COMMERCIAL LAW REVIEW 2021

Grandfather Rule

It a method by which the percentage of Filipino equity in a corporation engaged in

nationalized and/or partly nationalized areas of activities provided for under the
constitution and other nationalization laws is computed, in cases where corporations SH
are present, by attributing the nationality of the second or even subsequent tier of
ownership to determine the nationality of the corporate SH.

Under this rule, the Filipino ownership of the investing corporation and the investee
corporation are combined to determine the percentage of Filipino ownership.

1) Narra Nickel Mining and Dev. Corp. vs. Redmont Consolidated Mines
G.R. No. 195580, Apr. 21, 2014

FACTS:

Petitioners, Narra Nickel Mining, Tesoro Mining, McArthur Mining, filed an application
for Mineral Production Sharing Agreement ( MPSA) before the DENR.

Redmont, upon learning of the said application of petitioners, filed petitions before the
DENR for denial of petitioners’ application on the ground that:

-60 percent of the capital stock of McArthur, Tesoro, Narra are owned by MBMI
Resources Inc, a 100% Canadian Corp. Hence, petitioners are disqualified from
engaging in mining activities because majority of its capital stocks are owned by MBMI,
a foreign corp and the mining activities are reserved only for Filipino Citizens.

Petitioners, on the other hand argue that:

They are qualified under the Philippine Mining Act, that their nationality as applicants
is immaterial because they also applied for FTAA / Financial Technical Assistance
Agreement which are granted to foreign owned corps.

ISSUE: WON the petitioners are foreign owned corp?

RULING:

The SC ruled that the petitioners, Narra Nickel, Tesoro and Redmont, are not Filipino
since MBMI, a 100% Canadian Corp. owns 60% or more of their equity interests.

GF rule provides that, if the percentage of the Filipino ownership in the corporation is
less than 60%, only the number of shares corresponding to such percentage shall be
counted as Phil. Nationality (Par 7 1967 SEC Rules). The combined totals in Investing
Corporation and the Investee Corp. must be traced to determine the total percentage of
Filipino ownership. GF rule applies only when the 60-40 filipino equity ownership is in
doubt.

In this case, doubt is present in the 60-40 Fil. Equity ownership of petitioners since
their common investor, the 100% Canadian Corp., MBMI funded them.

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Noticeably, the ownership of the layered corporations boils down to group wherein
MBMI has joint venture agreements with, practically exercising majority control over
the corporations mentioned. The MBMI holds the majority of capital stocks of the
investing corporation of the petitioners. Hence, MBMI has control over the
corporations.

Separate Personality/ Piercing the Veil

2) Reynaldo S. Geraldo vs. The Bill Sender Corp./Ms. Lourdes Ner Cando
MESSENGER

FACTS:

1997, Respondent The Bill Sender Corp, a corp engaged in the business of delivering
bills and mails for its customers, employed petitioner Geraldo as a delivery/messenger
man to deliver the bills of its client, PLDT.

2012, Geraldo filed a complaint for illegal dismissal alleging that Mr. Constantino
(operations manager) suddenly informed him that his employment was being
terminated because he failed to deliver certain bills. His employment was terminated
despite his explanation that the said bills were not assigned to him. Hence, he prays that
the company and its presidentCando, be held liable for his monetary claims.

LA and NLRC ruled in favor of Cando.

ISSUE: WON respondent Cando can be held personally and solidarily liable with the
company for the monetary claims of Geraldo.

RULING:

NO. Cando cannot be held personally and solidarity liable with the company for the
monetary claims of Geraldo.

As a general rule, a corporate officer cannot be held liable for acts done in
his official capacity because a corporation, by legal fiction, has a personality
separate and distinct from its officers, stockholders, and members.

To pierce this fictional veil, it must be shown that the corporate personality
was used to:

perpetuate fraud or an illegal act,

or to evade an existing obligation, or

to confuse a legitimate issue.

In illegal dismissal cases, corporate officers may be held solidarily liable

with the corporation if the termination was done with malice or bad faith. 17 

To hold a director or officer personally liable for corporate obligations, two

requisites must concur, to wit:

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(1) the complaint must allege that the director or officer assented to the
patently unlawful acts of the corporation, or that the director or officer was
guilty of gross negligence or bad faith; and

(2) there must be proof that the director or officer acted in bad faith. 18 

In the instant case, there is no showing that Cando, as President of the company, was
guilty of malice or bad faith in terminating the employment of Geraldo. Thus, she should
not be held personally liable for his monetary claims.

Geraldo, a regular employee entitled to security of tenure, was illegally dismissed from
his employment due to the failure of the company to comply with the substantial and
procedural requirements of the law. SC sustained the award of his monetary claims.
(separation pay, in lieu of reinstatement, attorney's fees, as well as Geraldo's monetary
claims of 13th month pay and service incentive leave pay)

3) EDSA SHANG vs BF Corp. G.R NO. 145842

4) Maricalum Mining Corporation vs. Ely G. Florentino, et. al., G.R. No.
221813, July 23, 2018

5) Manuel C. Espiritu, Jr., et al. vs. Petron Corp., et al., G.R. No. 170891,
Nov. 24, 2009

6) Eric Godfrey Stanley Livesey vs Binswanger Phils., G.R. no. 177493

March 19, 2014

Ultra Vires Acts

7. Jose Bernas, et. al. vs. Jovencio Cinco, et. al.,

G.R. Nos. 163356-57

July 01, 2015–SSM IS INVALID; BERNAS GROUP REMOVAL IS

INVALID; MSCOC HAS NO AUTHORITY TO CALL OR A SSM.

FACTS: Consolidated petitions.

Makati Sports Club (MSC) (domestic corporation duly organized and existing under
Philippine laws for the primary purpose of establishing, maintaining, and providing
social, cultural, recreational and athletic . activities among its members)

Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas), Cecile H. Cheng, Victor
Africa, Jesus Maramara, Jose T. Frondoso, Ignacio T. Macrohon and Paulino T. Lim
(Bernas Group) were among the Members of the Board of Directors and Officers of the
corporation whose terms were to expire either in 1998 or 1999.

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Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea · and Alex Y. Pardo
(Cinco Group) are the members and stockholders of the corporation who were elected
Members of the Board of Directors and Officers of the club during the 17 December 1997
Special Stockholders Meeting.

Alarmed with the rumored anomalies in handling the corporate funds, the MSC
Oversight Committee (MSCOC), composed of the past presidents of the club, demanded
from the Bernas Group, who were then incumbent officers of the corporation, to resign
from their respective positions to pave the way for the election of new set of officers. 4 

MSCOC called a Special Stockholders' Meeting (SSM) and sent out notices 6 to all
stockholders and members. The meeting proceeded wherein the Bernas Group were
removed from office and was replaced by Cinco Group via election.

Bernas Group initiated an action before the SEC seeking for the nullification of the 17
December 1997 SSM on the ground that it was improperly called; that the authority to
call a meeting lies with the Corporate Secretary and not with the MSCOC which
functions merely as an oversight body and is not vested with the power to call corporate
meetings.; Bernas group prays that the SSM and the election of the new officers be
declared null and void.

Cinco Group insisted that the SSM is sanctioned by the Corporation Code and the MSC
by-laws; MSC by-laws merely authorized the Corporate Secretary to issue notices of
meetings and nowhere does it state that such authority solely belongs to him; Corp Sec
refused to call a SSM despite repeated demands.

Meanwhile, the shares of Bernas were sold in public bidding.

SEC: 17 December 1997 Special Stockholders' Meeting and expulsion of Bernas from the
corporation and the sale of his share at the public auction are invalid.

SEC En Banc---reversed the findings of the SICD and validated the holding of the 17
December 1997 Special Stockholders' Meeting as well as the expulsion of Bernas and the
sale of his shares.

Court of Appeals -- 17 December 1997 Special Stockholders' Meeting invalid for being
improperly called but affirmed the actions taken during the Annual Stockholders'
Meeting held on 20 April 1998, 19 April 1999 and 17 April 2000.

ISSUE: WON the SSM is valid

RULING:

Only the President and the Board of Directors are authorized by the by-laws to call a
special meeting. In cases where the person authorized to call a meeting refuses, fails or
neglects to call a meeting, then the stockholders representing at least 100 shares, upon
written request, may file a petition to call a special stockholder's meeting.

In the instant case, there is no dispute that the 17 December 1997 Special
Stockholders' Meeting was called neither by the President nor by the Board
of Directors but by the MSCOC. While the MSCOC, as its name suggests, is
created for the purpose of overseeing the affairs of the corporation,
nowhere in the by-laws does it state that it is authorized to exercise
corporate powers, such as the power to call a special meeting, solely vested
by law and the MSC by-laws on the President or the Board of Directors.

The board of directors is the directing and controlling body of the corporation.

Relative to the powers of the Board of Directors, nowhere in the Corporation Code or in
the MSC by-laws can it be gathered that the Oversight Committee is authorized to step
in wherever there is breach of fiduciary duty and call a special meeting for the purpose

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of removing the existing officers and electing their replacements even if such call was
made upon the request of shareholders. MSCOC is neither empowered by law nor the
MSC by-laws to call a meeting and the subsequent ratification made by the stockholders
did not cure the substantive infirmity, the defect having set in at the time the void act
was done.

It is apt to recall that illegal acts of a corporation which contemplate the doing of an act
which is contrary to law, morals or public order, or contravenes some rules of public
policy or public duty, are, like similar transactions between individuals, void. 30 They
cannot serve as basis for a court action, nor acquire validity by performance, ratification
or estoppel.31 The same principle can apply in the present case. The void election of 17
December 1997 cannot be ratified by the subsequent Annual Stockholders' Meeting.

A distinction should be made between corporate acts or contracts which are illegal and
those which are merely ultra vires. The former contemplates the doing of an act which
are contrary to law, morals or public policy or public duty, and are, like similar
transactions between individuals, void: They cannot serve as basis of a court action nor
acquire validity by performance, ratification or estoppel. Mere ultra vires acts, on the
other hand, or those which are not illegal or void ab initio, but are not merely within the
scope of the articles of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders. 32 The 1 7 December 1997 Meeting belongs
to the category of the latter, that is, it is void ab initio and cannot be validated.

Consequently, such Special Stockholders' Meeting called by the Oversight Committee

cannot have any legal effect. The removal of the Bernas Group, as well as the election of
the Cinco Group, effected by the assembly in that improperly called meeting is void, and
since the Cinco Group has no legal right to sit in the board, their subsequent acts of
expelling Bernas from the club and the selling of his shares. at the public auction, are
likewise invalid.

PCGG has no right to vote the sequestered shares of petitioners including the
sequestered corporate shares. Only their owners, duly authorized representatives or
proxies may vote the said shares.

Apparently, the assumption of office of the Cinco Group did not bear parallelism with
the factual milieu in Cojuangco and as such they cannot be considered as de facto
officers and thus, they are without colorable authority to authorize the removal of
Bernas and the sale of his shares at the public auction. They cannot bind the corporation
to third persons who acquired the shares of Bernas and such third persons cannot be
deemed as buyer in good faith.35

The case would have been different if the petitioning stockholders went directly to the
SEC and sought its assistance to call a special stockholders' meeting citing the previous
refusal of the Corporate Secretary to call a meeting. Where there is an officer authorized
to call a meeting and that officer refuses, fails, or neglects to call a meeting, the SEC can
assume jurisdiction and issue an order to the petitioning stockholder to call a meeting
pursuant to its regulatory and administrative powers to implement the Corporation
Code.36 This is clearly provided for by Section 50 of the Corporation Code

As early as Ponce v. Encarnacion, etc. and Gapol, 37 the Court of First Instance (now the
SEC)38 is empowered to call a meeting upon petition of the stockholder or member and
upon showing of good cause.

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 8. Magallanes Watercraft Asso., Inc., et. al. vs. Margarito Auguis, et.
al., G.R. No. 211485, May 30, 2016 ASSIGNED

EXPRESS AND IMPLIED POWERS OF CORP; suspended rights of members

and officers

FACTS:

Magallanes Watercraft Association, Inc. (MWAI) is a local association of

motorized banca owners and operators ferrying cargoes and passengers from
Magallanes, Agusan del Norte, to Butuan City. Respondents Margarito C. Auguis
(Auguis; VP) and Dioscoro C. Basnig (Basnig; SECRETARY) were members and officers
of MWAI.

2003, the BOT of MWAI passed a Resolution and thereafter issued a Memorandum
suspending the rights and privileges of Auguis and Basnig as members of the association
for thirty (30) days for their refusal to pay their membership dues and berthing fees
because of their pending oral complaint and demand for financial audit of the
association funds.

(Auguis had an accumulated unpaid obligation of P4,059.00 while Basnig had

P7,552.00)

Auguis and Basnig still failed to settle their obligations with MWAI. For said reason,
MWAI issued another Memo, suspending their rights and privileges for another thirty
(30) days.

Auguis and Basnig filed an action for damages with a prayer for the issuance of a writ of
preliminary injunction before the RTC.

RTC ---

ordered Auguis and Basnig to pay their unpaid account and required MWAI to pay them
actual damages and attorney's fees.[6]

CA ---

affirmed with modification the RTC decision;

MWAI was guilty of an ultra vires act;

NEITHER MWAI's Articles of Incorporation nor its By-Laws [7] contained any provision
that expressly and/or impliedly vested power or authority upon its Board to recommend
the imposition of disciplinary sanctions on its delinquent officers and/or members;

MWAI lacked the authority to suspend the right of the respondents to operate
their bancas, only the Maritime Industry Authority (MARINA) expressly had the
authority to suspend, cancel and'or revoke the franchise of the two.

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ISSUE: WON MWAI was guilty of an ultra vires act when it suspended respondents'
rights as members and officers

RULING: NO.

Corporate powers include implied and incidental powers

Section 45 of the Corporation Code provides for the powers possessed by a corporation,
to wit:
Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall possess
or exercise any corporate powers except those conferred by this Code or by its articles of
incorporation and except such as are necessary or incidental to the exercise of the
powers so conferred.

Under the law, a corporation has:

(1) express powers, which are bestowed upon by law or its articles of incorporation;
and

(2) necessary or incidental powers to the exercise of those expressly conferred.

An act which cannot fall under a corporation's express or necessary or incidental powers
is an ultra vires act.

Corporations are artificial entities granted legal personalities upon their creation by
their incorporators in accordance with law. Unlike natural persons, they have no
inherent powers. Third persons dealing with corporations cannot assume that
corporations have powers. It is up to those persons dealing with corporations to
determine their competence as expressly defined by the law and their articles of
incorporation.

A corporation may exercise its powers only within those definitions.

Corporate acts that are outside those express definitions under the law or
articles of incorporation or those "committed outside the object for which a
corporation is created" are ultra vires.

In this case, MWAI's By-Laws provides that its members are bound to obey and comply
with the by-laws, rules and regulations that may be promulgated by the association from
time to time" and "to pay membership dues and other assessments of the association.
Thus, the respondents were obligated to pay the membership dues of which they were
delinquent. MWAI could not be faulted in suspending the rights and
privileges of its delinquent members.

The absence of any provision in MWAI’s articles of incorporation or its by-

laws granting its Board the authority to discipline members, does not make
the suspension of the rights and privileges of the respondents ultra
vires.An act might be considered within corporate powers, even if it was not
among the express powers, if the same served the corporate ends.

A corporation is not restricted to the exercise of powers expressly conferred

upon it by its charter, but has the power to do what is reasonably necessary
or proper to promote the interest or welfare of the corporation.

Corporations were not limited to the express powers enumerated in their charters, but
might also perform powers necessary or incidental thereto.

Corporate acts that are outside those express definitions under the law or articles of
incorporation or those "committed outside the object for which a corporation is created"

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are ultra vires.

The only exception to this rule is when acts are necessary and incidental to
carry out a corporation's purposes, and to the exercise of powers conferred
by the Corporation Code and under a corporation's articles of
incorporation. 

The test to be applied is whether the act in question is in direct and

immediate furtherance of the corporation's business, fairly incident to the
express powers and reasonably necessary to their exercise. 

Therefore, MWAI can properly impose sanctions on Auguis and Basnig for being
delinquent members considering that the payment of membership dues enables MWAI
to discharge its duties and functions enumerated under its charter. Moreover,
respondents were obligated by the by-laws of the association to pay said dues. The
suspension of their rights and privileges is not an ultra vires act as it is reasonably
necessary or proper in order to further the interest and welfare of MWAI.

Also, the imposition of the temporary ban on the use of MWAI's berthing facilities until
Auguis and Basnig have paid their outstanding obligations was a reasonable measure
that the former could undertake to ensure the prompt payment of its membership dues.
[15]
  Otherwise, MWAI will be rendered inutile as it will have no means of ensuring that
its members will promptly settle their obligations. It will be exposed to deleterious
consequences as it will be unable to continue with its operations if the members
continue to be delinquent in the payment of their obligations, without fear of possible
sanctions.

Residence of a Corporation

9. Hyatt Elevators Inc. vs. Goldstar Elevators. Phils.,

G.R. No. 161026, Oct. 24, 2005

FACTS:

Goldstar Elevator Philippines, Inc. (GOLDSTAR for brevity) is a domestic corporation

primarily engaged in the business of marketing, distributing, selling, importing,
installing, and maintaining elevators and escalators, with address at 6th Floor, Jacinta
II Building, 64 EDSA, Guadalupe, Makati City.

Hyatt Elevators and Escalators Company (HYATT for brevity) is a domestic corporation
similarly engaged in the business of selling, installing and maintaining/servicing
elevators, escalators and parking equipment, with address at the 6th Floor, Dao I
Condominium, Salcedo St., Legaspi Village, Makati, as stated in its Articles of
Incorporation.

1999, HYATT filed a Complaint for unfair trade practices and damages under Articles
19, 20 and 21 of the Civil Code of the Philippines against LG Industrial Systems Co. Ltd.
(LGISC) and LG International Corporation (LGIC). Hyatt alleged that it was appointed
by LGIC and LGISC as the exclusive distributor of LG elevator and escalator in the
Philippines under a distributorship agreement. LGISC made a proposal to change the
exclusive distributorship agency/ EDA to that of a joint venture partnership. However,
in the middle of the negotiations, LGISC and LGIC terminated the EDA.

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As a consequence, [HYATT] suffered ₱120,000,000.00 as actual damages, representing
loss of earnings and business opportunities / 20M.

LGISC and LGIC filed a Motion to Dismiss raising the following grounds: (1) lack of
jurisdiction over the persons of defendants, summons not having been served on its
resident agent; (2) improper venue which the trial court denied.

HYATT filed an amended complaint alleging that LGISC transferred all its organization
and assets to LG OTIS; it also averred that GOLDSTAR was being utilized by LG OTIS
and LGIC in perpetrating their unlawful and unjustified acts against HYATT.
Consequently, in order to afford complete relief, GOLDSTAR was to be additionally
impleaded as a party-defendant.

GOLDSTAR filed a Motion to Dismiss the amended complaint, raising the following
grounds: (1) the venue was improperly laid, as neither HYATT nor defendants reside in
Mandaluyong City, where the original case was filed.

ISSUE: WON the venue was improper.

RULING:

Section 2 of Rule 4 of the 1997 Revised Rules of Court:

"Sec. 2. Venue of personal actions. – All other actions may be commenced and tried
where the plaintiff or any of the principal plaintiff resides, or where the defendant or
any of the principal defendant resides, or in the case of a non-resident defendant where
he may be found, at the election of the plaintiff."

Since both parties to this case are corporations, there is a need to clarify the meaning of
"residence." The law recognizes two types of persons: (1) natural and (2) juridical.

Corporations come under the latter in accordance with Article 44(3) of the Civil Code.8

Residence is the permanent home -- the place to which, whenever absent for business or
pleasure, one intends to return.9 Residence is vital when dealing with venue.10 A
corporation, however, has no residence in the same sense in which this term is applied
to a natural person.

For practical purposes, a corporation is in a metaphysical sense a resident of the place

where its principal office is located as stated in the articles of incorporation." 12 The
residence of a corporation is the place where its principal office is established. 13

For purposes of venue, the term "residence" is synonymous with "domicile." 14 The
residence or domicile of a juridical person is fixed by "the law creating or recognizing" it.
Under Section 14(3) of the Corporation Code, the place where the principal office of the
corporation is to be located is one of the required contents of the articles of
incorporation, which shall be filed with the Securities and Exchange Commission (SEC).

In the present case, there is no question as to the residence of respondent. Petitioner’s

principal place of business is Makati, as indicated in its Articles of Incorporation. Since
the principal place of business of a corporation determines its residence or domicile,
then the place indicated in petitioner’s articles of incorporation becomes controlling in
determining the venue for this case.

The place where the principal office of a corporation is located, as stated in the articles,
indeed establishes its residence.

Inconclusive are the bare allegations of petitioner that it had closed its Makati office and
relocated to Mandaluyong City, and that respondent was well aware of those

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circumstances. Assuming arguendo that they transacted business with each other in the
Mandaluyong office of petitioner, the fact remains that, in law, the latter’s residence was
still the place indicated in its Articles of Incorporation.

Complaint was dismissed because the venue had been improperly laid, not because of
the failure of petitioner to amend the latter’s Articles of Incorporation.

Indeed, it is a legal truism that the rules on the venue of personal actions are fixed for
the convenience of the plaintiffs and their witnesses. Equally settled, however, is the
principle that choosing the venue of an action is not left to a plaintiff’s caprice; the
matter is regulated by the Rules of Court.21 

"The choice of venue should not be left to the plaintiff’s whim or caprice. He may be
impelled by some ulterior motivation in choosing to file a case in a particular court even
if not allowed by the rules on venue."24

Claim for Moral Damages

10. ABS-CBN Broadcasting Corp. vs. CA

301SCRA 589, G.R. No. 128690. Jan. 21, 1999

FACTS:

ABSCBN and Viva executed a Film Exhibition Agreement (FEA), whereby Viva gave
ABS an exclusive right to exhibit some Viva Films. Under the FEA ABS shall have the
right of first refusal to the next 24 Viva films for TV telecast. Viva, thru defendant Del
Rosario, offered ABS a list of 52 original movie titles including 14 titles subject of the
present case, as well as 104 re-runs from which ABS may choose another 52 titles, as
a total of 156 titles.

Proposing to sell ABS the airing rights over the package of 52 originals and 52 re
runs for 60 million pesos.

During a meeting between Del Rosario and ABS Gen Manager Mr. Lopez III, the
latter alleged that there was an agreement between the parties that ABS was granted
exclusive film rights to 14 films for a total consideration of 36 M; that Mr Lopez
allegedly put this agreement as to the price and number of films in a napkin and
signed it. However, Del Rosario alleged that there was no agreement that took place
and denied the existence of the napkin, that the purpose of the meeting was Viva’s
film package offer of 104 films for a total price of 60M pesos.

After the meeting, Del Rosario received a letter from ABS signifying its counter
proposal regarding the films for a total consideration of 35M, however, it was denied
by Viva.

Viva, thru Del Rosario and its Pres. Cruz, signed a letter of agreement granting RBS
(GMA, Republic Broadcasting System) the exclusive right to air 104 Viva-produced
films in consideration of 60M.

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 ABS then filed before the RTC a complaint for specific performance with prayer for a
writ of PRE INJ and/or temporary rest order against RBS, Viva and Del Rosario.
Both parties now demand for damages.

ISSUE: WON moral damages may be awarded to a corporation.

RULING:

No.

The award of moral damages cannot be granted in favor of a corporation because,

being an artificial person and having existence only in legal contemplation, it has no
feelings, no senses. A corporation cannot, therefore, experience physical suffering
and mental anguish, which can only be experienced by one having a nervous system.

11. Filipinas Broadcasting Network, Inc. vs. Ago Medical

G.R. No. 141994, January 17, 2005

Expose about sa school

FACTS:

Expose is a radio program hosted by Rima and Alegre. In the said program, they
exposed various complaints from students, teachers and parents against AMEC.

The said complaints from students and parents were about failing the subjects and
repeating to take up all the subjects even those they have passed already; and AMEC’s
administration is greedy for money; a dumping ground and garbage.

Expose was aired in DZRC owned by Filipino Broadcasting Network Inc., (FBNI).

Claiming that the broadcasts were defamatory, AMEC and its Dean of Medicine, Ago,
filed a complaint for damages against FBNI.

The complaint alleges that AMEC is a reputable learning institution and the report of
FBNI was malicious and thus destroyed AMEC’s reputation.

FBNI, Rima and Alegre argued that FBNI were fair and true.

The trial court rendered a decision finding FBNI and Alegre liable for libel except Rima.

The CA upheld the ruling of the RTC and awarded AMEC moral damages.

FBNI contends that AMEC is not entitled to moral damages because it is a corporation.

ISSUE: WON AMEC is entitled to moral damages.

RULING:

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As a rule, a juridical person is not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded feeling,
serious anxiety, mental anguish or moral shock.

However, AMEC’S claim for moral damages falls under Item 7 of Article 2219 of the
Civil Code. This provision expressly authorizes the recovery of moral damages in cases
of libel, slander or any other form of defamation. The said article does not qualify
whether the plaintiff is a natural or juridical person. Therefore, a juridical person such
as a corporation can validly complain for libel or any other form of defamation and
claim moral damages.

Doctrine of Apparent Authority / DAA

This doctrine imposes liability, not as the result of the reality of a contractual
relationship, but rather because of the actions of a principal or an employer in somehow
misleading the public into believing that the relationship or the authority exists. (Irving
v. Doctors Hospital of Lake Worth, Inc., 415 So. 2d 55 (1982), quoting Arthur v. St.
Peters Hospital, 169 N.J. 575, 405 A 2d 443 (1979)). The concept is essentially one of
estoppel.

Under the rule, the principal is bound by the acts of his agent with the
apparent authority which he knowingly permits the agent to assume, or
which he holds to the agent out to the public as possessing. The question in
every case is whether the principal has by his voluntary act placed the agent with
business usages and the nature of the particular business, is justified in presuming that
such agent has authority to perform the particular act in question. (Hudson C., Loan
Assn., Inc. v. Horowytz, 116 N.J.L. 605, 608 A 437 (Supp. Ct. 1936).

12.Advance Paper Corp, et.al., vs. Arma Traders Corp, et. al.
G.R. No.176897, Dec. 11, 2013 ASSIGNED

FACTS:

Advance Paper is a domestic corporation engaged in the business of producing, printing,

manufacturing, distributing and selling of various paper products.

Advance Paper is the supplier of Arma Traders. Arma is domestic corp engaged in the
wholesale and distribution of school and office supplies, and novelty products.

Antonio Tan was the President and UySeneKee Willy is the Treasurer of Arma. They
represented Arma Traders when dealing with its supplier, Advance Paper, for about 14
years.

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September to December 1994, Arma Traders purchased on credit ( notebooks and other
paper products amounting to 7M pesos from Advance Paper. 10

(Buying On Credit Meaning Definition : To purchase something with the promise that
you will pay in the future. When buying something on credit, you acquire the item
immediately, but you pay for it at a later date.)

Upon the representation of Tan and Uy, Arma Traders also obtained three loans from
Advance Paper witht the total amount of 7M.11 

Arma Traders needed the loan to settle its obligations to other suppliers. Advance Paper
extended the loans.13

As payment for the purchases on credit and the loan transactions, Arma Traders issued
82 postdated checks14 in favour of Advance Paper.

Tan and Uy were Arma’s authorized bank signatories who signed and issued these
checks which had the aggregate amount of ₱15M.15

Advance Paper presented the checks to the drawee bank but these were dishonored for
"insufficiency of funds" and "account closed." Despite repeated demands, however,
Arma Traders failed to settle its account with Advance Paper.16

Advance Paper filed a complaint17 for collection of sum of money against Arma Traders
and the aforementioned officers.

REPSONDENTS: argued that the purchases on credit were simulated and fraudulent

since there was no delivery of the ₱7M worth of notebooks and other paper products. 24

As to the loan transactions, these were the personal obligations of Tan and Uy to

Advance Paper. These loans were never intended to benefit the Arma; the loan
transactions were ultra vires because the board of directors of Arma Traders did not
issue a board resolution authorizing Tan and Uy to obtain the loans from Advance
Paper. When the acts of the corporate officers are ultra vires, the corporation is not
liable for whatever acts that these officers committed in excess of their authority. 

RTC---

ruled that the purchases on credit and loans were sufficiently proven by the petitioners.
Hence, the RTC ordered Arma Traders to pay Advance Paper the sum of ₱15,321,798.25
with interest, and ₱1,500,000.00 for attorney’s fees, plus the cost of the suit.

CA---

Arma Traders was not liable for the loan in the absence of a board resolution
authorizing Tan and Uy to obtain the loan from Advance Paper. 39 

Hence, the CA set aside the RTC’s order for Arma Traders to pay Advance Paper

ISSUE: Whether Arma Traders is liable to pay the loans applying the doctrine of
apparent authority.

RULING:

Arma Traders is liable to pay the

loans on the basis of the doctrine of
apparent authority.

The doctrine of apparent authority provides that a corporation will be estopped from
denying the agent’s authority if it knowingly permits one of its officers or any other
agent to act within the scope of an apparent authority, and it holds him out to the public
as possessing the power to do those acts.

13
WHEN NOT APPLICABLE: The doctrine of apparent authority does not apply if the
principal did not commit any acts or conduct which a third party knew and relied upon
in good faith as a result of the exercise of reasonable prudence. Moreover, the agent’s
acts or conduct must have produced a change of position to the third party’s detriment. 77

Sec. 23 of the Corporation Code: the power and responsibility to decide whether the
corporation should enter into a contract that will bind the corporation is lodged in the
board, subject to the articles of incorporation, bylaws, or relevant provisions of law. 

The board of directors may validly delegate some of its functions and
powers to officers, committees or agents. The authority of such individuals
to bind the corporation is generally derived from law, corporate bylaws or
authorization from the board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business.

[A]pparentauthority is derived not merely from practice. Its existence may

be ascertained through:

(1) the general manner in which the corporation holds out an officer or agent as having
the power to act or, in other words the apparent authority to act in general, with which it
clothes him; or

(2) the acquiescence in his acts of a particular nature, with actual or

constructive knowledge thereof, within or beyond the scope of his ordinary
powers. It requires presentation of evidence of similar act(s) executed
either in its favor or in favor of other parties. It is not the quantity of similar
acts which establishes apparent authority, but the vesting of a corporate
officer with the power to bind the corporation. [emphases and underscores
ours]

In the absence of a charter or bylaw provision to the contrary, the president

is presumed to have the authority to act within the domain of the general
objectives of its business and within the scope of his or her usual duties."81

In this case, Arma Traders’ Articles of Incorporation 82 provides that the

corporation may borrow or raise money to meet the financial requirements
of its business by the issuance of bonds, promissory notes and other evidence of
indebtedness. More importantly, the sole management of Arma Traders was
left to Tan and Uy and that he and the other officers never dealt with the
business and management of Arma Traders for 14 years. Since 1984 up to
the filing of the complaint against Arma Traders, its stockholders and
board of directors never had its meeting.83

Thus, Arma Traders bestowed upon Tan and Uy broad powers by allowing them to
transact with third persons without the necessary written authority from its non-
performing board of directors. Because of its own laxity in its business dealings, Arma
Traders is now estopped from denying Tan and Uy’s authority to obtain loan from
Advance Paper.

13.Terp Construction Corp. vs. Banco Filipino Savings Bank

G.R. No. 221771, Sept.18, 2019 Margarita Projects

FACTS:

1995,Terp Construction, Home Insurance Guaranty Corporation, and Planters

Development Bank (Planters Bank) agreed to raise funds through the issuance of bonds

14
worth P400 million called the Margarita Project Participation Certificates (Margarita
Bonds) to finance their housing and condominium project named Margarita.

It was agreed that Terp Construction would sell the Margarita Bonds and convey the
funds generated into an asset pool named the Margarita Asset Pool Formation and Trust
Agreement. Banco Filipino purchased Margarita Bonds for P100 million.

Terp Construction began constructing Margarita house project. After the economic
crisis in 1997, however, it suffered unrealized income and could not proceed with the
construction.7

When the Margarita Bonds matured, the funds in the asset pool were insufficient to pay
the bond holders. Planters Bank conveyed the asset pool funds to Home Insurance
Guaranty Corporation, which then paid Banco Filipino interest earnings of 8%.

Banco Filipino, however, sent Terp Construction a demand letter, alleging that it was
entitled to a 15.5% interest on its investment and it was entitled to a seven percent (7%)
remaining unpaid interest.8 Terp Construction refused to pay the demanded interest.9

Terp Construction filed a Complaint for declaration of nullity of interest, damages,

and attorney's fees against Banco Filipino. It alleged that it only agreed to pay the seven
percent (7%) additional interest on the condition that all the asset pool funds would be
released to Terp Construction for it to pay the additional interest. However, it could not
have paid the additional interest since the funds of the asset pool were never released to
it.10

Banco Filipino, on the other hand, alleged that it was induced into buying the
Margarita Bonds after Terp Construction, through its senior vice president's
letters, committed to pay 15.5% interest on a P50 million bond that Banco
Filipino held for a client and 16.5% interest on a P50 million bond it held for
another client. It alleged that Terp Construction paid the additional interest twice
during the Margarita Bonds' holding period.11

RTC--- ruled in favor of Terp Construction. It found that there was no evidence to show
that Terp Construction was obligated to pay the interest differentials, and that the act of
Escalona, the senior vice president, were not binding on the corporation since they were
not ratified.14

CA--- rendered a Decision16 setting aside the Regional Trial Court Decision and ordering
Terp Construction to pay Banco Filipino interest differentials of 18M; both parties
agreed that Terp Construction would pay Banco Filipino additional interest other than
the guaranteed 8.5%.

Terp argues that it was not liable for the payment of interest differentials since there was
no written contract between the parties on any additional payment beyond the
stipulated 8.5%.24 It asserts that Escalona's acts as then senior vice president cannot
bind the corporation since he was not authorized to make such commitments.

Banco Filipino maintains that Escalona's acts as then senior vice president were
subsequently ratified by the Board of Directors when petitioner paid respondent
additional interests during the Margarita Bonds' term.29

ISSUE: WON Terp Construction Corporation expressly agreed to be bound to Banco

Filipino for additional interest in the bonds it purchased.

RULING:

Petitioner categorically committed itself to pay respondent over and above the
guaranteed interest of 8.5% per annum.

15
Relevant portions of the letters sent by its then Senior Vice President Escalona to
respondent, as reproduced in the Court of Appeals Decision read:

[February 3, 1997 letter]:

. . . We hereby commit a guaranteed floor rate of 16.5% as project

proponent. This would commit us to pay the differential interest earnings to be paid
by Planters Development Bank as Trustee every 182 days from purchase date of period
of three (3) years until maturity date....

[April 8, 1997 letter]:

Terp Construction commit (sic) that the yield to you for this investment is 15.5%. The
difference between the yield approved by the Project Governing Board will be paid for
by, Terp Construction Corp.42

Terp does not deny that it paid respondent the additional interest during the Margarita
Bonds' holding period, not just once, but twice.

A corporation exercises its corporate powers through its board of directors. 43 This power
may be validly delegated to its officers, committees, or agencies. "The authority of such
individuals to bind the corporation is generally derived from law, corporate bylaws or
authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business[.]"44

The authority of the board of directors to delegate its corporate powers may either be:
(1) actual; or (2) apparent.45

Actual authority may be express or implied.

Express actual authority refers to the corporate powers expressly delegated by

the board of directors.

Implied actual authority, on the other hand, "can be measured by his or her
prior acts which have been ratified by the corporation or whose benefits
have been accepted by the corporation."46

Terp's subsequent act of twice paying the additional interest Escalona

committed to during the term of the Margarita Bonds is considered a
ratification of Escalona's acts. Corporations are bound by errors of their own
making.

Escalona likewise had apparent authority to transact on behalf of petitioner.

Apparent authority is ascertained through:

(1) the general manner by which the corporation holds out an officer or agent as having
power to act or, in other words, the apparent authority with which it clothes him to act
in general, or (2) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or without the scope of his ordinary
powers.50 (Citation omitted)

Here, Banco Filipino relied on Escalona's apparent authority to promise interest

payments over and above the guaranteed 8.5%, considering that Escalona was
petitioner's then senior vice president. His apparent authority was further demonstrated
by petitioner paying respondent what Escalona promised during the Margarita Bonds'
term.

It should likewise be noted that at the time this Petition was filed, Escalona signed the
Verification and Certification51 as the president of the corporation, signifying that

16
petitioner did not consider his alleged unauthorized acts as fatal to his continued
involvement in corporate affairs.

Trust Fund Doctrine / TFD

14.Donnina C. Halley vs. Printwell, Inc.,

G.R. No. 157549, May 30, 2011

FACTS:

Doctrine: It is established doctrine that subscriptions to the capital of a corporation

constitute a fund to which creditors have a right to look for satisfaction of their claims
and that the assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts. Stockholders of a
corporation are liable for the debts of the corporation up to the extent of their unpaid
subscriptions. They cannot invoke the veil of corporate identity as a shield from liability,
because the veil may be lifted to avoid defrauding corporate creditors.

Facts:

The petitioner was an incorporator and original director of Business Media Philippines,
Inc. (BMPI), which, at its incorporation on November 12, 1987,had an authorized capital
stock of ₱3,000,000.00 divided into 300,000 shares each with a par value of ₱10.00,of
which 75,000 were initially subscribed by the petitioner and other subscribers. Printwell
engaged in commercial and industrial printing.

BMPI commissioned Printwell for the printing of the magazine Philippines, Inc.
(together with wrappers and subscription cards) that BMPI published and sold. For that
purpose, Printwell extended 30-day credit accommodations to BMPI. In the period from
October 11, 1988 until July 12, 1989, BMPI placed with Printwell several orders on
credit, evidenced by invoices and delivery receipts totalling₱316,342.76. Considering
that BMPI paid only ₱25,000.00, Printwell sued BMPI on January 26, 1990 for the
collection of the unpaid balance of ₱291,342.76 in the RTC.

On February 8, 1990,Printwell amended the complaint in order to implead as

defendants all the original stockholders and incorporators including the petitioner to

17
recover on their unpaid subscriptions. The defendants filed a consolidated answer,
averring that, among others, they all had paid their subscriptions in full and that BMPI
had a separate personality from those of its stockholders.

The RTC rendered a decision in favor of Printwell.Applying the trust fund doctrine, the
RTC declared the defendant stockholders liable to Printwell.

The CA concurred with the RTC on the applicability of the trust fund doctrine, under
which corporate debtors might look to the unpaid subscriptions for the satisfaction of
unpaid corporate debts. The petitioner argues that the trust fund doctrine was
inapplicable because she had already fully paid her subscriptions to the capital stock of
BMPI. She thus insists that both lower courts erred in disregarding the evidence on the
complete payment of the subscription, like receipts, income tax returns, and relevant
financial statements.

Issue/s: IS THE TRUST FUND DOCTRINE APPLICABLE IN THE INSTANT CASE?

Held: YES.

The trust fund doctrine enunciates a – xxx rule that the property of a corporation is a
trust fund for the payment of creditors, but such property can be called a trust fund ‘only
by way of analogy or metaphor.’ As between the corporation itself and its creditors it is a
simple debtor, and as between its creditors and stockholders its assets are in equity a
fund for the payment of its debts. The trust fund doctrine, first enunciated in the
American case of Wood v. Dummer,was adopted in our jurisdiction in Philippine Trust
Co. v. Rivera,where this Court declared that: It is established doctrine that subscriptions
to the capital of a corporation constitute a fund to which creditors have a right to look
for satisfaction of their claims and that the assignee in insolvency can maintain an
action upon any unpaid stock subscription in order to realize assets for the payment of
its debts. (Velasco vs. Poizat, 37 Phil., 802) xxx

We clarify that the trust fund doctrine is not limited to reaching the stockholder’s
unpaid subscriptions. The scope of the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also other property and assets generally
regarded in equity as a trust fund for the payment of corporate debts.All assets and
property belonging to the corporation held in trust for the benefit of creditors that were
distributed or in the possession of the stockholders, regardless of full payment of their
subscriptions, may be reached by the creditor in satisfaction of its claim.

Also, under the trust fund doctrine, a 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, without a valuable consideration, or fraudulently, to the prejudice of
creditors.

The creditor is allowed to maintain an action upon any unpaid subscriptions and
thereby steps into the shoes of the corporation for the satisfaction of its debt. To make
out a prima facie case in a suit against stockholders of an insolvent corporation to
compel them to contribute to the payment of its debts by making good unpaid balances
upon their subscriptions, it is only necessary to establish that the stockholders have not

18
in good faith paid the par value of the stocks of the corporation

Board of Directors/Power of the BOD

15.ValleVerde Country Club, Inc. vs. Victor Africa

G.R. No. 151969, Sept. 4, 2009 HOLD OVER CAPACITY

The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood
for election, and who have actually been elected by the stockholders, on an
annual basis. Only in that way can the directors' continued accountability to
shareholders, and the legitimacy of their decisions that bind the corporation's
stockholders, be assured. The shareholder vote is critical to the theory that
legitimizes the exercise of power by the directors or officers over properties that
they do not own

FACTS:

On February 27, 1996, during the Annual Stockholders’ Meeting of petitioner Valle
Verde Country Club, Inc. (VVCC), the VVCC Board of Directors were elected including
Eduardo Makalintal (Makalintal) among others. In the years 1997-2001 / 5 years,
however, the requisite quorum for the holding of the stockholders’ meeting could not be
obtained.

Consequently, the directors continued to serve in the VVCC Board in a hold-over

capacity. Later, Makalintal resigned as member of the VVCC Board. He was replaced by
Jose Ramirez (Ramirez), who was elected by the remaining members of the VVCC Board
on March 6, 2001.

Respondent Africa (Africa), a member of VVCC, questioned the election of Ramirez as

members of the VVCC Board with the Regional Trial Court (RTC), respectively. Africa
claimed that a year after Makalintal’s election as member of the VVCC Board in 1996,
his [Makalintal’s] term – as well as those of the other members of the VVCC Board –
should be considered to have already expired.

Thus, according to Africa, the resulting vacancy should have been filled by the
stockholders in a regular or special meeting called for that purpose, and not by the
remaining members of the VVCC Board, as was done in this case.

The RTC and SEC ruled in favor of Africa. VVCC filed a petition for review on certiorari.

Issue/s:

1. Whether or not there is an expired term

2. Whether or not the remaining directors of a corporation’s Board, still constituting a

quorum, can elect another director to fill in a vacancy caused by the resignation of a
hold-over director. – NO

Held:

19
Petition is denied.

1. NO. “Term” time during which the officer may claim to hold the office as of right is
not affected by the holdover. It is fixed by statute and it does not change simply because
the office may have become vacant, nor because the incumbent holds over in office
beyond the end of the term due to the fact that a successor has not been elected and has
failed to qualify. “Tenure” is the term during which the incumbent actually holds office.
Section 23 of the Corporation Code provides that the term of BOD is only 1 year - in
which case is fixed and has expired (1 yr after 1996)

2. NO. The business and affairs of a corporation must be governed by a

board of directors whose members have stood for election, and who have
actually been elected by the stockholders, on an annual basis. Only in that way
can the directors' continued accountability to shareholders, and the legitimacy of their
decisions that bind the corporation's stockholders, be assured.

The shareholder vote is critical to the theory that legitimizes the exercise of power by the
directors or officers over properties that they do not own. When Section 23 of the
Corporation Code declares that “the board of directors…shall hold office for one (1) year
until their successors are elected and qualified,” we construe the provision to mean that
the term of the members of the board of directors shall be only for one year;
their term expires one year after election to the office.

The holdover period – that time from the lapse of one year from a member’s
election to the Board and until his successor’s election and qualification – is
not part of the director’s original term of office, nor is it a new term; the
holdover period, however, constitutes part of his tenure. Corollary, when an
incumbent member of the board of directors continues to serve in a holdover capacity, it
implies that the office has a fixed term, which has expired, and the incumbent is holding
the succeeding term.

When the remaining members of the VVCC Board elected Ramirez to

replace Makalintal, there was no more unexpired term to speak of, as
Makalintal’s one-year term had already expired. Pursuant to law, the
authority to fill in the vacancy caused by Makalintal’s leaving lies with the
VVCC’s stockholders, not the remaining members of its board of directors.
To assume – as VVCC does – that the vacancy is caused by Makalintal’s resignation in
1998, not by the expiration of his term in 1997, is both illogical and unreasonable. His
resignation as a holdover director did not change the nature of the vacancy;
the vacancy due to the expiration of Makalintal’s term had been created
long before his resignation.

16.Filipinas Port Services vs. Go

G.R. No. 161886, March 16, 2007

Doctrine: The Board of Directors has the power to create positions not provided for in
Filport’s bylaws since the board is the corporation’s governing body, clearly upholding
the power of its board to exercise its prerogatives in managing the business affairs of the
corporation.

20
Facts: Eliodor Cruz, a former president and a stockholder of Filipinas, in representation
of Filipinas Port, wrote a letter to the corporation’s Board of Directors questioning the
board’s creation of several positions with corresponding monthly remunerations.

The letter was not duly acted upon, prompting Cruz to file a derivative suit with the SEC.
Cruz argued that the power to create executive positions was not granted by the by-laws
to the board of directors.

Issue/s: WON the executive committee created by the board is illegal.

Held: No.

The governing body of a corporation is its board of directors. Section 23 of the

Corporation Code provides that unless otherwise provided therein, the
corporate powers of all corporations formed under the Code shall be
exercised, all business conducted and all property of the corporation shall
be controlled and held by a board of directors.

Thus, with the exception only of some powers expressly granted by law to stockholders
(or members, in case of non-stock corporations), the board of directors (or trustees, in
case of non-stock corporations) has the sole authority to determine policies, enter into
contracts, and conduct the ordinary business of the corporation within the scope of its
charter, i.e., its articles of incorporation, bylaws and relevant provisions of law. Verily,
the authority of the board of directors is restricted to the management of the regular
business affairs of the corporation, unless more extensive power is expressly conferred.

The concentration in the board of the powers of control of corporate business and of
appointment of corporate officers and managers is necessary for efficiency in any large
organization. Stockholders are too numerous, scattered and unfamiliar with the
business of a corporation to conduct its business directly.

And so the plan of corporate organization is for the stockholders to choose the directors
who shall control and supervise the conduct of corporate business. In the present case,
the board’s creation of the positions of Assistant Vice Presidents for Corporate Planning,
Operations, Finance and Administration, and those of the Special Assistants to the
President and the Board Chairman, was in accordance with the regular business
operations of Filport as it is authorized to do so by the corporation’s by-laws, pursuant
to the Corporation Code.

The election of officers of a corporation is provided for under Section 25 of the Code
which reads:

Sec. 25. Corporate officers, quorum. – Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director, a secretary who shall be a

21
resident and citizen of the Philippines, and such other officers as may be provided for in
the by-laws. In turn, the amended Bylaws of Filport provides the following: Officers of
the corporation, as provided for by the by-laws, shall be elected by the board of directors
at their first meeting after the election of Directors. The officers of the corporation shall
be a Chairman of the Board, President, a Vice-President, a Secretary, a Treasurer, a
General Manager and such other officers as the Board of Directors may from time to
time provide, and these officers shall be elected to hold office until their successors are
elected and qualified.

Likewise, the fixing of the corresponding remuneration for the positions in question is
provided for in the same by-laws of the corporation, Unfortunately, the bylaws of the
corporation are silent as to the creation by its board of directors of an executive
committee. Under Section 35 of the Corporation Code, the creation of an executive
committee must be provided for in the bylaws of the corporation.

Notwithstanding the silence of Filport’s bylaws on the matter, the creation

of the executive committee by the board of directors is NOT illegal or
unlawful. One reason is the absence of a showing as to the true nature and functions of
said executive committee considering that the "executive committee," referred to in
Section 35 of the Corporation Code which is as powerful as the board of directors and in
effect acting for the board itself, should be distinguished from other committees which
are within the competency of the board to create at anytime and whose actions require
ratification and confirmation by the board.

Another reason is that, ratiocinated by both the two (2) courts below, the Board of
Directors has the power to create positions not provided for in Filport’s
bylaws since the board is the corporation’s governing body, clearly
upholding the power of its board to exercise its prerogatives in managing
the business affairs of the corporation.

17. AGO Realty &Dev.Corp. (ARDC) vs. Dr. Angelita F. Ago, et. al.,

G.R. No. 210906, October 16, 2019

NO BOARD RESO- - NOT DERIVATIVE SUIT

FACTS:

Ago Realty is a close corporation. Its SHs are Petitioners Emmanuel Ago et al (wife
and children of Emmanuel). Angelita Ago, sister of Emmanuel and one of the SHs,
introduced improvement on the parcel of land titled in the name of ARDC, this was
done without the proper resolution from the BOD.

As such, ARDC and Emmanuel et al filed a complaint before the RTC against
Angelita with some local officials of Legazpi City who allegedly participated on the
said improvements.

Angelita: Admitted introducing improvements on the said lots.

-She alleged that Emmanuel and his wife Corazon, before leaving for US, entrusted
to her the management of ARDC’s properties.

-She thus took control of the corporation’s properties.

22
 -She also argued that ARDC never authorized the institution of the suit because there
was no resolution from the BOD authorizing the filing of the complaints, hence,
Emmanuel et al had no legal standing to bring the case since the lot in question
belonged to ARDC.

RTC: dismissed the complaint on the ground that the properties belonged to ARDC
hence, Emmanuel et al., in their individual capacities, were not the real parties in
interest. CA affirmed RTC.

Emmanuel et al: argue that they have the right to file a derivative suit on behalf of
ARDC since the corp was the victim of the wrong committed by Angelita.

ISSUE: WON Emmanuel et al may sue on behalf of ARDC absent resolution from its
BOD sanctioning the institution of the case

RULING: NO.

One of the powers granted by law to a corporation is the power to sue. The power to
sue is lodged in the BODs, acting as a collegial body. Thus, in the absence of any
clear authority from the board, charter, or by-laws, no suit may be maintained on
behalf of the corporation. A case instituted by a corporation without authority from
is BOD is subject to dismissal on the ground of failure to state a cause of action.

However, there is an exception known as derivative suits.

The minority SHs may bring suits on behalf of corporation. Where the BOD itself is a
party to the wrong, either because it is the author thereof or because it refuses to take
remedial action, equity permits individual SHs to seek redress.

In DS, it is the corporation that is the victim of the wrong.

The corporation is the real party in interest while the SH is merely a nominal party.

The corporation must be impleaded so that the benefits of the suit accrue to it and
also because it must be barred from bringing a subsequent case against the same
defendants for the same cause of action.

The right of SH to bring DS is not based on any provision of Corp Code, but it is a
right that is implied by the fiduciary duties that directors owe corps and SHs. DSs are
not grounded on law but on equity.

A board resolution is not needed for the institution of D.S. WHY? Since the BOD is
guilty of breaching the trust reposed in it by the SH, it is but logical to dispense with
the requirement of obtaining from it authority to institute the case.

Requisites of DSs: (Sec. 8 Interim Rules of Procedure for Intra Corp Controversies:

A SH or member may bring an action in the name of the corporation provided that:

1. He/she was a SH at the time the acts or transactions complained of occurred

AND at the time the action was filed;
2. He/she exerted all reasonable efforts, and alleges the same with particularity in
the complaint, he/she exhausted all remedies available under the AOI, by laws,
laws to obtain the reliefs he desires;
3. No appraisal rights are available for the acts complained of;
4. And The suit is not a nuisance or harassment suit.

Before instituting a DS, the SH must exert all reasonable efforts to exhaust all remedies.

23
In this case, the second requisite is absent. Emmanuel et al failed to prove that they have
exhausted the remedies available to them. Even though they alleged that they invited
Angelita to a meeting to amicably settle the dispute and Angelita walked out before the
meeting started, such effort cannot be considered all reasonable efforts to exhaust all
remedies available.

Also, Emmanuel et al could have resorted to cause ARDC itself, through its BOD to
directly institute the case. But this could not happen in this case because ARDC did not
have a BODs. ARDC’s SHs never had a meeting to elect its BODs. Their failure to elect a
board ultimately resulted in their failure to exhaust all legal remedies to obtain relief
they desire.

Even if Emmanuel was the President of the Corp, he still cannot file a DS in behalf of the
corp because the law requires that the president of a corporation to concurrently hold
office as a director. But there was BOD to speak of in this case.

Corporate Officer / Liability of Corporate Officer

18.MatlingInd’land Commercial Corp., et. al.VS Ricardo R. Coros

19.
G.R. No. 157802 Oct. 13, 2010

Doctrine: The corporate officers enumerated in the by-laws are the exclusive Officers of
the corporation and the Board has no power to create other Offices without amending
first the corporate By-laws. However, the Board may create appointive positions other
than the positions of corporate Officers, but the persons occupying such positions are
not considered as corporate officers within the meaning of Section 25 of the Corporation
Code and are not empowered to exercise the functions of the corporate Officers, except
those functions lawfully delegated to them. Their functions and duties are to be
determined by the Board of Directors/Trustees.

Facts:

RespondentCoros was the former VP of Finance and Administration ofMatling

but was eventually dismissed. He filed a case for illegal dismissal and against Matling
and its officers.

The petitioners moved to dismiss the complaint raising the ground, among
others, that the complaint pertained to the jurisdiction of the Securities and Exchange
Commission (SEC) due to the controversy being intra-corporate inasmuch as the
respondent was a member of Matling’s Board of Directors aside from being its Vice-
President for Finance and Administration prior to his termination.

The Coros opposed the petitioners’ motion to dismiss, insisting that his status as a
member of Matling’s Board of Directors was doubtful, considering that he had not been
formally elected as BOD. Also, even assuming that he had been a Director of Matling, he
had been removed as the Vice President for Finance and Administration, not as a
Director.

24
Issue/s:

WON the respondent’s position as Vice President for Finance and Administration was a corporate
office.

Held: No.

Section 25 of the Corporation Code partly provides: Section 25. Corporate

officers, quorum.--Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall
be a director, a treasurer who may or may not be a director, a secretary who
shall be a resident and citizen of the Philippines, and such other officers as
may be provided for in the by-laws.

Any two (2) or more positions may be held concurrently by the same
person, except that no one shall act as president and secretary or as
president and treasurer at the same time. Conformably with Section 25, a
position must be expressly mentioned in the By-Laws in order to be
considered as a corporate office.

Thus, the creation of an office pursuant to or under a By-Law enabling

provision is not enough to make a position a corporate office.The only
officers of a corporation were those given that character either by the
Corporation Code or by the By-Laws; the rest of the corporate officers could
be considered only as employees or subordinate officials.

An "office" is created by the charter of the corporation and the officer is

elected by the directors or stockholders.

On the other hand, an employee occupies no office and generally is

employed not by the action of the directors or stockholders but by the
managing officer of the corporation who also determines the compensation
to be paid to such employee.

Section 25 plainly states that the corporate officers are the President, Secretary,
Treasurer and such other officers as may be provided for in the By-Laws.

Accordingly, the corporate officers in the context of PD No. 902-A are exclusively those
who are given that character either by the Corporation Code or by the corporation’s By-
Laws. A different interpretation can easily leave the way open for the Board of Directors
to circumvent the constitutionally guaranteed security of tenure of the employee by the
expedient inclusion in the By-Laws of an enabling clause on the creation of just any
corporate officer position.

Thus, pursuant to Section 25, whoever are the corporate officers enumerated in the by-
laws are the exclusive Officers of the corporation and the Board has no power to create
other Offices without amending first the corporate By-laws.

However, the Board may create appointive positions other than the positions
of corporate Officers, but the persons occupying such positions are not
considered as corporate officers within the meaning of Section 25 and are
not empowered to exercise the functions of the corporate Officers, except
those functions lawfully delegated to them.

25
Their functions and duties are to be determined by the Board of Directors/Trustees.
Moreover, the Board of Directors of Matling could not validly delegate the power to
create a corporate office to the President, in light of Section 25 requiring the Board of
Directors itself to elect the corporate officers.

Verily, the power to elect the corporate officers was a discretionary power
that the law exclusively vested in the Board of Directors, and could not be
delegated to subordinate officers or agents.

The office of Vice President for Finance and Administration created by

Matling’s President pursuant to By Law No. V was an ordinary, not a
corporate, office.

19.Leslie Okol vs. Slimmers World International, et al.,

G.R. No. 160146, December 11, 2009

Doctrine: An “office” is created by the charter of the corporation and the officer is
elected by the directors or stockholders, while an “employee” usually occupies no office
and generally is employed not by action of the directors or stockholders but by the
managing officer of the corporation who also determines the compensation to be paid to
such employee.

Facts:

Respondent Slimmers World International employed petitioner Leslie Okol as a

management trainee in 1992. She rose up the ranks to become Head Office Manager and
then Director and Vice President from 1996 until her dismissal in 1999. Prior to Okol’s
dismissal, Slimmers World preventively suspended Okol.

The suspension arose from the seizure by the Bureau of Customs of elliptical machines
and treadmills belonging to or consigned to Slimmers World. The shipment of the
equipment was placed under the names of Okol and two customs brokers for a value less
than US$500.

For being undervalued, the equipment were seized. Slimmers World found Okol’s
explanation to be unsatisfactory. Through a letter signed by its president Ronald Joseph
Moy, Slimmers World terminated Okol’s employment. Okol filed a complaint with the
NLRC against the respondents for illegal suspension, illegal dismissal, unpaid
commissions, damages and attorney’s fees, with prayer for reinstatement and payment
of backwages.

The labor arbiter granted the motion to dismiss of respondents. The labor arbiter ruled
that Okol was the vice-president of Slimmers World at the time of her dismissal. Since it
involved a corporate officer, the dispute was an intra-corporate controversy falling

26
outside the jurisdiction of the Arbitration branch. Okol filed an appeal with the NLRC
which reversed and set aside the labor arbiter’s order.

Issue:

whether Okol was an employee or a corporate officer of Slimmers

World

Held:

Okol was a corporate officer of Slimmers World. The Supreme Court ruled that an
“office” is created by the charter of the corporation and the officer is elected by the
directors or stockholders.

On the other hand, an “employee” usually occupies no office and generally is employed
not by action of the directors or stockholders but by the managing officer of the
corporation who also determines the compensation to be paid to such employee.

In the respondent’s motion to dismiss filed before the labor arbiter, respondents
attached the General Information Sheet, Minutes of the meeting of the Board of
Directors and Secretary’s Certificate, and the Amended By-Laws of Slimmers World as
submitted to the SEC to show that Okolwas a corporate officer whose rights do not fall
within the NLRC’s jurisdiction.

The GIS and minutes of the meeting of the board of directors indicated that Okolwas a
member of the board of directors, holding one subscribed share of the capital stock, and
an elected corporate officer. Clearly, from the documents submitted by respondents,
Okol was a director and officer of Slimmers World.

The charges of illegal suspension, illegal dismissal, unpaid commissions, reinstatement

and back wages imputed by petitioner against respondents fall squarely within the
ambit of intra-corporate disputes. A corporate officer’s dismissal is always a corporate
act, or an intra-corporate controversy which arises between a stockholder and a
corporation.

The question of remuneration involving a stockholder and officer, not a mere employee,
is not a simple labor problem but a matter that comes within the area of corporate
affairs and management and is a corporate controversy in contemplation of the
Corporation Code.

The determination of the rights of a director and corporate officer dismissed from his
employment as well as the corresponding liability of a corporation, if any, is an intra-
corporate dispute subject to the jurisdiction of the regular courts. Thus, the appellate
court correctly ruled that it is not the NLRC but the regular courts which have
jurisdiction over the present case.

20. Gloria V. Gomez vs. PNOC Dev. and Mngt. Corp. (PDMC),
G.R. No. 174044, Nov. 27, 2009

Doctrine: The relationship of a person to a corporation, whether as officer or agent or

employee, is not determined by the nature of the services he performs but by the
incidents of his relationship with the corporation as they actually exist.

Facts:

27
In 1994, petitioner Gloria V. Gomez was appointed by PNOC Development Management
Corporation (PDMC) [formerly Filoil Refinery Corporation (Filoil)] as its corporate
secretary and legal counsel and later re-hired as administrator and legal counsel.

In 1998, the next president extended her term as administrator beyond her retirement
age.

In 1999, the new board of directors removed her as corporate secretary and questioned
her continued employment as administrator. The board sought advice from its legal
department which expressed that Gomez’s term extension was an ultra vires act of the
former president.

It reasoned that since her position was functionally that of a vice-president or general
manager, her term could only be extended under the company’s by-laws only with the
approval of the board.

Eventually, the board decided to terminate her services retroactive to the date of her
retirement. Petitioner filed a complaint against PDMC for illegal dismissal, nonpayment
of wages, damages, and attorney’s fees with the Labor Arbiter.

The Labor Arbiter granted PDMC’s motion to dismiss upon a finding that Gomez was a
corporate officer and that her case involved an intra-corporate dispute that fell under
the jurisdiction of the SEC (now under the jurisdiction of the RTC pursuant to R.A. No.
8799).

The NLRC set aside the Labor Arbiter’s decision and held that Gomez was a regular
employee, not a corporate officer; hence, her complaint came under the jurisdiction of
the Labor Arbiter.

The CA rendered a decision reversing the NLRC decision and held that since Gomez’s
appointment as administrator required the approval of the board of directors, she was
clearly a corporate officer. Thus, her complaint is within the jurisdiction of the RTC.

Issue: Whether or not petitioner Gomez was a corporate officer.

Held:

Petitioner Gomez was not a corporate officer.

Ordinary company employees are generally employed not by action of the directors and
stockholders but by that of the managing officer of the corporation who also determines
the compensation to be paid such employees;

Corporate officers, on the other hand, are elected or appointed by the directors or
stockholders, and are those who are given that character either by the Corporation Code
or by the corporation’s by-laws.

Here, it was the PDMC president who appointed petitioner Gomez administrator, not its
board of directors or the stockholders. The president alone also determined her
compensation package.

Moreover, the administrator was not among the corporate officers mentioned in the
PDMC by-laws.

28
As to the claim if PDMC that Gomez was performing functions that were similar to those
of its vicepresident or its general manager (corporate positions mentioned in the by-
laws of PDMC), the Supreme Court ruled that relationship of a person to a corporation,
whether as officer or agent or employee, is not determined by the nature of the services
he performs but by the incidents of his relationship with the corporation as they actually
exist.

Here, respondent PDMC hired petitioner Gomez as an ordinary employee without board
approval as was proper for a corporate officer.

What is more, respondent PDMC enrolled petitioner Gomez with the Social Security
System, the Medicare, and the Pag-Ibig Fund. It even issued certifications stating that
Gomez was a permanent employee and that the company had remitted combined
contributions during her tenure.

The company also made her a member of the PDMC’s savings and provident plan and its
retirement plan. It grouped her with the managers covered by the company’s group
hospitalization insurance. Likewise, she underwent regular employee performance
appraisals, purchased stocks through the employee stock option plan, and was entitled
to vacation and emergency leaves.

PDMC even withheld taxes on her salary and declared her as an employee in the official
BIR forms. These are all indicia of an employer-employee relationship which
respondent PDMC failed to refute. In addition, that petitioner Gomez served
concurrently as corporate secretary for a time is immaterial. A corporation is not
prohibited from hiring a corporate officer to perform services under circumstances
which will make him an employee. Indeed, it is possible for one to have a dual role of
officer and employee.

21.Rodolfo Laborte, et al. v. Pagsanjan Tourism Consumers’ Coop.,

PINASARA NA RESTO

et al., G.R. No. 183860, Jan. 15, 2014

Doctrine: “The officer cannot be held personally liable with the corporation, whether
civilly or otherwise, for the consequences of his acts, if acted forand in behalf of the
corporation, within the scope of his authority and in good faith.

Facts:

Petitioner Philippine Tourism Authority (PTA) is a government-owned and controlled

corporation that administers tourism zones.It administers PTA Complex, a declared
tourist zone in Pagsanjan, Laguna.

Respondent Pagsanjan Tourism Consumers' Cooperative (PTCC) is an organized

cooperative and other individual respondents are PTCC employees, consisting of
restaurant staff and boatmen at the PTA Complex.

29
In order to help PTCC, the PTA allowed it to operate a restaurant business located at the
main building of the PTA Complex and the boat ride services to ferry guests and tourists
to and from the Pagsanjan Falls, paying a certain percentage of its earnings to the PTA.

Herein petitioner Rodolfo Laborte (Laborte) was designated as Area Manager,

CALABARZON area with direct supervision over the PTA Complex and other entities at
the Southern Luzon.

However,Laborte, the Area Manager of CALABARZON assigned to directly supervise

the PTA Complex, served a written notice upon the PTCC to cease the operations of the
latter's restaurant business and boat ride services in view of the rehabilitation,
facelifting and upgrading project of the PTA Complex.

PTCC filed with the RTCa Complaint for Prohibition, Injunction and Damages with
Temporary Restraining Order (TRO) and Preliminary Injunction against Laborte.

The trial court issued the TRO prayed for, prohibiting Laborte from (a) causing the
PTCC to cease operations; (b) doing the threatened act of closing the operation of the
PTCC's restaurant and other activities; (c) evicting the PTCC's restaurant from the main
building of the PTA Complex; and (d) demolishing the said building. In the same Order,
the trial court set the hearing on the Writ of Preliminary Injunction on November 25,
1993.

Laborte averred that the PTCC does not own the restaurant facility as it was only
tolerated to operate the same by the PTA as a matter of lending support and assistance
to the cooperative in its formative years. It has neither been granted any franchise nor
concession to operate the restaurant nor any exclusive franchise to handle the boating
operations in the complex.

Since the PTCC had no contract, concession, or exclusive franchise to operate the
restaurant business and the boating services in the PTA Complex, no existing right has
been allegedly violated by the petitioners.

It alleged that Laborte and his lawyers defied the TRO and proceeded to close the
restaurant on December 2, 1993.

On March 14, 1994, the individual respondents, Fabricio et al., who are employees and
boatmen of the PTCC, filed a Complaint-in-Intervention against Laborte. They stated
that they were rendered jobless and were deprived of their livelihood because Laborte
failed to heed the trial court's TRO.

Thus, they prayed that the trial court order Laborte to pay their unearned salaries,
among others.

Issue: Whether or not Laborte is liable.

Ruling:

No. The Court finds that Laborte was simply implementing the lawful order of the PTA
Management.

As a general rule "the officer cannot be held personally liable with the corporation,
whether civilly or otherwise, for the consequences of his acts, if acted for and in behalf of
the corporation, within the scope of his authority and in good faith." Furthermore, the
Court also notes that the charges against petitioners Laborte and the PTA for grave
coercion and for the violation of R.A. 6713 have all been dismissed. Thus, the Court finds
no basis to hold petitioner Laborte liable.

22. Harpoon Marine Services, Inc., et al. v. Fernan H. Francisco

G.R. No. 167751, March 2, 2011

30
FACTS:

Fernan Francisco was hired by Harpoon, a company engaged in ship building and
repair. Francisco was the Yard Supervisor and tasked to oversee and supervise all
project of the company.

Francisco filed an illegal dismissal case against Harpoon and its CEO Rosit. He alleged
that he was dismissed by Rosot and informed him that the company could no longer
afford his salary and that he would be paid his separation pay and accrued commissions.
He allegedly continued going to work but was later on barred from entering the
company premises. He refused to accept the separation pay and declined to sign the
quitclaim.

Respondents aver that his dismissal was valid because of his habitual absenteeism and
abandonment of work.

The LA dismissed the complaint but was later on overturned by the NLRC.

NLRC ruled that Francisco was illegally dismissed and Harpoon and Rosit are liable to
pay his monetary claims.

Petitioners insist that petitioner Rosit, being an officer of the company, has a personality
distinct from that of petitioner Harpoon and that no proof was adduced to show that he
acted with malice or bad faith hence no liability, solidary or otherwise, should be
imposed on him.

ISSUE: WON Rosit is liable

RULING: NO

Rosit could not be held solidarily liable with Harpoon for lack of
substantial evidence of bad faith and malice on his part in terminating
Francisco.

The obligations incurred by [corporate officers], acting as such corporate agents, are not
theirs but the direct accountabilities of the corporation they represent." 34 As such, they
should not be generally held jointly and solidarily liable with the corporation.

The Court, however, cited circumstances when solidary liabilities may be imposed, as
exceptions:

1. When directors and trustees or, in appropriate cases, the officers of a

corporation –

(a) vote for or assent to [patently] unlawful acts of the corporation;

(b) act in bad faith or with gross negligence in directing the corporate
affairs;

(c) are guilty of conflict of interest to the prejudice of the corporation, its
stockholders or members, and other persons.

2. When the director or officer has consented to the issuance of watered stock or
who, having knowledge thereof, did not forthwith file with the corporate
secretary his written objection thereto.

3. When a director, trustee or officer has contractually agreed or stipulated to

hold himself personally and solidarily liable with the corporation.

4. When a director, trustee or officer is made, by specific provision of law,

personally liable for his corporate action. 35

31
A corporation has a legal personality separate and distinct from the persons comprising
it.36 To warrant the piercing of the veil of corporate fiction, the officer’s bad faith or
wrongdoing "must be established clearly and convincingly" as "[b]ad faith is never
presumed."37

In this case, the records are bereft of any other satisfactory evidence that petitioner
Rosit acted in bad faith with gross or inexcusable negligence, or that he acted outside
the scope of his authority as company president. Indeed, petitioner Rosit informed
respondent that the company wishes to terminate his services since it could no longer
afford his salary. Moreover, the promise of separation pay, according to petitioners, was
out of goodwill and magnanimity.

At the most, petitioner Rosit’s actuations only show the illegality of the manner of
effecting respondent’s termination from service due to absence of just or valid cause and
non-observance of procedural due process but do not point to any malice or bad faith on
his part. Besides, good faith is still presumed. In addition, liability only attaches if the
officer has assented to patently unlawful acts of the corporation.

23. Mirant [Phils.] Corp., et al. v. Joselito A. Caro

G.R. No. 181490, April 23, 2014

Failed to attend drug test

Doctrine: A corporation has a personality separate and distinct from its officers and
board of directors.

Facts:

Mirant Phils Corp. is a holding company that owns shares in project companies such as
Mirant Sual Corporation and Mirant Pagbilao Corporation, which operate and maintain
power stations in Pangasinan and Quezon. Edgardo A. Bautista was the President.

Caro was hired by Mirant Pagbilao as its logistics officer. Then he became a
Procurement Supervisor.

Upon random drug testing of the employees of Mirant, Caro failed to submit himself for
drug testing because he received a phone call from his wife’s colleague in Tel Aviv,
Israel, informing him that there was a bombing incident near his wife’s work station.
That Respondent has to attend to this emergency incident.

For his failure to attend the drug testing, Mirant terminated his employment. Hence,
Caro filed an illegal dismissal case.

LA ruled in favor of Ca. NLRC overturned the ruling of the LA.

CA ruled in favor of Caro and ordered Mirant and Bautista jointly and severally reinstate

32
complainant to his former position without loss of seniority rights and to pay him back
wages, other benefits, moral and exemplary damages.

Issue: WON Edgardo A. Bautista, President of Petitioner Corporation be held

personally liable for respondent’s dismissal?

Ruling: NO

Both decisions of the Labor Arbiter and the CA did not discuss the basis of the personal
liability of petitioner Bautista.

A corporation has a personality separate and distinct from its officers and board of
directors who may only be held personally liable for damages if it is proven that they
acted with malice or bad faith in the dismissal of an employee.

Absent any evidence on record that petitioner Bautista acted maliciously or in bad faith
in effecting the termination of the respondent, plus the apparent lack of allegation in the
pleadings of respondent that petitioner Baustista acted in such manner, the doctrine of
corporate fiction dictates that only petitioner corporation should be held liable for illegal
dismissal of respondent.

24. Queensland-Tokyo Commodities, Inc., et al. vs. Thomas George, G.R. No.
172727, Sept. 8, 2010

Doctrine: Personal liability of a corporate director, trustee, or officer, along, although

not necessarily, with the corporation, may validly attach, as a rule,

only when —

1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad

faith or gross negligence in directing its affairs, or when there is a conflict of interest
resulting in damages to the corporation, its stockholders, or other persons;

2) he consents to the issuance of watered down stocks or who, having knowledge

thereof, does not forthwith file with the corporate secretary his written objection
thereto;

3) he agrees to hold himself personally and solidarily liable with the corporation; or

4) he is made by a specific provision of law personally answerable for his corporate

action.

Facts:

QTCI is a duly licensed broker engaged in the trading of commodity futures

(A commodity futures contract is an agreement to buy or sell a predetermined amount of
a commodity at a specific price on a specific date in the future. Commodity futures can be
used to hedge or protect an investment position or to bet on the directional move of the
underlying asset).

In 1995, Guillermo Mendoza, Jr. (Mendoza) and Oniler Lontoc (Lontoc) of QTCI met
with respondent Thomas George, encouraging the latter to invest with QTCI.

Collado, on behalf of QTCI, and George signed the Customer's Agreement. Forming part
of the agreement was the Special Power of Attorney executed by George, appointing
Mendoza as his attorney-in-fact with full authority to trade and manage his account.

The SEC issued a Cease-and-Desist Order against QTCI. Alarmed by the issuance of the
CDO, George demanded from QTCI the return of his investment, but it was not heeded.

He then sought legal assistance, and discovered that Mendoza and Lontoc were not

33
licensed commodity futures salesmen. Thus, he filed a complaint for Recovery of
Investment with Damages with the SEC against QTCI, Lau, and Collado, and against the
unlicensed salesmen, Mendoza and Lontoc.

SEC rendered a decision in favor of George and ordered QCTI, Lau and Collado to
jointly and severally pay George the amount of his investments plus interests and
damages.

Issue/s:

Whether or not Lau and Collado, corporate officers of QCTI are jointly and severally
liable with QCTI

Ruling: YES

A corporation is invested by law with a personality separate and distinct from those of
the persons composing it, such that, save for certain exceptions, corporate officers who
entered into contracts in behalf of the corporation cannot be held personally liable for
the liabilities of the latter. 

Personal liability of a corporate director, trustee, or officer, along (although not

necessarily) with the corporation, may validly attach, as a rule, only when

(1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad
faith or gross negligence in directing its affairs, or when there is a conflict of interest
resulting in damages to the corporation, its stockholders, or other persons;

(2)  he consents to the issuance of watered down stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;

(3) he agrees to hold himself personally and solidarily liable with the corporation; or

(4) he is made by a specific provision of law personally answerable for his corporate
action.[

Petitioners allowed unlicensed individuals to engage in, solicit or accept orders in

futures contracts. They did not object to, and in fact recognized, Mendoza's appointment
as respondent's attorney-in-fact.

Collado, in behalf of QTCI, concluded the Customer's Agreement despite the fact that

the appointed attorney-in-fact was not a licensed dealer. Worse, petitioners permitted
Mendoza to handle respondent's account.

Petitioners indeed permitted an unlicensed trader and salesman, like Mendoza, to

handle respondent's account.  On the other hand, the record is bereft of proof that
respondent had knowledge that the person handling his account was not a licensed
trader. Respondent can, therefore, recover the amount he had given under the contract. 
The SEC Hearing Officer and the CA, therefore, committed no reversible error in
holding that respondent is entitled to a full recovery of his investments.

Collado, who is not a licensed commodity salesman, himself violated the aforequoted
provisions of the Revised Rules and Regulations on Commodity Futures Trading when
he admitted having participated in the execution of the customers orders without giving
any exception thereto, which presumably includes his participation in the execution of
customers orders of the [respondent].

Such being the case, [Mendoza's] participation in the trading of [respondent's] account
is within the knowledge of [petitioner] Collado.

Romeo Lau, as president of QTCI, cannot feign innocence on the existence of these
unlawful activities within the company, especially so that Collado, himself a ranking

34
officer of QTCI, is involved in the unlawful execution of customers orders.  Lau, being
the chief operating officer, cannot escape the fact that had he exercised a modicum of
care and discretion in supervising the operations of QTCI, he could have detected and
prevented the unlawful acts of [petitioner] Collado and Mendoza.

It is therefore safe to conclude that although Lau may not have participated nor been
aware of the unlawful acts, he is however deemed to have been grossly negligence in
directing the affairs of QTCI.

In all, it having been established by substantial evidence that [petitioner] Collado

assented to the unlawful act of QTCI, and that [petitioner] Lau is grossly negligent in
directing the affairs of QTCI, and pursuant to Section 31 of the Corporation Code, they
are therefore, jointly and severally liable with QTCI for all the damages and awards due
to the [respondent].[23]

25. MARC II Marketing, Inc. vs. Alfredo M. Joson

G.R. No. 171993, Dec. 12, 2011

Doctrine: The corporation has a personality separate and distinct from its officers,
stockholders and members such that corporate officers are not personally liable for their
official acts unless it is shown that they have exceeded their authority. However, this
corporate veil can be pierced when the notion of the legal entity is used as a means to
perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation, and
to confuse legitimate issues

35
Facts:

Marc II Marketing, Inc. is a domestic corporation, primarily engaged in buying,

marketing, selling and distributing in retail or wholesale for export or import household
appliances and products and other items.

Lucila V. Joson (Lucila) is the President and majority stockholder of Marc II.
Respondent Alfredo M. Joson (Alfredo) was the General Manager, incorporator,
director and stockholder of Marc II.

Before Marc II was officially incorporated, Joson has already been engaged by
Lucila, in her capacity as President of Marc Marketing, Inc., to work as the General
Manager of Marc II.

It was formalized through the execution of a Management Contract under the

letterhead of Marc Marketing, Inc. as Marc II is yet to be incorporated at the time of its
execution.

It was explicitly provided therein that respondent shall be entitled to 30% of its
net income for his work as General Manager. Respondent will also be granted 30% of its
net profit to compensate for the possible loss of opportunity to work overseas.

Marc II decided to stop and cease its operations, as evidenced by an Affidavit of

Non-Operation16, due to poor sales collection aggravated by the inefficient management
of its affairs. On the same date, it formally informed respondent of the cessation of its
business operation.

Concomitantly, respondent was apprised of the termination of his services as

General Manager since his services as such would no longer be necessary for the
winding up of its affairs. Feeling aggrieved, respondent filed a Complaint for
Reinstatement and Money Claim against petitioners before the Labor Arbiter which.

In his complaint, respondent averred that petitioner Lucila dismissed him from
his employment with Marc II due to the feeling of hatred she harbored towards his
family.

Petitioners opted to file a Motion to Dismiss grounded on the Labor Arbiter’s lack
of jurisdiction as the case involved an intra-corporate controversy, which jurisdiction
belongs to the SEC [now with the Regional Trial Court (RTC).

Labor Arbiter rendered his Decision in favor of respondent. Respondent’s

money claim did not arise from his being a director or stockholder of petitioner
corporation but from his position as being its General Manager. The Labor Arbiter
likewise held that respondent was not a corporate officer under petitioner corporation’s
bylaws. As such, respondent’s complaint clearly arose from an employer-employee
relationship, thus, subject to the Labor Arbiter’s jurisdiction.

The NLRC ruled in favor of petitioners by giving credence to the Secretary’s

Certificate, which evidenced petitioner corporation’s Board of Directors’ meeting in
which a resolution was approved appointing respondent as its corporate officer with
designation as General Manager.

Issue/s: WHETHER OR NOT LUCILA BEING A PRESIDENT OF THE

CORPORATION IS SOLIDARY LIABLE WITH THE CORPORATION?

Held: Yes.

As a rule, corporation has a personality separate and distinct from its officers,
stockholders and members such that corporate officers are not personally liable for their
official acts unless it is shown that they have exceeded their authority.

36
 However, this corporate veil can be pierced when the notion of the legal entity is
used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of an
existing obligation, and to confuse legitimate issues.

Under the Labor Code, for instance, when a corporation violates a provision
declared to be penal in nature, the penalty shall be imposed upon the guilty officer or
officers of the corporation.

Based on the prevailing circumstances in this case, petitioner Lucila, being the
President of petitioner corporation, acted in bad faith and with malice in effecting
respondent’s dismissal from employment. Although petitioner corporation has a valid
cause for dismissing respondent due to cessation of business operations, however, the
latter’s dismissal therefrom was done abruptly by its President, petitioner Lucila.

Respondent was not given the required one-month prior written notice that
petitioner corporation will already cease its business operations. As can be gleaned from
the records, respondent was dismissed outright by petitioner Lucila on the
same day that petitioner corporation decided to stop and cease its business
operations. Worse, respondent was not given separation pay considering
that petitioner corporation’s cessation of business was not due to business
losses or financial reverses.

STOCKHOLDERS

26. Joselito Musni Puno vs Puno Enterprises et al

G.R. NO. 177066 9-11-2009
Anak sa labas claiming ng mana – death of a SH does not
automatically transfer his rights over his shares to his heirs

Doctrine: Upon the death of a shareholder, the heirs do not automatically

become stockholders of the corporation and acquire the rights and
privileges of the deceased as shareholder of the corporation.

FACTS:

Carlos L. Puno, who died on June 25, 1963, was an incorporator of

respondent Puno Enterprises, Inc. On March 14, 2003, petitioner Joselito
Musni Puno, claiming to be an heir of Carlos L. Puno, initiated a complaint
for specific performance against Puno Enterprises.

Petitioner Joselito Musni Puno averred that he is the son of the deceased
with the latter’s common-law wife, Amelia Puno. As surviving heir, he
claimed entitlement to the rights and privileges of his late father as
stockholder of respondent. The complaint thus prayed that respondent
allow petitioner to inspect its corporate book, render an accounting of all
the transactions it entered into from 1962, and give petitioner all the
profits, earnings, dividends, or income pertaining to the shares of Carlos L.
Puno.

Puno Ent., filed a motion to dismiss on the ground that Joselito Musni
Puno did not have the legal personality to sue because his birth certificate
names him as "Joselito Musni Muno."

Apropos, there was yet a need for a judicial declaration that "Joselito Musni
Puno" and "Joselito Musni Muno" were one and the same. RTC rendered a
decision ordering Jesusa Puno and/or Felicidad Fermin to allow the
37
plaintiff to inspect the corporate books and records of the company from
1962 up to the present including the financial statements of the
corporation.

On appeal, the CA ordered the dismissal of the complaint. Accordingly, the

CA said that petitioner had no right to demand that he be allowed to
examine respondent’s books. Moreover, petitioner was not a stockholder of
the corporation but was merely claiming rights as an heir of Carlos L. Puno,
an incorporator of the corporation.

Issue: Whether an heir of a deceased stockholder shall automatically be a

stockholder and shall in consequence acquire the rights and privileges of
the deceased stockholder of the corporation?

Held: NO.

Petitioner failed to establish the right to inspect respondent corporation’s

books and receive dividends on the stocks owned by Carlos L. Puno.

The stockholder’s right of inspection of the corporation’s books and records

is based upon his ownership of shares in the corporation and the necessity
for self-protection.

After all, a shareholder has the right to be intelligently informed about

corporate affairs. Such right rests upon the stockholder’s underlying
ownership of the corporation’s assets and property. Similarly, only
stockholders of record are entitled to receive dividends declared by the
corporation, a right inherent in the ownership of the shares.

Upon the death of a shareholder, the heirs do not automatically

become stockholders of the corporation and acquire the rights
and privileges of the deceased as shareholder of the corporation.
The stocks must be distributed first to the heirs in estate
proceedings, and the transfer of the stocks must be recorded in
the books of the corporation.

Section 63 of the Corporation Code provides that no transfer

shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation. During such interim
period, the heirs stand as the equitable owners of the stocks, the
executor or administrator duly appointed by the court being vested with the
legal title to the stock.

Until a settlement and division of the estate is effected, the stocks of the
decedent are held by the administrator or executor.

Consequently, during such time, it is the administrator or

executor who is entitled to exercise the rights of the deceased as
stockholder.

Thus, even if petitioner presents sufficient evidence in this case to establish

that he is the son of Carlos L. Puno, he would still not be allowed to inspect
respondent’s books and be entitled to receive dividends from respondent,

38
absent any showing in its transfer book that some of the shares owned by
Carlos L. Puno were transferred to him. This would only be possible if
petitioner has been recognized as an heir and has participated in the
settlement of the estate of the deceased.

The status of an illegitimate child who claims to be an heir to a decedent’s

estate cannot be adjudicated in an ordinary civil action, as in a case for the
recovery of property.

27. David Lao and Jose Lao vs Dionisio Lao

G.R. No. 170585 Oct 6, 2008
Certificates of Stocks and registration in the corporate books.

The mere inclusion as shareholder of petitioners in the General Information Sheet of

PFSC is insufficient proof that they are shareholders of the company. While it may be
true that petitioners were named as shareholders in the General Information Sheet
submitted to the SEC, that document alone does not conclusively prove that they are
shareholders of PFSC. The information in the document will still have to be correlated
with the corporate books of PFSC. As between the General Information Sheet and the
corporate books, it is the latter that is controlling. Mere inclusion in the General
Information Sheets as stockholders and officers does not make one a stockholder of a
corporation, for this may have come to pass by mistake, expediency or negligence.

Facts:

Petitioners David and Jose Lao filed a petition with SEC against respondent Dionisio
Lao, president of Pacific Foundry Shop Corporation (PFSC). Petitioners prayed for a
declaration as stockholders and directors of PFSC, issuance of certificates of shares in
their name and to be allowed to examine the corporate books of PFSC. Petitioners
claimed that they are stockholders of PFSC based on the General Information Sheet
(GIS) filed with the SEC, in which they are named as stockholders and directors of the
corporation.

Petitioner David Lao alleged that he acquired 446 shares in PFSC from his father, Lao
Pong Bao, which shares were previously purchased from a certain Hipolito Lao.
Petitioner Jose Lao, on the other hand, alleged that he acquired 333 shares from
respondent Dionisio Lao himself.

Respondent denied petitioners' claim. He alleged that the inclusion of their names in the
corporation's GIS was inadvertently made. He also claimed that petitioners did not
acquire any shares in PFSC by any of the modes recognized by law, namely subscription,
purchase, or transfer. Since they were neither stockholders nor directors of PFSC,
petitioners had no right to be issued certificates or stocks or to inspect its corporate
books.

On June 19, 2000, Republic Act 8799, otherwise known as the Securities Regulation
Code, was enacted, transferring jurisdiction over all intra-corporate disputes from the
SEC to the RTC.

The RTC denied the petition of David C. Lao and Jose C. Lao

On appeal, CA modified the decision of the trial court declaring that petitioners have
owned since 1987 shares of stock in PFSC, numbering 446 for petitioner-appellant
David C. Lao and 333 for petitionerappellant Jose C. Lao; ordering respondent-appellee
through the corporate secretary to issue to petitioners appellants the certificates of stock
for the aforementioned number of shares; ordering respondent-appellee, as President of
PFSC, to allow petitioners-appellants to exercise their rights as stock holders.

39
Issues: Is the mere inclusion as shareholder in the GIS of a corporation sufficient proof
that one is a shareholder in such corporation rendering petitioners as stockholders of
the PFSC?

Ruling: NO.

Petitioners failed to prove that they are shareholders of PSFC. Records, however,
disclose that petitioners have no certificates of shares in their name. A
certificate of stock is the evidence of a holder's interest and status in a corporation. It is
a written instrument signed by the proper officer of a corporation stating or
acknowledging that the person named in the document is the owner of a
designated number ofshares of its stock.

It is prima facie evidence that the holder is a shareholder of a corporation. Nor is there
any written document that there was a sale of shares, as claimed by petitioners.

Petitioners did not present any deed of assignment, or any similar instrument, between
Lao Pong Bao and Hipolito Lao; or between Lao Pong Bao and petitioner David Lao.

There is likewise no deed of assignment between petitioner Jose Lao and private
respondent Dionisio Lao. Absent a written document, petitioners must prove, at the very
least, possession of the certificates of shares in the name of the alleged seller. Again,
they failed to prove possession.

They failed to prove the due delivery of the certificates of shares of the sellers to them.

Section 63 of the Corporation Code provides:

Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president
or vice-president, countersigned by the secretary or assistant secretary, and sealed with
the seal of the corporation shall be issued in accordance with the bylaws. Shares of stock
so issued are personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books of the corporation so as to show
the names of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred. In contrast, respondent
was able to prove that he is the owner of the disputed shares.

He had in his possession the certificates of stocks of Hipolito Lao. The certificates of
stocks were also properly endorsed to him. More importantly, the transfer was duly
registered in the stock and transfer book of the corporation. Thus, as between the
parties, respondent has proven his right over the disputed shares. Dionisio C. Lao was
able to show through competent evidence that he is undeniably the owner of the
disputed shares of stocks being claimed by David C. Lao. He was able to validate that he
has the physical possession of the certificates covering the shares of Hipolito Lao.
Notably, it was Hipolito Lao who properly endorsed said certificates to herein Dionisio
Lao and that such transfer was registered in PFSC's Stock and Transfer Book. These
circumstances are more in accord with the valid transfer contemplated by Section 63 of
the Corporation Code.

The mere inclusion as shareholder of petitioners in the General

Information Sheet of PFSC is insufficient proof that they are shareholders
of the company. While it may be true that petitioners were named as
shareholders in the General Information Sheet submitted to the SEC, that
document alone does not conclusively prove that they are shareholders of
PFSC. The information in the document will still have to be correlated with the
corporate books of PFSC. As between the General Information Sheet and the corporate
books, it is the latter that is controlling.

40
Mere inclusion in the General Information Sheets as stockholders and officers does not
make one a stockholder of a corporation, for this may have come to pass by mistake,
expediency or negligence. As professed by respondent-appellee, this was done merely to
comply with the reportorial requirements with the SEC. This maybe against the law but
"practice, no matter how long continued, cannot give rise to any vested right. If a
transferee of shares of stock who failed to register such transfer in the
Stock and Transfer Book of the Corporation could not exercise the rights
granted unto him by law as stockholder, with more reason that such rights
be denied to a person who is not a stockholder of a corporation.

Petitioners-appellants never secured such a standing as stockholders of PFSC and

consequently, their petition should be denied. It should be stressed that the burden of
proof is on petitioners to show that they are shareholders of PFSC. This is so because
they do not have any certificates of shares in their name.

Moreover, they do not appear in the corporate books as registered shareholders. If they
had certificates of shares, the burden would have been with PFSC to prove that they are
not shareholders of the corporation. Petitioners failed to hurdle their burden. There is
no written document evidencing their claimed purchase of shares.

BY LAWS

28.Loyola Grand Villas Homwowners Assoc. Inc., vs. CA et al.,

G.R. No. 117188

Doctrine: That failure to file the by-laws within the period does not imply the
"demise" of the corporation

FACTS:

Loyola Grand Villas Homeowners Association Inc. (LGVHAI) was organized on

February 8, 1983, as the association of homeowners and residents of the Loyola Grand
Villas. It was registered with the Home Financing Corporation, the predecessor of
herein respondent Home Insurance and Guaranty Corporation (HIGC; quasi judicial
body).

For unknown reasons, however, LGVHAI did not file its corporate by-laws. In
July 1989, Soliven, the president of LGVHAI inquired about the status of the
association.

Atty. Joaquin A. Bautista, the head of the legal department of the HIGC, informed
him that LGVHAI had been automatically dissolved for two reasons.

First, it did not submit its by-laws within the period required by the Corporation
Code and, second, there was non-user of the corporate charter because HIGC had not
received any report on the association’s activities. These developments prompted the
officers of the LGVHAI to lodge a complaint with the HIGC. After some time, the HIGC
ruled in favor of LGVHAI revoking the Certificates of Registration of Loyola Grand
Villas Homeowners (North) Association, Inc. and Loyola Grand Villas Homeowners
(South) Association, Inc. as hereby revoked or cancelled and that the receivership
terminated and that the receiver is ordered to render an accounting and turn-over to
LGVHAI all assets and records of the Association under his custody and possession.
Hence, petitioner now raises the issue of certiorari.

ISSUE:

Whether or not the failure of a corporation to file its by-laws within one month from its
incorporation results in its automatic dissolution?

41
RULING: NO.

Under the Corporation Code, a private corporation commences to have corporate

existence and juridical personality from the date the Securities and Exchange
Commission (SEC) issues a certificate of incorporation under its official seal.

There was no showing that the registration of LGVHAI had been validly revoked,
it continued to be the duly registered homeowners’ association in the Loyola Grand
Villas. It has been held that automatic corporate dissolution for failure to file the by-laws
on time was never the intention of the legislature.

Taken as a whole and under the principle that the best interpreter of a statute is
the statute itself (optima statuli interpretatix est ipsum statutum),

 Section 46 of the Corporate Code reveals the legislative intent to

attach a directory, and not mandatory, meaning for the word “must” in the
first sentence thereof. Note should be taken of the second paragraph of the
law which allows the filing of the by-laws even prior to incorporation.

This provision in the same section of the Code rules out mandatory
compliance with the requirement of filing the by-laws “within one (1)
month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission.” It necessarily
follows that failure to file the by-laws within that period does not imply the
“demise” of the corporation.

29. Valley Golf Country Club vs. Rosa De Caram

G.R.No. 158805, April 16, 2009
CONG

Doctrine: Title XI, SEC. 91. on Non-Stock Corporations of the Corporation Code-
Membership shall be terminated in the manner and for the causes provided in the
articles of incorporation or the by-laws. Termination of membership shall have the
effect of extinguishing all rights of a member in the corporation or in its property, unless
otherwise provided in the articles of incorporation or the by-laws.

Facts:

Valley Golf & Country Club is a duly constituted non-stock, non-profit corporation
which operates a golf course.

In 1961, the late Congressman Caram, Jr., the husband of the present respondent Rosa,
subscribed to purchase and paid for in full one share (Golf Share) in the capital stock of
Valley Golf. He was issued Stock Certificate No. 389 for the Golf Share.

Valley Golf alleged that beginning 25 January 1980, Caram stopped paying his monthly
dues. As it turned out, Caram had died on 6 October 1986.

Unaware of the pending controversy over the Golf Share, the Caram family and the RTC
included the same as part of Caram’s estate.

Despite the five demand letters sent by Petitioner, Caram defaulted in paying his
monthly dues. Thus, Petitioner sold Caram’s golf membership share at a public auction.

It was only through a letter dated 15 May 1990 that the heirs of Caram learned of the
sale of the Golf Share following their inquiry with Valley Golf about the share.

42
An action for reconveyance of the Golf Share with damages was filed by Respondent
before the Securities and Exchange Commission (SEC) against Petitioner. The SEC
Hearing Officer ordered Petitioner to convey ownership of the Golf Share, or in the
alternative, to issue one fully paid share of stock of the same class as the Golf Share to
Respondent, plus damages in the amount of P90,000.00.

Issue/s: Whether or not a non-stock corporation may seize and dispose of the
membership of a fully-paid member on account of its unpaid debts to the corporation
when it is authorized to do so under the corporate-by-laws but not the Articles of
Incorporation?

Held:

Sec. 91 of Corp Code provides that a non-stock corp has the right to expel
member though the forfeiture of his share as may be provided in the by-
laws ALONE, AS IN THIS CASE.

The SC cited Sec. 91 of the Corp Code:

Sec. 91. Termination of membership – Membership shall be terminated in

the manner and for the causes provided in the AIO OR the by-laws.
Termination of membership shall have the effect of extinguishing all rights
of a member in the corporation or in its property, unless otherwise
provided in the AOI or the by-laws.

A share can only be deemed delinquent and sold at public auction only upon the
failure of the stockholder to pay the unpaid subscription. Delinquency in monthly club
dues was merely an ordinary debt enforceable by judicial action in a civil case.

A provision creating a lien upon shares of stock for unpaid debts, liabilities or
assessments of SHs to the corporation, should be embodied in the AOI and not merely
in the by-laws. Moreover, the by-laws of Villa Golf should have provided formal notice
and hearing procedure before a member’s shares may be seized and sold.

The procedure for stock corporation’s recourse on unpaid subscription is not

applicable in member’s shares in a non-stock corporation.

However, the sale is invalid, Valley Golf acted in bad faith when it sent
the final notice to Caram under the pretence they believed him to be still
alive, when in fact they had known that he was already dead. At the time of
the final notice, Valley Golf knew that Caram, having died and gone, would
not be able to settle his obligation himself, yet they persisted in sending him
notice to provide a color of regularity to the resulting sale.

ermination of membership.—
Membership shall be terminated in
the manner
and for the causes provided in the
articles of incorporation or the by-
laws. Termination of

43
membership shall have the
effect of extinguishing all rights
of a member in the
corporation or in its property,
unless o
ermination of membership.—
Membership shall be terminated in
the manner
and for the causes provided in the
articles of incorporation or the by-
laws. Termination of
membership shall have the
effect of extinguishing all rights
of a member in the
corporation or in its property,
unless o
DERIVATIVE SUITS

30. Legaspi Towers Inc  LILIA MARQUINEZ PALANCA, ROSANNA D. IMAI, GLORIA
DOMINGO and RAY VINCENT, vs Amelia Muer et al
G.R. No. 170783, June 18, 2021

FACTS:

Pursuant to the by-laws of Legaspi Towers 300, Inc., petitioners, the incumbent
Board of Directors, set the annual meeting of the members of the condominium
corporation and the election of the new BODs at the lobby of Legaspi Towers 300, Inc.

The Committee on Elections of Legaspi Towers 300, Inc., however, found most of
the proxy votes, at its face value, irregular, thus, questionable; and for lack of time to
authenticate the same, petitioners adjourned the meeting for lack of quorum.

However, the group of respondents challenged the adjournment of the meeting

by filing a complaint for declaration of nullity of elections before the RTC. They aver that
despite petitioners’ insistence that no quorum was obtained during the annual meeting

44
held on April 2, 2004, respondents pushed through with the scheduled election and
were elected as the new Board of Directors and officers of Legaspi Towers 300, Inc. and
subsequently submitted a General Information Sheet to the Securities and Exchange
Commission (SEC).

Respondents filed their comment contending that the name Legaspi Towers 300
Inc be removed as party-plaintiff because there was no authority from the BOD
authorizing the petitioners.

ISSUE: Whether or not Derivative Suit proper in this case?

RULING: 

The Supreme Court DENIED the petition and AFFIRMED the Decision of the Court of
Appeals.

Derivative Suit is not applicable. Since it is the corporation that is the real party-in-
interest in a derivative suit, then the reliefs prayed for must be for the benefit or interest
of the corporation. When the reliefs prayed for do not pertain to the corporation, then it
is an improper derivative suit. The requisites for a derivative suit are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to heed
his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit.

Petitioners’ complaint seek to nullify the said election, and to protect and enforce their
individual right to vote. The cause of action devolves on petitioners, not the
condominium corporation, which did not have the right to vote. Hence, the complaint
for nullification of the election is a direct action by petitioners, who were the members
of the Board of Directors of the corporation before the election, against respondents,
who are the newly-elected Board of Directors. Under the circumstances, the derivative
suit filed by petitioners in behalf of the condominium corporation in the Second
Amended Complaint is improper.

Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or other
persons may be classified into individual suits, class suits, and derivative suits. Where a stockholder or
member is denied the right of inspection, his suit would be individual because the wrong is done to
him personally and not to the other stockholders or the corporation. Where the wrong is done to a group of
stockholders, as where preferred stockholders' rights are violated, a class or representative suit will be
proper for the protection of all stockholders belonging to the same group. But where the acts complained of
constitute a wrong to the corporation itself, the cause of action belongs to the corporation and not to the
individual stockholder or member. Although in most every case of wrong to the corporation, each stockholder is
necessarily affected because the value of his interest therein would be impaired, this fact of itself is not
sufficient to give him an individual cause of action since the corporation is a person distinct and separate from
him, and can and should itself sue the wrongdoer. Otherwise, not only would the theory of separate entity be
violated, but there would be multiplicity of suits as well as a violation of the priority rights of creditors.
Furthermore, there is the difficulty of determining the amount of damages that should be paid to each individual
stockholder.

However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees
themselves, a stockholder or member may find that he has no redress because the former are vested by law
with the right to decide whether or not the corporation should sue, and they will never be willing to sue
themselves. The corporation would thus be helpless to seek remedy. Because of the frequent occurrence of
such a situation, the common law gradually recognized the right of a stockholder to sue on behalf of a
corporation in what eventually became known as a "derivative suit." It has been proven to be an effective
remedy of the minority against the abuses of management. Thus, an individual stockholder is permitted to
institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate

45
corporate rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold the
control of the corporation. In such actions, the suing stockholder is regarded as the nominal party, with the
corporation as the party-in- interest.18

Since it is the corporation that is the real party-in-interest in a derivative suit, then the reliefs prayed for must be
for the benefit or interest of the corporation. When the reliefs prayed for do not pertain to the corporation, then
19 

it is an improper derivative suit.

20

The requisites for a derivative suit are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or transaction complained
of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors
for the appropriate relief but the latter has failed or refused to heed his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or
being caused to the corporation and not to the particular stockholder bringing the suit. 21

In this case, petitioners, as members of the Board of Directors of the condominium corporation before the
election in question, filed a complaint against the newly-elected members of the Board of Directors for the
years 2004-2005, questioning the validity of the election held on April 2, 2004, as it was allegedly marred by
lack of quorum, and praying for the nullification of the said election.

As stated by the Court of Appeals, petitioners’ complaint seek to nullify the said election, and to protect and
enforce their individual right to vote. Petitioners seek the nullification of the election of the Board of Directors for
the years 2004-2005, composed of herein respondents, who pushed through with the election even if
petitioners had adjourned the meeting allegedly due to lack of quorum. Petitioners are the injured party, whose
rights to vote and to be voted upon were directly affected by the election of the new set of board of directors.
The party-in-interest are the petitioners as stockholders, who wield such right to vote. The cause of action
devolves on petitioners, not the condominium corporation, which did not have the right to vote. Hence, the
complaint for nullification of the election is a direct action by petitioners, who were the members of the Board of
Directors of the corporation before the election, against respondents, who are the newly-elected Board of
Directors. Under the circumstances, the derivative suit filed by petitioners in behalf of the condominium
corporation in the Second Amended Complaint is improper.

The stockholder’s right to file a derivative suit is not based on any express provision of The Corporation Code,
but is impliedly recognized when the law makes corporate directors or officers liable for damages suffered by
the corporation and its stockholders for violation of their fiduciary duties, which is not the issue in this case.
22 

31. Maj. Stockholders of Ruby Int’l Corp vs Miguel Lim et al

G.R. NO. 165887, June 6, 2011

FACTS:

TRANSFER OF STOCK OWNERHSIP

32. Simny Guy et al vs Calo G.R. No. 189486, Sept. 5, 2012

33. Fil-estate Gold and Dev. Inc., et al vs Vertex Sales Trading G.R.
NO. 202079 June 10, 2013

SALE OF DELINQUENT STOCKS

34. Calatagan Golf Club vs Sixto Clemente Jr. G.R. No. 16544 April
16, 2009

Quorom

35. Paul Lee Tan et al vs Paul Sycip et al., August 17, 2006

Appraisal Right

46
 36. Philip Turner et al vs. Lorenzo Shipping Corp G.R. No. 157479
Nov. 24, 2010

Corporate Books and Right to inspect

37. Ma. Belen Abaya et al vs. Eduardo Willkom et al G.R. No. 178511
Dec. 4, 2008
38. Aderito Z. Yujuico et al vs. Cezar Quiambao et al G.R. No.
180416 June 2, 2014

47