Commercial Law Cases under Atty.

Busmente – Batch 2

1. AF Realty vs. Dieselman Freight Service

G.R. No. 111448, Jan. 16, 2002

Doctrine: Contracts or acts of a corporation must be made either by the board of

directors or by a corporate agent duly authorized by the board. Absent such valid
delegation/authorization, the rule is that the declarations of an individual director
relating to the affairs of the corporation, but not in the course of, or connected with, the
performance of authorized duties of such director, are held not binding on the
corporation.

Facts: Dieselman Freight Service Co. is an owner of commercial lot consisting of 2,094
sqm., located at Pasig City.

On May 10, 1988, Manuel C. Cruz, Jr. a member of the board of directors of Dieselman,
issued a letter authorizing Cristeta N. Polintan "to look for a buyer and negotiate
the sale" of the lot at ₱3,000.00 per sqm..

Cruz Jr. has no written authority from Dieselman Corp to sell the lot. In turn Polintan
authorized Felicisima Noble to sell the same lot.

Noble offered the property to AF Realty & Development, Inc. at ₱2,500.00 per sqm.
Zenaida Ranullo, board member and vice-president of AF Realty, accepted the offer
and issued a check in the amount of ₱300,000.00.

Ranullo asked Polintan for the board resolution of Dieselman  authorizing the sale.
However, Polintan could only give Ranullo the original copy of TCT No. 39849, the tax
declaration and tax receipt for the lot, and a photocopy of the Articles of Incorporation
of Dieselman.

Cruz, Sr. president of Dieselman, acknowledged receipt of the said ₱300,000.00 as

"earnest money" but required AF Realty to finalize the sale at ₱4,000.00 per sqm. AF
Realty replied that it is willing to pay the balance.

However, Cruz, Sr. terminated the offer and demanded from AF Realty the return of the
title of the lot claiming that there was a perfected contract of sale, AF Realty filed a
complaint for specific performance against Dieselman and Cruz, Jr.. The complaint
prays that Dieselman be ordered to execute and deliver a final deed of sale in favor of AF
Realty.
In its answer Dieselman alleged that it did not authorize any person to enter into such
transaction on its behalf. Meanwhile, on July 30, 1988, Dieselman and Midas
Development Corporation (Midas) executed a Deed of Absolute Sale of the same
property.

The CA held that Cruz, Jr. was not authorized in writing by Dieselman to sell the
property to AF Realty, the sale was not perfected, and that the Deed of Absolute Sale
between Dieselman and Midas is valid, there being no bad faith on the part of the latter.

Issue: Whether or not there was a valid delegation of power.

Held: YES.

Sec. 23 of the Corporation Code expressly provides that the corporate powers of all
corporations shall be exercised by the Board of Directors just as natural person may
authorize another to do certain acts in his behalf, so may board of directors of a
corporation may delegate some of its functions to individual officers or agents appointed
by it.

Thus, contracts or acts of a corporation must be made either by the Board of Directors
or by a corporate agent duly authorized by the board absent such valid
delegation/authorization, the rule is that the declaration of an individual director
relating to the affairs of the corporation, but not in the course of, or connected with the
performance of authorized duties of such director, are held not binding on the
corporation.

The decision of the Court of Appeals was affirmed by the Supreme Court. According to
the Court, considering that respondent Cruz, Polintan and Noble were not authorized by
respondent Dieselman to sell its lot, the supposed contract is void. Being a void contract,
it is not susceptible of ratification by clear mandate of the Civil Code. On the other hand,
the validity of the sale of the subject lot to respondent Midas was unquestionable. The
sale was authorized by the board resolution of respondent Dieselman.

2. Inter-Asia Investment vs. Court of Appeals,

G.R. No. 125778, June 10, 2003

Summary: Petitioner corporation assailed the decision of the CA and the lower court,
holding it liable to pay a sum of money plus interest to private respondent corporation,
as a consequence of a Letter-Proposal dated January 24, 1980 signed by its president,
with regard to the sale of petitioner's shares of stock of FARMACOR, INC., to the private
respondent corporation. Petitioner argued that the letter-proposal of its president has
no legal force and effect against it as it was not authorized by its board of directors.

On appeal, the Supreme Court held petitioner liable to pay a sum of money plus interest
to the private respondent because the January 24, 1980 letter signed by petitioner's
president is valid and binding. An officer of a corporation authorized to purchase the
stock of another corporation has the implied power to perform all other obligations
arising therefrom, such as payment of the shares of stock. By allowing its president to
sign the Agreement on its behalf, petitioner clothed him with apparent capacity to
perform all acts which are expressly, impliedly and inherently stated therein. The Court,
however, deleted the award of attorney's fees because it was bereft of factual, legal and
equitable basis.

Facts: On 1 September 1978, Inter-Asia Industries, Inc. (Inter-Asia), by a Stock

Purchase Agreement (the Agreement), sold to Asia Industries, Inc. (Asia Industries)
for and in consideration of the sum of P19,500,000.00 all its right, title and interest in
and to all the outstanding shares of stock of FARMACOR, INC. (FARMACOR).

The Agreement was signed by Leonides P. Gonzales and Jesus J. Vergara, presidents of
Inter-Asia and Asia Industries, respectively. Under paragraph 7 of the Agreement, Inter-
Asia as seller made warranties and representations.

The Agreement was later amended with respect to the "Closing Date," originally set up
at 10:00 a.m. of 30 September 1978, which was moved to 31 October 1978, and to the
mode of payment of the purchase price.

The Agreement, as amended, provided:

1. that pending submission by SGV of FARMACOR's audited financial statements as
of 31 October 1978, Asia Industries may retain the sum of P7,500,000.00 out of
the stipulated purchase price of P19,500,000.00;
2. that from this retained amount of P7,500,000.00, Asia Industries may deduct
any shortfall on the Minimum Guaranteed Net Worth of P12,000,000.00; and
3. that if the amount retained is not sufficient to make up for the deficiency in the
Minimum Guaranteed Net Worth, Inter-Asia shall pay the difference within 5
days from date of receipt of the audited financial statements.

Asia Industries paid Inter-Asia a total amount of P12,000,000.00 - P5,000,000.00

upon the signing of the Agreement, and P7,000,000.00 on 2 November 1978.
From the STATEMENT OF INCOME AND DEFICIT attached to the financial report
dated 28 November 1978 submitted by SGV, it appears that FARMACOR had, for the 10
months ended 31 October 1978, a deficit of P11,244,225.00.

Since the stockholder's equity amounted to P10,000,000.00, FARMACOR had a net

worth deficiency of P1,244,225.00. The guaranteed net worth shortfall thus amounted to
P13,244,225.00 after adding the net worth deficiency of P1,244,225.00 to the Minimum
Guaranteed Net Worth of P12,000,000.00.

The adjusted contract price, therefore, amounted to P6,225,775.00 which is the

difference between the contract price of P19,500,000.00 and the shortfall in the
guaranteed net worth of P13,224,225.00. Asia Industries having already paid Inter-Asia
P12,000,000.00, it was entitled to a refund of P5,744,225.00.

Inter-Asia thereafter proposed, by letter of 24 January 1980, signed by its president,

that Asia Industries's claim for refund be reduced to P4,093,993.00, it promising to pay
the cost of the Northern Cotabato Industries, Inc. (NOCOSII) superstructures in the
amount of P759,570.00. To the proposal respondent agreed. Inter-Asia, however,
welched on its promise. Inter-Asia's total liability thus stood at P4,853,503.00
(P4,093,993.00 plus P759,570.00) exclusive of interest.

On 5 April 1983, Asia Industries filed a complaint against Inter-Asia with the Regional
Trial Court of Makati, one of two causes of action of which was for the recovery of above-
said amount of P4,853,503.00 plus interest.

Denying Asia Industries' claim, Inter-Asia countered that Asia Industries failed to pay
the balance of the purchase price and accordingly set up a counterclaim.
Finding for Asia Industries, the trial court rendered on 27 November 1991 a Decision,
ordering Inter-Asia to pay Asia Industries the sum of P4,853,503.00 plus interest
thereon at the legal rate from the filing of the complaint until fully paid, the sum of
P30,000.00 as attorney's fees and the costs of suit; and dismissing the counterclaim.

On appeal to the Court of Appeals, and by Decision of 25 January 1996, the Court of
Appeals affirmed the trial court's decision. Inter-Asia's motion for reconsideration of the
decision having been denied by the Court of Appeals by Resolution of 11 July 1996,
Inter-Asia filed the petition for review on certiorari.

Issue: Whether the 24 January 1980 letter signed by Inter-Asia’s president is valid and
binding.

Held: YES, it is valid and binding.

As held in the case of People's Aircargo and Warehousing Co., Inc. v. Court of Appeals,
the general rule is that, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation.

A corporation is a juridical person, separate and distinct from its stockholders and
members, "having . . . powers, attributes and properties expressly authorized by law or
incident to its existence."

Being a juridical entity, a corporation may act through its board of directors, which
exercises almost all corporate powers, lays down all corporate business policies and is
responsible for the efficiency of management, as provided in Section 23 of the
Corporation Code of the Philippines.

Under this provision, 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.

However, just as a natural person may authorize another to do certain acts for and on
his behalf, 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, viz: "A corporate officer or
agent may represent and bind the corporation in transactions with third persons to the
extent that [the] authority to do so has been conferred upon him, and this includes
powers as, in the usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused person dealing with the officer or agent to believe that it has
conferred.... Apparent authority 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 acts 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."

Hence, an officer of a corporation who is authorized to purchase the stock of another

corporation has the implied power to perform all other obligations arising therefrom,
such as payment of the shares of stock. By allowing its president to sign the Agreement
on its behalf, Inter-Asia clothed him with apparent capacity to perform all acts which
are expressly, impliedly and inherently stated therein.

3. Republic Planters Bank vs. Agana,

269 Scra 1 (1997)

Facts:
On September 1961, Robes-Francisco Realty & Development Corporation (RFRDC)
secured a loan from the Republic Planters Bank in the amount of P120,000.00. As part
of the proceeds of the loan, preferred shares of stocks were issued to RFRDC through its
officers then, Adalia F. Robes and one Carlos F. Robes.

In other words, instead of giving the legal tender totaling to the full amount of the loan,
which is P120,000.00, the Bank lent such amount partially in the form of money and
partially in the form of stock certificates numbered 3204 and 3205, each for 400 shares
with a par value of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00.
Said stock certificates were in the name of Adalia F. Robes and Carlos F. Robes, who
subsequently, however, endorsed his shares in favor of Adalia F. Robes.

Said certificates of stock bear the following terms and conditions: "The Preferred Stock
shall have the following rights, preferences, qualifications and limitations, to wit:
1. Of the right to receive a quarterly dividend of 1%, cumulative and participating. xxx
2. That such preferred shares may be redeemed, by the system of drawing lots, at any
time after 2 years from the date of issue at the option of the Corporation."

On January 1979, RFRDC and Robes proceeded against the Bank and filed a complaint
anchored on their alleged rights to collect dividends under the preferred shares in
question and to have the bank redeem the same under the terms and conditions of the
stock certificates.

The bank filed a Motion to Dismiss private respondents' Complaint on the following
grounds:
(1) that the trial court had no jurisdiction over the subject-matter of the action;
(2) that the action was unenforceable under substantive law; and
(3) that the action was barred by the statute of limitations and/or laches.

RTC: Denied the bank's Motion to Dismiss. Thereafter, the trial court gave the parties
10 days from 30 July 1979 to submit their respective memoranda after the submission of
which the case would be deemed submitted for resolution.

On September 1979: RTC rendered the decision in favor of RFRDC and Robes; ordering
the bank to pay RFRDC and Robes the face value of the stock certificates as redemption
price, plus 1% quarterly interest thereon until full payment.

The bank filed the petition for certiorari with the Supreme Court, essentially on pure
questions of law.

Issue #1: Whether or not the respondent judge committed a grave abuse of discretion
in disregarding the order of the Central Bank to petitioner to desist from redeeming its
preferred shares and from paying dividends.

Held: YES, the respondent judge committed a grave abuse of discretion in disregarding
the order of the Central Bank to petitioner to desist from redeeming its preferred shares
and from paying dividends.

What respondent Judge failed to recognize was that while the stock certificate does
allow redemption, the option to do so was clearly vested in the petitioner bank. The
redemption therefore is clearly the type known as "optional".

Thus, except as otherwise provided in the stock certificate, the redemption rests entirely
with the corporation and the stockholder is without right to either compel or refuse the
redemption of its stock. Furthermore, the terms and conditions set forth therein use the
word "may". It is a settled doctrine in statutory construction that the word "may"
denotes discretion, and cannot be construed as having a mandatory effect.

We fail to see how respondent judge can ignore what, in his words, are the "very
wordings of the terms and conditions in said stock certificates" and construe what is
clearly a mere option to be his legal basis for compelling the petitioner to redeem the
shares in question.

The redemption of said shares cannot be allowed. As pointed out by the petitioner, the
Central Bank made a finding that said petitioner has been suffering from chronic reserve
deficiency, and that such finding resulted in a directive on the ground that said
redemption would reduce the assets of the Bank to the prejudice of its depositors and
creditors.

Redemption of preferred shares was prohibited for a just and valid reason. The directive
issued by the Central Bank Governor was obviously meant to preserve the status quo,
and to prevent the financial ruin of a banking institution that would have resulted in
adverse repercussions, not only to its depositors and creditors, but also to the banking
industry as a whole.

The directive, in limiting the exercise of a right granted by law to a corporate entity, may
thus be considered as an exercise of police power. The respondent judge insists that the
directive constitutes an impairment of the obligation of contracts. It has, however, been
settled that the Constitutional guaranty of non-impairment of obligations of contract is
limited by the exercise of the police power of the state, the reason being that public
welfare is superior to private rights.

Issue #2: Whether or not the respondent judge committed a grave abuse of discretion
in ordering petitioner to pay respondent Adalia F. Robes interests on her preferred
shares.

Held: Yes, the respondent judge committed a grave abuse of discretion in ordering
petitioner to pay respondent Adalia F. Robes interests on her preferred shares.

Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code
prohibit the issuance of any stock dividend without the approval of stockholders,
representing not less than two-thirds (2/3) of the outstanding capital stock at a regular
or special meeting duly called for the purpose.

These provisions underscore the fact that payment of dividends to a stockholder is not a
matter of right but a matter of consensus. Furthermore, "interest bearing stocks", on
which the corporation agrees absolutely to pay interest before dividends are paid to
common stockholders, is legal only when construed as requiring payment of interest as
dividends from net earnings or surplus only.

Clearly, the respondent judge, in compelling the petitioner to redeem the shares in
question and to pay the corresponding dividends, committed grave abuse of discretion
amounting to lack or excess of jurisdiction in ignoring both the terms and conditions
specified in the stock certificate, as well as the clear mandate of the law.

Issue #3: Whether or not the trial court erred in not holding that the claim of
respondent Adalia F. Robes is barred by prescription.
Held: Anent the issue of prescription, this Court so holds that the claim of private
respondent is already barred by prescription as well as laches. Art. 1144 of the New Civil
Code provides that a right of action that is founded upon a written contract prescribes in
ten (10) years.

The letter-demand made by the private respondents to the petitioner was made only on
January 5, 1979, or almost eighteen years after receipt of the written contract in the
form of the stock certificate. As noted earlier, this letter-demand, significantly, was not
formally offered in evidence, nor were any other evidence of demand presented.

Therefore, we conclude that the only time the private respondents saw it fit to assert
their rights, if any, to the preferred shares of stock, was after the lapse of almost
eighteen years. The same clearly indicates that the right of the private respondents to
any relief under the law has already prescribed.

Moreover, the claim of the private respondents is also barred by laches. Laches has been
defined as the failure or neglect, for an unreasonable length of time, to do that which by
exercising due diligence could or should have been done earlier; it is negligence or
omission to assert a right within a reasonable time, warranting a presumption that the
party entitled to assert it either has abandoned it or declined to assert it.

Considering that the terms and conditions set forth in the stock certificate clearly
indicate that redemption of the preferred shares may be made at any time after the lapse
of two years from the date of issue, private respondents should have taken it upon
themselves, after the lapse of the said period, to inquire from the petitioner the reason
why the said shares have not been redeemed.

As it is, not only two years had lapsed, as agreed upon, but an additional sixteen years
passed before the private respondents saw it fit to demand their right. The petitioner, at
the time it issued said preferred shares to the private respondents in 1961, could not
have known that it would be suffering from chronic reserve deficiency twelve years later.
Had the private respondents been vigilant in asserting their rights, the redemption
could have been effected at a time when the petitioner bank was not suffering from any
financial crisis.

WHEREFORE, the instant petition, being impressed with merit, is hereby GRANTED.
The challenged decision of respondent judge is set aside and the complaint against the
petitioner is dismissed.
Costs against the private respondents.
4. Montelibano vs. Bacolod-Murcia Milling, 5 Scra 36 (1962)

5. Rev. A0-As, et. al., vs. Court of Appeals,

G.R. No. 128464, June 20, 2006

Facts: This petition involves an intra-corporate dispute concerning the management of

the Lutheran Church of the Philippines (LCP), a religious organization which led SEC to
organize and create a Management Committee.

Subsequent to the establishment of the said committee, LCP held a national convention
where members initiated an election, in line with the organization’s By-Laws for a new
set of church leaders because the incumbent directors were enjoined to act as Board.

As provided for in the LCP By-Laws, directors are elected by division, to the exception of
the President which is elected through the National Convention. Various issues were
raised by the parties before the SEC, which were all denied in favor of the SEC
Management Committee.

When appealed to the CA, the latter aside from ruling on other relevant issues also
nullified the manner of election conducted by LCP for being in violation of the
Corporation Code which requires the presence of majority of the members entitled to
vote at the election. Hence, this petition.

Issue: Whether or not the manner of election of the BOD of LCP as provided in its By-
Laws is invalid.

Held: NO. The matter of how the directors or other leaders of a church shall be chosen
is a matter of ecclesiastical law or custom which is outside the jurisdiction of civil courts.
In any case, the stipulation in the By-Laws is not contrary to the Corporation Code.
Section 89 of the Corporation Code pertaining to non-stock corporations provides that
"the right of the members of any class or classes (of a non-stock corporation) to vote
may be limited, broadened or denied to the extent specified in the articles of
incorporation or the by-laws.

This is an exception to Section 6 of the same code where it is provided that "no share
may be deprived of voting rights except those classified and issued as ‘preferred’ or
‘redeemable’ shares, unless otherwise provided in this Code."

The stipulation in the By-Laws providing for the election of the Board of Directors by
districts is a form of limitation on the voting rights of the members of a non-stock
corporation as recognized under the aforesaid Section 89. Section 24, which requires the
presence of a majority of the members entitled to vote in the election of the board of
directors, applies only when the directors are elected by the members at large, such as is
always the case in stock corporations by virtue of Section 6.

6. Valle Verde Country Club vs. Africa, G.R. No. 151969, Sept. 4, 2009

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, 1998, 1999, 2000, and 2001, 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 sustained
Africa’s complaint.

Issue: Whether the remaining directors of the 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.

Held: NO. 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.

In this case, when 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.

7. Marc Ii Marketing, Inc. vs. Joson G.R. No. 171993. December 12, 2011

8. Nectarina Raniel vs. Jochico, G.R.No.153413, March 1, 2007

9. Ong Yong vs. Tiu, G.R. No. 144476, April 8, 2003

10. Rural Bank of Lipa vs. Ca, G.R. No. 124535, Sept. 28, 2001