CASE

32: Grace Christian High School vs CA, The Grace Village Association
PRINCIPLE/RATIO: [quorum based on by laws]

The provisions of the former and present corporation law leave no doubt as to its meaning:
the board of directors of corporation must be elected from among the stockholders or
members.
FACTS:
1. Petitioner is an educational institution at the Grace Village Association while the latter is an
organization of lot and/or building owners, lessees and residents at Grace Village.

2. In 1975, a committee of the board of directors of the association made a draft to amend
their 1968 by-laws, adding “GRACE CHRISTIAN HIGH SCHOOL representative is a permanent
Director of the ASSOCIATION”. However, this draft was never presented to the general
membership for approval.

3. For 15 years, the school has permanent seat in the Board until in 1990, the association’s
committee on election wanted to re-examine the allotted permanent seat. Notices were sent
to the members of association informing that the provision of the 1968 bylaws would be
observed and not the by-laws of 1975.

4. Petitioner requested to change the notice of election alleging that this is contrary to the
practice, violates the 1975 by-laws, and unlawfully deprives the school of its vested right to a
permanent seat in the board.

5. The association denied the request so the school filed a suit for mandamus in the Home
Insurance Guaranty Corporation (HIGC) to compel the association to recognize its right to a
permanent seat.

6. In its answer, the association cited the SEC Opinion which states that the practice of
allowing unelected members in the board was contrary to the existing by-laws (1968) and
Section 92 of the Corporation Code.

7. The hearing officer of HIGC favored the association by dismissing the petitioner’s action on
the ground that the basis of petitioner which is the 1975 draft was merely proposed by-laws, it
was not ratified. HIGC held that petitioner did not acquire vested right to a permanent seat
since allowing automatic inclusion is contrary to law and 1968 registered by-laws of
association.

8. Appeals board of HIGC affirmed the decision of HIGC. CA affirmed HIGC decision. Hence,
this petition for review
PETITIONER’S CONTENTION:
Summary: The school has already acquired a vested right to a permanent seat; the amended
by-laws in 1975 is valid and binding; and the practice for tolerating the automatic inclusion of
petitioner as permanent member of the Board of Directors without the bereft of election is
allowed under the law.

LOWER COURT/S DECISION:
CA- affirmed the HIGC decision because the 1975 amendment was not in accordance with
Article XIX of the by-laws and the Section 22 of the Corporation Law (Act 1459) which
requires the approval by the majority of the members of the association.

Article XIX of the by-laws: “The members of the Association by an affirmative vote of the
majority at any regular or special meeting called for the purpose, may alter, amend, change,
or adopt any new by-laws.”

ISSUE/S:
1. Whether or not automatic inclusion of petitioner as permanent member of the Board of
Directors without the bereft of election is allowed

NO. It is actually Secs 28 and 29 of the Corporation Law which require members of the boards
of directors of corporations to be elected.

§28. Unless otherwise provided in this Act, the corporate powers of all corporations
formed under this Act shall be exercised, all business conducted and all property of such
corporations controlled and held by a board of not less than five nor more than eleven
directors to be elected from among the holders of stock or, where there is no stock,
from the members of the corporation :Provided, however, That in corporations, other
than banks, in which the United States has or may have a vested interest, pursuant to
the powers granted or delegated by the Trading with the Enemy Act, as amended, and
similar Acts of Congress of the United States relating to the same subject, or by
Executive Order No. 9095 of the President of the United States, as heretofore or
hereafter amended, or both, the directors need not be elected from among the
holders of the stock, or, where there is no stock from the members of the corporation.
(emphasis added)

§29. At the meeting for the adoption of the original by-laws, or at such subsequent
meeting as may be then determined, directors shall be elected to hold their offices for
one year and until their successors are elected and qualified. Thereafter the directors of
the corporation shall be elected annually by the stockholders if it be a stock corporation
or by the members if it be a nonstock corporation, and if no provision is made in the by-
laws for the time of election the same shall be held on the first Tuesday after the first
Monday in January. Unless otherwise provided in the by-laws, two weeks' notice of the
election of directors must be given by publication in some newspaper of general
circulation devoted to the publication of general news at the place where the principal
office of the corporation is established or located, and by written notice deposited in
the post-office, postage pre-paid, addressed to each stockholder, or, if there be no
 stockholders, then to each member, at his last known place of residence. If there be no
newspaper published at the place where the principal office of the corporation is
established or located, a notice of the election of directors shall be posted for a period
of three weeks immediately preceding the election in at least three public places, in
the place where the principal office of the corporation is established or located.
(Emphasis added)

The present Corporation Code (BP Blg. 63) similarly provides for election of Board of
Directors.
§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 one (1) year and until their successors are elected and qualified. (Emphasis
added)

The provisions of the former and present corporation law leave no doubt as to its meaning:
the board of directors of corporation must be elected from among the stockholders or
members. Although the petitioner cited corporations in which there are unelected members
in the board, these members sit as ex officio members, i.e., by virtue of and for as long as they
hold a particular office. In the case at hand, there is no reason at all for the school’s
representative to be given a seat in the board.

In sum, the provision “GRACE CHRISTIAN HIGH SCHOOL representative is a permanent
Director of the ASSOCIATION” is contrary to law. Although it was not questioned for 15 years,
this does not mean that its validity cannot be challenged. Notably, they did not actually
implement the provision in question except perhaps insofar as it increased the number of
directors from 11 to 15, but certainly not the allowance of petitioner’s representative as an
unelected member of the board of directors. The members of the association merely
tolerated petitioner’s representative and tolerance cannot be considered ratification.

Also, the petitioner cannot claim vested right to sit in the board on the basis of practice,
because “practice, no matter how long continued, cannot give rise to any vested right if it is
contrary to law”.

CA decision against petitioner is affirmed.







CASE # 33
PRINCIPLE/RATIO:

Every corporation has the inherent power to adopt by-laws; The by-laws may be
made so as to add qualifications and disqualification provided it is valid and reasonable,
i.e. not contrary to law.

FACTS:
1. San Miguel Corporation (SMC) is a corporation created under the laws of
the Philippines which originally did not prohibit its directors from holding
the seat of a director in other corporations.
2. Basing their authority to do so on a resolution of the stockholders adopted
on 13 March 1961, SMC directors Andres Soriano, Jr., Jose M. Soriano,
Enrique Zobel, Antonio Roxas, Emeterio Buñao, Walthrode B. Conde,
Miguel Ortigas, and Antonio Prieto (Private Respondents) mended the
bylaws of the SMC on 18 September 1976.
3. As a result of such amendment, John Gokongwei, Jr. (Gokongwei) was
prohibited from becoming a director in SMC.
4. On 22 October 1976, Gokongwei, as stockholder of SMC, 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. (SEC Case 1375)
5. While this 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. Petitioner prayed to prevent the meeting to occur as
such shows the flaw of the amendment and seeks to ratify such.
6. Upon discovery of an investment of corporate funds by the board outside
of the purpose of the corporation under its Articles of incorporation,
Petitioner seeks relief by filing another case under the SEC (SEC Case
1423).
P CONTENTION:
SEC Case 1375
1. It was alleged that 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.
 2. 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.
3. It 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
4. Lastly, Gokongwei 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; in relation to such, 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
5. 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.
6. That by calling a special stockholders' meeting for the ratification of the
amendment, Soriano, et. al. admitted the invalidity of the amendments of
18 September 1976.
7. In connection to the same case, Gokongwei alleged 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.

SEC Case 1423

1. 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
R: CONTENTION:
Case 1375
1. Private Respondents deny the material averments thereof and states, as
part of their affirmative defenses, that in August 1972, the Universal Robina
 Corporation (Robina) and the Consolidated Foods Corporation (CFC), both
corporations engaged in business competitive to that of respondent
corporation, began acquiring shares therein.
2. That on January 12, 1976, petitioner, who is president and controlling
shareholder of Robina and CFC (both closed corporations) purchased
5,000 shares of stock of respondent corporation, and thereafter, in behalf
of himself, CFC and Robina, "conducted malevolent and malicious
publicity campaign against SMC" to generate support from the stockholder
"in his effort to secure for himself and in representation of Robina and CFC
interests, a seat in the Board of Directors of SMC"
Case 1423
1. No mentioned contention for this case, their motion to dismiss and
opposition ad abundantiorem cautelam was denied.
LOWER COURT/S DECISION:

SEC Case 1375: Partly in favor of petitioner

2. 1.That respondents produce and permit the inspection, copying and
photographing, by or on behalf of the petitioner-movant, John Gokongwei,
Jr., of the minutes of the stockholders' meeting of the respondent San
Miguel Corporation held on March 13, 1961…
3. As to the Balance Sheet of San Miguel International, Inc. as well as the list
of salaries, allowances, bonuses, compensation and/or remuneration
receive 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 hereby DENIED, as petitioner-movant is
not a stockholder of San Miguel International, Inc. and has, therefore, no
inherent right to inspect said documents;
3. Finally, the Commission holds in abeyance the resolution on the matter of
production and inspection of the authority of the stockholders of San
Miguel Corporation to invest the funds of respondent corporation in San
Miguel International, Inc., until after the hearing on the merits of the
principal issues in the above-entitled case.

SEC Case 1423:

No action from the SEC even upon the filing of this case to the SC
ISSUE/S:
1. Whether the corporation has the power to provide for the (additional)
qualifications of its directors.
2. Whether the disqualification of a competitor from being elected to the
Board of Directors is a reasonable exercise of corporate authority.
3. 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.
4. 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.

RULING/S:
Ø Ruled Partly in favor of Petitioner but only to the inspection of the
corporate books – Everything else is against him. Bylaws can be amended
by the BOD provided it is with authority.
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 cannot therefore be justly said that the contract, express or
implied, between the corporation and the stockholders is infringed by any act of
the former which is authorized by a majority." 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.
CASE # 36 Expert Travel & Tours, Inc. v. Court of Appeals and Korean Airlines
FACTS:
Korean Airlines (KAL) is a corporation established and registered in the Republic of
South Korea and licensed to do business in the Philippines. Its general manager in the
Philippines is Suk Kyoo Kim, while its appointed counsel was Atty. Mario Aguinaldo and
his law firm.

KAL, through appointed counsel, filed a complaint against Expert Travel with the RTC
for the collection of sum of money. The verification and certification against forum
shopping was signed by the same appointed counsel, who indicated therein that he was
the resident agent and legal counsel of KAL and had caused the preparation of the
complaint. Expert Travel filed a motion to dismiss the complaint on the ground that the
appointed counsel was not authorized to execute the verification and certificate of non-
forum shopping as required by the Rules of Court. KAL opposed the motion, contending
that he is a resident agent and was registered as such with the SEC as required by the
Corporation Code. He also claimed that he had been authorized to file the complaint
through a resolution of the KAL Board of Directors approved during a special meeting,
wherein the board of directors conducted a special teleconference which he attended. It
was also averred that in the same teleconference, the board of directors approved a
resolution authorizing him to execute the certificate of non-forum shopping and to file the
complaint. Suk Kyoo Kim alleged, however, that the corporation had no written copy of
the aforesaid resolution.
LOWER COURT/S DECISION:
The trial court issued an Order denying the motion to dismiss, giving credence to the
claims of Atty. Aguinaldo and Suk Kyoo Kim that the KAL Board of Directors indeed
conducted a teleconference during which it approved a resolution as quoted in the
submitted affidavit. ETI filed a motion for the reconsideration of the Order, contending
that it was inappropriate for the court to take judicial notice of the said teleconference
without any prior hearing. However, the trial court denied the motion in its Order dated
August 8, 2000.

ETI then filed a petition for certiorari and mandamus, assailing the orders of the RTC.
CA afterwards rendered judgment dismissing the petition, ruling that the verification and
certificate of non-forum shopping executed by Atty. Aguinaldo was sufficient compliance
with the Rules of Court. According to the appellate court, Atty. Aguinaldo had been duly
authorized by the approved board resolution, and was the resident agent of KAL. As
such, the RTC could not be faulted for taking judicial notice of the said teleconference of
the KAL Board of Directors. ETI filed a motion for reconsideration of the said decision,
which the CA denied.
ISSUE/S:
Can a special teleconference be recognized as legitimate means to approved a board
resolution and authorize an agent to execute an act in favor of the corporation?
RULING/S:

Yes. In this age of modern technology, the courts may take judicial notice that business
transactions may be made by individuals through teleconferencing. Teleconferencing is
interactive group communication (three or more people in two or more locations)
through an electronic medium. It represents a unique alternative to face-to-face (FTF)
meetings. In general terms, teleconferencing can bring people together under one roof
even though they are separated by hundreds of miles. This type of group
communication may be used in a number of ways, and have three basic types: (1) video
conferencing – television-like communication augmented with sound; (2) computer
conferencing – printed communication through keyboard terminals, and (3) audio-
conferencing-verbal communication via the telephone with optional capacity for
telewriting or telecopying.

Teleconferencing and videoconferencing of members of board of directors of private

corporations is a reality, in light of Republic Act No. 8792. The Securities and Exchange
Commission issued SEC Memorandum Circular No. 15, on November 30, 2001,
providing the guidelines to be complied with related to such conferences. Thus, the
Court agrees with the RTC that persons in the Philippines may have a teleconference
with a group of persons in South Korea relating to business transactions or corporate
governance.

HOWEVER, in the case at bar, even given the possibility that Atty. Aguinaldo and Suk
Kyoo Kim participated in a teleconference along with the respondent’s Board of
Directors, the Court is not convinced that one was conducted; even if there had been
one, the Court is not inclined to believe that a board resolution was duly passed
specifically authorizing Atty. Aguinaldo to file the complaint and execute the required
certification against forum shopping. Facts and circumstances show that there was
gross failure http://www.lawphil.net/judjuris/juri2005/may2005/gr_152392_2005.html
- fnt24on the part of company to prove that there was indeed a special teleconference
such as failure to produce a written copy of the board resolution via teleconference.

Petition is GRANTED. The Decision of the Court of Appeals is REVERSED and

SET ASIDE.

NOTE: Read SEC Memo Circular No. 15-2001, the guidelines for the conduct of
teleconferencing and videoconferencing

CASE #37: Lopez v. Ericta
PRINCIPLE/RATIO:
A vote to abstain is only prima facie evidence of an intent to acquiesce to the affirmative
vote and the real intent of the abstaining member can be gleaned from the facts and
circumstances surrounding the voting.
FACTS:

1. Dr. Consuelo Blanco was first appointed as ad interim Dean of the College of
Education effective May 1, 1970 until April 30, 1970 unless sooner terminated.

2. On May 26, 1970, the UP Board of Regents met and President Lopez submitted to it
the ad interim appointment of Dr. Blanco for reconsideration.

3. In view of the objections by Regent Kalaw, the Board voted to defer action and it was
referred to the Committee on Personnel.

4. Because of the deferment, the appointment was extended until April 30, 1971 with the
same conditions.

5. On July 9, 1970, the Board met and the appointment was terminated on the ground
that Dr. Blanco had not obtained the necessary majority number of votes.

6. The roll-call voting on which the decision to terminate was based were as follows: 5 in
favor of the appointment, 3 against, and 4 abstained (total of 12 members).

7. Dr. Blanco addressed a letter to the Board requesting a reconsideration and to the
President of the university but since there were no replies, Dr. Blanco filed a petition for
certiorari and prohibition with preliminary injunction before the CFI of Quezon City.
P CONTENTION:
If the abstentions were considered as affirmative votes a situation might arise wherein a
nominee is elected by only one affirmative vote with eleven members of the Board
abstaining.
R: CONTENTION:
An abstention vote should be recorded in the affirmative on the theory that refusal to
vote indicates acquiescence in the action of those who vote.
LOWER COURT/S DECISION:
In favor of Blanco. Declared Blanco as the duly elected Dean of the College of
Education.
ISSUE/S:
Whether an abstention should be counted as an affirmative or as a negative vote.
RULING/S: NO. Decision appealed from is set aside.

Respondent’s contention is premised on the presumption that those who abstained

intend to acquiesce in the action of those who vote affirmatively but such presumption is
only prima facie. It is pertinent to inquire into the facts and circumstances which
attended the voting on the ad interim appointment to determine whether or not such a
construction would govern.

From the minutes of the meeting it is clear: (1) that the Personnel Committee, to which
the matter of Dr. Blanco's appointment had been referred for study, was for
recommending that it be rejected; (2) that, however, the rejection should be done in a
diplomatic way "to avoid any embarrassment on the part of both the appointee and the
President;" and (3) that the "final decision" of the committee was to ask the President of
the University to talk to Dr. Blanco "for the appointment to be withdrawn."

The votes of abstention, viewed in their setting, can in no way be construed as

votes for confirmation of the appointment. There can be no doubt whatsoever as to
the decision and recommendation of the three members of the Personnel Committee: it
was for rejection of the appointment. If the committee opted to withdraw the
recommendation it was on the understanding that the President would talk to Dr. Blanco
for the purpose of having her appointment withdrawn in order to save them from
embarrassment. No inference can be drawn from this that the members of the
Personnel Committee, by their abstention, intended to acquiesce in the action taken by
those who voted affirmatively. Neither, for that matter, can such inference be drawn
from the abstention that he was abstaining because he was not then ready to make a
decision.

All arguments on the legal question of how an abstention should be treated, all
authorities cited in support of one or the other position, become academic and
purposeless in the face of the fact that respondent Dr. Blanco was clearly not the choice
of a majority of the members of the Board of Regents.

Note: Case has become moot since the 3-yr tenure for Deanship has expired. It should
be noted that both under the Charter (See. 10) and under the Revised Code of the
University (Art. 78) the Dean of a college is elected by the Board of Regents on
nomination by the President of the University. In other words the President's function is
only to nominate, not to extend an appointment, even if only ad interim; and the power
of the Board of Regents is not merely to confirm, but to elect or appoint.
CASE # 38

Gochan et. al. v. Young et. al

G.R. No. 131889 March 12, 2001

FACTS:
Felix Gochan and Sons Realty Corporation (Gochan Realty) was
registered with the SEC with Felix Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro
Gochan, Tomasa Gochan, Esteban Gochan and Crispo Gochan as its
incorporators.
Felix Gochan Sr.'s daughter, Alice, mother of the respondents, inherited
50 shares of stock in Gochan Realty from the former. Alice died in 1955,
leaving the 50 shares to her husband, John Young, Sr.
The Regional Trial Court of Cebu adjudicated 6/14 of these shares to her
children, herein respondents Richard Young, David Young, Jane Young Llaban,
John Young Jr., Mary Young Hsu and Alexander Thomas Young. Having
earned dividends, these stocks numbered 179.

Their father John Sr., requested Gochan Realty to partition the shares of his
late wife by cancelling the stock certificates in his name and issuing in lieu thereof,
new stock certificates in the names of the respondents. However, Gochan Realty
refused citing as reason, the right of first refusal granted to the remaining
stockholders by the Articles of Incorporation.

Cecilia Gochan Uy and Miguel Uy filed a complaint with the SEC for issuance of
shares of stock to the rightful owners, nullification of shares of stock, reconveyance of
property impressed with trust, accounting, removal of officers and directors and
damages against respondents.

Petitioners argue that Spouses Cecilia and Miguel Uy had no capacity or legal
standing to bring the suit before the SEC on February 8, 1994, because the latter were
no longer stockholders at the time. Allegedly, the stocks had already been purchased
by the corporation.

LC RULING:

1. SEC- granted the motin to dismiss and ordered the cancellation of the notice of
lis pendens annotated upon the tiles of the corporate lands.

- Complainants are suing in their own right and as heirs of and/or as the
beneficial owners of the shares in the capital stock of FGSRC held in trust
for them during his lifetime by the late John D. Young. Moreover, it has
been shown that said complainants ha[d] never been x x x stockholder[s] of
record of FGSRC to confer them with the legal capacity to bring and
maintain their action. Conformably, the case cannot be considered as an
intra-corporate controversy within the jurisdiction of this Commission.
- Complainants base their “stockholders rights” upon the act of their succession
to all the rights, property ad interest of their father…Conformably, until
 therefore the estate is settled and the payment of the debts of the deceased is
accomplished, the heirs cannot as a matter of right compel the delivery of the
shares of stock to them and register such transfer in the books of the
corporation to recognize them as stockholders. The complainant heirs succeed
to the estate of [the] deceased John D. Young, Sr. but they do not thereby
become stockholders of the corporation.

2. CA- the SEC had no jurisdiction over the case as far as the heirs of Alice
Gochan were concerned, because they were not yet stockholders of the
corporation. On the other hand, it upheld the capacity of Respondents Cecilia
Gochan Uy and her spouse Miguel Uy. It also held that the intestate Estate of
John Young Sr. was an indispensable party.

ISSUE:

Whether or not respondents have the legal personality to file a derivative suit on
behalf of the corporation.

Whether or not the intestate estate of John D. Young Sr. is an indispensable

party in the SEC case considering that the individual heirs shares are still in the
decedent stockholders name.

NOTE: Effect of RA 8799 (The case can no longer be remanded to the SEC. As
earlier stated, RA 8799, which became effective on August 8, 2000, transferred SECs
jurisdiction over cases involving intra-corporate disputes to courts of general jurisdiction
or to the regional trial courts.)

RULING:

1. Yes. The respondents have personality to file a derivative suit. 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.

In the present case, the Complaint alleges all the components of a derivative
suit. The allegations of injury to the Spouses Uy can coexist with those pertaining to
the corporation. The personal injury suffered by the spouses cannot disqualify them
from filing a derivative suit on behalf of the corporation. It merely gives rise to an
additional cause of action for damages against the erring directors. This cause of
action is also included in the Complaint filed before the SEC.

Cecilia Uy's averment in the Complaint that the purchase of her stocks by the
corporation was null and void ab initio is deemed admitted. It is elementary that a void
contract produces no effect either against or in favor of anyone. It cannot create,
modify or extinguish the juridical relation to which it refers. Thus, Cecilia remains a
stockholder of the corporation in view of the nullity of the Contract of Sale. The
Spouses Uy have the capacity to file a derivative suit in behalf of and for the benefit of
the corporation. The reason is that the allegations of the Complaint make them out as
stockholders at the time the questioned transaction occurred, as well as at the time
the action was filed and during the pendency of the action.

2. Yes. While permitting an executor or administrator to represent or to bring suits on

behalf of the deceased, do not prohibit the heirs from representing the deceased.
These rules are easily applicable to cases in which an administrator has already
been appointed. But no rule categorically addresses the situation in which special
proceedings for the settlement of an estate have already been instituted, yet no
administrator has been appointed.

The Rules are to be interpreted liberally in order to promote their objective of securing
a just, speedy and inexpensive disposition of every action and proceeding. For the
protection of the interests of the decedent, this Court has in previous
instances recognized the heirs as proper representatives of the decedent, even when
there is already an administrator appointed by the court. When no administrator has
been appointed, as in this case, there is all the more reason to recognize the heirs as
the proper representatives of the deceased. Since the Rules do not specifically prohibit
them from representing the deceased, and since no administrator had as yet been
appointed at the time of the institution of the Complaint with the SEC, we see nothing
wrong with the fact that it was the heirs of John D. Young Sr. who represented his
estate in the case filed before the SEC.

CASE #39: Trans Middle Estate (Phils.) v. Sandiganbayan
FACTS:
Petition for certiorari was filed by petitioner Trans Middle East (Phil.) Equities (TMEE),
the registered owners of sequestered shares in Equitable-PCI Bank (EPCIB) assails
Sandiganbayan’s Resolution which declared that a TRO “issued 14 years ago by this
Court in cases that were closed and terminated ten years ago, remained in effect, thus
disqualifying TMEE from voting on its shares. The annual stockholders meeting of
EPCIB was scheduled on 23 May 2006, or the day after the Resolution was
promulgated, leaving questions as to the timing of the promulgation. In any event, the
Resolution is rooted in dubious and erroneous legal premises.”

TMEE is the registered owner of 6,119,067 common shares of stock in EPCIB. The
shares were sequestered by the Presidential Commission on Good Government
(PCGG) on a theory that those shares actually belong to a Benjamin Romualdez who
acquired such from illegal wealth. Sandiganbayan filed a case to recover such shares
which was countered by a motion of TMEE to enjoin the PCGG from voting the shares
of TMEE. SC then issued a TRO enjoining the implementation of the Sandiganbayan
Resolutions.

In January and February of 1997, TMEE filed two motions before the Sandiganbayan
urging the nullification or lifting of the writ of sequestration. It contended that no valid writ
of sequestration was ever issued since it was only effected through a letter addressed to
EPCIB signed only by one PCGG Commission, a violation of the PCGG Rules and
Regulations where the required writes of sequestration be issued by at least 2
commissioner. TMEE argued that it was entitled to the actual custody and control of
the shares, it nonetheless manifested that it was willing to deposit these shares in
escrow to allay any fear of dissipation, loss or wastage of the subject shares, as well as
on all futures cash and stock dividends to be declared on the shares.

PCGG filed with Sandiganbayan a Motion for Issuance of Restraining Order to enjoin
the holding of the EPCIB stockholders meeting on the ground that since the SC
Resolution enjoined both PCGG and TMEE from voting sequestered stock, these
shares stood to be diluted considering a proposal in the agenda to increase the
authorized capital stock of EPCIB, among others. Sandiganbayan dismissed these fears
of the PCGG as unfounded. In the same Resolution, Sandiganbayan acknowledged that
SC had granted it power to modify or terminate the Court’s TRO in the exercise of its
sound discretion and in the light of subsequent evidence. Thus, Sandiganbayan
proceeded to recognize the right of TMEE to vote the shares of stock registered in its
name, and to allow it to vote at the stockholders meeting.

Sandiganbayan justified such recognition based on the following premises: (a) that the
PCGG which bore the burden of proof to show prima facie foundation for the
sequestration of TMEE shares had failed to timely do so; (b) that no damage or
dissipation of the... sequestered shares would result should TMEE be allowed to vote
them; and (c) that on its face, the writ of sequestration was issued only by one PCGG
Commissioner, in violation of the PCGG's rules and regulations promulgated on 11 April
1986.

The pending motion for nullification of the writ of sequestration was left unresolved then.
On 10 January 2003, the Sandiganbayan issued a Resolution on the motions filed by
TMEE in 1997 assailing the sequestration order. The Sandiganbayan granted the
motion to nullify the writ of sequestration of TMEE shares, ruling that the sequestration
order null and void as it was issued only by one PCGG Commissioner.
At the same time, based on TMEE's manifestation that it was willing to deposit the
subject shares in escrow to allay any fear of dissipation, loss or wastage of the subject
shares, the Sandiganbayan ordered that the shares be deposited in escrow with the
Land Bank of the Philippines.
PCGG filed motions for the reconsideration of both the 1998 and 2003 resolutions of the
Sandiganbayan. These motions have not yet been resolved to date. In the meantime,
TMEE alleged that it has voted the subject shares from 1998 up to 2005.
On 2 May 2006, the PCGG filed a Motion for Execution of this Court's Decision in G.R.
Nos. 105808 and 105809, which was promulgated on 23 January 1995, or more than
ten (10) years earlier. It was argued therein that the 1995 Decision became final and
executory by virtue of an... entry of judgment dated 2 April 1996 which was allegedly
received by the PCGG only on 2 March 2006.
Desiring to "exercise its voting rights as upheld by the Supreme Court", the PCGG
prayed of the Sandiganbayan to issue the appropriate order permitting it to vote the
sequestered shares or, in the alternative, to order "re-enforced and/or reissued" the
TRO affirmed by the Supreme Court in the 1995 Decision, which enjoined TMEE from
voting the sequestered shares.
The PCGG argued that due to the fact that the stockholders meeting of EPCIB was
scheduled on 23 May 2006, there was an urgent need for the re-enforcement or
reissuance of the TRO affirmed by the Supreme Court in its 1995 Decision. The
PCGG... also alleged that they had received reports that "the Romualdezes are bent on
disposing of their shares in EPCIB," and that should they "gain control of the bank of
(sic) electing themselves and/or their dummies/nominees to the helm of the bank, there
is a danger... that the sequestered Equitable-PCI Bank shares might dissipate or be
disposed of."
The Sandiganbayan acknowledged that the 1998 and 2003 Resolutions it earlier issued
had indeed modified the TRO issued by this Court, and that it had the authority, as
granted bythe Court, to modify or terminate such TRO. Nevertheless, the
Sandiganbayan ruled that both resolutions had not yet attained finality since it itself still
had to resolve the motions for reconsideration respectively related thereto filed by the
PCGG in 1998 and 2003. The Sandiganbayan opined that it could not re-issue the TRO
since it was this Court which issued the same.
On the following day, 23 May 2003, TMEE filed the instant petition with this Court, with a
prayer for the issuance of a Temporary Restraining Order or a Writ of Preliminary
Injunction "to preserve and maintain the status quo wherein TMEE [was] allowed to vote
the shares... registered in its name and restraining the respondents from enforcing the
[22 May 2003 Sandiganbayan] Resolution granting the motion to re-enforce/re-issue
TRO, until the final resolution" of this Court.
In the absence of an injunctive order restraining the holding of the stockholders' meeting
on 23 May 2006, the meeting was held. Over the objections of TMEE, the election of a
new Board of Directors of EPCIB was held.
Since TMEE was not allowed to vote its shares, it was unable to elect any
representative to the Board of Directors despite the fact that it maintained enough
shares to be entitled to at least one board seat.

ISSUE/S:
Whether or not PCGG exercises acts of dominion on the voting shares over the
registered owner of the shares in TMEE.
RULING/S:
NO.
It is a well-settled rule that registered owners of the shares of a corporation, even
if they are sequestered by the government through the PCGG, exercises the right
and the privilege of voting on them. PCGG (as conservator) cannot, as a rule,
exercise acts of dominion by voting these shares. Registered owner of sequestered
shares may only be deprived of these voting rights, and the PCGG authorized to
exercise the same, only if it is able to establish that:
(1) there is prima facie evidence showing that the said shares are ill-gotten and
thus belong to the State; and
(2) there is an imminent danger of dissipation, thus necessitating the continued
sequestration of the shares and authority to vote thereupon by the PCGG while the main
issue is pending before the Sandiganbayan.

The writ of sequestration would not legally bar TMEE from voting its shares. It would
only be possible if there is prima facie evidence that such shares are ill-gotten and
where there is an imminent danger of dissipation. Given that Sandiganbayan has yet to
release such findings, this is not applicable. In fact, in a Resolution of Sandiganbayan, it
declared that TMEE has the prima facie right as owner of the registered owner of the
sequestered shares. Petition granted.

CASE #40 (Republic v. Sandiganbayan):
PRINCIPLE/RATIO:
When sequestered shares registered in the names of private individuals or entities are
alleged to have been acquired with ill-gotten wealth, then the two-tiered test is applied.
However, when the sequestered shares in the name of private individuals or entities are
shown, prima facie, to have been (1) originally government shares, or (2) purchased
with public funds or those affected with public interest, then the two-tiered test does not
apply. Rather, the public character exception in Baseco v. PCGG and Cojuangco Jr. v.
Roxas prevail; that is, the government shall vote the shares.
FACTS:
1. On 7 August 1991, the Presidential Commission on Good Government (PCGG)
conducted an Eastern Telecommunications, Philippines, Inc. (ETPI) stockholders
meeting during which a PCGG controlled board of directors was elected. A
special stockholders meeting was later convened by the registered ETPI
stockholders wherein another set of board of directors was elected, as a result of
which two sets of such board and officers were elected.
2. Victor Africa, a stockholder of ETPI, alleging that the PCGG had since 29
January 1988 been "illegally 'exercising' the rights of stockholders of ETPI,"
especially in the election of the members of the board of directors, filed a motion
before the Sandiganbayan, prayed that said court order the "calling and holding
of the Eastern Telecommunications, Philippines, Inc. (ETPI) annual stockholders
meeting for 1992 under the [c]ourt's control and supervision and prescribed
guidelines."
3. The PCGG did not object to Africa's motion provided that "(1) An Order be issued
upholding the right of PCGG to vote all the Class "A" shares of ETPI; (2) In the
alternative, in the remote event that PCGG's right to vote the sequestered shares
be not upheld, an Order be issued (a) disregarding the Stock and Transfer Book
and Booklet of Stock Certificates of ETPI in determining who can vote the shares
in an Annual Stockholders Meeting of ETPI, (b) allowing PCGG to vote 23.9% of
the total subscription in ETPI, and (c) directing the amendment of the Articles of
Incorporation and By-laws of ETPI providing for the minimum safeguards for the
conservation of assets prior to the calling of a stockholders meeting. By the
assailed Resolution of 13 November 1992, the Sandiganbayan resolved Africa's
motion, ordering the conduct of an annual stockholders meeting of ETPI, for
1992. Assailing the foregoing resolution, the PCGG filed before the Supreme
Court a petition (GR 107789) for Certiorari, Mandamus and Prohibition.
4. By Resolution of 26 November 1992, the Supreme Court enjoined the
Sandiganbayan from (a) implementing its Resolution of 13 November 1992, and
(b) holding the stockholders' meeting of ETPI scheduled on 27 November 1992.
On 7 December 1992, all stockholders of record of ETPI, filed a motion to
intervene in GR 107789. Their motion was granted by the Supreme Court by
Resolution of 14 January 1993.
5. After the parties submitted their respective memoranda, the PCGG, in early
1995, filed a "VERY URGENT PETITION FOR AUTHORITY TO HOLD SPECIAL
 STOCKHOLDERS' MEETING FOR [THE] SOLE PURPOSE OF INCREASING
[ETPI's] AUTHORIZED CAPITAL STOCK," it claiming that the increase in
authorized capital stock was necessary in light of the requirements laid down by
Executive Order 109 and Republic Act 7975. By Resolution of 7 May 1996, the
Supreme Court resolved to refer the PCGG's very urgent petition to hold the
special stockholders' meeting to the Sandiganbayan for reception of evidence
and resolution.
6. In compliance therewith, the Sandiganbayan issued a Resolution of 13
December 1996, granting the PCGG "authority to cause the holding of a special
stockholders' meeting of ETPI for the sole purpose of increasing ETPI's
authorized capital stock and to vote therein the sequestered Class 'A' shares of
stock." The PCGG-controlled ETPI board of directors thus authorized the ETPI
Chair and Corporate Secretary to call the special stockholders meeting. Notices
were sent to those entitled to vote for a meeting on 17 March 1997. The meeting
was held as scheduled and the increase in ETPI's authorized capital stock from
P250 Million to P2.6 Billion was "unanimously approved."
P CONTENTION:

R: CONTENTION:
On 1 April 1997, Africa filed before the Supreme Court a motion to cite the PCGG "and
its accomplices" in contempt and "to nullify the 'stockholders meeting' called/conducted
by PCGG and its accomplices," he contending that only this Court, and not the
Sandiganbayan, has the power to authorize the PCGG to call a stockholders meeting
and vote the sequestered shares. Africa went on to contend that, assuming that the
Sandiganbayan had such power, its Resolution of 13 December 1996 authorizing the
PCGG to hold the stockholders meeting had not yet become final because the motions
for reconsideration of said resolution were still pending. Further, Africa alleged that he
was not given notice of the meeting, and the PCGG had no right to vote the sequestered
Class "A" shares. A motion for leave to intervene relative to Africa's "Motion to Cite the
PCGG and its Accomplices in Contempt" was filed by ETPI.
LOWER COURT/S DECISION:
1. The Supreme Court granted the motion for leave but ETPI never filed any
pleading relative to Africa's motion to cite the PCGG in contempt. By Resolution
of 16 February 2001, the Sandiganbayan finally resolved to deny the motions for
reconsideration of its Resolution of 13 December 1996, prompting Africa to file on
6 April 2001 before the Supreme Court a petition for Review on Certiorari (GR
147214), challenging the Sandiganbayan Resolutions of 13 December 1996
(authorizing the holding of a stockholders meeting to increase ETPI's authorized
capital stock and to vote therein the sequestered Class "A" shares of stock) and
16 February 2001 (denying reconsideration of the December 13, 1996
Resolution). The petitions were consolidated.
ISSUE/S:
1. Whether the PCGG can vote the sequestered ETPI Class "A" shares in
the stockholders meeting for the election of the board of directors.
2. Whether the Sandiganbayan can order the Division Clerk of Court to call
the stockholders meeting and in appointing then Sandiganbayan Associate
Justice Sabino de Leon, Jr. to control and supervise the same.

RULING/S:

1. The PCGG cannot thus vote sequestered shares, except when there are
"demonstrably weighty and defensible grounds" or "when essential to prevent
disappearance or wastage of corporate property."15

The principle laid down in this Court developed a "two-tiered" test in determining
whether the PCGG may vote sequestered shares:

The issue of whether PCGG may vote the sequestered shares in SMC
necessitates a determination of at least two factual matters:

1. whether there is prima facie evidence showing that the said shares are
ill-gotten and thus belong to the state; and

2. whether there is an immediate danger of dissipation thus necessitating

their continued sequestration and voting by the PCGG while the main
issue pends with the Sandiganbayan.18

The two-tiered test, however, does not apply in cases involving funds of "public
character." In such cases, the government is granted the authority to vote said shares,
namely:

(1) Where government shares are taken over by private persons or entities
who/which registered them in their own names, and

(2) Where the capitalization or shares that were acquired with public funds
somehow landed in private hands.19

The [public character] exceptions are based on the common-sense principle that legal
fiction must yield to truth; that public property registered in the names of non-owners is
affected with trust relations; and that the prima facie beneficial owner should be given
the privilege of enjoying the rights flowing from the prima facie fact of ownership.

In short, when sequestered shares registered in the names of private individuals or

entities are alleged to have been acquired with ill-gotten wealth, then the two-tiered test
is applied. However, when the sequestered shares in the name of private individuals or
entities are shown, prima facie, to have been (1) originally government shares, or (2)
purchased with public funds or those affected with public interest, then the two-tiered
test does not apply. Rather, the public character exception in Baseco v.
PCGG and Cojuangco Jr. v. Roxas prevail; that is, the government shall vote the
shares.

And it further held that the PCGG could not vote the sequestered shares as "only the
owners of the shares of stock of subject corporation, their duly authorized
representatives or their proxies, may vote the said shares,"24 relying on this Court's
ruling in Cojuangco, Jr. v. Roxas25 that:

The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict
ownership of sequestered property. It is a mere conservator. It may not vote the shares
in a corporation and elect members of the board of directors. The only conceivable
exception is in a case of a takeover of a business belonging to the government or
whose capitalization comes from public funds, but which landed in private hands as in
BASECO.

In short, the Sandiganbayan held that the public character exception does not apply, in
which case it should have proceeded to apply the two-tiered test. This it failed to do.

The questions thus remain if there is prima facie evidence showing that the subject
shares are ill-gotten and if there is imminent danger of dissipation. This Court is not,
however, a trier of facts, hence, it is not in a position to rule on the correctness of the
PCGG's contention. Consequently, this issue must be remanded to the Sandiganbayan
for resolution.

2. The Clerk of Court, who is already saddled with judicial responsibilities, need not be
burdened with the additional duties of a corporate secretary. Moreover, the Clerk of
Court may not have the requisite knowledge and expertise to discharge the functions of
a corporate secretary. The case of Board of Directors and Election Committee of SMB
Workers Savings and Loan Asso., Inc. v. Tan, etc., et al. (105 Phil. 426 (1959). Vide
also 5 Fletcher Cyc Corp (Perm Ed) §2074; 18A Am Jur 2d ) provides a solution to the
Sandiganbayan's dilemma of calling a meeting when ETPI had two sets of officers.
There, the Supreme Court upheld the creation of a committee empowered to call,
conduct and supervise the election of the board of directors. Such a committee
composed of impartial persons knowledgeable in corporate proceedings would provide
the needed expertise and objectivity in the calling and the holding of the meeting without
compromising the Sandiganbayan or its officers. The appointment of the committee
members and the delineation of the scope of the duties of the committee may be made
pursuant to an agreement by the parties or in accordance with the provisions of Rule 9
(Management Committee) of the Interim Rules of Procedure for Intra-Corporate
Controversies insofar as they are applicable.
CASE #40 GSIS v. Court of Appeals GRN 183905
PRINCIPLE/RATIO: Proxy solicitation is a procedure that antecedes proxy validation. The former involves
the securing and submission of proxies, while the latter concerns the validation of such secured and submitted
proxies.

FACTS: The annual stockholders’ meeting (annual meeting) of the Manila Electric Company (Meralco) was
scheduled on 27 May 2008. In connection with the annual meeting, proxies were required to be submitted on or
before 17 May 2008, and the proxy validation was slated for five days later, or 22 May.

The Corporate secretary (Quiason) resigned so the board of directors of Meralco designated Jose Vitug to act as
corporate secretary for the annual meeting. However, the proxy proceedings were presided over by respondent
Anthony Rosete assistant corporate secretary and in-house chief legal counsel of Meralco. Private respondents (
nonetheless argue that Rosete was the acting corporate secretary of Meralco. Petitioner GSIS, a major shareholder
in Meralco, was distressed over the proxy validation proceedings, and the resulting certification of proxies in favor
of the Meralco management.

GSIS filed a complaint with the RTC seeking the declaration of certain proxies as invalid.

Thereafter GSIS filed a Notice with the RTC manifesting the dismissal of the complaint and filed an Urgent Petition
with the Securities and Exchange Commission (SEC) seeking to restrain Rosete from "recognizing, counting and
tabulating, directly or indirectly, notionally or actually or in whatever way, form, manner or means, or otherwise
honoring the shares covered by" the proxies in favor of respondents "or any officer representing MERALCO
Management," and to annul and declare invalid said proxies. GSIS also prayed for the issuance of a Cease and
Desist Order (CDO) to restrain the use of said proxies during the annual meeting scheduled for the following day. A
CDO to that effect signed by SEC Commissioner was issued. During the annual meeting held on the following day,
Rosete announced that the meeting would push through, expressing the opinion that the CDO is null and void.
LOWER COURT/S DECISION:

SEC – issued a Show Cause Order (SCO) against Rosete ordering them to give an explanation why they should not
be cited in contempt. (Respondents then filed a petition for ceritiorari with prohibition with CA, praying that the
CDO and the SCO be annulled)

CA - complaint filed by GSIS in the SEC is hereby DISMISSED due to SEC’s lack of jurisdiction, due to forum shopping
by respondent GSIS, and due to splitting of causes of action by respondent GSIS. Consequently, the SEC’s undated
cease and desist order and the SEC’s May 28, 2008 show cause order are hereby DECLARED VOID AB INITIO and
without legal effect and their implementation are hereby permanently restrained
ISSUE/S: Whether the SEC has jurisdiction over the petition filed by GSIS. To recall, SEC has sought to enjoin the
use and annul the validation, of the proxies issued in favor of several of the private respondents, particularly in
connection with the annual meeting.
RULING/S: The distinction between "proxy solicitation" and "proxy validation" cannot be dismissed offhand. The
right of a stockholder to vote by proxy is generally established by the Corporation Code, but it is the SRC which
specifically regulates the form and use of proxies, more particularly the procedure of proxy solicitation, primarily
through Section 20. AIRR-SRC Rule 20 defines the terms solicit and solicitation:

The terms solicit and solicitation include:

A. any request for a proxy whether or not accompanied by or included in a form of proxy

B. any request to execute or not to execute, or to revoke, a proxy; or

C. the furnishing of a form of proxy or other communication to security holders under circumstance
 reasonably calculated to result in the procurement, withholding or revocation of a proxy.

It is plain that proxy solicitation is a procedure that antecedes proxy validation. The former involves the securing
and submission of proxies, while the latter concerns the validation of such secured and submitted proxies. GSIS
raises the sensible point that there was no election yet at the time it filed its petition with the SEC, hence no
proper election contest or controversy yet over which the regular courts may have jurisdiction. And the point ties
its cause of action to alleged irregularities in the proxy solicitation procedure, a process that precedes either the
validation of proxies or the annual meeting itself.

Under Section 20.1, the solicitation of proxies must be in accordance with rules and regulations issued by the SEC,
such as AIRR-SRC Rule 4. And by virtue of Section 53.1, the SEC has the discretion "to make such investigations as it
deems necessary to determine whether any person has violated" any rule issued by it, such as AIRR-SRC Rule 4.
The investigatory power of the SEC established by Section 53.1 is central to its regulatory authority, most crucial to
the public interest especially as it may pertain to corporations with publicly traded shares. For that reason, we are
not keen on pursuing private respondents’ insistence that the GSIS complaint be viewed as rooted in an intra-
corporate controversy solely within the jurisdiction of the trial courts to decide. It is possible that an intra-
corporate controversy may animate a disgruntled shareholder to complain to the SEC a corporation’s violations of
SEC rules and regulations, but that motive alone should not be sufficient to deprive the SEC of its investigatory and
regulatory powers, especially so since such powers are exercisable on a motu proprio basis.

At the same time, Meralco raises the substantial point that nothing in the SRC empowers the SEC to annul or
invalidate improper proxies issued in contravention of Section 20. It cites that the penalties defined by the SEC
itself for violation of Section 20 or AIRR-SRC Rule 20 are limited to a reprimand/warning for the first offense, and
pecuniary fines for succeeding offenses.43 Indeed, if the SEC does not have the power to invalidate proxies solicited
in violation of its promulgated rules, serious questions may be raised whether it has the power to adjudicate claims
of violation in the first place, since the relief it may extend does not directly redress the cause of action of the
complainant seeking the exclusion of the proxies.

There is an interesting point, which neither party raises, and it concerns Section 6(g) of Presidential Decree No.
902-A, which states:

SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers:

xxx

(g) To pass upon the validity of the issuance and use of proxies and voting trust agreements for absent
stockholders or members;

xxx

As promulgated then, the provision would confer on the SEC the power to adjudicate controversies relating not
only to proxy solicitation, but also to proxy validation. Should the proposition hold true up to the present, the
position of GSIS would have merit, especially since Section 6 of Presidential Decree No. 902-A was not expressly
repealed or abrogated by the SRC.44

Yet a closer reading of the provision indicates that such power of the SEC then was incidental or ancillary to the
"exercise of such jurisdiction." Note that Section 6 is immediately preceded by Section 5, which originally
conferred on the SEC "original and exclusive jurisdiction to hear and decide cases" involving "controversies in the
election or appointments of directors, trustees, officers or managers of such corporations, partnerships or
associations." The cases referred to in Section 5 were transferred from the jurisdiction of the SEC to the regular
courts with the passage of the SRC, specifically Section 5.2. Thus, the SEC’s power to pass upon the validity of
proxies in relation to election controversies has effectively been withdrawn, tied as it is to its abrogated
jurisdictional powers.

Based on the foregoing, it is evident that the linchpin in deciding the question is whether or not the cause of action
of GSIS before the SEC is intimately tied to an election controversy, as defined under Section 5(c) of Presidential
Decree No. 902-A. To answer that, we need to properly ascertain the scope of the power of trial courts to resolve
controversies in corporate elections.

The conferment of original and exclusive jurisdiction on the regular courts over such controversies in the election
of corporate directors must be seen as intended to confine to one body the adjudication of all related claims and
controversy arising from the election of such directors. For that reason, the aforequoted Section 2, Rule 6 of the
Interim Rules broadly defines the term "election contest" as encompassing all plausible incidents arising from the
election of corporate directors, including: (1) any controversy or dispute involving title or claim to any elective
office in a stock or nonstock corporation, (2) the validation of proxies, (3) the manner and validity of elections and
(4) the qualifications of candidates, including the proclamation of winners. If all matters anteceding the holding of
such election which affect its manner and conduct, such as the proxy solicitation process, are deemed within the
original and exclusive jurisdiction of the SEC, then the prospect of overlapping and competing jurisdictions
between that body and the regular courts becomes frighteningly real. From the language of Section 5(c) of
Presidential Decree No. 902-A, it is indubitable that controversies as to the qualification of voting shares, or the
validity of votes cast in favor of a candidate for election to the board of directors are properly cognizable and
adjudicable by the regular courts exercising original and exclusive jurisdiction over election cases. Questions
relating to the proper solicitation of proxies used in such election are indisputably related to such issues, yet if the
position of GSIS were to be upheld, they would be resolved by the SEC and not the regular courts, even if they fall
within "controversies in the election" of directors.

The Court recognizes that GSIS’s position flirts with the abhorrent evil of split jurisdiction,50 allowing as it does both
the SEC and the regular courts to assert jurisdiction over the same controversies surrounding an election contest.
Should the argument of GSIS be sustained, we would be perpetually confronted with the spectacle of election
controversies being heard and adjudicated by both the SEC and the regular courts, made possible through a mere
allegation that the anteceding proxy solicitation process was errant, but the competing cases filed with one
objective in mind – to affect the outcome of the election of the board of directors. There is no definitive statutory
provision that expressly mandates so untidy a framework, and we are disinclined to construe the SRC in such a
manner as to pave the way for the splitting of jurisdiction.

Unlike either Section 20.1 or Section 53.1, which merely alludes to the rule-making or investigatory power of the
SEC, Section 5 of Pres. Decree No. 902-A sets forth a definitive rule on jurisdiction, expressly granting as it does
"original and exclusive jurisdiction" first to the SEC, and now to the regular courts. The fact that the jurisdiction of
the regular courts under Section 5(c) is confined to the voting on election of officers, and not on all matters which
may be voted upon by stockholders, elucidates that the power of the SEC to regulate proxies remains extant and
could very well be exercised when stockholders vote on matters other than the election of directors.

That the proxy challenge raised by GSIS relates to the election of the directors of Meralco is undisputed. The
controversy was engendered by the looming annual meeting, during which the stockholders of Meralco were to
elect the directors of the corporation. GSIS very well knew of that fact. On 17 March 2008, the Meralco board of
directors adopted a board resolution stating:

RESOLVED that the board of directors of the Manila Electric Company (MERALCO) delegate, as it hereby delegates
to the Nomination & Governance Committee the authority to approve and adopt appropriate rules on:
(1) nomination of candidates for election to the board of directors; (2) appreciation of ballots during the election
of members of the board of directors; and (3) validation of proxies for regular or special meetings of the
stockholders.51

In addition, the Information Statement/Proxy form filed by First Philippine Holdings Corporation with the SEC
pursuant to Section 20 of the SRC, states:

REASON FOR SOLICITATION OF VOTES

The Solicitor is soliciting proxies from stockholders of the Company for the purpose of electing the directors
named under the subject headed ‘Directors’ in this Statement as well as to vote the matters in the agenda of the
meeting as provided for in the Information Statement of the Company. All of the nominees are current directors of
the Company.52

Under the circumstances, we do not see it feasible for GSIS to posit that its challenge to the solicitation or
validation of proxies bore no relation at all to the scheduled election of the board of directors of Meralco during
the annual meeting. GSIS very well knew that the controversy falls within the contemplation of an election
controversy properly within the jurisdiction of the regular courts. Otherwise, it would have never filed its original
petition with the RTC of Pasay. GSIS may have withdrawn its petition with the RTC on a new assessment made in
good faith that the controversy falls within the jurisdiction of the SEC, yet the reality is that the reassessment is
precisely wrong as a matter of law.

The lack of jurisdiction of the SEC over the subject matter of GSIS’s petition necessarily invalidates the CDO and
SDO issued by that body.
CASE # 42 GEORGE C. FONG v. JOSE V. DUEÑAS
PRINCIPLE/RATIO:
Before a stock corporation may be incorporated and registered, it is required that at least twenty five
percent (25%) of its authorized capital stock as stated in the articles of incorporation, be first subscribed
at the time of incorporation, and at least twenty five percent (25%) of the total subscription, be paid upon
subscription.
FACTS:
1. Dueñas is engaged in bakery, food manufacturing and retailing business under his 2 companies, D.C.
Danton, Inc. (Danton) and Bakcom Food Industries, Inc. (Bakcom). Dueñas and Fong were old
acquaintances and schoolmates.

2. On November 1996, they entered into a verbal joint venture contract where they agreed to engage in
the food business and to incorporate a holding company under the name “Alliance Holdings Inc.
(Alliance)” Its capitalization would be P65M, to which they contribute in equal parts (P32.5 each).

3. They agreed that Fong would contribute P32.5M in cash while Dueñas would contribute all his Danton
and Bakcon shares which he valued at P32.5M. As such, Fong required Dueñas to submit the
financial documents supporting the valuation of the shares.

4. Fong started to remit his share in the capital but on June 1997, Fong sent a letter to Dueñas informing
the latter that due to the delays in implementing the joint venture as well as personal business
commitments, Fong would be limiting his contribution (from advances to investment) to P5M only.

5. Thereafter, Fong observed that despite the P5M contribution, Dueñas still failed to give him the
financial documents on the valuation of the Danton and Bakcon shares. Moreover, Dueñas failed to
incorporate and register Alliance with the SEC.

6. This prompted Fong to write to Dueñas, and informed him of Fong’s decision to cancel the joint
venture as well as asking for a refund of the P5M. In response, Dueñas admitted that he could not
immediately pay the P5M because the money was used to defray the business expenses of Danton
and Bakcon.

7. For failure to meet Fong’s several demands, Fong filed a complaint against Dueñas for collection for
sum of money and damages.
P CONTENTION:
Fong argues that the unjustified retention of P5M and its appropriation to Dueñas’ two companies
amounted to unjust enrichment since that money was supposed to be contributed to the capital of
Alliance. Furthermore, the delays in the incorporation of Alliance and the failure to furnish Fong with the
financial documents on the valuation of Danton and Fakcom shares were adequate and acceptable
reasons for rescission.
R: CONTENTION:
Dueñas contends that he could no longer refund the P5M since he had already applied it to his two
companies; that this is proper since Danton and Bakcom’s shares would also form part of his capital
contribution to Alliance.

Moreover, the incorporation did not push through because Fong unilaterally rescinded the joint venture
agreement by limiting his investment from P32.5M to P5M. Thus, it was Fong who first breached the
contract, not he. Consequently, Fong’s failure to comply with his undertaking disqualified him from
seeking the agreement’s rescission.
LOWER COURT/S DECISION:
RTC: Ruled in favor of Fong. Held that after a careful examination of the complaint, although it was
labeled as a collection for sum of money, it was actuall an action of rescission. The trial court also held
that Dueñas erroneously invested Fong’s cash contributions in his two companies, Danton and Bakcom.
The signed receipts, presented as evidence, expressly provided that each remittance should be applied
as advance subscription to Fong’s shareholding in Alliance. Thus, Dueñas’ investment of the money in
Danton and Bakcom was clearly unauthorized and contrary to the parties’ agreement.

CA: Reversed RTC. The CA ruled that Fong’s June 13, 1997 letter evidenced his intention to convert his
cash contributions from “advances” to the proposed corporation’s shares, to mere “investments.” Thus,
contrary to the trial court’s ruling, Dueñas correctly invested Fong’s P5 Million contribution to Bakcom and
Danton. This did not deviate from the parties’ original agreement as eventually, the shares of these two
companies would form part of Alliance’s capital.
ISSUE/S:
W/N it was valid for Dueñas to use the P5M contribution of Fong for his 2 companies.
RULING/S: NO. PETITION IS GRANTED.

Rescission under Art. 1191 is applicable in the present case

The parties never agreed that Fong would invest his money in Danton and Bakcom. Contrary to Dueñas’
submission, Fong’s understanding was that his money would be applied to his shareholdings in Alliance.
As shown in Fong’s June 13, 1997 letter, this fact remained to be true even after he limited his
contribution to P5M

Moreover, under the Corporation Code, before a stock corporation may be incorporated and registered, it
is required that at least twenty five percent (25%) of its authorized capital stock as stated in the articles of
incorporation, be first subscribed at the time of incorporation, and at least twenty five percent (25%) of the
total subscription, be paid upon subscription. In this light, we conclude that Fong’s cash contributions play
an indispensable part in Alliance’s incorporation. The process necessarily requires the money not only to
fund Alliance’s registration with the SEC but also its initial capital subscription.

Thus, Dueñas erred when he invested Fong’s contributions in his two companies. This money should
have been used in processing Alliance’s registration. Its incorporation would not materialize if there would
be no funds for its initial capital. Moreover, Dueñas represented that Danton and Bakcom’s shares were
valued at P32.5 Million. If this was true, then there was no need for Fong’s additional P5 Million
investment, which may possibly increase the value of the Danton and Bakcom shares. Under these
circumstances, the Court agrees with the trial court that Dueñas violated his agreement with Fong. Aside
from unilaterally applying Fong’s contributions to his two companies, Dueñas also failed to deliver the
valuation documents of the Danton and Bakcom shares to prove that the combined values of their capital
contributions actually amounted to P32.5 Million. These acts led to Dueñas’ delay in incorporating the
planned holding company, thus resulting in his breach of the contract.

However, the Court notes that Fong also breached his obligation in the joint venture for failing to oblige
with his original promise of contributing P32.5M. This means that Fong also contributed to the non-
incorporation of Alliance that needed P65M to operate.

As both parties failed to comply with their respective reciprocal obligations, we apply Article 1192 of the
Civil Code, which provides: “In case both parties have committed a breach of the obligation, the liability
of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the
parties first violated the contract, the same shall be deemed extinguished, and each shall bear his
own damages”.

Thus, the joint venture is deemed extinguished. But no award for damages due to the mutual breach.


CASE 43 Velasco v. Poizat, GRN-L 11528, March 15, 1918

PRINCIPLE/RATIO:
Unpaid Subscription
A stock subscription is a contract between the corporation and the subscriber, and
courts will enforce it for or against either. No express promise to pay is necessary to
make the subscriber liable.
The corporation has two remedies for the enforcement of subscription for stock
against the subscriber to the corporate shares namely (1) to sell the stock for the
account of the delinquent subscriber, and (2) to bring a legal action against him for
the amount due.
The provisions of section 38 to 48, inclusive, of the Corporation Law are applicable
only where the directors of a corporation intend to subject the stock of the delinquent
subscriber to sale in order to enforce payment of the subscription. They have no
application in case a legal action is brought to recover upon the stock subscription.
When insolvency supervenes upon a corporation and the court assumes jurisdiction
demand, and are at once recoverable in an action instituted by the assignee in
insolvency.
A corporation has no legal capacity to release a subscriber to its capital stock from
the obligation to pay for his shares; and any agreement to this effect is invalid.
The plaintiff, as assignee in insolvency of "The Philippine Chemical Product
Company" (Ltd.) is seeking to recover of the defendant, Jean M. Poizat, the sum of
P1,500, upon a subscription made by him to the corporate stock of said company. It
appears that the corporation in question was originally organized by several residents
of the city of Manila, where the company had its principal place of business, with a
capital of P50,000, divided into 500 shares. The defendant subscribed for 20 shares
of the stock of the company, an paid in upon his subscription the sum of P500, the
par value of 5 shares . The action was brought to recover the amount subscribed
upon the remaining shares. It appears that the defendant was a stock holder in the
company from the inception of the enterprise, and for sometime acted as its treasurer
and manager. While serving in this capacity he called in and collected all
subscriptions to the capital stock of the company, except the aforesaid 15 shares
subscribed by himself and another 15 shares owned by Jose R. Infante.
A meeting of the board of directors of the company was held at which a majority of
the stock was presented. Upon this occasion two resolutions were adopted. The first
was a proposal that the directors, or shareholders, of the company should make
good by new subscriptions, in proportion to their respective holdings, 15 shares
which had been surrendered by Infante. It seems that this shareholder had already
paid 25 per cent of his subscription upon 20 shares, leaving 15 shares unpaid for,
and an understanding had been reached by him and the management by which he
was to be released from the obligation of his subscription, it being understood that
what he had already paid should not be refunded. Accordingly the directors present
at this meeting subscribed P1,200 toward taking up his shares, leaving a deficiency
of P300 to be recovered by voluntary subscriptions from stockholders not present at
the meeting. The other proposition was o the effect that Juan [Jean] M. Poizat, who
was absent, should be required to pay the amount of his subscription upon the 15
shares for which he was still indebted to the company. The resolution further
provided that, in case he should refuse to make such payment, the management of
the corporation should be authorized to undertake judicial proceedings against him.
When notification of this resolution reached Poizat through the mail it evoked from
him a manifestation of surprise and pain, which found expression in a letter written by
him in reply, dated July 27, 1914, and addressed to Velasco, as treasurer and
administrator. In this letter Poizat states that he had been given to understand by
some member of the board of directors that he was to be relieved from his
subscription upon the terms conceded to Infante. The company soon went into
voluntary insolvency, Velasco being named as the assignee.
LOWER COURT/S DECISION:
At the hearing of the Court of First Instance, judgment was rendered in favor of the
defendant, and the complaint was dismissed. From this action the plaintiff has
appealed.
ISSUE/S:
Whether or not Poizat is liable upon this subscription
RULING/S:
Poizat is liable upon his subscription. Section 36 of the Corporation Law clearly
recognizes that a stock subscription is subsisting liability from the time the
subscription is made, since it requires the subscriber to pay interest quarterly from
that date unless he is relieved from such liability by the by-laws of the corporation.
The subscriber is as much bound to pay the amount of the share subscribed by him
as he would be to pay any other debt, and the right of the company to demand
payment is no less incontestable. The provisions of the Corporation Law (Act No.
1459) given recognition of two remedies for the enforcement of stock subscriptions.
The first and most special remedy given by the statute consists in permitting the
corporation to put up the unpaid stock for sale and dispose of it for the account of the
delinquent subscriber. In this case the provisions of section 38 to 48, inclusive, of the
Corporation Law are applicable and must be followed. Nothing in this Act shall
prevent the directors from collecting, by action in any court of proper jurisdiction, the
amount due on any unpaid subscription, together with accrued interest and costs and
expenses incurred. The assignee of the insolvent corporation succeeds to all the
corporate rights of action vested in the corporation prior to its insolvency; and the
assignee therefore has the same freedom with respect to suing upon the stock
subscription as the directors themselves would have had under section 49 above
cited. There is another reason why the present plaintiff must prevail in this case. That
reason is this: When insolvency supervenes upon a corporation and the court
assumes jurisdiction to wind up, all unpaid stock subscriptions become payable on
demand, and are at once recoverable in an action instituted by the assignee or
receiver appointed by the court. It is now quite well settled that when the corporation
becomes insolvent, with proceedings instituted by creditors to wind up and distribute
its assets, no call or assessment is necessary before the institution of suits to collect
unpaid balances on subscription. It evidently cannot be permitted that a subscriber
should escape from his lawful obligation by reason of the failure of the officers of the
corporation to perform their duty in making a call; and when the original model of
making the call becomes impracticable, the obligation must be treated as due upon
demand. The better doctrine is that when insolvency supervenes all unpaid
subscriptions become at once due and enforceable.

The circumstance that the board of directors in their meeting of July 13, 1914,
resolved to release Infante from his obligation upon a subscription for 15 shares is no
wise prejudicial to the right of the corporation or its assignee to recover from Poizat
upon a subscription made by him. In releasing Infante the board transcended its
powers, and he no doubt still remained liable on such of his shares as were not taken
up and paid for by other persons.The general doctrine is that the corporation has no
legal capacity to release an original subscriber to its capital stock from the obligation
of paying for his shares, in whole or in part.The suggestion contained in Poizat's
letter of July 27, 1914, to the effect that he understood that he was to be relieved
upon the same terms as Infante is, for the same reason, of no merit as matter of
defense, even if an agreement to that effect had been duly proved.
CASE # 44 Forest Hills Golf & Country Club v. Vertex Sales And Trading, Inc
PRINCIPLE/RATIO:
The corporation whose shares of stock are the subject of a transfer transaction need not be a
party to the transaction, as may be inferred from the terms of Section 63 of the Corporation
Code. (See CA ruling for gist of Sec. 63)

FACTS:
8. Petitioner Forest Hills Golf & Country Club (Forest Hills) is a domestic non-profit stock
corporation that operates and maintains a golf and country club facility.
9. Forest Hills was created as a result of a joint venture agreement between Kings
Properties Corporation (Kings) and Fil-Estate Golf and Development, Inc. (FEGDI).
Kings (owned 40% of the shares of stock of Forest Hills) and FEGDI (owned 60%)
10. FEGDI sold to RS Asuncion Construction Corporation (RSACC) one (1) Class "C"
common share of Forest Hills for P1.1 million. Prior to the full payment of the purchase
price, RSACC transferred its interests over FEGDI's Class "C" common share to
respondent Vertex Sales and Trading, Inc. (Vertex).
11. RSACC advised FEGDI of the transfer and FEGDI, in turn, requested Forest Hills to
recognize Vertex as a shareholder. Forest Hills acceded to the request, and Vertex was
able to enjoy membership privileges in the golf and country club.
12. Despite the sale of FEGDI's Class "C" common share to Vertex, the share remained in
the name of FEGDI, prompting Vertex to demand for the issuance of a stock certificate in
its name.
13. The demand went unheeded, Vertex filed a complaint for rescission with damages
against defendants Forest Hills, FEGDI, and Fil-Estate Land, Inc. (FELI) the developer of
the Forest Hills golf course.
P CONTENTION:
The delay in the issuance of the stock certificate could not be considered as a substantial
breach, considering that Vertex was recognized as, and enjoyed the privileges of, a stockholder.

Forest Hills also objects to the CA ruling that required it to return the amount paid by Vertex for
the share of stock. It claims that it was not a party to the contract of sale; hence, it did not
receive any amount from Vertex which it would be obliged to return on account of the rescission
of the contract.

FELI claimed the same defense. FEGDI alleged that Vertex nonetheless was recognized as a
stockholder of Forest Hills and, as such, it exercised rights and privileges of one and that during
the pendency of Vertex's action for rescission, a stock certificate was issued in Vertex's name,
but Vertex refused to accept it.
R: CONTENTION:
Vertex disagrees and claims that its compliance with its obligation to pay the price and the other
fees called into action the defendants' compliance with their reciprocal obligation to deliver the
stock certificate, but the defendants failed to discharge this obligation. The defendants' three
(3)-year delay in issuing the stock certificate justified the rescission of the sale of the share of
stock. On account of the rescission, Vertex claims that mutual restitution should take place. It
argues that Forest Hills should be held solidarily liable with FEGDI and FELI, since the delay
was caused by Forest Hills' refusal to issue the share of FEGDI, from whom Vertex acquired its
share.
LOWER COURT/S DECISION:
RTC: dismissed Vertex's complaint after finding that the failure to issue a stock certificate did
not constitute a violation of the essential terms of the contract of sale that would warrant its
rescission. The RTC noted that the sale was already consummated notwithstanding the non-
issuance of the stock certificate. The issuance of a stock certificate is a collateral matter in the
consummated sale of the share; the stock certificate is not essential to the creation of the
relation of a shareholder. Hence, the RTC ruled that the non-issuance of the stock certificate is
a mere casual breach that would not entitle Vertex to rescind the sale.

CA: Reversed RTC. It declared that "in the sale of shares of stock, physical delivery of a stock
certificate is one of the essential requisites for the transfer of ownership of the stocks.

It based its ruling on Section 63 of the Corporation Code, which requires for a valid transfer of
stock
(1) the delivery of the stock certificate;
(2) the endorsement of the stock certificate by the owner or his attorney-in-fact or other
persons legally authorized to make the transfer; and
(3) to be valid against third parties, the transfer must be recorded in the books of the
corporation.

Without the issuance of the stock certificate and despite Vertex's full payment of the purchase
price, the share cannot be considered as having been validly transferred. Hence, the CA
rescinded the sale of the share and ordered the defendants to return the amount paid by Vertex.

ISSUE/S:
WON CA is correct in ruling; (a) the rescission of the sale of one (1) Class "C" common share of
Forest Hills to Vertex and (b) ordered the return by Forest Hills, FEGDI, and FELI to Vertex of
the amount the latter paid by reason of the sale.
RULING/S: YES! Forest Hill’s argument is justified.

Ruling on rescission of sale is a settled matter

We declare that the question of rescission of the sale of the share is a settled matter that the
Court can no longer review in this petition. While Forest Hills questioned and presented its
arguments against the CA ruling rescinding the sale of the share in its petition, it is not the
proper party to appeal this ruling.
1. As correctly pointed out by Forest Hills, it was not a party to the sale even though the
subject of the sale was its share of stock. The corporation whose shares of stock are the
subject of a transfer transaction need not be a party to the transaction, as may be
inferred from the terms of Section 63 of the Corporation Code.
2. However, to bind the corporation as well as third parties, it is necessary that the transfer
is recorded in the books of the corporation. In the present case, the parties to the sale of
the share were FEGDI as the seller and Vertex as the buyer. As party to the sale, FEGDI
is the one who may appeal the ruling rescinding the sale. The remedy of appeal is
available to a party who has "a present interest in the subject matter of the litigation and
is aggrieved or prejudiced by the judgment. A party, in turn, is deemed aggrieved or
prejudiced when his interest, recognized by law in the subject matter of the lawsuit, is
injuriously affected by the judgment, order or decree."
A necessary consequence of rescission is restitution: the parties to a rescinded contract must
be brought back to their original situation prior to the inception of the contract; hence, they must
return what they received pursuant to the contract.

Not being a party to the rescinded contract, however, Forest Hills is under no obligation to return
the amount paid by Vertex by reason of the sale. Indeed, Vertex failed to present sufficient
evidence showing that Forest Hills received the purchase price for the share or any other fee
paid on account of the sale (other than the membership fee which we will deal with after) to
make Forest Hills jointly or solidarily liable with FEGDI for restitution.

As to the membership fee

Although Forest Hills received P150,000.00 from Vertex as membership fee, it should be
allowed to retain this amount. For three years prior to the rescission of the sale, the nominees of
Vertex enjoyed membership privileges and used the golf course and the amenities of Forest
Hills. We consider the amount paid as sufficient consideration for the privileges enjoyed by
Vertex's nominees as members of Forest Hills.

Petitioner Forest Hills Golf & Country Club is ABSOLVED from liability for any amount paid by
Vertex Sales and Trading, Inc. by reason of the rescinded sale.