Turner v.

Lorenzo Shipping Corporation

G.R. No. 157479

Facts:

• Petitioners Philip and Elnora Turner were the owners of 1,010,000 shares of stocks of
Respondent Lorenzo Shipping Corporation. Petitioners voted against the restriction of
the pre-emptive right to newly issued stocks, to be effected via the amendment of the
articles of incorporation of the Respondent Corporation. They alleged that it is prejudicial
to their interests as shareholders.
• Thus, through the exercise of their appraisal right, they demanded the payment of their
shares at P2.276/share (P2,298,760.00).
• Respondent Corporation countered that it was an acceptable amount alleging that, the
FMV of Petitioners’ shares before the implementation of the corporate action to deny
pre-emptive right was at P0.41/share (P414,100.00).
• Respondent Corporation further alleged that the corporation had no unrestricted retained
earnings at the time the demand was made.
• Disagreement on stock valuation led to the constitution of an appraisal committee that
valued the shares in dispute at P2.54/share (2,565,000.00).
• Petitioners then asked for payment at said value plus 2% interest per month from the
date of the original demand.
• Respondent Corporation, through a letter, told Petitioners that they cannot pay due to
the absence of unrestricted retained earnings and that the corporation had a deficit of
P72,973,114.00. This led the petitioner to file an action for the collection of the sum of
money and damages with RTC Makati.
• Respondent Corporation alleged that the cause of action of the Petitioners has not yet
accrued due to the absence of the former’s URE
• RTC Makati, in finding that the suit was an intercorporate dispute, ordered the re-raffle of
the case pursuant to the Interim Rules of Intercorporate Dispute. The case was raffled in
RTC Manila, the court that exercises territorial jurisdiction in the place where the
principal office of Respondent Corporation is found
• RTC Manila, in ruling in favor of the Petitioners and ordering the Respondent to pay,
stated that the Corporation Code does not require that URE must exist at the time of
demand. Even if there is no URE at such time, if there would be URE later, the FMV of
the stocks shall be paid, provided that there must be sufficient funds to cover creditors
after such payment.
• Respondents, aggrieved, elevated the case to the Court of Appeals which reversed the
RTC Decision and enjoined the payment to the petitioners. This prompted the Petitioners
to elevate the same to the Supreme Court, thus, this recourse.

Issue: Whether or not the Court of Appeals erred in reversing the RTC Decision.

Ruling:

• No. The RTC erred in ordering the Respondent Corporation to pay, and that the same
exceeded in the exercise of its jurisdiction in rendering judgment in favor of Petitioners
and in the issuance of a writ of execution. A stockholder who dissents certain corporate
actions has the right to demand FMV of his share (appraisal right), provided that the
corporation has unrestricted retained earnings as provided for under Sec. 81 of the
Corporation Code. Such right may be exercised when there is a change in the Articles of
incorporation prejudicing the interests of the stockholder. No payment shall be made
unless there are unrestricted retained earnings in its books to cover such payment.
Payment by the corporation to a dissenting stockholder exercising his appraisal right
without the existence of unrestricted retained earnings is in violation of the trust fund
doctrine which prescribes the distribution of assets to a stockholder without first paying
corporate debts because the assets of the corporation are held in trust by the same for
the benefit of its creditors. Payment made under such circumstances is prejudicial to the
corporate creditors and is null and void. Creditors are always preferred over
stockholders.
• Petitioners’ cause of action is premature because there are no unrestricted retained
earnings at the time of demand. Right to demand has not yet accrued. No valid demand,
 no actionable wrong. The subsequent existence of URE does not cure the lack of cause
of action. Petition for Certiorari Denied.

MARIA CLARA PIROVANA ET AL., plaintiffs-appellees, vs. THE DE LA RAMA

STEAMSHIP CO., defendant-appellant.

Facts:
• Enrico Pirovano was the President and General Manager of the De la Rama Steamship
Company. Early in 1941, the company insured the life of said Enrico Pirovano in various
Philippine and American Life Insurance companies.
• Enrico Pirovano was largely responsible for the rapid and very successful development
of the activities of the company. He was killed by the Japanese in Manila sometime in
1944 leaving as his only heirs four minor children.
• In view of the fact that Enrico Pirovano left practically nothing to his heirs, the current
President of De la Rama Steamship proposed that it is but fit and proper that the
company which owes so much to the deceased should make some provision for his
children.
• He proposed that out of the proceeds of the insurance policies the sum of P400,000 is
set aside for Pirovano’s minor children, said sum of money to be convertible into 4,000
shares of the stock of the Company, at par, or 1,000 shares for each child. A resolution
was adopted to carry out the proposal and submitted to the stockholders of the De La
Rama company at a meeting properly convened, and on that same date, the same was
duly approved.
• Sometime in March 1950, the President of the corporation, Sergio Osmeña, Jr., inquired
to the SEC asking for an opinion regarding the validity of the donation of the proceeds of
the insurance policies to the Pirovano children.
• SEC rendered its opinion that the donation was void because the corporation could not
dispose of its assets by gift and therefore the corporation acted beyond the scope of its
corporate powers. In 1951, in view of the failure to comply with the conditions to which
the above donation was made subject, and in view of the opinion of the SEC
Commissioner, the majority of the stockholders' voted to revoke the resolution approving
the donation to the Pirovano children.
• The minor children of the late Enrico Pirovano, represented by their mother and
guardian, Estefania demanded the payment of the credit due them, amounting to
P564,980.89, but the company refused to pay. Thus, they instituted an action in the
Court of First Instance of Rizal.

Issue:
Whether or not the defendant corporation can give by way of donation the proceeds of
said insurance policies to the minor children of the late Enrico Pirovano under the law or its
articles of corporation, or is that donation an ultra vires act?

Ruling:
The corporation was given broad and almost unlimited powers to carry out the purposes
for which it was organized among them, (1) "To invest and deal with the money of the company
not immediately required, in such manner as from time to time may be determined" and, (2) "to
aid in any other manner any person, association, or corporation of which any obligation or in
which any interest is held by this corporation or in the affairs or prosperity of which this
corporation has a lawful interest." The donation in question undoubtedly comes within the scope
of this broad power for it is a fact appearing in the evidence that the insurance proceeds were
not immediately required when they were given away.
Granting arguendo that the donation given by Pirovano children is outside the scope of
the powers of the defendant corporation, or the scope of the powers that it may exercise under
the law, or it is an ultra vires act, still, it may say that the same cannot be invalidated, or
declared legally ineffective for the reason alone, it appearing that the donation represents not
only the act of the Board of Directors but of the stockholders themselves as shown by the fact
that the same has been expressly ratified in a resolution duly approved by the latter. By this
ratification, the infirmity of the corporate action, may have been obliterated thereby making the
act perfectly valid and enforceable. This is especially so if the donation is not merely executory
but executed and consummated and no creditors are prejudiced, or if there are creditors
affected, the latter has expressly given their conformity.
 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 that is contrary
to law, morals, or public policy or public duty, and is, like similar transactions between the
individuals void. They cannot serve as the basis of court action, nor require validity. Ultra vires
act on the other hand, or those which are not illegal and void ab initio, but are merely within are
not illegal and 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. Said donation, even if ultra vires in the supposition we have adverted to, is not
void, and if voidable its infirmity has been cured by ratification and subsequent acts of the
defendant corporation. The defendant corporation, therefore, is now prevented or estopped from
contesting the validity of the donation.