Loyola Grand Villas Homeowners (South) Association, Inc., vs. Honorable Court of Appeals G.R. No.

117188 August 7, 1997 Facts: Loyola Grand Villas Homeowners Association 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 Guarantee Corporation (HIGC), as the sole homeowners' organization in the said subdivision. For unknown reasons, LGVHAI did not file its corporate by-laws. In July, 1989, when Soliven, the developer and president of LGVHAI inquired about the status of the corporation, the head of the legal department of the HIGC, informed the former that LGVHAI had been automatically dissolved because, among other reasons, it did not submit its by-laws within the period required by the Corporation Code. Issue: May the failure of a corporation to file its by-laws within one month from the date of its incorporation, as mandated by Section 46 of the Corporation Code, result in its automatic dissolution? Held: No.The records of the deliberations of the Batasang Pambansa No. 68 suggest that automatic corporate dissolution for failure to file the by-laws on time was never the intention of the legislature. Moreover, the law itself provides the answer to the issue propounded by petitioner. 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), reveals the legislative intent to attach a directory, and not mandatory, meaning for the word "must" in the first sentence of Section 46 of the Corporation Code. There can also be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the Corporation Code. There is no outright "demise" of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society. In other words, the incorporators must be given the chance to explain their neglect or omission and remedy the same. G.R. No. L-23241 March 14, 1925 Lessons Applicable: Right of First Refusal (Corporate Law) FACTS:

March 13, 1923: Manuel Gonzales made a written statement to the Botica Nolasco, Inc., requesting that 5 shares of stock sold by him to Henry Fleischer be noted transferred to Fleischer's name o He also acknowledged in said written statement the preferential right of the corporation to buy said five shares June 14, 1923: he withdraw and cancelled his written statement of March 13, 1923 o Nolasco replied that his letter of June 14th was of no effect, and that the shares in question had been registered in the name of the Botica Nolasco, Inc., November 15, 1923: Fleischer filed an amended complaint against the Botica Nolasco, Inc., alleging that he became the owner of 5 shares of fully paid stock of Botica Nolasco Co (Nolasco) by purchase from their original owner, Manuel Gonzalez Despite repeated demands, Nolasco refused to register said shares in his name in the books of the corporation o caused him damages amounting to P500 Nolasco's defense: o article 12 of its by-laws: it had preferential right to buy the shares at the par value of P100/share, plus P90 as dividends corresponding to the year 1922 offer was refused by Fleischer Trial Court: favored Fleischer and ordered the shared be registered ISSUE: W/N article 12 of Nolasco's by-laws is in conflict with Act No. 1459 (Corporation Law), especially with section 35 (Now Sec. 63) HELD: Affirmed. mandamus will lie to compel the officers of the corporation to transfer said stock upon the books of the corporation Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not inconsistent with any existing law, for the transferring of its stock. section 35 of Act No. 1459 (now Sec. 63) o contemplates no restriction as to whom they may be transferred or sold It does not suggest that any discrimination may be created by the corporation in favor or against a certain purchaser. o The holder of shares, as owner of personal property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases, without any other limitation in this respect, than the general provisions of law GR: the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation, and are not contradictory to the general policy of the laws of the land o A by-law cannot take away or abridge the substantial rights of stockholder. o Under a statute authorizing by- laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction upon the right of sale. by-law cannot operate to defeat his rights as a purchaser who obtained them in good faith and for a valuable consideration VIII. BY-LAWS

1. Nature and Functions (Gokongwei v. SEC, 89 SCRA 337 [1979]; Pea v. CA, 193 SCRA 717 [1991]) As the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it, by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation. Loyola Grand Villas Homeowners (South) Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997). (a) Common Law Limitations on By-Laws (i) By-Laws Cannot Be Contrary to Law and Articles of Incorporation A by-law provision granting to a stockholder a permanent representation in the Board of Directors is contrary to the Corporation Code requiring all members of the Board to be elected by the stockholders or members. Even when the members of the association may have formally adopted the provision, their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997). Although the right to amend by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment, such right cannot impair the obligation of existing contracts or rights or undermine the right to security of tenure of a regular employee. Otherwise, it would enable an employer to remove any employee from employment by the simple expediency of amending its by-laws and providing the position shall cease to exist upon occurrence of a specified event. Salafranca v. Philamlife (Pamplona) Village Homeowners Association, Inc., 300 SCRA 469, 479 (1998). (ii) By-Laws Cannot Be Unreasonable or Be Contrary to Nature of By-laws. Government of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927). Authority granted to a corporation to regulate the transfer of its stock does not empower corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998). By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restrictions; they are always subject to the charter of the corporation. Rural Bank of Salinas, Inc. v. CA, 210 SCRA 510 (1992), quoting from Thompson on Corporation Sec. 4137, cited in xFleischer v. Nolasco, 47 Phil. 583. (iii) By-Laws Cannot Discriminate (b) Binding Effects of By-laws (China Banking Corp. v. Court of Appeals, 270 SCRA 503 [1997]). Neither can we concede that such contract would be invalid just because the signatory thereon was not the Chairman of the Board which allegedly violated the corporations by-laws. Since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the same. PMI Colleges v. NLRC, 277 SCRA 462 (1997). 2. Adoption Procedure (Sec. 46) Section 46 of the Corporation, which requires the filing of by-laws, does not expressly provide for the consequence of their non-filing within the period provided therein; however, Pres. Decree 902-A allows the SEC to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations which fail to file their by-laws. Clearly, there can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws, and there is no outright demise of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society, which would require that the incorporators must be given the chance to explain their neglect or omission and remedy the same. Loyola Grand Villas Homeowners (South) Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997). 3. Contents (Sec. 47) 4. Amendments (Sec. 48) Power to amend may be delegated to the board of directors Case Digest on GOV. OF THE PHILIPPINE ISLANDS V. EL HOGAR FILIPINO (Fixing compensation of directors and officers) The provision in the by-laws of El Hogar Filipino distributing 5% of the net income of the preceding year to the directors in proportion to their attendance in directors meetings cannot be made the basis of the revocation of their corporate franchise. Said provision led to highly beneficial results not only in securing a constant attendance on the part of the membership, but in obtaining their intelligent attention to the affairs of the association. The power to fix the compensation of directors, if any, is left to the corporation, to be determined in its by-laws. If a mistake has been made, or the rule adopted in the by-laws has been found to work harmful results, the remedy is in the hands of the stockholders who have the power at any lawful meeting to change the rule. GOKONGWEI V. SEC The amendment to the corporate by-law of SMC which renders a stockholder ineligible to be director, if he be also a director in a corporation whose business is in competition with that of the other corporation, has been sustained as valid. An officer of a corporation cannot engage in business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director. A director of SMC has access to sensitive and highly confidential information such as (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms. 4. Seizing corporate opportunity Sec. 34. Disloyalty of a director. Where a director. By virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked how own funds in the venture.

Sec. 31. Liability of directors, trustees or officers. - When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the rpofits which otherwise would have accrued to the corporation. An officer is similarly liable for seizing corporate opportunity because he is considered to have more chances than a board member to do so, since he is usually a full-time corporate agent, with great opportunity and with authority to make decisions on the operational level. The main problem in most cases would be whether or not the corporate opportunity seized was one which properly belonged to the corporation. Grace Christian High School v CA [(October 23, 1997)] Right of Share Holders to Vote for the Board of Directors Right of Share Holders to Be Voted to the Board of Directors Facts: Petitioner Grace Christian High School is an educational institution offering preparatory, kindergarten and secondary courses at the Grace Village in Quezon City. Private respondent Grace Village Association, Inc., on the other hand, is an organization of lot and/or building owners, lessees and residents at Grace Village. In 1968, the by-laws of the association provided in Article IV, as follows: The annual meeting of the members of the Association shall be held on the first Sunday of January in each calendar year at the principal office of the Association at 2:00 P.M. where they shall elect by plurality vote and by secret balloting, the Board of Directors, composed of eleven (11) members to serve for one year until their successors are duly elected and have qualified. On December 20, 1975, a committee of the board of directors prepared a draft of an amendment to the by-laws, reading as follows: The Annual Meeting of the members of the Association shall be held on the second Thursday of January of each year. Each Charter or Associate Member of the Association is entitled to vote. He shall be entitled to as many votes as he has acquired thru his monthly membership fees only computed on a ratio of TEN (P10.00) PESOS for one vote. The Charter and Associate Members shall elect the Directors of the Association. The candidates receiving the first fourteen (14) highest number of votes shall be declared and proclaimed elected until their successors are elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION. This draft was never presented to the general membership for approval. Nevertheless, from 1975, after it was presumably submitted to the board, up to 1990, petitioner was given a permanent seat in the board of directors of the association. From 1975 until 1989 petitioners representative had been recognized as a permanent director of the association. But on February 13, 1990, petitioner received notice from the associations committee on election that the latter was reexamining (actually, reconsidering) the right of petitioners representative to continue as an unelected member of the board. As the board denied petitioners request to be allowed representation without election, petitioner brought an action for mandamus in the Home Insurance and Guaranty Corporation. Its action was dismissed by the hearing officer whose decision was subsequently affirmed by the appeals board. Petitioner appealed to the Court of Appeals, which in turn upheld the decision of the HIGCs appeals board. Hence this petition for review. 1. The Petitioner herein has already acquired a vested right to a permanent seat in the Board of Directors of Grace Village Association; 2. The amended By-laws of the Association drafted and promulgated by a Committee on December 20, 1975 is valid and binding; and 3. The Practice of tolerating the automatic inclusion of petitioner as a permanent member of the Board of Directors of the Association without the benefit of election is allowed under the law. Issue: (1) WON the 1975 Amendment is valid despite not having been approved by the General Assembly (2) WON the Corporate Code grants Grace Christian High School a right to a seat at the Board Held: (1) This provision of the by-laws actually implements 22 of the Corporation Law which provides that the owners of a majority of the subscribed capital stock, or a majority of the members if there be no capital stock, may, at a regular or special meeting duly called for the purpose, amend or repeal any by-law or adopt new by-laws. The owners of two-thirds of the subscribed capital stock, or two-thirds of the members if there be no capital stock, may delegate to the board of directors the power to amend or repeal any by-law or to adopt new by-laws: Provided, however, That any power delegated to the board of directors to amend or repeal any by-law or adopt new by-laws shall be considered as revoked whenever a majority of the stockholders or of the members of the corporation shall so vote at a regular or special meeting. The proposed amendment to the by-laws was never approved by the majority of the members of the association as required by these provisions of the law and by-laws. But petitioner contends that the members of the committee which prepared the proposed amendment were duly authorized to do so and that because the members of the association thereafter implemented the provision for fifteen years, the proposed amendment for all intents and purposes should be considered to have been ratified by them. Petitioner contends: Considering, therefore, that the agents or committee were duly authorized to draft the amended by-laws and the acts done by the agents were in accordance with such authority, the acts of the agents from the very beginning were lawful and binding on the homeowners (the principals) per se without need of any ratification or adoption. The more has the amended by-laws become binding on the homeowners when the homeowners followed and implemented the provisions of the amended by-laws. This is not merely tantamount to tacit ratification of the acts done by duly authorized agents but express approval and confirmation of what the agents did pursuant to the authority granted to them. (2) The present Corporation Code (B.P. Blg. 68) provides: 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified. This provision leave no room for doubt as to the meaning: the board of directors of corporations must be elected from among the stockholders or members. There may be corporations in which there are unelected members in the board but it is clear that in the examples cited by petitioner the unelected members sit as ex officio members, i.e., by virtue of and for as long as they hold a particular office. But in the case of petitioner, there is no reason at all for its representative to be given a seat in the board. Nor does petitioner claim a right to such seat by virtue of an office held. In fact it was not given such seat in the beginning. It was only in 1975 that a proposed amendment to the by-laws sought to give it one. Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall a later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to law, it is beyond the power of the members of the association to waive its invalidity. For that matter the members of the association may have formally adopted the provision in question, but their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. It is probable that, in allowing petitioners representative to sit on the board, the members of the association were not aware that this was contrary to law. It should be noted that they did not actually implement the provision in question except perhaps insofar as it increased the number of directors from 11 to 15, but certainly not the allowance of petitioners representative as an unelected member of the board of directors. It is more accurate to say that the members merely tolerated petitioners representative and tolerance cannot be considered ratification. Nor can petitioner claim a vested right to sit in the board on the basis of practice. Practice, no matter how long continued, cannot give rise to any vested right if it is contrary to law. Even less tenable is petitioners claim that its right is coterminus with the existence of the association.

SALAFRANCA VS. PHILAMLIFE (PAMPLONA) VILLAGE HOMEOWNERS ASSOCIATION INC. 300 SCRA 469 FACTS: 1. Petitioner Enrique Salafranca started working with private respondent on May 1, 1981 as administrative officer for a period of 6 months. 2. Petitioner was re-appointed to his position three more times. 3. After petitioners term of employment expired on December 31, 1983, he still continued to work in the same capacity, albeit , without the benefit of a renewed contract. 4. Sometime in 1987, private respondent decided to amend its by-laws. 5. Included therein was a provision regarding officers, specifically, the position of administrative officer under which said officer shall hold office at the pleasure of the Board of Directors. 6. In view of the development, private respondent informed the petitioner that his term of office shall be co-terminus with the Board of Directors which appointed him to his position. 7. Furthermore, until he submits a medical certificate his employment shall be on a month to month basis. 8. Notwithstanding the failure of petitioner to submit his medical certificate, he continued to work until his termination in December 1992. 9. Petitioner filed a complaint for illegal dismissal , money claims and for damages. 10. The Labor Arbiter rendered decision in favor of petitioner. 11. According to the Labor Arbiter, the amendment would not be applicable to complainant who had become a regular employee long time before the amendment took place. 12. The NLRC reversed the decision of the Labor Arbiter and rendered a new one reducing petitioners monetary award to only month pay for every year of service representing his retirement pay. 13. The NLRC viewed the dismissal of petitioner as a valid act of private respondent. ISSUE: Was the dismissal of petitioner valid by virtue of the amendment in the by-laws making petitioners position co-terminus with that of the Board of Directors. HELD: Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment. However this right, extensive as it may be, cannot impair the obligation of existing contracts or rights. If private respondents wanted to make the petitioners position co-terminus with that of the Board of Directors, then the amendment must be effective after petitioners stay with the private respondent, not during his term. Obviously, the measure taken by the private respondent in amending its by-laws is nothing but a devious, but crude, attempt to circumvent petitioners right to security of tenure as a regular employee guaranteed under the Labor Code. China Banking Corporation v. Court of Appeals 327 SCRA 378 Facts: Alfonso Roxas Chua and his wife Kiang Ming Chu Chua were the owners of a residential land in San Juan, Metro Manila, covered by Transfer Certificate of Title No. 410603. On June19, 1985, petitioner China Bank filed with the Regional Trial Court of Manila, Branch 29, an action for collection of sum of money against Pacific Multi Agro-Industrial Corporation and Alfonso Chua which was docketed as Civil Case No. 85-31257. On November 7, 1985, the trial court promulgated its decision in Civil Case No. 85-31257 in favor of China Banking Corporation. On November 21, 1988, Alfonso Roxas Chua executed a public instrument denominated as "Assignment of Rights to Redeem," whereby he assigned his rights to redeem the one-half undivided portion of the property to his son, private respondent Paulino Roxas Chua. Paulino redeemed said one-half share on the very same day. On the other hand, in connection with Civil Case No. 85-31257, another notice of levy on execution was issued on February 4, 1991 by the Deputy Sheriff of Manila against the right and interest of Alfonso Roxas Chua in TCT 410603. Thereafter, a certificate of sale on execution dated April 13, 1992 was issued by the Sheriff of Branch 39, RTC Manila in Civil Case No. 85-31257, in favor of China Bank and inscribed at the back of TCT 410603 as Entry No. 01896 on May 4, 1992. On May 20, 1993, Paulino Roxas Chua and Kiang Ming Chu Chua instituted Civil Case No. 63199 before the RTC of Pasig, Metro Manila against China Bank, averring that Paulino has a prior and better right over the rights, title, interest and participation of China Banking Corporation in TCT410603. The trial court rendered a decision on July 15, 1994 in favor of private respondent Paulino Roxas Chua.:On appeal, the Court of Appeals affirmed the ruling of the trial court. Issue: Whether or not the assignment of the right of redemption made by Alfonso Roxas Chuain favor of private respondent Paulino was done to defraud his creditors and may be rescinded under Article 1387 of the Civil Code. Held: Existence of fraud or intent to defraud creditors may either be presumed in accordance with Article 1387 of the Civil Code or duly proved as the case may be. After his conjugal share inTCT 410603 was foreclosed by Metrobank, the only property that Alfonso Roxas Chua had was his right to redeem the same, it forming part of his patrimony. "Property" under civil law comprehends every species of title, inchoate or complete, legal or equitable. In the case at bar, the presumption that the conveyance is fraudulent has not been overcome. At the time a judgment was rendered in favor of China Bank against Alfonso and the corporation, Paulino was still living with his parents in the subject property. Paulino himself admitted that he knew his father was heavily indebted and could not afford to pay his debts. The transfer was undoubtedly made between father and son at a time when the father was insolvent and had no other property to pay off his creditors. Hence, it is of no consequence whether or not Paulino had given valuable consideration for the conveyance. Petition is granted