Three-fold duty of directors
, adopted a
Obedents- act of voting or assenting, either willfully
or knowingly to patently unlawful acts thereby
making the responsibility director jointly and
severally liable.
Diligent- reasonable care and prudence. Relative,
as an ordinary and prudent man would exercise
under similar circumstances. Extend to negligence.
Violation of duty of diligence - can always
advance the Business Judgment Rule
Loyal
What is the business judgment rule?
The question of policy and management are left
solely to the honest decision of the BOD and the
courts are without authority to substitute its
judgment as against the former. The directors are
the business managers of the corporation and as
long as they act in good faith, its actuations are not
subject to judicial review.
Section 30. Liability of Directors, Trustees or
Officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the
corporation, its stockholders or members and other
persons.
A director, trustee or officer shall not attempt to
acquire, or any interest adverse to the corporation
in respect of any matter which has been reposed in
them in confidence, and upon which, equity
imposes a disability upon themselves to deal in
their own behalf; otherwise, the said director,
trustee or officer shall be liable as a trustee for the
corporation and must account for the profits which
otherwise would have accrued to the corporation.
MONTELIBANO V. BACOLOD
Facts: plaintiffs-appellants, Alfredo and Alejandro
Montelibano, and the Limited co-partnership
Gonzaga and Co., had been and are sugar planters
adhered to the defendant-appellee's sugar central
mill under identical milling contracts. Originally
executed in 1919, said contracts were stipulated to
be in force for 30 years starting with the 1920-21
crop, and provided that the resulting product should
be divided in the ratio of 45% for the mill and 55%
for the planters. Sometime in 1936, it was proposed
to execute amended milling contracts, increasing
the planters' share to 60% of the manufactured
sugar and resulting molasses, besides other
concessions, but extending the operation of the
milling contract from the original 30 years to 45
years. To this effect, a printed Amended Milling
Contract form was drawn up. On August 20, 1963,
the Board of Directors of the appellee,
Bacolod-Murcia Milling Co., Inc.
resolution (Acts No. 11, Acuerdo No. 1) granting
further concessions to the planters over and above
those contained in the printed Amended Milling
Contract.
In 1953, the appellants initiated the present action,
contending that three Negros sugar centrals x x x
with a total annual production exceeding one-third
of all the production of all the sugar central mills in
the province, had already granted increased
participation (of 62.5%) to their planters, and that
under paragraph 9 of the resolution of August 20,
1936, the appellee had become obligated to grant
similar concessions to the plaintiffs (appellants
herein). The appellee, Bacolod Murcia Milling
resisted the claim, and defended by urging that the
stipulations contained in the resolution were made
without consideration; that the resolution in
question was, therefore, null and void ab initio,
being in effect a donation that was ultra-vires and
beyond the powers of the corporate directors to
adopt. After trial, the court below rendered
judgment upholding the stand of the defendant
Milling Co., and dismissed the complaint.
Thereupon, plaintiffs duly appealed to this Court.
ISSUE: [Whether or not the resolutions passed by
the board are valid and whether or not the court
may review the same]
HELD:Yes. There can be no doubt that the
directors of the appellee company had authority to
modify the proposed terms of the Amended Milling
Contract for the purpose of making its terms more
acceptable to the other contracting parties.
As the resolution in question was passed in good
faith by the board of directors, it is valid and
binding, and whether or not it will cause losses or
decrease the profits of the central, the court has no
authority to review them.
“They hold such office charged with the duty to act
for the corporation according to their best judgment,
and in so doing they cannot be controlled in the
reasonable exercise and performance of such duty.
Whether the business of a corporation should be
operated at a loss during depression, or close down
at a smaller loss, is a purely business and
economic problem to be determined by the
directors of the corporation and not by the court. It
is a well-known rule of law that questions of policy
or of management are left solely to the honest
decision of officers and directors of a corporation,
and the court is without authority to substitute its
judgment of the board of directors; the board is the
business manager of the corporation, and so long
as it acts in good faith its orders are not reviewable
by the courts. (Fletcher on Corporations, Vol. 2, p.
390).”
Montelibano vs Bacolod Murcia
● questions of policy and management are left
solely to the board of directors
 ● BOD, business manager of the corporation
and as long as they act in good faith, its
actuations are not subject to judicial review
● They are not insurer of the property of the
company, they were guarantors that the
enterprise undertaken by the corporation
shall be successful
● Directors are not liable due to imprudence
or honest error of judgment
● Duty of loyalty of corporate directors
● 31,32,33,34
● 31,32,33- specific instances when corporate
officers may violate loyalty
● 31,32 self-dealing and interlocking director
What does a stockholder have to do with this
duty of loyalty?
LOYALTY: refers to the proscription imposed on
directors on acquiring any personal or pecuniary
interest in conflict with their duty as director. Their
relationship is regarded as “fiduciary relation”. As
fiduciaries, they are obliged to act with utmost
candor and fair dealing for the interest of the
corporation and without selfish motives.
Duty of loyalty is violated in the ff. Instances;
(30,33)
1. When a director or trustee “acquires any
personal or pecuniary interest in conflict
with duty as such director or trustee
2. He attempts to acquire or acquires, in
violation of his duty, any interest adverse to
the corporation in respect to any matter
which has been reposed in him in
confidence as to which equity imposes a
disability upon him to deal in his own behalf
3. When he by virtue of his office, acquires for
himself a business opportunity which should
belong to the corporation thereby obtaining
profit to the prejudice of such corporation
Section 33. Disloyalty of a Director. - Where a
director, by virtue of such office, acquires a
business opportunity which should belong to the
corporation, thereby obtaining profits to the
prejudice of such corporation, the director must
account for and refund to the latter all such profits,
unless the act has been ratified by a vote of the
stockholders owning or representing at least
two-thirds (2/3) of the outstanding capital stock.
This provision shall be applicable, notwithstanding
the fact that the director risked one's own funds in
the venture.
Corporate opportunity doctrine - is nothing new
in the law. It places the director of a corporation in
the position of a fiduciary and prohibits him from
seizing a business opportunity and/or developing it
at the expense and with the facilities of the
corporation. He cannot appropriate to himself an
opportunity which in fairness should belong to the
corporation.
Strong vs Repide
FACTS: This is an action to recover certain shares
of corporate stock the plaintiffs Eleanor Erica
Strong and Richard P. Strong her husband, against
the defendant Repide.
In 1902 it was thought important for the government
of the United States to secure title, if reasonably
possible, to what were called the friar lands in the
Philippine Islands. To that end various inquiries
were made on the part of the government, from
time to time, as to the possibility of obtaining title to
all those lands, and what would be the probable
expense. The lands were not owned by the same
people, but were divided among different and
separate owners.
The Philippine Sugar Estates Development
Company, Ltd., owned of these lands or the
Dominican lands, and they were regarded as nearly
one half the value of all the friar lands.
On July 4, 1903, the Governor of the Philippine
Islands, on behalf of the Philippine Government,
made an offer of purchase for the total sum of
$6,043,219.47 in gold for all the friar lands, though
owned by different owners. However, While this
state of things existed, and before the final offer
had been made by the Governor, the defendant,
although still holding out for a higher price for the
lands, took steps, about the middle or latter part of
September, 1903, to purchase the 800 shares of
stock in his company owned by Mrs. Strong, which
he knew were in possession of F. Stuart Jones, as
her agent.
The defendant, having decided to obtain those
shares, instead of seeing Jones, who had an office
next door, employed one Kauffman and the latter
employed a Mr. Sloan, a broker, who had an office
some distance away, to purchase the stock for him,
and told Sloan that the stock was for a member of
his wife's family. Sloan communicated with the
husband of Mrs. Strong, and asked if he desired to
sell her stock. The husband referred him to Mr.
Jones for consultation, who had the stock in his
possession. Sloan did not know who wanted to buy
the shares nor did Jones when he was spoken to.
Jones would not have sold at the price he did had
he known it was the defendant who was
purchasing, because, as he said, it would show
increased value, as the defendant would not be
likely to purchase more stock unless the price was
going up.
The result of the negotiations was that Jones, on or
about October 10, 1903, assuming that he had the
power, and without consulting Mrs. Strong, sold the
800 shares of stock for $16,000 Mexican currency,
delivering the stock to Kauffman in Sloan's office for
$18,000, the surplus $2,000 being arranged for,
and Kauffman being paid $1,800 by defendant for
his services. The defendant thus obtained the 800
shares for about one-tenth of the amount they
became worth by the sale of the lands between two
and three months thereafter or ($76,256).
ISSUE: WON it was the duty of the defendant to
disclose to the agent of the plaintiff the facts
bearing upon or which might affect the value of the
stock?
HELD: Yes. A director upon whose action the value
of the shares depends cannot avail of his
knowledge of what his own action will be to acquire
shares from those whom he intentionally keeps in
ignorance of his expected action and the resulting
value of the shares.
Even though a director may not be under the
obligation of a fiduciary nature to disclose to a
shareholder his knowledge affecting the value of
the shares, that duty may exist in special cases,
and did exist upon the facts in this case.
In this case, the facts clearly indicate that a director
of a corporation owning friar lands in the Philippine
Islands, and who controlled the action of the
corporation, had so concealed his exclusive
knowledge of the impending sale to the government
from a shareholder from whom he purchased,
through an agent, shares in the corporation, that
the concealment was in violation of his duty as a
director to disclose such knowledge, and amounted
to deceit sufficient to avoid the sale; and, under
such circumstances, it was immaterial whether the
shareholder's agent did or did not have power to
sell the stock.
In addition to his ownership of almost three-fourths
of the shares of the stock of the company, the
defendant was one of the five directors of the
company, and was elected by the board the agent
and administrator general of such company, "with
exclusive intervention in the management" of its
general business.
Concealing his identity when procuring the
purchase of stock, by his agent, was in itself stock
evidence of fraud on the part of the defendant.
The concealment was not a mere inadvertent
omission but was a studied and intentional
omission, to be characterized as part of the
deceitful machination to obtain the purchase
without giving information whatever as to the state
and probable result of the negotiations, to the
vendor of the stock, and to, in that way, obtain the
same at a lower price.
Why did Strong seek to annul the sale? The
buyer concealed his identity. The concealment is
not a mere inadvertent omission but it was an
intentional and studied concealment to obtain the
purchase.
Difference between Sec. 31 and 33
The second paragraph of section 31 which
makes a director liable to account for profits if he
attempts to acquire or acquires any interest
adverse to the corporation in respect to any matter
reposed in him in confidence as to which equity
imposes a disability upon him to deal in his own
behalf is not subject to ratification by the
stockholders. Whereas, in section 33 if a director
acquires for himself a business opportunity which
should belong to the corporation, he is bound to
account for such profits unless his act is ratified by
the stockholders owning ore representing at least
2/3 of the outstanding capital stock.
- If reposed in him in confidence, not
subject to ratification
- If the acquisition is merely that of a
business opportunity which has not been
reposed in him in confidence, the same may
be subject to ratification by the
stockholders.
ABCDE are directors of realty company. A is the
president. Z has a property and has no intention
to return. A acquired that property and sold
this. A minority stockholder questioned the
disloyal act. A opposed the same and contend
that it may be ratified by the stockholders. Can
it be ratified? Yes. He merely acquired a business
owning to the corporation.
It may be different if A is armed with a letter of
authority from the corporation. Thus, ratification is
not proper. (Profts are to be returned)
Had A not attended the meeting he would not
have known of the sale it is then a matter reposed
in him in confidence.
Who ARE SELF-delaing directors?-a director of a
corp who deals or Transacts business with his Own
corporation. Status of a contract is VOID
Section 31. Dealings of Directors, Trustees or
Officers with the Corporation. - A contract of the
corporation with one (1) or more of its directors,
trustees, officers or their spouses and relatives
within the fourth civil degree of consanguinity or
affinity is voidable, at the option of such
corporation, unless all the following conditions are
present:
(a) The presence of such director or trustee in the
board meeting in which the contract was approved
was not necessary to constitute a quorum for such
meeting;
(b) The vote of such director or trustee was not
necessary for the approval of the contract;
(c) The contract is fair and reasonable under the
circumstances;
(d) In case of corporations vested with public
interest, material contracts are approved by at least
a majority of the independent directors voting to
approved the material contract; and
(e) In case of an officer, the contract has been
previously authorized by the board of directors.
Where any of the first three (3) conditions set forth
in the preceding paragraph is absent, in the case of
a contract with a director or trustee, such contract
may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds
(2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the
adverse interest of the directors or trustees
involved is made at such meeting and the contract
is fair and reasonable under the circumstances.
If merely voidable, how may it Be ratified?
such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of at least
two-thirds (2/3) of the members in a meeting called
for the purpose: Provided, That full disclosure of the
adverse interest of the directors or trustees
involved is made at such meeting and the contract
is fair and reasonable under the circumstances.
EX 1 A, B, C, D, E, directors of realty, Selling a
piece of property for 105M, there were two offers
made, same offer. Two Corporations offered for
105, Condition: 50% dp. The balance to be paid 5
years monthly Amortization. Third offer came from
the wife of A, only for 100M but cash. In a meeting
held, all the 5 directos were present Unanimously
agreed in favor of the wife of A.
Is A a self-dealing director?
Yes because he is the spouse of the buyer. It says
Including the relatives within the 4th degree of
Consanguinity or affinity. It includes spouse and
relative Consa or affinity.
Ex 2: Of the 5 directors present, 3 voted for he sale
of that piece of Property in favor of the wife A, c
and B voted. Is the contract Voidable or generally
valid?
It’s voidable because his vote was a necessary to
approve the contract. His presence is not required
But he voted for the approval Of the sale, and his
vote
Is necessary for the approval of the contract. The
conditions must Be present in order that it may be
considered Valid.
Strong vs. Rapide
What duty did he violate?
1. He violated his duty of loyalty
2. The law would be impotent if the sale were
not invalidated
3. Self-dealing director and interlocking
director
PRIME WHITE CEMENT CORPORATION V. IAC
FACTS: On or about the 16th day of July, 1969,
plaintiff and defendant corporation thru its
President, Mr. Zosimo Falcon and Justo C. Trazo,
Chairman of the Board, entered into a dealership
agreement whereby said plaintiff was obligated to
act as the exclusive dealer and/or distributor of the
said defendant corporation of its cement products
in the entire Mindanao area for a term of five (5)
years.
Relying heavily on the dealership agreement,
plaintiff (Alejandro Te, who was a member fo the
Board of Prime White Cement Corp.) sometime in
the months of September, October and December,
1969, entered into a written agreement with several
hardware stores dealing in buying and selling white
cement in the Cities of Davao and Cagayan de Oro
which would thus enable him to sell his allocation of
20,000 bags regular supply of the said commodity,
by
September 1970. After the plaintiff was assured by
his supposed buyer that his allocation of 20,000
bags of white cement can be disposed of, he
informed the defendant corporation in his letter
dated August 18, 1970 that he is making the
necessary preparation for the opening of the
requisite letter of credit to cover the price of the due
initial delivery for the month of September, 1970
looking forward to the defendant corporation's duty
to comply with the dealership agreement. In reply to
the said letter, the defendant corporation thru its
corporate secretary, replied that the board of
directors of the said defendant decided to impose
(certain) conditions. x x
Several demands to comply with the dealership
agreement were made by the plaintiff to the
defendant, however, defendant refused to comply
with the same, and plaintiff by force of
circumstances was constrained to cancel his
agreement for the supply of white cement with third
parties, which were concluded in anticipation of,
and pursuant to the said dealership agreement.
Notwithstanding that the dealership agreement
between the plaintiff and defendant was in force,
the defendant corporation, in violation of, and with
evident intention not to be bound by the terms and
conditions thereof, entered into an exclusive
dealership agreement with a certain Napoleon Co
for the marketing of white cement in Mindanao
hence, this suit.
ISSUE: [Whether the dealership agreement
entered into by Te with his own corporation through
the president and chairman is valid and binding]
HELD:No. Under the Corporation Law, which was
then in force at the time this case arose, as well as
under the present Corporation Code, all corporate
powers shall be exercised by the Board of
Directors, except as otherwise provided by law. 6
Although it cannot completely abdicate its power
and responsibility to act for the juridical entity, the
Board may expressly delegate specific powers to
its President or any of its officers.
In the absence of such express delegation, a
contract entered into by its President, on behalf of
the corporation, may still bind the corporation if the
board should ratify the same expressly or impliedly.
Implied ratification may take various forms - like
1. Silence or acquiescence;
2. by acts showing approval or adoption of the
contract; or
3. by acceptance and retention of benefits flowing
therefrom. 7
Furthermore, even in the absence of expressor
implied authority by ratification,the President as
such may, as a general rule, bind the corporation
by a contract in the ordinary course of business,
provided the same is reasonable under the
circumstances. These rules are basic, but are all
general and thus quite flexible. They apply where
the President or other officer, purportedly acting for
the corporation, is dealing with a third person,
i. e., a person outside the corporation. The situation
is quite different where a director or officer is
dealing with his own corporation. In the instant case
respondent Te was not an ordinary stockholder; he
was a member of the Board of Directors and
Auditor of the corporation as well. He was what is
often referred to as a "self-dealing" director.
A director of a corporation holds a position of trust
and as such, he owes a duty of loyalty to his
corporation. In case his interests conflict with those
of the corporation, he cannot sacrifice the latter to
his own advantage and benefit. As corporate
managers, directors are committed to seek the
maximum amount of profits for the corporation.
This trust relationship "is not a matter of statutory or
technical law. It springs from the fact that directors
have the control and guidance of corporate affairs
and property and hence of the property interests of
the stockholders. Granting arguendo that the
"dealership agreement" involved here would be
valid and enforceable if entered into with a person
other than a director or officer of the corporation,
the fact that the other party to the contract was a
Director and Auditor of the petitioner corporation
changes the whole situation.
First of all, We believe that the contract was neither
fair nor reasonable. The "dealership agreement"
entered into in July, 1969, was to sell and supply to
respondent Te 20,000 bags of white cement per
month, for five years starting September, 1970, at
the fixed price of P9.70 per bag. Respondent Te is
a businessman himself and must have known, or at
least must be presumed to know, that at that time,
prices of commodities in general, and white cement
in particular, were not stable and were expected to
rise. At the time of the contract, petitioner
corporation had not even commenced the
manufacture of white cement, the reason why
delivery was not to begin until 14 months later.
He must have known that within that period of six
years, there would be a considerable rise in the
price of white cement. In fact, respondent Te's own
Memorandum shows that inSeptember, 1970, the
price per bag was P14.50, and by the middle of
1975, it was already P37.50 per bag. Despite this,
no provision was made in the "dealership
agreement" to allow for an increase in price
mutually acceptable to the parties. Instead, the
price was pegged at P9.70 per bag for the whole
five years of the contract. Fairness on his part as a
director of the corporation from whom he was to
buy the cement, would require such a provision. In
fact, this unfairness in the contract is also a basis
which renders a contract entered into by the
President, without authority from the Board of
Directors, void or voidable, although it may have
been in the ordinary course of business. We
believe that the fixed price of P9.70 per bag for a
period of five years was not fair and reasonable.
Respondent Te, himself, when he subsequently
entered into contracts to resell the cement to his
"new dealers"
Henry Wee and Gaudencio Galang stipulated as
follows:
The price of white cement shall be mutually
determined by us but in no case shall the same be
less than P14.00 per bag (94 lbs)
As director, especially since he was the other party
in interest, respondent Te's bounden duty was to
act in such manner as not to unduly prejudice the
corporation. In the light of the circumstances of this
case, it is to Us quite clear that he was guilty of
disloyalty to the corporation; he was attempting in
effect, to enrich himself at the expense of the
corporation. There is no showing that the
stockholders ratified the "dealership agreement" or
that they were fully aware of its provisions. The
contract was therefore not valid and this Court
cannot allow him to reap the fruits of his disloyalty.
1. Prime White Cement vs IAC
- a director of a corporation owes a position in trust
- in case of conflict between himself and that of the
corporation, he cannot sacrifice the interest of the
corporation to his own advantage
- as a director he should have acted in a manner
as not to unduly prejudice the corporation
- he cannot be allowed to enrich himself
The contract is not valid. A director owes duty to the
corporation. In case of conflict, he cannot advance his
own benefit. Not only a director but a business
manager and auditor, should have known the price of
cement will increase in the near future. Price 9.40 vs.
14.00. He is guilty of disloyalty.
Mead vs. Mccullogh
Who is an interlocking director? Is a director in one
corporation who deals or transact business with
another corporation of which he is also a director.
INTERLOCKING - GENERALLY VALID
SELF DEALING - GENERALLY VOIDABLE
The contract of an interlocking director, on the other
hand, is generally valid. Sec. 32 provides that ''except
in cases of fraud, and provided the contract is fair
and reasonable, a contract between two or more
corporations having interlocking directors shall not be
invalidated on that ground alone.
Provided that if the interest of the interlocking director
in one corporation is substantial and his interest in the
other corporation/s is merely nominal, the provisions of
the preceding Sec. 31 insofar as the latter corporation
is concerned shall apply. Stockholdings in excess of
20% is substantial for the purpose of interlocking
directors. Thus, if such is the case the contract
becomes voidable.
Section 32. Contaracts Between Corporations with
Interlocking Directors. - Except in cases of fraud,
and provided the contract is fair and reasonable
under the circumstances a contract between two
(2) or more corporations having interlocking
directors shall not be invalidated on that ground
alone: Provided, That if the interest of the
interlocking director in one (1) corporation is
substantial and the interest in the other corporation
or corporations is merely nominal, the contract shall
be subject to the provisions of the preceding
section insofar as the latter corporation or
corporations are concerned.
Stockholding exceeding twenty percent (20%) of
the outstanding capital stock shall be considered
substantial for purposes of interlocking directors.
FACTS: On March 15, 1902, the plaintiff (Mead will
be referred to as the plaintiff in this opinion unless it
is otherwise stated) and the defendant organized
the Philippine Engineering and Construction
Company, the incorporators being the only
stockholders and also the directors of said
company, with general ordinary powers. Each of
the stockholders paid into the company $2,000
mexican currency in cash, with the exception of
Mead who turned over to the company personal
property in lieu of cash.
Shortly after the plaintiff left the Philippine Islands
for China, the other directors, the defendants in this
case, held a meeting on December 24, 1903, for
the purpose of discussing the condition of the
company at that time and determining what course
to pursue. They did on that date enter into the
following contract with the defendant McCullough,
to wit:
"For value received, this contract and all the rights
and interests of the Philippine Engineering and
Construction Company in the same are hereby
assigned to E.C. Mc Cullough of Manila, P. I.
(Sgd.) E. C. McCullough, Philippine Engineering
and Construction Company
(Sgd.) F. E. Green, Treasurer,
(Sgd.) Thomas L. Hartigan, Secretary"
The contract reffered to in the foregoing document
was known as the wrecking contract with the naval
authorities. On the 28th of the same month,
McCullough executed and signed the
following document:
"For value received, and having the above
assignment from my associates in the Philippine
Engineering and Construction Company, I hereby
transfer my right, title, and interest in the within
contract, with the exception of one sixth, which I
hereby retain, to R. W. Brown, H. D. C. Jones, John
T. Macleod, and T. H. Twentyman."
The assignees of the wrecking contract, including
McCullough, formed what was known as the
"Manila Salvage Association." This association paid
to McCullough $15,000 Mexican currency cash for
the assignment of said contract In addition to this
cash payment, McCullough retained a one-sixth
interest in the new company or association
ISSUE: [May officers or directors of the corporation
purchase the corporate property
HELD: Yes. While a corporation remains solvent,
we can see no reason why a director or officer, by
the authority of a majority of the stockholders or
board of managers, may not deal with the
corporation, loan it money or buy property from it, in
like manner as a stranger. So long as a purely
private corporation remains solvent, its directors
are agents or trustees for the stockholders. They
owe no duties or obligations to others. But the
moment such a corporation becomes insolvent, its
directors are trustees of all the creditors, whether
they are members of the corporation or not, and
must manage its property and assets with strict
regard to their interest; and if they are themselves
creditors while the insolvent corporation is under
their management, they will not be permitted to
secure to themselves by purchasing the corporate
property or otherwise any personal advantage over
the other creditors. Nevertheless, a director or
officer may in good faith and for an adequate
consideration purchase from a majority of the
directors or stockholders the property even of an
insolvent corporation, and a sale thus made to him
is valid and binding upon the minority. (Beach et al.
vs. Miller, supra; Twin-Lick Oil Company vs.
Marbury, supra; Drury vs. Cross, 7 Wall., 299;
Curran vs. State of Arkansas, 15 How., 304;
Richards vs. New Hamphshire Insurance Company,
43 N. H., 263; Morawetz on Corporations (first
edition), sec. 579; Haywood vs. Lincoln Lumber
Company et al., 64 Wis., 639; Port vs. Russels, 36
Ind., 60; Lippincott vs. Shaw Carriage Company, 21
Fed. Rep., 577.)
In the case of the Twin-Lick Oil Company vs.
Marbury, he court said: That a director of a
joint-stock corporation occupies one of those
fiduciary relations where his dealings with the
subject-matter of his trust or agency, and with the
beneficiary or party whose interest is confided to
his care, is viewed with jealousy by the courts, and
may be set aside on slight grounds, is a doctrine
founded on the soundest morality, and which has
received the clearest recognition in this court and
others. (Koehler vs. Iron., 2 Black, 715; Drury vs.
Cross, 7 Wall., 299; R.R. Co. vs. Magnay, 25 Beav.,
586; Cumberland Co vs. Sherman, 30 Barb., 553;
Hoffman S. Coal Co. vs. Cumberland Co., 16 Md.,
456.) The general doctrine, however, in regard to
contracts of this class, is, not that they are
absolutely void, but that they are voidable at the
election of the party whose interest has been so
represented by the party claiming under it. We say,
this is the general rule; for there may be cases
where such contracts would be void ab initio; as
when an agent to sell buys of himself, and by his
power of attorney conveys to himself that which he
was authorized to sell. But even here, acts which
amount to a ratification by the principal may
validate the sale
The sale or transfer of the corporate property in the
case at bar was made by three directors who were
at the same time a majority of stockholders. If a
majority of the stockholders have a clear and a
better right to sell the corporate property than a
majority of the directors, then it can be said that a
majority of the stockholders made this sale or
transfer to the defendant McCullough.
What were the circumstances under which said
sale was made? The corporation had been going
from bad to worse. The work of trying to raise the
sunken Spanish fleet had been for several months
abandoned. The corporation under the
management of the plaintiff had entirely failed in
this undertaking. It had broken its contract with the
naval authorities and the $10,000 Mexican currency
deposited had been confiscated. It had no money. It
was considerably in debt. It was a losing concern
and a financial failure. To continue its operation
meant more losses. Success was impossible. The
corporation was civilly dead and had passed into
the limbo of utter insolvency. The majority of the
stockholders or directors sold the assets of this
corporation, thereby relieving themselves and the
plaintiff of all responsibility. This was only the wise
and sensible thing for them to do. They acted in
perfectly good faith and for the best interests of all
the stockholders. "It would be a harsh rule that
would permit one stockholder, or any minority of
stockholders to hold a majority to their investment
where a continuation of the business would be at a
loss and where there was no prospect or hope that
the enterprise would be profitable."
We therefore conclude that the sale or transfer
made by the quorum of the board of directors — a
majority of the stockholders — is valid and binding
upon the majority-the plaintif
DERIVATIVE SUIT
To allow SH - multiplicity of suits
An individual or personal action is one brought by
the shareholder for direct injury to his rights, such
as denial of his right to inspect corporate books and
records or pre-emptive rights. NO DAMAGE TO
THE CORPORATION.
A representative or class suit is one in which one or
more members of a class sue for themselves as a
class or for all to whom the right was denied, either
as an individual action or as a derivative suit. NO
DAMAGE TO THE CORPORATION.
A derivative suit means an action based on injury to
the corporation – to enforce a corporate right –
wherein the corporation itself is joined as a
necessary party, and recovery is in favor of and for
the corporation. It is a suit grated to any
stockholder to institute a case to remedy a wrong
done directly to the corporation and indirectly to the
stockholders if the board refuses to do so.
Otherwise if not they would be left without any
recourse. Recognized in the Philippines in 1911.
Pascual vs. Orozco
FACTS: (D)uring the years 1903, 1904, 1905, 1906
and 1907 the defendants and appellees, without
the knowledge, consent or acquiescence of the
stockholders, deducted their compensation from
the gross income instead of from the net profits of
the bank, thereby defrauding the bank and its
stockholders of approximately P20,000 per annum;
that though demands has been made upon them
therefor, defendants refuse to refund to the bank
the misappropriated, or any part thereof; that
defendants constitute a majority of the sums so
present board of directors of the bank, who alone
can authorize an action against them in the name
of the corporation, and that prior to the filing of the
present suit plaintiff exhausted every remedy in the
premises within this banking corporation.
The second cause of action sets forth that
defendants' and appellees' immediate
predecessors in office in this bank during the years
1899, 1900, 1901, and 1902, committed the same
illegality as to their compensation as is charged
against the defendants themselves; that in the four
years immediately following the year 1902, the
defendants and the appellees were the only
officials or representatives of the bank who could
and should investigate and take action in regard to
the sums of money thus fraudulently appropriated
by their predecessors; x x x that they wholly
neglected to take any action in the premises or
inform the stockholders thereof. xxx
This action was brought by the plaintiff Pascual, in
his own right as a stockholder of the bank, for the
benefit of the bank, and all the other stockholders
thereof. The plaintiff sues on behalf of the
corporation, which, even though nominally a
defendant, is to all intents and purposes the real
plaintiff in this case. That such is the case is shown
by the prayer of the complaint which is that
judgment be entered in favor of the bank. x x x
ISSUE: WON plaintiff has capacity to sue?
HELD: Yes. In suits of this character the
corporation itself and not the plaintiff stockholder is
the real party in interest. The rights of the individual
stockholder are merged into that of the corporation.
It is a universally recognized doctrine that a
stockholder in a corporation has no title legal or
equitable to the corporate property; that both of
these are in the corporation itself for the benefit of
all the stockholders. Text writers illustrate this rule
by the familiar example of one person or entity
owning all the stock and still having no greater or
essentially different title than if he owned but one
single share. Since, therefore, the stockholder has
no title; it is evident that what he does have, with
respect to the corporation and his fellow
stockholder, are certain rights sui generis. These
rights are generally enumerated as being, first, to
have a certificate or other evidence of his status as
stockholder issued to him; second, to vote at
meetings of the corporation; third, to receive his
proportionate share of the profits of the corporation;
and lastly, to participate proportionately in the
distribution of the corporate assets upon the
dissolution or winding up. (Purdy's Beach on
Private Corporations, sec. 554.) The right of
individual stockholders to maintain suits for and on
behalf of the corporation was denied until within a
comparatively short time, but his right is now no
longer doubted. Accordingly, in 1843, in the leading
case of Foss vs. Harbottle, a stockholder brought
suit in the name of himself and other defrauded
stockholders, and for the benefit of the corporation,
against the directors, for a breach of their duty to
the corporation. This case was decided against the
complaining stockholder, on the ground that the
complainant had not proved that the corporation
itself was under the control of the guilty
parties, and had not proved that it was unable to
institute suit. The court, however, broadly intimated
that a case might arise when a suit instituted by
defrauded stockholders would be entertained by
the court and redress given. Acting upon this
suggestion, and impelled by the utter inadequacy of
suits instituted by the corporation, defrauded
stockholders continued to institute these suits and
to urge the courts of equity to grant relief. These
efforts were unsuccessful in clearly establishing the
right of stockholders herein until the cases of Atwol
against Merriwether, in England, 1867, and of
Dodge vs. Woolsey, in this country, in 1855. These
two great and leading cases have firmly established
the law for England and America, that 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.
So it is clear that the plaintiff, by reason of the fact
that he is a stockholder in the bank (corporation)
has a right to maintain a suit for and on behalf of
the bank, but the extent of such a right must
depend upon when, how, and for what purpose he
acquired the shares which he now owns. In the
determination of these questions we cannot see
how, if it be true that the bank is a quasi-public
institution, it can affect in any way the final result.
It is alleged that the plaintiff became a stockholder
on the 13th of November, 1903; that the
defendants, as members of the board of directors
and board of government, respectively, during each
and all the years 1903, 1904, 1905, 1906, and
1907, did fraudulently, and to the great prejudice of
the bank and its stockholders, appropriate to their
own use from the profits of the bank sums of
money amounting approximately to P20,000 per
annum.
It is self-evident that the plaintiff in the case at bar
was not, before he acquired in September, 1903,
the shares which he now owns, injured or affected
in any manner by the transactions set forth in the
second cause of action. His vendor could have
complained of these transactions, but he did not
choose to do so. The discretion whether to sue to
set them aside, or to acquiesce in and agree to
them, is, in our opinion, incapable of transfer. If the
plaintiff himself had been injured by the acts of
defendants' predecessors that is another matter.
He ought to take things as he found them when he
voluntarily acquired his ten shares. If he was
defrauded in the purchase of these shares he
should sue his vendor. (Thus, he may sue for the
second half of 1903 to 1907 but not for the years
1989 to the first half of 1903.)
So it seems to be settled by the Supreme Court of
the United States, as a matter of substantive law,
that a stockholder in a corporation who was not
such at the time of the transactions complained of,
or whose shares had not devolved upon him since
by operation of law, cannot maintain suits of this
character, unless such transactions continue and
are injurious to the stockholder, or affect him
especially and specifically in some other way.