange Commission
(SEC) and the Regional Trial Court (RTC) as contrary to:
 Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of
directors or trustees to be elected from among the holders of stocks, or where there is no
stock, from among the members of the corporation, who shall hold office for 1 year until
their successors are elected and qualified.
 Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board
of directors or trustees other than by removal by the stockholders or members or by
expiration of term, may be filled by the vote of at least a majority of the remaining directors
or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called for that purpose. A director or trustee so
elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in
office. xxx.
 Makalintal's term should have expired after 1996 there being
no unexpired term. The vacancy should have been filled by the stockholders in a regular or
special meeting called for that purpose
 RTC: Favored Africa - Ramirez as Makalintal's replacement = null and void
 SEC: Roxas as Vice hold-pver director of Dinglasan = null and void
 VVCC appealed in SC for certiorari being partially contrary to law and
jurisprudence
ISSUES:
1. W/N there is an unexpired term - NO
2. W/N the remaining directors of a corporation’s Board, still constituting a quorum, can elect
another director to fill in a vacancy caused by the resignation of a hold-over director. - NO
 HELD: Petition Denied. RTC Affirmed.

1. NO
 “term” time during which the officer may claim to hold the office as of right
 not affected by the holdover
 fixed by statute and it does not change simply because the office may have become vacant, nor because
the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been
elected and has failed to qualify.
 “tenure”
 term during which the incumbent actually holds office.
 Section 23 of the Corporation Code: term of BOD only 1 year - fixed and has expired (1 yr
after 1996)
2. NO
 underlying policy of the Corporation Code is that the business and affairs of a corporation
must be governed by a board of directors whose members have stood for election, and who
have actually been elected by the stockholders, on an annual basis. Only in that way can the
directors' continued accountability to shareholders, and the legitimacy of their decisions that
bind the corporation's stockholders, be assured. The shareholder vote is critical to the theory
that legitimizes the exercise of power by the directors or officers over properties that they do
not own.
 theory of delegated power of the board of directors
 Section 29 contemplates a vacancy occurring within the director’s term of office (unexpired)
 vacancy caused by Makalintal’s leaving lies with the VVCC’s stockholders, not the
remaining members of its board of directors