Corporation Code Outline 6

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) BUSORG2 - OUTLINE 6 (2016) Prof. M.I.P. Romero Xlll. DUTIES OF DIRECTORS &CONTROLLING STOCKHOLDERS 3-fold duty of directors --- Hustle, Diligence, Loyalty, Obedience Sec. 21 of NCC CHAPTER 2:HUMAN RELATIONS (n) Art. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage. Diligence - The directors and officers are required to exercise due care in the performance of their functions. - Negligence on their part proximately causing damage to the corporation will make them liable. Loyalty - The directors and officers owes loyalty and allegiance to the corporation – a loyalty that is undivided and allegiance that is influenced by no consideration other than the welfare of the corporation. Obedience - obedience requires compliance with the laws and the rules . - in relation to this duty, directors, trustees, and officers have the duty to act intra vires and within authority. Montelibano v. Bacolod-Murcia May 18, 1962 ALFREDO MONTELIBANO and ALEJANDRO MONTELIBANOvs.THE HON. COURT OF APPEALS and BACOLOD-MURCIA MILLING COMPANY, INC. G.R. No. 85757, July 8, 1991 FACTS: Alfredo and Alejandro Montelibano, together with other planters, entered into contracts with Bacolod-Murcia Milling Co., Inc., for the milling of sugar cane at a sharing ratio of 55% for the planters and 45% for the miller. The contracts were to be in force for thirty (30) years starting with the 1920-21 crops. A proposal was made to amend the milling contracts by increasing the planters' share to 60% of the manufactured sugar and molasses and giving them other concessions besides, but the term of the contracts was extended to 45 years instead of 30. On August 30,

2013400036 1936, the milling company's Board of Directors adopted a resolution granting further concessions to the planters over and above those contained in the amended milling contract. Subsequently, the Montelibanos sued the milling company alleging that the three other centrals in the province were granting increased participation to their planters;; therefore, pursuant to paragraph 9 of the August 20, 1936 Resolution, Bacolod-Murcia Milling Co., Inc. was obligated to grant similar concessions to the Montelibanos. The milling company opposed the claim on the ground that, among others, it was a donation which was not within the power of the Board of Directors to grant. The trial court dismissed the action, but on appeal to the Supreme Court reversed the lower court. ISSUE: Whether or not the reversal was proper. RULING: YES. The Court ruled that the August 20, 1936 resolution, passed in good faith by the board of directors, was valid and binding and formed an integral part of the amended milling contracts, the milling company having agreed to give concessions to the planters, precisely to induce them to agree to an extension of their contracts. Petitioner filed two motions for reconsideration;; however, the doctrine of res judicata had set in. Wherefore, the appeal was denied. NOTES: • BUSINESS JUDGMENT RULE à the court recognizes that the boards are voted by the stockholders. Board would think in terms for the stockholders. • Directors and officers à they are no infalliable, business judgment is valid for as long as there is absence of BAD FAITH, GROSS NEGLIGENCE, not performing patently wrong act/unlawful à Court will recognize it as business judgment and cannot substitute the courts decision with the said judgment • SECTION 31à court cannot interfere unless tyere is bad faith, gross negligence or patently unlawful act • Section 31 (2) with Section 34 CO - RELATE Litwin v. Allen, et al 25 N.Y.S. 2D 667 (1940)

1

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) CASE SYNOPSIS In consolidated actions, plaintiffs filed derivative stockholder suits against defendants for allegedly improper transactions involving a trust company in which plaintiffs owned shares. CASE FACTS In derivative stockholder action, plaintiffs sued defendants over four allegedly improper transactions. Plaintiffs first claimed defendant officers' stock purchase of a third-party corporation for their personal benefit violated their fiduciary duties. DISCUSSION The court held trust company had no interest in third-party corporation;; thus, defendant officers had not breached their duty. Plaintiffs also charged defendant officers' bond acquisition on trust company's behalf constituted an improper loan to third-party corporation. The court held that the bonds were purchased negligently but that the applicable statute of limitations prevented recovery against three defendant officers. Plaintiffs also claimed defendant officers negligently extended a loan to a third-party company and then improperly auctioned the loan's collateral due to improper influence from defendant banking firm. The court followed the rule that allowed deference to business decisions, and held defendant directors properly extended the loan using information they possessed and that their auction of the loan's collateral was equitable. CONCLUSION The court entered partial judgment in favor of plaintiffs as to their claim involving the improper purchase of bonds, due to defendant officers' negligence in approving the bond purchase. The court entered judgment in favor of defendants as to plaintiffs' other claims. Brief Fact Summary. Stockholders (Plaintiff) brought a derivative action against Trust Company (Defendant), its subsidiary, Guaranty Company (Defendant), and J.P. Morgan & Co. (Defendant) for a loss resulting from a bond transaction. Synopsis of Rule of Law. A director is not liable for loss or damage other than what was proximately caused by his own acts or omissions in breach of his duty. s resulting from a bond transaction. Facts. On October 16, 1930, Trust Company (Defendant) and its subsidiary, Guaranty

2013400036 Company (Defendant), agreed to participate in the purchase of $3,000,000 in Missouri Pacific Convertible Debentures, through the firm of J.P. Morgan & Co. (Defendant), at par, with an option to the seller, Alleghany Corporation, to repurchase them at the same price at any time within six months. The purpose of the purchase was to enable Alleghany to raise money to pay for particular properties without going over its borrowing limit. The only purpose served by the option therefore, was to make the transaction conform as closely as possible to a loan without the usual incidents of a loan transaction. The decision to purchase was made after the October 1929 stock market crash when the market was in a slight upswing that started in April 1930. After October 1930, there was another sharp and unexpected drop in the market. Guaranty (Defendant) and Trust (Defendant) could not sell any of the bonds until October 8, 1931, and the last were not sold until December 28, 1937, which resulted in a loss of $2,250,000. Stockholders (Plaintiff) brought a derivative action to hold the directors liable for the loss. Issue. Is a director liable for loss or damage other than what was proximately caused by his own acts or omissions in breach of his duty? Held. (Shientag, J.) No. Directors stand in a fiduciary relationship to their company. They are bound by rules of conscientious fairness, morality, and honesty, which are imposed by the law as guidelines for those who are under fiduciary obligations. A director owes a loyalty to his corporation that is undivided and an allegiance uninfluenced by no consideration other than the welfare of the corporation. He must conduct the corporation’s business with the same degree of care and fidelity, as an ordinary prudent man would exercise when managing his own affairs of similar size and importance. A director of a bank is held to stricter accountability. He must use that degree of care ordinarily exercised by prudent bankers, and, if he does so, he will be absolved from liability even though his opinion may turn out to be mistaken and his judgment faulty. The facts in existence at the time of their occurrence must be considered when determining liability. In this case, the first question was whether the bond purchase was ultra vires. “It would seem that if it is against public policy for a bank, anxious to dispose of some of its securities, to agree to buy them back at the same price, it is even more so where a bank purchases securities and gives the seller the option to buy them back at the same price, thereby incurring the entire risk of loss with no possibility of gain other than the interest derived from the securities during the period the bank holds them.” Therefore, regarding the price of securities, the bank inevitably assumed any risk of heavy loss, and any sharp rise was assured to benefit the seller. Trust (Defendant) could not avoid liability by having an

2

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) agreement with its subsidiary, Guaranty (Defendant), for Guaranty (Defendant) to take any loss, should it occur. In this case, “the entire arrangement was so improvident, so risky, so unusual and unnecessary as to be contrary to fundamental conceptions of prudent banking practice.” Therefore, the directors must be held personally liable. The second question, in this case, was whether they were liable for the entire 81 percent loss or whether their liability was limited to the percentage lost during the six-month option period. A director is not liable for loss or damage other than what was proximately caused by his own acts or omissions in breach of his duty. Only the option was tainted with improvidence. When the option expired, any loss that followed was the result of the director’s independent business judgment for which they should not be held. Discussion. In general, hesitation exists to hold directors liable for questionable conduct. The main fear is that the directors’ financial liabilities may be devastating. Though the chance of such liabilities being imposed may be small, it is feared that qualified persons will be discouraged from serving as directors. In addition, directors may be overly cautious and pass up a desirable business risk out of fear of being held for any loss that might result. The fear of directors’ personal liability is often cited to justify broad indemnification and insurance provisions and for the adoption of state statutes defining the scope of directors’ duties. Walker v. Man, et al 253 N.Y.S. 458 (1931)

2013400036 and did not take steps to salvage the loan, he is chargeable with negligence and is accountable for his conduct COLLINS, J. The defendant Man moves for judgment dismissing the amended complaint on the ground generally that it does not state facts sufficient to constitute a cause of action against him, and specifically moves to dismiss the first, second, third, fourth, seventh, eighth, ninth, tenth and eleventh causes of action on the ground that it appears on the face of each one thereof that it does not state facts sufficient to constitute a cause of action against him. The litigation is by the trustee in bankruptcy of Frederick Southack Alwyn Ball, Jr., Inc., and seeks to recover $1,677,411.19 from the defendants, as former directors of the bankrupt corporation, for dereliction of duty and mismanagement in the conduct of the bankrupt's affairs. The amended complaint asserts eleven causes of action. The suit is grounded upon section 60 of the General Corporation Law, which, in part, provides: "An action may be brought against one or more of the directors or officers of a corporation to procure judgment for the following relief or any part thereof:

"1. To compel the defendants to account for their official conduct, including DOCTRINE: Exemplary case. Directors were made liable for doing wrongful acts & committing waste, but w/ acquiescing & confirming the wrong doing of others, & w/ any neglect of or failure to perform their duties, in the management and disposition of the funds and property, committed to their charge. doing nothing to retrieve the waste. WALKER VS. MAN, ET.AL. (253 N.Y.S. 458;; 1931) FACTS: Frederick Southack and Alwyn Ball loaned Avram $20T evidenced by a promissory note executed by Avram and endorsed by Lacey. The loan was not authorized by any meeting of the board of directors and was not for the benefit of the corporation. The note was dishonored but defendant-directors did not protest the note for non-payment;; thus, Lacey, the indorser who was financially capable of meeting the obligation, was subsequently discharged. HELD: Directors are charged not with misfeasance, but with non-feasance, not only with doing wrongful acts and committing waste, but with acquiescing and confirming the wrong doing of others, and with doing nothing to retrieve the waste. Directors have the duty to attempt to prevent wrongdoing by their co-directors, and if wrong is committed, to rectify it. If the defendant knew that an unauthorized loan was made

"2. To compel them to pay to the corporation, or to its creditors, any money and the value of any property, which they have acquired to themselves, or transferred to others, or lost, or wasted, by or through any neglect of or failure to perform or other violation of their duties." Section 61 of the General Corporation Law authorizes the bringing of an action for the relief prescribed in section 60 by a trustee in bankruptcy of the corporation. As a prelude, let it be emphasized that we are dealing with allegation, not proof. We are not now fixing liability, but determining whether liability may be predicated upon the challenged allegations. Many of the cases cited by the moving defendant, which condemn alternative or equivocal allegations, are no patterns for the present case. These directors are charged not only with misfeasance, but with nonfeasance, not only with doing wrongful acts and committing waste, but with acquiescing in and confirming the

3

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) wrongdoing of others, and with doing nothing to retrieve the waste. As directors, these defendants were not only obligated to do nothing wrongful themselves, but to attempt to prevent wrongdoing by their fellow directors, and, if wrong be committed, to seek to rectify it. Passivity and disavowal of knowledge alone do not constitute a pass to freedom from responsibility. A director may not shut off liability by shutting off his hearing and sight. It is his duty to know what is transpiring. The company's stockholders and creditors, as well as the public, have a right to rely upon the performance by him of the duties of a director. ( Kavanaugh v. Kavanaugh Knitting Co., 226 N.Y. 185, 193.) As it is succinctly put in Kavanaugh v. Gould ( 147 A.D. 281, 289), "The law has no place for dummy directors." True, liability is not to be fastened upon a director for every derleiction of duty of a fellow director. "They are bound generally to use every effort that a prudent business man would use in supervising his own affairs." ( Kavanaugh v. Gould, supra.) "A wrong done or a duty omitted must lie at the foundation of his liability." ( Croft v. Williams, 88 N.Y. 384, 389.) "If at their meetings, or otherwise, information should come to [directors] them of irregularity in the proceedings of the" corporation, "they are bound to take steps to correct those irregularities." ( Kavanaugh v. Gould, supra.) "They [directors] are liable only for the losses of its funds attributable to their negligence." ( Bloom v. National United Benefit Sav. Loan Co., 81 Hun, 120, 127;; affd., 152 N.Y. 114.) Negligence, however, may ensue from inaction, as well as action. With these general principles as a setting, we proceed seriatim to an examination of the various causes of action assailed. Prefatory to the specific charges, the first cause of action alleges that the bankrupt was a domestic corporation engaged in the business of managing real properties, as agents for owners, in New York city, the leasing and renting of real property, the underwriting and selling of corporate bonds secured by mortgages upon real estate, and other business of a general real estate character;; that the bankrupt's by-laws provided for a board of directors consisting of fifteen members, and that the business affairs of the bankrupt were managed by a board of directors consisting of fifteen men, or a lesser number, during the entire period of the carrying on of its business;; that the corporation was adjudicated a bankrupt in this Federal district in January, 1928;; that, at the time complained of, creditors of the bankrupt were in

2013400036 existence and that the wrongful acts charged were made and done by the "defendants for the purpose of defrauding" the bankrupt's creditors then existing, or subsequent creditors now represented by the plaintiff herein. The first cause of action then alleges that at the time of the formation of the corporation its authorized capital stock consisted of 10,000 shares of preferred stock of a par value of $100 each, and 15,000 shares of common stock of no par value, and that in connection with the formation of the corporation the board of directors authorized the sale of stock of the corporation to the public generally;; that in connection with such sale, the defendant Wheeler was employed by the defendant Alwyn Ball, 3d, under an agreement whereby Wheeler was to receive eighteen per cent of the gross amount of any moneys received by him or the corporation on account of the sale of the corporation's shares of stock. The claim is made that this agreement was not authorized by any resolution of the board of directors and that the defendant Alwyn Ball, 3d, though purporting to act for the corporation, acted without any authority of the corporation or the board;; that thereafter the corporation paid to Wheeler $232,000 as commission and for his services in selling $875,210 of the stock;; that the board knew that substantial payments were being made to Wheeler "and knew or ought to have known the approximate amount thereof." The charge is then made that "said directors permitted and acquiesced in the payment to the said Wheeler of the sum of $232,000 without ascertaining or making any check upon the agreements made with Wheeler, or the terms thereof, or the amount of the sales made by him, and without in any way properly, reasonably and fairly performing their duties and obligations as directors of the said corporation;;" that said sum of $232,000 paid to Wheeler "was at least $74,000 in excess of any moneys to which Wheeler was entitled" under his agreement with Alwyn Ball, 3d;; "and that the said overpayment was made through the negligent acts, omission and wilful default and negligence on the part of the defendants, and all of them, of their duties and obligations to the stockholders and creditors of the said corporation, and in fraud thereof, and without effort being made on the part of said directors to recover back said sums, or in any way, shape or form to protect the rights of stockholders and creditors of the corporation and to preserve the assets thereof." Paragraph 15 of the complaint alleges that "At the time of the acts hereinbefore set forth some of the defendants were directors of the corporation and at the time that other defendants became directors they approved, acquiesced in, confirmed and ratified the said acts of the other defendant directors so performed as aforesaid." This first cause concludes with an allegation of damage in the sum of $74,000. The moving defendant contends that this first cause does not assert that he was a director during any part of the period in question, and he maintains that the

4

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO)

2013400036

above-quoted allegation in paragraph 15 that those not directors at the time complained of "approved, acquiesced in, confirmed and ratified the said acts of the other defendant directors so performed as aforesaid," is a conclusion of law, and consequently insufficient as a matter of law.

the loan, and that it does not appear that at the time he was a director Lacey could have been held by a suit upon the note. Surely, however, if the moving defendant knew that an improvident and unauthorized loan had been made, and took no steps whatever at salvaging the loan, and acquiesced in and confirmed the original wrongful act, he would be open to the charge of negligence and should account for It has been held, however, that "Ratification is a conclusion of fact and not a his conduct. conclusion of law." ( Pollitz v. Wabash R.R. Co., 207 N.Y. 113, 131.) Ratification may be implied through acquiescence instead of expressed by positive and distinct action The illustrations by the moving defendant in support of his contention that the or language. ( Arnot v. Union Salt Co., 186 N.Y. 501.) It follows that the first cause passivity of one group may not be utilized as a basis for a suit, because of the must be deemed sufficient. affirmative negligence of another group, are not apt. Our concern here is with the duties and responsibilities of corporate directors. What has been written leads to The second cause of action, after realleging the preliminary statements above the holding that the second cause is sufficient. set forth, avers that in about February, 1925, the bankrupt advanced to one M.H. Avram or M.H. Avram Co. the sum of $20,000, taking as security therefor the note of The third, fourth and fifth causes of action are predicated upon the declaration M.H. Avram or M.H. Avram Co. indorsed by one J.D. Lacey;; that the loan was not and payment of dividends in violation of section 58 of the Stock Corporation Law. authorized by any meeting of the board of directors and "was not for the benefit of The third cause alleges that at the time of the declaration of the dividend the corporation or in aid of any business or business affairs of the corporation;;" that complained of therein, the defendants Comstock, Fife, Trisman, Allen, Alwyn Ball, this loan item remained on the bankrupt's books until the bankruptcy as unpaid and Jr., Wadham, Alwyn Ball, 3d, John S. Ball, Russell and Arnold "were present appeared as an asset "in various statements issued by said corporation from time to and/or voted;; that the other defendants herein did approve, ratify and acquiesce in time." the said declaration of said dividend and did approve of, participate in and/or receive payment of dividend pursuant to said declaration, and that the said Paragraph 20 of the complaint charges that the directors "knew or ought to have defendants thereafter failed, neglected and refused to take any steps or known the existence of said item upon the books of the defendant company, yet took proceedings or to make any efforts to recover back said sums on behalf of said no proceedings of any kind or sort, either individually or at board meeting, or in any corporation, or to protect the rights of the corporation and to preserve the assets other manner, for the collection or enforcement of said alleged loan;; and either thereof in that connection." acquiesced in and ratified and confirmed said conversion of the funds of the corporation, or negligently and wilfully and in violation of their duties and obligations The fourth cause alleges that at the time of the declaration of the unlawful to the creditors and stockholders of the corporation, permitted the item to remain in dividend therein sought to be recovered, the defendants Comstock, Guggenheim, an open item for several years without any steps or proceedings being taken by them Trisman, Ball, Jr., Ball, 3d, Russell, Fife, Allen, Wadham, John S. Ball and Arnold to recover the amount thereof." "were present and/or voted," and the allegation of approval, etc., heretofore set forth, is repeated. The allegation follows that the note was dishonored, and that "no steps or proceedings were taken by the defendants to have said note protested for The fifth cause alleges that at the time of the declaration of the unlawful nonpayment and said note was negligently, carelessly or wilfully and fraudulently dividend made the basis of that cause, the defendants Comstock, Ball, Jr., this permitted to remain unprotested and as a result thereof, the said Lacey, the endorser moving defendant Man, Ball, 3d, Trisman, Russell, Fife, Allen, Wadham J.S. Ball thereof, who was fully and amply able financially to meet said obligation, was and Arnold "were present and/or voted," and the allegation of approval, etc., is released and discharged from any obligation arising by virtue of his endorsement of reasserted. said note." The sufficiency of the third, fourth and fifth causes are assailed by the moving Damage in the sum of $20,000 is claimed. defendant (and the defendant Perrine in a separate motion made by him) on two grounds: In challenging the sufficiency of this second cause of action, the moving defendant again urges that there is no allegation that he was a director at the time of First, that section 58 of the Stock Corporation Law fastens joint and several

5

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) liability for the payment of dividends out of surplus instead of earnings on "the directors in whose administration the same shall have been declared or made, except those who may have caused their dissent therefrom to be entered upon the minutes of the meetings of directors at the time or who were not present when such action was taken. * * *" The moving defendant maintains that since it does not affirmatively appear that he was present or voted at the meeting, or did not cause his dissent to be registered, he is excluded from the operation of the section. Irrespective of section 58 of the Stock Corporation Law, if the moving defendant approved, ratified and acquiesced in the declaration of an unlawful dividend and approved of, participated in and/or received payment of such dividend, and "thereafter failed, neglected and refused to take any steps or proceedings or to make any efforts to recover back said sums on behalf of the corporation, or to protect the rights of the stockholders and creditors of the corporation and to preserve the assets thereof, in that connection," he would be liable. ( Darcy v. Brooklyn N.Y. Ferry Co., 127 A.D. 167;; affd., 196 N.Y. 99;; Johnson v. Nevins, 87 Misc. 430;; Brinckerhoff v. Bostwick, 99 N.Y. 185;; Mason v. Henry, 152 id. 529.) In City Investing Co. v. Gerken ( 121 Misc. 763, 764), Mr. Justice PROSKAUER held: "With respect to the dividend, I find as a fact that it was declared and paid out of capital. The defendant Gerken was not at the meeting at which the dividend was voted. If this circumstance stood alone it would free him from liability under the opinion of Mr. Justice CLARKE in Hutchinson v. Curtiss, 45 Misc. 484. But the complaint alleges and the answer admits that all of the directors were present at a subsequent meeting, `at which they were advised of the declaration and payment of said dividend, and ratified and approved same.' This, coupled with the other facts alleged, seems to me sufficient to charge Gerken with personal and affirmative participation in the declaration and payment of the dividend."

2013400036 Inc., there were approximately 5,200 units, consisting of one share of common stock and one share of preferred stock of the corporation, held in the treasury;; that subsequent thereto and pursuant to certain arrangements, Southack Ball, Inc., received subscriptions for approximately 6,000 units prior to February 26, 1925;; that on or about March 18, 1925, at a meeting of the stockholders of Southack Ball, Inc., the capital stock was authorized to be increased, making available for sale an additional 10,000 shares of preferred and 5,000 shares of common stock;; that on February 16, 1925, an alleged meeting of the board of directors of Southack Ball, Inc., was held, at which were present Alwyn Ball, Jr., Alwyn Ball, 3d, Trisman, Russell, John S. Ball and Fife;; that at the time of such meeting there were eleven directors of the corporation, making six a quorum;; that "the virtual management and control of said meeting was exercised by the said defendants Ball who represented three members of said board;; that the remaining three members of said board present at said time were in the employ of said corporation and subservient to the wishes of the said defendants Ball;;" that at that meeting it was voted by the directors then present that the corporation, in order to meet the alleged oversubscription of units of its stock, should purchase from the defendants Ball 800 units of the stock of the company for the sum of $80,000;; that pursuant to such action of the board, the corporation, on or about February 28, 1925, did purchase from the said Balls 800 units and paid therefor the sum of $80,000. The allegation is then made that the defendants Ball were disqualified by virtue of their personal interest in the transaction from voting or participating therein;; that as a consequence thereof there was no quorum of the board, and that the resolution authorizing the purchase was invalid and nullified the purchase;; that at the time, and thereafter, sufficient unissued units of stock were available to meet any paid subscription and that the purchase of the 800 additional units was unnecessary;; "and that the defendants herein knew and were well advised or ought to have known of said facts at the time of the payment of said sum of $80,000 to the said defendants Ball."

It is charged that the directors present at the February 16, 1925, meeting exercised full control of the management of the corporation and that it was then within the board's discretion and control to increase the capital stock to meet any existing or prospective requirements for the filling of subscriptions;; that $80,000 was diverted from the treasury of the corporation to the defendants Ball, and should have been received by the corporation;; that the diversion was in violation of the obligations of the directors to the stockholders and creditors and in fraud of the corporation and creditors;; that such diversion constituted a violation of subdivision The conclusion is that the third, fourth and fifth causes meet the requirements, 5 of section 664 of the Penal Law, and section 58 of the Stock Corporation Law;; that the defendants not present at the meeting were elected and became directors and that the objections thereto must be overruled. at the time of the increase, or shortly thereafter, and that they were advised and The seventh cause alleges that, at the time of the incorporation of Southack Ball, knew, or ought to have known, of the wrongful conduct of February 16, 1925, and The second objection to these three causes of action is that there is an absence of allegation that at the time of the declaration of the unlawful dividends there were any judgment creditors of the corporation. Under section 58 of the Stock Corporation Law, however, liability is "to such corporation. * * *" The trustee here represents the corporation. Furthermore, section 60 of the General Corporation Law authorizes the recovery of damages for wasted assets by a trustee in bankruptcy. Manifestly dividends declared in the manner here charged constitute a waste of assets.

6

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) the payments subsequently made to the defendants Ball;; and that "the other defendants herein did acquiesce, approve, confirm and ratify the conduct of the said directors and the said defendants Ball and negligently failed and omitted to do anything or take any steps for the return of said moneys to the corporation or for the protection of the rights of said corporation, its stockholders or creditors, actual or prospective," to the damage of the plaintiff, representing the corporation, in the sum of $80,000. The moving defendant indicates that this seventh cause of action affirmatively shows that he was not present at the meeting of February 16, 1925, and that the allegation that certain named directors other than the moving defendant then owned all of the stock of the corporation and controlled the meeting excludes the moving defendant from liability. However, what has been said hereinabove as to knowledge, acquiescence and ratification applies with equal force here. Accordingly, this seventh cause is held adequate. The eighth cause repeats all of the allegations contained in the preceding seven causes, and charges that "as a result of the negligent, wasteful and fraudulent management and conduct of the business and affairs of the corporation * * * and as a result of the inattention to the conduct of the affairs of the corporation upon the part of the defendants or some of them, and their gross neglect of their duties as directors of the corporation, substantial losses were incurred upon the part of the said corporation, so that in the early part of 1926 the corporation was unable to carry on its affairs and meet its current obligations with the assets then available;;" that about that time the corporation had unlawfully converted funds which came into its possession as a fiduciary, and that in July, 1926, the amount so wrongfully converted was approximately $70,000, which shortage became the subject of discussion by the board on July 14, 1926, when a ways and means committee was appointed, consisting of the defendants Comstock, Man (the moving defendant), Rich, Wadham, Allen and Perrine;; that the defendants failed, neglected and refused to take proceedings to compel the defendants who had caused the wrongful diversion to make restitution, but, instead, "approved, ratified and acquiesced" therein;; that thereafter and on August 6, 1926, an agreement was entered into between the corporation and the defendants Comstock, Guggenheim, Man and Perrine, whereunder these four defendants indorsed the corporation's note for $140,000. Certain collateral was pledged to them as security. The purpose of the agreement, it is averred, was that these four defendants should arrogate to themselves the management of the corporation's affairs and that under the guise of lending their credit to the corporation they placed themselves in the position whereby they would secure, upon their own terms and for their own use and purposes, in violation of their duties, all of the assets and property of the corporation.

2013400036 Southack Ball Management Corporation, whose stock consisted of 1,000 shares of no par value, and all of which were issued to the bankrupt in consideration of the transfer to the management corporation of the entire management business of the corporation, consisting of the good will and all its contracts, valued by the board at the time at $250,000, but which, it is alleged, were worth in excess thereof;; that thereafter the agreement between said four defendants and the corporation was altered so as to include the 1,000 shares of management stock;; that then the aforementioned defendants, as a part of the aforesaid scheme, transferred all of the collateral in their possession to the American Trust Company as security for loans which had been made by that bank and guaranteed by the directors pursuant to the agreement of August 6, 1926;; that thereafter these four so maneuvered that the collateral was sold and the aforementioned defendants purchased the same for $1,000 when, in fact, the shares of the management corporation were valued in excess of $250,000. It is objected that this moving defendant did not cause or participate in the acts complained of in this eighth cause. Sufficient is alleged, however, to taint the moving defendant with the general charge of negligence respecting this transaction. The eighth cause, therefore, is held to state a cause of action against the moving defendant. The ninth cause charges the defendants with mismanagement in connection with the affairs of the Thayer West Point Hotel Corporation (in which the bankrupt was interested), the bankrupt having guaranteed payment of the bills of the builder and other contractors. It is charged that the construction costs exceeded what they should have, and as a consequence of this mismanagement regarding the hotel the bankrupt sustained damage in the sum of $585,279.09.

The moving defendant insists that the directors cannot be held personally liable because a building venture exceeds in cost the preliminary estimate and that, in effect, a mere error of judgment is alleged. Of course, the exercise of bad judgment alone cannot be made the foundation for liability. This ninth cause, however, goes beyond that, and charges that alterations of the plans of the hotel were made by the defendants "without any competent or proper or adequate investigation upon their part or consultation amongst themselves or with others as to the financial obligations necessarily to be incurred thereby and the means of financing the same and without any reasonable or proper regard to the financial obligation of the corporation by virtue of its guaranteeing of the existing contracts relating to the erection of said hotel and that the defendants with gross and culpable negligence did not make any adequate or proper arrangements for the financing of said additional expenditures in said sum of almost Eight Hundred That, pursuant to and in execution of this scheme, there was incorporated Thousand Dollars." In this connection all of the defendants are charged with "gross

7


2013400036

and culpable negligence * * * and * * * wanton disregard of their obligations as directors." These allegations are adequate. ISSUE: Did the failure to take affirmative action to discover the thief amount to a breach of duty to the corporation? The tenth cause is general in terms, but taken in connection with the allegations set forth in the preceding nine causes, which are realleged, and considering that the HOLDING: Yes, as far as the president is concerned, but not regarding the defendants are called upon to account, it is sufficient. The defendants' remedy for an directors. The directors acted reasonably by relying on the information given to amplification of the charges alleged in this cause, as well as the other causes, is a them. They had no reason to believe that there were any irregularities in the bank motion for a bill of particulars. records. Dresser’s position was different. He was in the bank daily. He had access to the books at all times. He knew of shortages and apparent The eleventh cause accuses the defendants of unlawful conduct in speculating unexplained declines in deposits, yet he failed to make any attempt to with the bankrupt's money in Florida real estate, it being charged that an investment discover the reasons behind these peculiar events. The continued losses were was made in a corporation owned and controlled by certain of the defendants, as a his fault b/c the warnings that he had should have led him to investigate. Had consequence of which the bankrupt was damaged in the sum of $75,000. It is he investigated, the losses may have been eliminated b/c he may have discovered alleged that all of the defendants approved, ratified and acquiesced in the unlawful the reason behind them. Dresser, as president, was much closer to the purchase of this worthless stock. This eleventh cause charges more than mere error operation of the bank than the directors. He was there every day, and he of judgment, and is sufficient to compel all of the defendants to account for their supervised the actual operation of the bank. This the directors didn’t do;; therefore, conduct in connection therewith. Where a fiduciary is personally interested in a Dresser’s position exposed him to the warning signs, while the directors transaction concerning the trust, "there is in equity a presumption against the were not exposed and, therefore, he was personally liable while the directors transaction, which he is required to explain." ( Sage v. Culver, 147 N.Y. 241, 247.) In were not. such a case only a prima facie case would be established. ( Coplay Cement Mfg. Co. v. Loeb, 124 Misc. 640;; affd., 215 A.D. 805.) MR. JUSTICE HOLMES delivered the opinion of the court. For the reasons above stated, the motion of the defendant Man is in all This is a bill in equity brought by the receiver of a national bank to charge its respects denied. former president and directors with the loss of a great part of its assets through the thefts of an employee of the bank while they were in power. The case was sent to a master who found for the defendants;; but the District Court entered a decree Bates v. Dresser 251 US 524 (1920) against all of them. 229 Fed. Rep. 772. The Circuit Court of Appeals reversed this DOCTRINE: The President being closer to the operations of the bank on a day to decree, dismissed the bill as against all except the administrator of Edwin Dresser, day basis is more liable for breach of diligence when compared to directors who must the president, cut down the amount with which he was charged and refused to add act on the basis of reports & representations to them during board meetings. interest from the date of the decree of the District Court. 250 Fed. Rep. 525. 162 C.C.A. 541. Dresser's administrator and the receiver both appeal, the latter contending that the decree of the District Court should be affirmed with interest and FACTS: Dresser (Defendant) was the president of a small bank in Cambridge. The costs. bank had only a few employees, and defendant supervised all the work that was done. One of the employees, Coleman, was promoted from messenger to The bank was a little bank at Cambridge with a capital of $100,000 and bookkeeper in 1904. From 1904 until 1907, there were several small shortages in average deposits of somewhere about $300,000. It had a cashier, a bookkeeper, a the bank and indications that an employee was stealing. There was no indication, teller and a messenger. Before and during the time of the losses Dresser was its however, that Coleman was dishonest. In 1907, Coleman began using his access to president and executive officer, a large stockholder, with an inactive deposit of the books to cover up the thefts he was making. He did this by altering the records in from $35,000 to $50,000. From July, 1903, to the end, Frank L. Earl was cashier. such a way that the only way he could be caught was to examine the deposit record Coleman, who made the trouble, entered the service of the bank as messenger in of all the deposits. During this time, defendant had several indications that someone September, 1903. In January, 1904, he was promoted to be bookkeeper, being at the bank was a thief. He never attempted to ascertain who the thief was or to then not quite eighteen but having studied bookkeeping. In the previous August an examine the books, even though he had the opportunity to do so.

8

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) auditor employed on the retirement of a cashier had reported that the daily balance book was very much behind, that it was impossible to *527 prove the deposits, and that a competent bookkeeper should be employed upon the work immediately. Coleman kept the deposit ledger and this was the work that fell into his hands. There was no cage in the bank, and in 1904 and 1905 there were some small shortages in the accounts of three successive tellers that were not accounted for, and the last of them, Cutting, was asked by Dresser to resign on that ground. Before doing so he told Dresser that someone had taken the money and that if he might be allowed to stay he would set a trap and catch the man, but Dresser did not care to do that and thought that there was nothing wrong. From Cutting's resignation on October 7, 1905, Coleman acted as paying and receiving teller, in addition to his other duty, until November, 1907. During this time there were no shortages disclosed in the teller's accounts. In May, 1906, Coleman took $2,000 cash from the vaults of the bank, but restored it the next morning. In November of the same year he began the thefts that come into question here. Perhaps in the beginning he took the money directly. But as he ceased to have charge of the cash in November, 1907, he invented another way. Having a small account at the bank, he would draw checks for the amount he wanted, exchange checks with a Boston broker, get cash for the broker's check, and, when his own check came to the bank through the clearing house, would abstract it from the envelope, enter the others on his book and conceal the difference by a charge to some other account or a false addition in the column of drafts or deposits in the depositors' ledger. He handed to the cashier only the slip from the clearing house that showed the totals. The cashier paid whatever appeared to be due and thus Coleman's checks were honored. So far as Coleman thought it necessary, in view of the absolute trust in him on the part of all concerned, he took care that his balances should agree with those in the cashier's book. *528 By May 1, 1907, Coleman had abstracted $17,000, concealing the fact by false additions in the column of total checks, and false balances in the deposit ledger. Then for the moment a safer concealment was effected by charging the whole to Dresser's account. Coleman adopted this method when a bank examiner was expected. Of course when the fraud was disguised by overcharging a depositor it could not be discovered except by calling in the pass-books, or taking all the deposit slips and comparing them with the depositors' ledger in detail. By November, 1907, the amount taken by Coleman was $30,100, and the charge on Dresser's account was $20,000. In 1908 the sum was raised from $33,000 to $49,671. In 1909 Coleman's activity began to increase. In January he took $6,829.26;; in March, $10,833.73;; in June, his previous stealings amounting to $83,390.94, he took $5,152.06;; in July, $18,050;; in August, $6,250;; in September, $17,350;; in October, $47,277.08;; in November, $51,847;; in December, $46,956.44;; in January, 1910, $27,395.53;; in February, $6,473.97;; making a total of $310,143.02, when the bank closed on February 21, 1910. As a result of this the amount of the monthly deposits

2013400036 seemed to decline noticeably and the directors considered the matter in September, 1909, but concluded that the falling off was due in part to the springing up of rivals, whose deposits were increasing, but was parallel to a similar decrease in New York. An examination by a bank examiner in December, 1909, disclosed nothing wrong to him. In this connection it should be mentioned that in the previous semi-annual examinations by national bank examiners nothing was discovered pointing to malfeasance. The cashier was honest and everybody believed that they could rely upon him, although in fact he relied too much upon Coleman, who also was unsuspected by all. If Earl had opened the envelopes from the clearing house, and had seen the checks, or had examined the deposit *529 ledger with any care he would have found out what was going on. The scrutiny of anyone accustomed to such details would have discovered the false additions and other indicia of fraud that were on the face of the book. But it may be doubted whether anything less than a continuous pursuit of the figures through pages would have done so except by a lucky chance. The question of the liability of the directors in this case is the question whether they neglected their duty by accepting the cashier's statement of liabilities and failing to inspect the depositors' ledger. The statements of assets always were correct. A by-law that had been allowed to become obsolete or nearly so is invoked as establishing their own standard of conduct. By that a committee was to be appointed every six months "to examine into the affairs of the bank, to count its cash, and compare its assets and liabilities with the balances on the general ledger, for the purpose of ascertaining whether or not the books are correctly kept, and the condition of the bank is in a sound and solvent condition." Of course liabilities as well as assets must be known to know the condition and, as this case shows, peculations may be concealed as well by a false understatement of liabilities as by a false show of assets. But the former is not the direction in which fraud would have been looked for, especially on the part of one who at the time of his principal abstractions was not in contact with the funds. A debtor hardly expects to have his liability understated. Some animals must have given at least one exhibition of dangerous propensities before the owner can be held. This fraud was a novelty in the way of swindling a bank so far as the knowledge of any experience had reached Cambridge before 1910. We are not prepared to reverse the finding of the master and the Circuit Court of Appeals that the directors should not be held answerable for taking the cashier's statement of liabilities to be as correct as the *530 statement of assets always was. If he had not been negligent without their knowledge it would have been. Their confidence seemed warranted by the semi- annual examinations by the government examiner and they were encouraged in their belief that all was well by the president, whose responsibility, as executive

9


2013400036

officer;; interest, as large stockholder and depositor;; and knowledge, from long daily presence in the bank, were greater than theirs. They were not bound by virtue of the office gratuitously assumed by them to call in the pass-books and compare them with the ledger, and until the event showed the possibility they hardly could have seen that their failure to look at the ledger opened a way to fraud. See Briggs v. Spaulding, 141 U.S. 132;; Warner v. Penoyer, 91 Fed. Rep. 587. We are not laying down general principles, however, but confine our decision to the circumstances of the particular case.

hesitation the date of December 1, 1908, as the beginning of Dresser's liability, but think it reasonable that interest should be charged against his estate upon the sum found by the Circuit Court of Appeals to be due. It is a question of discretion, not of right, Lincoln v. Claflin, 7 Wall. 132;; Drumm-Flato Commission Co. v. Edmisson, 208 U.S. 534, 539, but to the extent that the decree of the District Court was affirmed, Kneeland v. American Loan & Trust Co., 138 U.S. 509;; De La Rama *532 v. De La Rama, 241 U.S. 154, 159, it seems to us just upon all the circumstances that it should run until the receiver interposed a delay by his appeal to this Court. The Scotland, 118 U.S. 507, 520. Upon this as upon the other points our decision The position of the president is different. Practically he was the master of the is confined to the specific facts. situation. He was daily at the bank for hours, he had the deposit ledger in his hands at times and might have had it at any time. He had had hints and warnings in addition Decree modified by charging the estate of Dresser with interest from February to those that we have mentioned, warnings that should not be magnified unduly, but 1, 1916, to June 1, 1918, upon the sum found to be due, and affirmed. still that taken with the auditor's report of 1903, the unexplained shortages, the MR. JUSTICE McKENNA and MR. JUSTICE PITNEY dissent, upon the suggestion of the teller, Cutting, in 1905, and the final seeming rapid decline in deposits, would have induced scrutiny but for an invincible repose upon the status ground that not only the administrator of the president of the bank but the other quo. In 1908 one Fillmore learned that a package containing $150 left with the bank directors ought to be held liable to the extent to which they were held by the District for safe keeping was not to be found, told Dresser of the loss, wrote to him that he Court, 229 Fed. Rep. 772. could but conclude that the package had been destroyed or removed by someone MR. JUSTICE VAN DEVANTER and MR. JUSTICE BRANDEIS took no part in connected with the bank, and in later conversation said that it was evident that there was a thief in the bank. He added that he would advise the president to look after the decision. Coleman, that he believed he was living at a pretty fast pace, and that he *531 had pretty good authority for thinking that he was supporting a woman. In the same year PNB v. CA 83 SCRA 238 ( May 18, 1978) or the year before, Coleman, whose pay was never more than twelve dollars a week, 83 SCRA 237 – Business Organization – Corporation Law – Corporation’s set up an automobile, as was known to Dresser and commented on unfavorably, to Liability for Negligence him. There was also some evidence of notice to Dresser that Coleman was dealing Rita Tapnio owes PNB an amount of P2,000.00. The amount is secured by her in copper stocks. In 1909 came the great and inadequately explained seeming sugar crops about to be harvested including her export quota allocation worth shrinkage in the deposits. No doubt plausible explanations of his conduct came from 1,000 piculs. The said export quota was later dealt by Tapnio to a certain Jacobo Coleman and the notice as to speculations may have been slight, but taking the Tuazon at P2.50 per picul or a total of P2,500. Since the subject of the deal is whole story of the relations of the parties, we are not ready to say that the two courts mortgaged with PNB, the latter has to approve it. The branch manager of PNB below erred in finding that Dresser had been put upon his guard. However little the recommended that the price should be at P2.80 per picul which was the prevailing warnings may have pointed to the specific facts, had they been accepted they would minimum amount allowable. Tapnio and Tuazon agreed to the said amount. And have led to an examination of the depositors' ledger, a discovery of past and a so the bank manager recommended the agreement to the vice president of PNB. prevention of future thefts. The vice president in turn recommended it to the board of directors of PNB. However, the Board of Directors wanted to raise the price to P3.00 per picul. We do not perceive any ground for applying to this case the limitations of liability ex contractu adverted to in Globe Refining Co. v. Landa Cotton Oil Co., 190 U.S. This Tuazon does not want hence he backed out from the agreement. This 540. In accepting the presidency Dresser must be taken to have contemplated resulted to Tapnio not being able to realize profit and at the same time rendered responsibility for losses to the bank, whatever they were, if chargeable to his fault. her unable to pay her P2,000.00 crop loan which would have been covered by her Those that happened were chargeable to his fault, after he had warnings that should agreement with Tuazon. Eventually, Tapnio was sued by her other creditors and Tapnio filed a third party have led to steps that would have made fraud impossible, even though the precise form that the fraud would take hardly could have been foreseen. We accept with complaint against PNB where she alleged that her failure to pay her debts was because of PNB’s negligence and unreasonableness.

10

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) ISSUE: Whether or not Tapnio is correct. HELD: Yes. In this type of transaction, time is of the essence considering that Tapnio’s sugar quota for said year needs to be utilized ASAP otherwise her allotment may be assigned to someone else, and if she can’t use it, she won’t be able to export her crops. It is unreasonable for PNB’s board of directors to disallow the agreement between Tapnio and Tuazon because of the mere difference of 0.20 in the agreed price rate. What makes it more unreasonable is the fact that the P2.80 was recommended both by the bank manager and PNB’s VP yet it was disapproved by the board. Further, the P2.80 per picul rate is the minimum allowable rate pursuant to prevailing market trends that time. This unreasonable stand reflects PNB’s lack of the reasonable degree of care and vigilance in attending to the matter. PNB is therefore negligent. A corporation is civilly liable in the same manner as natural persons for torts, because “generally speaking, the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person. All of the authorities agree that a principal or master is liable for every tort which it expressly directs or authorizes, and this is just as true of a corporation as of a natural person, a corporation is liable, therefore, whenever a tortious act is committed by an officer or agent under express direction or authority from the stockholders or members acting as a body, or, generally, from the directors as the governing body.” LIABILITY OF OFFICER – TRAMAT CASE • when officer becomes solidarily liable with the corporation - gross negligence, issuance of watered stocks. Consent to be solidarily liable – signing of promissory notes in his personal capacity, vicarious liability, trust receipt law – officer can be solidarily liable. 1) Compensation of directors – Sec. 30 Section 30. Compensation of directors. – In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. (n) (LAST SENTENCE: includes per diem)

2013400036 2 ways DIRECTOR MAY HAVE COMPENSATION: 1. fixed by the by-law granting compensation to director 2. not fixed in the bylaw but granted by the 2/3 outstanding stockholders • RATIONALE: directors as stockholders should be gratuitous if they became a director .They should act for the stockholders advantage. • DIEM: by the directors à board resolution • Section 30 also applies to TRUSTEES • NOT applicable to OFFICERS à must be reasonable compensation, and not done in fraud Western Institute of Technology v. Salas 278 SCRA 216 WESTERN INSTITUTE OF TECHNOLOGY, INC. vs. SALAS G.R. No. 113032 August 21, 1997 FACTS: Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas- Tubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the same family, are the majority and controlling members of the Board of Trustees of Western Institute of Technology, Inc., a stock corporation engaged in the operation, among others, of an educational institution. According to petitioners, the minority stockholders of WIT, a Special Board Meeting was held. In attendance were other members of the Board including one of the petitioners Reginald Villasis. In said meeting, the Board of Trustees passed Resolution No. 48, s. 1986, granting monthly compensation to the private respondents as corporate officers retroactive June 1, 1985. A few years later, petitioners Homero Villasis, Prestod Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against private respondents before the Office of the City Prosecutor, as a result of which two (2) separate criminal informations, one for falsification of a public document and the other for estafa, were filed before the Regional Trial Court. The charge for falsification of public document was anchored on the private respondents' submission of WIT's income statement for the fiscal year 1985-1986 with the Securities and Exchange Commission reflecting therein the disbursement of corporate funds for the compensation of private respondents based on Resolution No. 4, series of 1986, making it appear that the same was passed by the board on March 30, 1986, when in truth, the same was actually passed on June 1, 1986, a date not covered by the corporation's fiscal year 1985-1986. Thereafter, trial for the two criminal cases, was consolidated. After a full-blown hearing, Judge Porfirio Parian handed down a verdict of acquittal on both counts without imposing any civil

11

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) liability against the accused therein. Petitioners filed a Motion for Reconsideration of the civil aspect of the RTC Decision which was, however, denied in an Order. ISSUE: Whether or not the case is derivative suit correctly filed in the Regional Trial Court. RULING: NO. Granting, for purposes of discussion, that this is a derivative suit as insisted by petitioners, which it is not, the same is outrightly dismissible for having been wrongfully filed in the regular court devoid of any jurisdiction to entertain the complaint. The ease should have been filed with the Securities and Exchange Commission (SEC) which exercises original and exclusive jurisdiction over derivative suits, they being intra-corporate disputes, per Section 5 (b) of P.D. No. 902-A: “In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates;; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively;; and between such corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity. SYNOPSIS – CD ASIA Private respondents, majority and controlling members of the Board of Trustees of Western Institute of Technology, Inc. were acquitted of the crimes of estafa and falsification of public document. The falsification charge was anchored on private respondents submission of the school's income statement for fiscal year 1985-1986 with the Securities and Exchange Commission reflecting therein the disbursement of corporate funds for the compensation of private respondents based on Resolution No. 4, series of 1986, and making it appear that the Resolution was passed by the board on March 30, 1986, when in truth the same was actually passed on June 1, 1986, a date not covered by the corporation's fiscal year. The charge of estafa is based on private respondent's having disbursed funds of the corporation by effecting payment of their retroactive salaries of P186,470.00 and subsequently paying themselves every 15th and 30th of the month starting June 15, 1986 in the amount of

2013400036 P19,500.00 per month. After trial, the court acquitted the private respondents on both counts without imposing any civil liability against them. The individual petitioners, minority stockholders of the corporation, thus seek to hold the private respondents civilly liable despite their acquittal based on the alleged illegal issuance by private respondents of Resolution No. 4, series of 1986, ordering the disbursement of corporate funds and that the grant of compensation to private respondents is proscribed under Sec. 30 of the Corporation Code. The Supreme Court held that the proscription against granting compensation to directors/trustees of a corporation is not a sweeping rule. The implication under Sec. 30 of the Corporation Code is that members of the board may receive compensation in addition to reasonable per diems when they render services to the corporation in a capacity other than as directors/trustees. Resolution No. 4 s. 1986 granted compensation to private respondents not in their capacity as members of the board but rather as officers of the corporation. The instant case which is merely an appeal on the civil aspect of the criminal cases for estafa and falsification of public document, is not a derivative suit. Even if the case is a derivative suit, the same was wrongfully filed in the regular court as the proper forum is the Securities and Exchange Commission which exercises original and exclusive jurisdiction over intra-corporate disputes. The acquittal in the criminal cases is not merely based on reasonable doubt but rather on a finding that the accused-private respondents did not commit action ex delicto cannot prosper. 2) Duty of diligence/Business Judgment Rule – Secs.23, 31 TITLE III BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Section 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 until their successors are elected and qualified. (28a) Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

12

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. NOTE: • Relate section 31 with 34 à Section 34 on Business Opportunity à it must belong to the corporation • If not a business opportunity, that the director will grab à will not be liable for dmages under Section 34 since it does not belong to the corporation Board of Liquidators v. Kalaw 20 SCRA 987 Board of Liquidators vs. Heirs of Kalaw G.R. No. L-18805;; August 14, 1967 FACTS: Maximo Kalaw is chairman of the board and general manager of the National Coconut Corporation (NACOCO), a non-profit GOCC empowered by its charter to buy sell barter export and deal in coconut, copra, and desiccated coconut. Bocar, Garcia and Moll were directors. It entered into contracts for the trading and delivery of copra. Nature intervened—4 typhoons devastated agriculture and copra production. NACOCO was on the verge of sustaining losses and could not be able to make good on the contracts. Sensing this, Kalaw submitted the contracts to the board for approval and made a full disclosure of the situation. No action was taken, and no vote was taken on the matter. On 20 Jan 1947 the board met again with Kalaw, Bocar, Garcia, and Moll in attendance, and approved the contracts. NACOCO however only partially performed the contracts. One of the contracts concerns the Louis Drayfus & Co., which sued NACOCO. NACOCO settled out-of-court and paid Drayfus P567,024.52 representing 70% of total claims. The total settlements sum up to P1.3M. NACOCO sues Kalaw, and his directors Bocar, Moll and Garcia to recover this sum, alleging negligence, bad faith and breach of trust in approving the contracts, by not having them approved by the board. TC dismisses complaint. NACOCO claims that the by-laws provide that prior board approval is required before the GM can perform or execute in behalf of NACOCO all contracts necessary to accomplish its purpose. ISSUE: WON the Kalaw contracts are valid despite its lack of prior board approval as required by the NACOCO by-laws.

2013400036 HELD: The contracts in question are “forward sales” contracts—a sales agreement entered into, even though the goods are not yet in the hands of the seller. Given the peculiar nature of copra trading, i.e. copra must be disposed of as soon as possible else it would lose weight and would decrease its value, it necessitates a quick turnover and execution of the contract on short notice (w/in 24 hours). It would be difficult if not impractical to call a formal meeting of the board each time a contract is to be executed. Kalaw was a corporate officer entrusted with general management and control of NACOCO. He had implied authority to make any contract or do any act which is necessary for the conduct of the business. He may, without authority from the board, perform acts of ordinary nature for as long as these redound to the interest of the corporation. Particularly, he contracted forward sales with business entities. Long before some of these contracts were disputed, he contracted by himself alone, without board approval. All of the members of the board knew about this practice and have entrusted fully such decisions with Kalaw. He was never questioned nor reprimanded nor prevented from this practice. In fact, the board itself, through its acts and by acquiescence, have laid aside the by-law requirement of prior board approval. Thus, it cannot now declare that these contracts (failures) are not binding on NACOCO. Ratification by a corporation of an unauthorized act or contract by its officers relates back to the time of the act or contract ratified and is equivalent to original authority. The theory of corporate ratification is predicated upon the right of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior authority. Ratification “cleanses the contract from all its defects from the moment it was constituted. Thus, even in the face of an express by-law requirement of prior approval, the law on corporations is not to be held too rigid and inflexible as to fail to recognize equitable considerations. FACTS: National Coconut Corporation (NACOCO) is with Maximo Kalaw as its General Manager and Chairman of the BOD. Under his tenure NACOCO entered into different contracts involving the trade of coconuts. It failed, however, due to natural calamities that greatly affected the production of coconuts. This led to some customers of NACOCO suing the corporation for undelivered coconuts due to them under the contracts that they signed. This was settled by NACOCO by paying the customers. Thereafter, NACOCO seeks to recover the above sum of P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under

13

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) Article 1902 of the old Civil Code (now Article 2176, new Civil Code);; and defendant board members, including Kalaw, with bad faith and/or breach trust for having approved the contracts. ISSUE: Whether or not Kalaw may be held liable by NACOCO for the debts the corporation incurred under his administration. RULING: NO. They were done with implied authority from the BOD. These previous contracts, it should be stressed, were signed by Kalaw without prior authority from the board. Said contracts were known all along to the board members. Nothing was said by them. The aforesaid contracts stand to prove one thing. Obviously NACOCO board met the difficulties attendant to forward sales by leaving the adoption of means to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw. Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general practice, custom, and policy, the general manager may bind the company without formal authorization of the board of directors. In varying language, existence of such authority is established, by proof of the course of business, the usages and practices of the company and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority;;" and that "[t]he corporation and the other party to the transaction are in precisely the same position as if the act or contract had been authorized at the time." The language of one case is expressive: "The adoption or ratification of a contract by a corporation is nothing more nor less than the making of an original contract. The theory of corporate ratification is predicated on the right of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior authority. NOTE: • for an officer à prove guilty of gross negligence or bad faith à must be clearly established by evidence and bad faith. • Officers / directors à trustees of the properties of the corporation for the stockholders • Insolvencies à directors becomes trustees of the creditors

2013400036 Benguet Electric Coop. v. NLRC 209 SCRA 55 Benguet Electric Cooperative vs. NLRC G.R. No. 89070;; May 18, 1992 FACTS: Cosalan, GM of the Benguet Electric Cooperative, was informed by COA that cash advances received by officers and employees of Benguet Electric had been virtually written off the books, that per diems and allowances showed substantial inconsistencies with the directives of the National Electrification Administration, and that several irregularities in the utilization of funds released by NEA to Benguet. Cosalan then implemented the remedial measures recommended by COA. Board members of Benguet responded by abolishing the housing allowance of Cosalan, reduced his salary, representation and other allowances, and directed him to hold in abeyance all disciplinary actions, and struck his name out as principal signatory of Benguet Electric. The Board adopted another series of resolutions which resulted in the ouster of Cosalan as GM. Cosalan nonetheless continued to work as GM, contending that only the NEA can suspend and remove him. The Board then refused to act on Cosalan request to release compensation due him. Cosalan files a complaint with the NLRC against the Board of Benguet Electric, and impleaded Benguet Electric itself as well as the individual members of the board in their official and private capacities. Labor Arbiter rules in favor of Cosalan, holding both the company and the board solidarily liable to Cosalan. NLRC modifies award to Cosalan by declaring Benguet alone, and not the Board members, was liable to Cosalan. Benguet appeals. ISSUE: WON both the corporation and board members are liable to Cosalan. HELD: YES. The Board members and officers of a corporation who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting, and act in good faith, do not become liable, civilly or otherwise, for the consequences of their acts. Those acts are properly attributed to the corporation alone and no personal liability is incurred. In this case, the board members obviously wanted to get rid of Cosalan and acted with indecent haste in removing him from his GM position. This shows strong indications that the members of the board had illegally suspended and dismissed him precisely because he was trying to rectify the financial irregularities. The Board members are also liable for damages under Sec. 31 of the

14

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) Corporation Code, which by virtue of Sec. 4 thereof, makes it applicable in a supplementary manner to all corporations, including those with special or individual charters so long as these are not inconsistent therewith. The Board members are also guilty of gross negligence and bad faith in directing the affairs of the corporation in enacting the said resolutions, and in doing so, acted beyond the scope of their authority. 3) Self-dealing directors- Sec. 32 • Co-relate Section 32(2) with Section 34 • If the person obtains a business opportunity for himself but he is an office à Section 31 • NOT RATIFIED à vitiated • Other conditions are not complied but 2/3 is complied à? • If all conditions are complied à valid and cannot be rescinded Section 32. Dealings of directors, trustees or officers with the corporation. – A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;; 2. That the vote of such director or trustee was not necessary for the approval of the contract;; 3. That the contract is fair and reasonable under the circumstances;; and 4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances. (n) Prime White Cement v. IAC 220 SCRA 103 Prime White Cement vs. IAC G.R. No. L-68555;; March 19, 1993 FACTS:

2013400036 Prime White Cement entered into a dealership agreement with one of its directors, Alejandro Te, for the latter to be the exclusive distributor of 20,000 bags of Prime White cement per month @ P9.70 per bag for the entire Mindanao area for 5 years, and that a letter of credit be opened to secure payment. Te advertised his dealership and was able to obtain possible clients, and entered into agreements with several hardware stores for the purchase of the cement. Te then informed Prime White of the orders, but the latter imposed additional conditions, which effectively delayed the delivery of the cement, lowered the number of bags to be delivered, and increased the price per bag. It also made the prices subject to change unilaterally and additional conditions on the manner of payment. Te refused to comply and Prime White cancelled the dealership agreement. Te sued for specific performance and damages. TC ruled in favor of Te. ISSUE: WON the dealership agreement is a valid and enforceable contract binding on the corporation. HELD: NO. It is not valid and enforceable. All corporate powers are exercised by the Board. It may also delegate specific powers to its President or other officers. In the absence of express delegation, a contract entered into by the President in behalf of the corporation, may still bind the latter if the board should ratify expressly or impliedly. In the absence of express or implied ratification, the President may as a general rule bind the corporation through a contract in the ordinary course of business, provided the same is reasonable under the circumstances. These rules are applicable where the President or other officer acting for the corporation is dealing with a third person. The situation is different where a director or officer is dealing with his own corporation. Te was not an ordinary stockholder;; he was a member of the Board and Auditor of the corporation. He is what is often called a “self- dealing” director. As a director, he holds a position of trust and owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. The trust relationship springs from the control and guidance of the corporate affairs and property interests of the stockholders. A director’s contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made. 4) Interlocking directors – Sec. 33 Section 33. Contracts between corporations with interlocking directors. – Except in cases of fraud, and provided the contract is fair and reasonable under the

15

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. (n) NOTE: • CONDITIONS: 1. Not fraudulent 2. Fair and reasonable under the circumstances 3. The interest of the interlocking director à substantial interest in one corporation and a nominal interest in the other corporation. • APPLY SECTION 32 à directors who has nominal interest àhe is at a disadvantage à corporation code protects those with nominal. Considered as a self dealing corporation à apply only his interest in one is substantial and the other is nominal • WHAT IF, director voted for the approval of the contract and that his interest is 30% in one and 20% in another à is it valid? Both corporation approved à it is valid, his interest is substantial in both so he is allowed to vote o Nominal interest of both, both corporation voted to validate the contract, including his vote à still valid Gokongwei v. SEC et al. 89 SCRA 336 FACTS: Petitioner, stockholder of San Miguel Corp. filed a petition with the SEC for the declaration of nullity of the by-laws etc. against the majority members of the BOD and San Miguel. It is stated in the by-laws that the amendment or modification of the by-laws may only be delegated to the BOD’s upon an affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 could have been computed on the basis of the capitalization at the time of the amendment. Petitioner contends that the amendment was based on the 1961 authorization, the Board acted without authority and in usurpation of the power of the stockholders in amending the by-laws in 1976. He also contends that the 1961 authorization was already used in 1962 and 1963. He also contends that the amendment deprived him of his right to vote and be voted upon as a stockholder (because it disqualified competitors from nomination and election in the BOD of SMC), thus the amended by-laws were null and void.

2013400036 While this was pending, the corporation called for a stockholder’s meeting for the ratification of the amendment to the by-laws. This prompted petitioner to seek for summary judgment. This was denied by the SEC. In another case filed by petitioner, he alleged that the corporation had been using corporate funds in other corporations and businesses outside the primary purpose clause of the corporation in violation of the Corporation Code. ISSUE: WON the amended by-laws of SMC of disqualifying a competitor (Interlocking director) from nomination or election to the Board of Directors of SMC are valid and reasonable. HELD: Under US corporate law, corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation's Board of Directors. ... An amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid." This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment "advances the benefit of the corporation and is good." In the Philippines, section 21 of the Corporation Law expressly provides that a corporation may make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a 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.” It is also well established that corporate officers "are not permitted to use their position of trust and confidence to further their private interests." In a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of its products, the court held that equity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal. FACTS:

16

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) Gokonwei alleged that on September 18, 1976, individual respondents amended by bylaws of San Miguel Corporation, basing their authority to do so on a resolution of the stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled 30,127,043, with a total par value of P301,270,430.00. It was contended that according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the amendment. Since the amendment was based on the 1961 authorization, petitioner contended that the Board acted without authority and in usurpation of the power of the stockholders. It was claimed that prior to the questioned amendment, petitioner had all the qualifications to be a director of respondent corporation, being a substantial stockholder thereof;; that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors;; and that in amending the by-laws, respondents purposely provided for petitioner's disqualification and deprived him of his vested right as afore-mentioned, hence the amended by-laws are null and void. ISSUE: Whether or not SMC’s BoD acted in bad faith in making the amendment which disqualified Gokongwei from being elected as Director. RULING: NO. SMC is merely protecting its interest from Gokongwei, who owns companies in direct competition with SMC’s business. Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, they occupy a fiduciary relation, and in this sense the relation is one of trust. It springs from the fact that directors have the control and guidance of corporate affairs and property;; hence of the property interests of the stockholders. Equity recognizes that stockholders are

2013400036 the proprietors of the corporate interests and are ultimately the only beneficiaries thereof It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. 5) Doctrine of Corporate Opportunity – Sec. 34 Section 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 his own funds in the venture. (n) NOTE: • The corporate opportunity doctrine is the legal principle providing that directors, officers, and controlling shareholders of a corporation must not take for themselves any business opportunity that could benefit the corporation.[1] The corporate opportunity doctrine is one application of the fiduciary duty of loyalty • The corporate opportunity doctrine does not apply to all fiduciaries of a corporation;; rather, it is limited to directors, officers, and controlling shareholders.[3] The doctrine applies regardless of whether the corporation is harmed by the transaction;; indeed, it applies even if the corporation benefits from the transaction.[4] The corporate opportunity doctrine only applies if the opportunity was not disclosed to the corporation. If the opportunity was disclosed to the board of directors and the board declined to take the opportunity for the corporation, the fiduciary may take the opportunity for him- or herself.[5] When the corporate opportunity doctrine applies, the corporation is entitled to all profits earned by the fiduciary from the transaction

17

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) •

Elements: A business opportunity is a corporate opportunity if the corporation is financially able to undertake the opportunity, the opportunity is within the corporation's line of business, and the corporation has an interest or expectancy in the opportunity.[7] The Delaware Court of Chancery has stated, "An opportunity is within a corporation's line of business . . . if it is an activity as to which the corporation has fundamental knowledge, practical experience and ability to pursue."[8] In In re eBay, Inc. Shareholders Litigation, investing in various securities was held to be in a line of business of eBay despite the fact that eBay's primary purpose is to provide an online auction platform.[9] Investing was in a line of business of eBay because eBay "consistently invested a portion of its cash on hand in marketable securities."[10] A corporation has an interest or expectancy in a business opportunity if the opportunity would further an established business policy of the corporation.[11]

NOTE: • Directors are not full time or employee of the corporation except if they are COO, CEO or CFO à acts of said directors to take business opportunity à ratified by the stockholders will make said director not liable anymore for profits or loss incurred by him. • Reason why ratified ? if director owns 2/3 to ratify, it is not attractive to the business or not in line with the corporations business • Business Opportunity belongs to the corporation à director takes such opportunity he shall be liable under Sec34 (is it in line with the corporations business?) • Business Opportunity NOT BELONGS to the corporation à director will not be liable if he takes said opportunity 6) Duty to stockholders - Special Facts Doctrine NOTES: • Special facts doctrine is a term used in corporate law to describe the fiduciary duty of a corporate officer to shareholders to disclose information during a transaction involving a stock transfer. This duty arises because of the superior knowledge the officer holds by virtue of his or her position. • The special facts doctrine requires a director to disclose information in the context of a sale of the stock of a privately held corporation “only when a director is possessed of special knowledge of future plans or secret resources and deliberately misleads a stockholder who is ignorant of them.” To satisfy the special facts requirement, a plaintiff must point to

2013400036 knowledge of a substantial transaction, such as an offer to acquire the whole company. Strong v.Repide 41 Phil. 947 Strong and Strong vs. Repide 41 Phil. 9473 May 1909 PONENTE : Justice Peckham FACTS: Among the lands comprising the friar lands are the Dominican lands, the only valuable asset owned by the corporation Philippine Sugar Estates Development Company Limited (Philippine Sugar Estates). Francisco Gutierrez Repide (Repide), defendant, was the majority stockholder and one of the five directors of Philippine Sugar Estates. He was likewise elected by the board as the agent and administrator general of such company. The factual backdrop being during US occupation, the US Government wanted to secure title over the friar lands. To accomplish this objective, Governor for the Philippines entered into negotiations for the purchase of the Dominican lands, during which Repide represented Philippine Sugar Estates. The first offer of the Governor was to purchase the subject lands in the amount of $6,043,219.47. As the majority stockholder of Philippine Sugar Estates and without prior consultation with the other stockholders, Repide rejected the offer. For the second offer, the purchase price was increased to $7,535,000. While negotiations for the second offer were ongoing and while still holding out for a higher price of the Dominican lands, Repide took steps to purchase the 800 shares of stock of Philippine Sugar Estates. These shares were owned by Mrs. Eleanor Strong (Strong) which were then in the possession of her agent, F. Stuart Jones (Jones). Repide, instead of seeing Jones, employed Kauffman who later on employed Sloan, a broker, to purchase the shares of Strong. Jones sold the 800 shares of Strong for 16,000 Mexican currency. For this sale transaction a check of one Rueda Ramos was issued. Later on, the negotiations for the purchase of the Dominican lands were concluded and a contract of sale was subsequently executed. This sale transaction increased the value of the shares of stocks originally owned by Strong from 16,000 Mexican currency to 76,256 US currency. During the negotiations regarding the purchase of the shares of stock of Strong, not one word of the facts affecting the value of this stock was made known to her nor her agent, Jones. After the sale of Dominican lands and after the purchase of the 800 shares of Strong, Repide became the owner of 30,400 out of the 42,030 shares of Philippine Sugar Estates.

18

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) Strong filed a complaint for the recovery of her 800 shares. She argued that her agent Jones had no authority to sell her shares and that Repide fraudulently concealed the facts affecting their value. ISSUE: Was there fraud in effecting the purchase of Strong’s shares? RULING: Yes. With the factual circumstances of this case, it became the duty of Repide, acting in good faith, to state the facts before making the purchase of Strong’s shares. That Repide was one of the directors of Philippine Sugar Estates was but one of the facts upon which liability is asserted. He was not only a director, but he owned three-fourths of the shares of its stock, and was, at the time of the purchase of the stock, administrator general of the company with large powers and engaged in the negotiations which finally led to the sale of the company’s lands at a price which greatly enhanced the value of the stock. He was the negotiator for the sale of the Dominican lands and was acting substantially as the agent of the shareholders of Philippine Sugar Estates by reason of his ownership of the shares in the company. Because of such ownership and agency, no one knew as well as he does about the exact condition of the negotiations. He was the only one who knew of the probability of the sale of the Dominican lands to the government and of the probable purchase price. Under these circumstances, Repide employed an agent to purchase the stock of Strong, concealed his own identity and his knowledge of the state of negotiations and their probable result. The concealment of his identity while procuring the purchase of the stock, by his agent, was in itself strong evidence of fraud on the part of Repide. By such means, the more easily was he able to avoid questions relative to the negotiations for the sale of Dominican lands and actual misrepresentations regarding that subject. He kept up the concealment as long as he could by giving the check of a third person Rueda Ramos, for the purchase money. This move of Repide was a studied and intentional omission to be characterized as part of the deceitful machinations to obtain the purchase without giving any information whatever as to the state and probable result of the negotiations and to obtain a lower price for the shares of Strong. After the purchase of stock, he continued negotiations for the sale of the Dominican lands as the administrator general and eventually entered into a contract of sale. The whole transaction gives conclusive evidence of the overwhelming influence Repide had in the negotiations and it is clear that the final consummation was in his hands at all times. OBITER DICTUM: The directors are declared to be mandatories of the society and that they are prohibited from acquiring by purchase, even at public or judicial auction, the

2013400036 property the administration or sale of which, may have been entrusted to them, and that this is the extent of the prohibition. 7) Duty to creditors – Steinberg v. Velasco 52 Phil. 953 G.R. No. L-30460;; March 12, 1929 FACTS: The board of the corporation authorized the purchase of 330shares of capital stock of the corporation and the declaration of dividends at a time when the corporation was indebted and in such a bad financial condition. The directors relied on the face value on the books of its A/R, which had little or no value. Furthermore it appears that two of the directors were permitted to resign so that they could sell their stock to the corporation. The corporation became insolvent, and the receiver Steinberg sues the directors. ISSUE: Duty to creditors. HELD: Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the BOD will not use the assets of the corporation to buy its own stock, and will not declare dividends to stockholders when the corporation is insolvent. In this case, it was found that the corporation did not have an actual bona fide surplus from which dividends could be paid. Moreover, the Court noted that the Board of Directors purchased the stock from the corporation and declared the dividends on the stock at the same Board meeting, and that the directors were permitted to resign so that they could sell their stock to the corporation. Given all of this, it was apparent that the directors did not act in good faith or were grossly ignorant of their duties. Either way, they are liable for their actions which affected the financial condition of the corporation and prejudiced creditors. FACTS: Plaintiff is the receiver of the Sibuguey Trading Company, a domestic corporation. The defendants are residents of the Philippine Islands. It is alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo, as vice- president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as director of Trading Company, at a meeting of the board of directors, approved and authorized various lawful purchases already made of a large portion of the capital

19

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) stock of the company from its various stockholders with total amount of the capital stock unlawfully purchased was P3,300. At the time of such purchase, the corporation had accounts payable amounting to P13,807.50, most of which were unpaid at the time petition for the dissolution of the corporation was its financial condition, in contemplation of an insolvency and dissolution. That on September 11, 1923, when the petition was filed for its dissolution upon the ground that it was insolvent, its accounts payable amounted to P9,241.19, and its accounts receivable P12,512.47, or an apparent asset of P3,271.28 over and above its liabilities. ISSUE: Whether or not the Petition Corporation can acquire its own shares. RULING: NO. It is, indeed, peculiar that the action of the board in purchasing the stock from the corporation and in declaring the dividends on the stock was all done at the same meeting of the board of directors, and it appears in those minutes that the both Ganzon and Mendaros were formerly directors and resigned before the board approved the purchase and declared the dividends, and that out of the whole 330 shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out of the 330, which were purchased by the corporation, and for which it paid P3,300. In other words, the directors were permitted to resign so that they could sell their stock to the corporation. As stated, the authorized capital stock was P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was subscribed and paid. Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000 of paid up stock, from which deduct P3,000 paid in dividends, there would be left P4,000 only. In this situation and upon this state of facts, it is very apparent that the directors did not act in good faith or that they were grossly ignorant of their duties. Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare dividends to stockholders when the corporation is insolvent. 8) Watered Stocks - Sec. 65 Section 65. Liability of directors for watered stocks. – Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith

2013400036 express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. (n) 9) Duty of shareholders in close corps. – Secs. 97(2);; 100 (4),(5) Section 97. Articles of incorporation. – The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section;; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock;; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors;; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code;; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. Section 100. Agreements by stockholders. - 4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors. 5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate

20

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) liability insurance. XlV. DEVICES AFFECTING CONTROL – DISCUSS HOW EACH ITEM AFFECTS CONTROL 1) Proxy device – Sec. 58;; SEC Memo Circ. 4 (2004) Section 58. Proxies. – Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. (n) This is limitation: how does it affect the control of the corporation? à To ensure that the absent stockholder can still avail of his right to vote VOTING BY MAIL 1. stockholders attending stockholder' meetings shall vote their shares as provided by existing laws 2. stockholders shall have the right to vote at all stockholders' meetings in person or by proxy. The stockholder may deliver, in person or by mail, his proxy vote directly to the corporation 3. in Case provided In Section 16 of the Corporation Code of the the philippines where written assent is allowed, the same number of votes shall be observed and voting can likewise be done by proxy 4. The stockholder may designate any person of his choice to act as his proxy. Absent such designation, the Chairman of the meeting shall be deemed authorized and hereby directed to cast the vote as indicated by the voting stockholder or his proxy 5. The proxy must be dated. If a duly accomplished and executed proxy is undated, the postmark or date of dispatch indicated in the electronic mail or, if not mailed, its actual date of presentation, shall be considered as the date of proxy 6. Where the corporation receives more than one (1) proxy from the same stockholder and they are all undated, the postmark or electronic dates shall be considered. If the proxies are mailed on the same date, the one bearing the latest time of day indicated in the postmark or latest time of dispatch appearing in the electronic mail shall prevail. If the proxies are not mailed, then the time of their actual presentation is considered. That which is presented last will be recognized. 7. If the stockholder intends to designate several proxies, the number of

2013400036 shares of stock to be represented by each proxy shall be specifically indicated in the proxy form. If some of the proxy forms do not indicate the number of shares, the total shareholdings of the stockholder shall be tallied and the balance thereof, if any, shall be alloted to the holder of the proxy form without the number of shares. If all are blank, the stocks shall be distributed equally among the proxies. The number of persons to be designated as proxies may be limited by the By-laws ONE SHARE- ONE VOTE POLICY 1. Pursuant to Section 24 of the Corporation Code, one share is entitled to 1 vote. Voting shall always be in the basis of the number of shares and not on the number of stockholders present in the stockholders' meeting. 2. Common shares shall have complete voting rights and such shares cannot be deprived of such rights except as provided by law 3. Each common share shall be equal in all respects to every other common share. Corporations are hereby prohibited from issuing multiple voting and non-voting common shares nor can they limit the maximum number of votes per stockholder irrespective of the number of shares he holds. OUTSTANDING CAPITAL STOCK 1. The articles of incorporation and the certificate of stocks cannot deprive preferred shares of the right to cote in the following cases (Section 6, Corporation Code) i. Amendment of the articles of incorporation;; ii. Adoption and amendment of by-laws;;   iii. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;;   iv. Incurring, creating or increasing bonded indebtedness;;   v. Increase or decrease of capital stock;;   vi. Merger or consolidation of the corporation with another corporation or other corporations;;   vii. Investment of corporate funds in another corporation or business in accordance with this Code;; and   viii. Dissolution of the corporation. 2. For purposes of the foregoing, the phrase “outstanding capital stock” as defined under Section 137 of the Corporation Code shall be deemed to include preferred shares. Types – general/limited;;

21

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) GENERAL • A general or unrestricted proxy gives a general discretionary power of attorney to vote for directors and on all ordinary matters that may properly come before a regular meeting, even specific mention of them is not made in the notice of the meeting. A general proxy has no authority, however, to vote for fundamental changes in the corporate charter or for dissolution or a transfer of all of the property to another corporation, or other unusual transactions. LIMITED • limited proxy may restrict the authority to vote on specified matters only and may direct the manner in which the vote shall be cast. Duration – limited and specific/continuing DURATION • The Code states: "Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effectivefor a period longer than five (5) years at anyone time."53 Under this provision, it is clear that the proxy may fix the period during which it may be used, but it cannot exceed five years, renewable for not more than five years for each renewal. Where the proxy does not fix any period, then it expires after the meeting for which it was given. It cannot be used again for a subsequent meeting unless it is renewed. REVOCATION

•

A proxy, like agency in general, is revocable unless coupled with an interest, even though it may expressly be declared to be irrevocable. Revocation of a proxy need not be made by formal notice in writing to the corporation unless so required by statute. Revocation may be expressed to the proxy holder, by a subsequent proxy to another or by sale of the shares. Thus it may be revoked orally or by conduct. Appearing and assert- ing the right to vote at a meeting revokes a proxy previously given. Like agency in general, proxy is also terminated by the death of the principal, or of the agent, or by the loss of capacity by either party, unless this is changed by statute.

•

At the end of five years, whether or not it is coupled with an interest and even where the period fixed exceeds five years, the proxy automatically loses its effectivity.

2013400036 Restrictions, renewal, etc. RESTRICTIONS: • The question as to whether the by-laws may deny the stockholder the right to vote by proxy has not yet been ruled upon by our Supreme Court. However, our Securities and Exchange Commission has expressed the opinion that the appointment of a proxy is purely personal and an incident of ownership and, therefore, a by-law provision prohibiting the use of proxy is contrary to law and, hence, null and void •

The by-laws may, however, impose conditions as to the form and manner of voting by proxy. But these conditions must be reasonable. A by-law which imposes unreasonably restrictive conditions is void for it is practically a denial of the right to vote by proxy.

•

Proxies may be given only by those who are entitled to vote in the stockholders' meeting.

FORM • "proxies shall be in writing, signed by the stockholder and filed before the scheduled meeting with the corporate secretary."51 The by-laws may not provide that the proxy may be oral. However,. the by-laws may require as an additional requirement the acknowledgment before a notary public of the proxy.52 The by-laws may also prescribe a reasonable period before the meeting when the written proxy should be filed with the secretary;; e.g., not later than two days before the meeting. SEC vs CA October 22, 2014 SECURITIES AND EXCHANGE COMMISSION, Petitioner, vs. THE HONORABLE COURT OF APPEALS, OMICO CORPORATION, EMILIO S. TENG AND TOMMY KIN HING TIA, Respondents. x - - - - - - - - - - - - - - - - - - - - - - - x G.R. No. 189014 ASTRA SECURITIES CORPORATION, Petitioner, vs. OMICO CORPORATION, EMILIO S. TENG AND TOMMY KIN HING TIA, Respondents. FACTS

22

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) Omico Corporation (Omico) is a company whose shares of stock are listed and traded in the Philippine Stock Exchange, Inc.4 Astra Securities Corporation (Astra) is one of the stockholders of Omico owning about 18% of the latter’s outstanding capital stock.5 Omico scheduled its annual stockholders’ meeting on 3 November 2008.6 It set the deadline for submission of proxies on 23 October 2008 and the validation of proxies on 25 October 2008. Astra objected to the validation of the proxies issued in favor of Tommy Kin Hing Tia (Tia), representing about 38% of the outstanding capital stock of Omico.7 Astra also objected to the inclusion of the proxies issued in favor of Tia and/or Martin Buncio, representing about 2% of the outstanding capital stock of Omico.8 Astra maintained that the proxy issuers, who were brokers, did not obtain the required express written authorization of their clients when they issued the proxies in favor of Tia. In so doing, the issuers were allegedly in violation of SRC Rule 20(11)(b)(xviii)9 of the Amended Securities Regulation Code (SRC or Republic Act No. 8799) Rules.10 Furthermore, the proxies issued in favor of Tia exceeded 19, thereby giving rise to the presumption of solicitation thereof under SRC Rule 20(2)(B)(ii)(b)11 of the Amended SRC Rules. Tia did not comply with the rules on proxy solicitation, in violation of Section 20.112 of the SRC. Despite the objections of Astra, Omico’s Board of Inspectors declared that the proxies issued in favor of Tia were valid.13 On 27 October 2008, Astra filed a Complaint14 before the Securities and Exchange Commission (SEC) praying for the invalidation of the proxies issued in favor of Tia. Astra also prayed for the issuance of a cease and desist order (CDO) enjoining the holding of Omico’s annual stockholders’ meeting until the SEC had resolved the issues pertaining to the validation of proxies. On 30 October 2008, SEC issued the CDO enjoining Omico from accepting and including the questioned proxies in determining a quorum and in electing the members of the board of directors during the annual stockholders’ meeting on 3 November 2008.15 Attempts to serve the CDO on 3 November 2008 failed, and the stockholders’ meeting proceeded as scheduled with 52.3% of the outstanding capital stock of Omico present in person or by proxy.16 The nominees for the board of directors were elected upon motion.17

2013400036 Astra instituted before the SEC a Complaint18 for indirect contempt against Omico for disobedience of the CDO. On the other hand, Omico filed before the CA a Petition for Certiorari and Prohibition19 imputing grave abuse of discretion on the part of the SEC for issuing the CDO. ISSUE Whether the SEC has jurisdiction over controversies arising from the validation of proxies for the election of the directors of a corporation. OUR RULING About a month after the CA issued the assailed Decision, this Court promulgated 31 GSIS v. CA, which squarely answered the above issue in the negative. 32 In that case, we observed that Section 6 (g) of Presidential Decree No. (P.D.) 902-A dated 11 March 1976 conferred on SEC the power “[t]o pass upon the validity of the issuance and use of proxies and voting trust agreements for absent stockholders or members.” Section 6, however, opens thus: “In order to effectively exercise such jurisdiction x x x.” This opening clearly refers to the preceding 33 Section 5. The Court pointed out therein that the power to pass upon the validity of proxies was merely incidental or ancillary to the powers conferred on the SEC under Section 5 of the same decree. With the passage of the SRC, the powers granted to SEC under Section 5 were withdrawn, together with the incidental and ancillary powers enumerated in Section 6. While the regular courts now had the power to hear and decide cases involving controversies in the election of directors, it was not clear whether the SRC also transferred to these courts the incidental and ancillary powers of the SEC as enumerated in Section 6 of P.D. 902-A. Thus, in GSIS v. CA, it was necessary for the Court to determine whether the action to invalidate the proxies was intimately tied to an election controversy. Hence, the Court pronounced:chanRoblesvirtualLawlibrary Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the jurisdiction of the regular trial courts with respect to election- related controversies is specifically confined to “controversies in the election or appointment of directors, trustees, officers or managers of corporations, partnerships, or associations.” Evidently, the jurisdiction of the regular courts over so-called election contests or controversies under Section 5 (c) does not extend to every potential subject that may be voted on by shareholders, but only

23


2013400036

to the election of directors or trustees, in which stockholders are authorized to participate under Section 24 of the Corporation Code. This qualification allows for a useful distinction that gives due effect to the statutory right of the SEC to regulate proxy solicitation, and the statutory jurisdiction of regular courts over election contests or controversies. The power of the SEC to investigate violations of its rules on proxy solicitation is unquestioned when proxies are obtained to vote on matters unrelated to the cases enumerated under Section 5 of Presidential Decree No. 902-A. However, when proxies are solicited in relation to the election of corporate directors, the resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy solicitation, should be properly seen as an election controversy within the original and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to Section 5 (c) of Presidential Decree No. 902-A. The conferment of original and exclusive jurisdiction on the regular courts over such controversies in the election of corporate directors must be seen as intended to confine to one body the adjudication of all related claims and controversy arising from the election of such directors. For that reason, the aforequoted Section 2, Rule 6 of the Interim Rules broadly defines the term “election contest” as encompassing all plausible incidents arising from the election of corporate directors, including: (1) any controversy or dispute involving title or claim to any elective office in a stock or nonstock corporation, (2) the validation of proxies, (3) the manner and validity of elections and (4) the qualifications of candidates, including the proclamation of winners. If all matters anteceding the holding of such election which affect its manner and conduct, such as the proxy solicitation process, are deemed within the original and exclusive jurisdiction of the SEC, then the prospect of overlapping and competing jurisdictions between that body and the regular courts becomes frighteningly real. From the language of Section 5 (c) of Presidential Decree No. 902-A, it is indubitable that controversies as to the qualification of voting shares, or the validity of votes cast in favor of a candidate for election to the board of directors are properly cognizable and adjudicable by the regular courts exercising original and exclusive 34 jurisdiction over election cases. x x x.

SRC Rule 20(11)(b)(xxi) of the Amended SRC Rules provides: SRC RULE 20. Disclosures to Stockholders Prior to Meeting (formerly, SRC Rule 20 – The Proxy Rule) x x x x 11. Other Procedural Requirements x x x x b. Proxy x x x x xxi. In the validation of proxies, a special committee of inspectors shall be designated or appointed by the Board of Directors which shall be empowered to pass on the validity of proxies. Any dispute that may arise pertaining thereto, shall be resolved by the Securities and Exchange Commission upon formal complaint filed by the aggrieved party, or by the SEC officer supervising the proxy validation process. (Emphasis supplied) On the other hand, these are the provisions of Section 1, Rule 1;; and Section 2, Rule 6 of the Interim Rules of Procedure Governing Intra-Corporate Disputes: RULE 1 General Provisions SECTION 1. (a) Cases Covered – These Rules shall govern the procedure to be observed in civil cases involving the following: a) Devices or schemes employed by, or any act of, the board of directors, business associates, officers or partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, or members of any corporation, partnership, or The ruling harmonizes the seeming conflict between the Amended SRC Rules association;;cralawlawlibrary promulgated by the SEC and the Interim Rules of Procedure Governing Intra- Corporate Disputes promulgated by the Court. b) Controversies arising out of intra-corporate, partnership, or association relations,

24

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) between and among stockholders, members, or associates;; and between, any or all of them and the corporation, partnership, or association of which they are stockholders, members, or associates, respectively;;cralawlawlibrary c) Controversies in the election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or associations;; d) Derivative suits;; and e) Inspection of corporate books. x x x x RULE 6 Election Contests x x x x SECTION 2. Definition. – An election contest refers to any controversy or dispute involving title or claim to any elective office in a stock or non-stock corporation, the validation of proxies, the manner and validity of elections, and the qualifications of candidates, including the proclamation of winners, to the office of director, trustee or other officer directly elected by the stockholders in a close corporation or by members of a non-stock corporation where the articles of incorporation or by-laws so provide. (Emphases supplied) The Court explained that the power of the SEC to regulate proxies remains in place 35 in instances when stockholders vote on matters other than the election of directors. The test is whether the controversy relates to such election. All matters affecting the manner and conduct of the election of directors are properly cognizable by the regular courts. Otherwise, these matters may be brought before the SEC for resolution based on the regulatory powers it exercises over corporations, partnerships and associations. Astra endeavors to remove the instant case from the ambit of GSIS v. CA by arguing that 1) the validation of proxies in this case relates to the determination of the existence of a quorum;; and 2) no actual voting for the members of the board of directors was conducted, as the directors were merely elected by motion. Indeed, the validation of proxies in this case relates to the determination of the existence of a quorum. Nonetheless, it is a quorum for the election of the directors, and, as such, which requires the presence – in person or by proxy – of the owners of

2013400036 36

the majority of the outstanding capital stock of Omico. Also, the fact that there was no actual voting did not make the election any less so, especially since Astra had never denied that an election of directors took place. We find no merit either in the proposal of Astra regarding the “two (2) viable, non- 37 exclusive and successive legal remedies to question the validity of proxies.” It suggests that the power to pass upon the validity of proxies to determine the existence of a quorum prior to the conduct of the stockholders’ meeting should lie with the SEC;; but, after the stockholders’ meeting, questions regarding the use of invalid proxies in the election of directors should be cognizable by the regular courts, since there was already an election to speak of. First, this interpretation is akin to the argument struck down by the Court in GSIS v. CA. If the Court adopts the suggestion, “we would be perpetually confronted with the spectacle of election controversies being heard and adjudicated by both the SEC and the regular courts, made possible through a mere allegation that the anteceding x x x process was errant, but the competing cases [were] filed with one 38 objective in mind – to affect the outcome of the election of the board of directors.” Second, the validation of proxies serves a number of purposes, including determining the existence of a quorum and ascertaining the authenticity of proxies to be used for the election of directors at the stockholders’ meeting. Section 2, Rule 6, of the Interim Rules of Procedure Governing Intra-Corporate Disputes provides that an election contest covers any controversy or dispute involving the validation of proxies, in general. Thus, it can only refer to all the beneficial purposes that validation of proxies can bring about when made in connection with a forthcoming election of directors. Thus, there is no point in making distinctions between who has jurisdiction before and who has jurisdiction after the election of directors, as all controversies related thereto – whether before, during or after – shall be passed upon by regular courts as provided by law. The Court closes with an observation. As in the instant cases, GSIS v. CA is a consolidation of two cases, one of which was filed by a private party and the other by the SEC itself. In both cases, the parties were aggrieved by the CA ruling, so they filed the cases seeking a pronouncement from the Court that it recognizes the jurisdiction of the SEC over the controversy. Calling to mind established jurisprudential principles, the Court therein ruled that quasi-judicial agencies do not have the right to seek the review of an appellate 39 court decision reversing any of their rulings. This is because they are not real

25

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) parties-in-interest. Thus, the Court expunged the petition filed by the SEC for the latter’s lack of capacity to file the suit. So it must be in the instant cases. WHEREFORE, the petition in G.R. No. 187702 is EXPUNGED for lack of capacity of petitioner to file the suit. The petition in G.R. No. 189014 is DENIED. The Court of Appeals Decision dated 18 March 2009 and Resolution dated 9 July 2009 in CA-G.R. SP No. 106006 are AFFIRMED. 2) Voting trusts – Sec. 59;; Section 59. Voting trusts. – One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission;; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code. (approved by the SEC) Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud.

2013400036 Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. (36a) AFFECT? • Voting trustee affects of the control of the corporation by • Mechanics and right Everett v. Asia Banking (49 Phil 512) (IN ORDER TO PERPETRATE FRAUD) HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W. ROBINSON vs. THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D. MACINTOSH G.R. No. L-25241. November 3, 1926 FACTS: In order more effectually to plunder the Company and to defraud these plaintiffs the said defendants, Mullen, Barclay, Mears and Macintosh, made, executed and filed in the Bureau of Commerce and Industry of the Philippine Islands, articles of incorporation of a corporation called the "Philippine Motors Corporation," having its principal office in the City of Manila, a capital stock of P25,000, of which the sum of P5,000, was alleged to have been subscribed and paid as follows: the defendant Barclay P200, defendant Mears P1,200, defendant Kelly P1,200, defendant Macintosh P1,200, defendant Mullen P1,200, the treasurer thereof being the defendant Mears. And these plaintiffs beg leave to refer to the original articles of Incorporation on file in the said Bureau for greater certainty. That at the time of such incorporation each and every one of the last above named defendants was an officer or employee of the defendant Bank. That these plaintiffs have nor information nor means of obtaining information as to whether the money alleged to have been described by them for their shares of stock was of their personal funds and property or whether it was money furnished them by the Bank of purpose moneys such incorporation was a fraud upon these plaintiffs for the reason that it was intended for the sole purpose of taking over the assets of the

26

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) Company and said defendants were enabled to effectuate such intent by reason of their positions as officers and employees of the Bank. ISSUE: Whether or not plaintiffs have the capacity to sue. RULING: YES. Invoking the well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the corporation, but that the action must be brought by the Board of Directors, the appellees argue — and the court below held — that the corporation Teal and Company is a necessary party plaintiff and that the plaintiff stockholders, not having made any demand on the Board to bring the action, are not the proper parties plaintiff. But, like most rules, the rule in question has its exceptions. It is alleged in the complaint and, consequently, admitted through the demurrer that the corporation Teal and Company is under the complete control of the principal defendants in the case, and, in these circumstances, it is obvious that a demand upon the Board of Directors to institute an action and prosecute the same effectively would have been useless, and the law does not require litigants to perform useless acts. The conclusion of the court below that the plaintiffs, not being stockholders in the Philippine Motors Corporation, had no legal right to proceed against that corporation in the manner suggested in the complaint evidently rest upon a misconception of the character of the action. In this proceeding it was necessary for the plaintiffs to set forth in full the history of the various transactions which eventually led to the alleged loss of their property and, in making a full disclosure, references to the Philippine Motors Corporation appear to have been inevitable. It is to be noted that the plaintiffs seek no judgment against the corporation itself at this stage of the proceedings. NIDC v. Aquino (163 SCRA 153) (VOTING TRUST AGREEMENT AS A SECURITY) NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, EUSEBIO VILLATUYA MARIO Y. CONSING and ROBERTO S. BENEDICTO vs. HON. BENJAMIN AQUINO, et al. G.R. No. L-34192 June 30, 1988

2013400036 FACTS: Batjak, a manufacturer of coco oil and copra cake for export, is on the brink of bankruptcy. It entered in to a Financial Agreement with PNB for additional operating capital for its 3 processing mills and to pay its other debts to other banks. Under the agreement with PNB, NIDC, a wholly-owned subsidiary of PNB, would invest P6.7M worth of preferred shares convertible within 5 years into common stock to pay off the other debts and the balance to pay off its own due with PNB. PNB also granted various credit accommodations. Batjak as part of the deal mortgaged all its properties in the province. A 5-year voting trust agreement was executed in favor of NIDC by the stockholders representing 60% outstanding stock of Batjak. Years later, PNB instituted foreclosure proceedings against the mortgaged properties due to Batjak’s insolvency, and soon became owner of the properties. Batjak failed to exercise its right to redeem within the period allowed and PNB transferred ownership of the 2 oil mills to NIDC. Three years later, Batjak represented by majority stockholders, inquired with NIDC if it was still interested in negotiating the renewal of the voting trust agreement. NIDC replied that it was no longer interested and requested turn-over of all Batjak assets and properties. Batjak demanded an accounting of all assets and properties and operations but NIDC refused to comply. Batjak then filed an action for mandamus. CFI Judge Aquino issued a TRO prohibiting NIDC from removing any record, report, or document or disposing all of the properties of Batjak, and allowed Batjak to inspect the same. Batjak then moved for the appointment of a receiver. NIDC and PNB opposes, but overruled by CFI. MR’s denied. ISSUE: WON NIDC was constituted as trustee of the assets, management and operations of Batjak due to the expiration of the Voting Trust Agreement. HELD: NO. A Voting Trust Agreement only transfers voting or other rights pertaining to the shares subject of the agreement, or control over the stock. Stockholders of a corporation that lost all its assets through foreclosures cannot go after those properties. However, the acquisition by PNB-NIDC of the properties in question was not made or effected under the capacity of a trustee but as a foreclosing creditor for the purpose of recovering on a just and valid obligation of Batjak. FACTS: Batjak, is a Filipino-American corporation which has indebtedness to Philippine National Bank (PNB) amounted to P11,915,000.00, As security for the payment of its obligations and advances against shipments, Batjak mortgaged its

27

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) three (3) coco-processing oil mills to Manila Bank, Republic Bank , and PCIB, respectively. In need for additional operating capital to place the three (3) coco- processing mills at their optimum capacity and maximum efficiency and to settle, pay or otherwise liquidate pending financial obligations with the different private banks, Batjak applied to PNB for additional financial assistance. A Financial Agreement was submitted by PNB to Batjak for acceptance which was duly accepted by Batjak. Upon receiving payment, RB, PCIB, and MBTC released in favor of PNB the first and any mortgages they held on the properties of Batjak. Batjak executed a first mortgage in favor of PNB on all its properties A Voting Trust Agreement was executed in favor of NIDC by the stockholders representing 60% of the outstanding paid-up and subscribed shares of Batjak. This agreement was for a period of five (5) years and, upon its expiration, was to be subject to negotiation between the parties. Forced by the insolvency of Batjak, PNB instituted extrajudicial foreclosure proceedings against the oil mills of Batjak. The properties were sold to PNB as the highest bidder. Three years thereafter, Batjak wrote a letter to NIDC inquiring if the latter was still interested in negotiating the renewal of the Voting Trust Agreement. Batjak wrote another letter to NIDC informing the latter that Batjak would now safely assume that NIDC was no longer interested in the renewal of said Voting Trust Agreement. ISSUE: Whether or not the NIDC and PNB acquired ownership over the assets of Batjak despite a voting trust agreement between Batjak’s stockholders and NIDC. RULING: YES. What was assigned to NIDC was the power to vote the shares of stock of the stockholders of Batjak, representing 60% of Batjak's outstanding shares, and who are the signatories to the agreement. The power entrusted to NIDC also included the authority to execute any agreement or document that may be necessary to express the consent or assent to any matter, by the stockholders. Nowhere in the said provisions or in any other part of the Voting Trust Agreement is mention made of any transfer or assignment to NIDC of Batjak's assets, operations, and management. NIDC was constituted as trustee only of the voting rights of 60% of the paid-up and outstanding shares of stock in Batjak. Under the provision on termination what was to be returned by NIDC as trustee to Batjak's stockholders, upon the termination of the agreement, are the certificates of shares of stock belonging to Batjak's stockholders, not the properties or assets of Batjak itself which were never delivered, in the first place to NIDC, under the terms of said Voting Trust Agreement. A voting trust transfers only voting or other rights pertaining to the shares subject of the agreement

2013400036 or control over the stock hence the acquisition by PNB-NIDC of the properties in question was not made or effected under the capacity of a trustee but as a foreclosing creditor for the purpose of recovering on a just and valid obligation of Batjak. LEE vs CA LEE vs. CA G.R. No. 93695 February 4, 1992 FACTS: On November 15, 1985, a complaint for a sum of money was filed by the International Corporate Bank, Inc. against the private respondents SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and THOMAS GONZALES who, in turn, filed a third party complaint against ALFA and the petitioners RAMON C. LEE and ANTONIO DM. LACDAO on March 17, 1986. On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint which the Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27, 1988. Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of an alias summons upon ALFA through the DBP as a consequence of the petitioner's letter informing the court that the summons for ALFA was erroneously served upon them considering that the management of ALFA had been transferred to the DBP. On August 16, 1988, the private respondents filed a Manifestation and Motion for the Declaration of Proper Service of Summons which the trial court granted. On motion for reconsideration, petitioners contend that Rule 14, section 13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA and that the private respondents should have availed of another mode of service under Rule 14, Section 16 of the said Rules, i.e.,through publication to effect proper service upon ALFA. In their Comment to the Motion for Reconsideration dated September 27, 1988, the private respondents argued that the voting trust agreement dated March 11, 1981 did not divest the petitioners of their positions as president and executive vice-president of ALFA so that service of summons upon ALFA through the petitioners as corporate officers was proper. On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA through the petitioners. On second motion for reconsideration, petitioners reiterate their stand that by virtue of the voting trust agreement they ceased to be officers and directors of ALFA, hence, they could no longer receive summons or any court processes for or on behalf of ALFA. On April 25, 1989, the trial court reversed itself by setting aside its previous Order and declared that service upon the petitioners who were no longer corporate officers of ALFA cannot be considered as proper service of summons on ALFA. On May 15, 1989, the private respondents moved for a reconsideration of the above Order which was affirmed by the court in its Order dated August 14, 1989 denying the private respondent's

28


2013400036

motion for reconsideration. On September 18, 1989, a petition for certiorari was belatedly submitted by the private respondent before the public respondent. Meanwhile, the trial court, not having been notified of the pending petition for certiorari with public respondent issued an Order declaring as final the Order dated April 25, 1989. The filed petition for certiorari before the CA was given due course setting aside the orders of respondent judge dated April 25, 1989 and August 14, 1989. Motion for reconsideration was likewise denied. Hence, this petition for certiorari.

delivery in favor of the DBP, as trustee. Consequently, the petitioners ceased to own at least one share standing in their names on the books of ALFA as required under Section 23 of the new Corporation Code. They also ceased to have anything to do with the management of the enterprise. The petitioners ceased to be directors. Hence, the transfer of the petitioners' shares to the DBP created vacancies in their respective positions as directors of ALFA. The transfer of shares from the stockholder of ALFA to the DBP is the essence of the subject voting trust agreement. ISSUE: Whether or not the creation of voting trust agreement divests the petitioners 3) Pooling & voting agreements – Sec. 100 Section 100. Agreements by stockholders. - of their positions as president and executive vice-president of ALFA. RULING: A voting trust agreement results in the separation of the voting rights of a 1. Agreements by and among stockholders executed before the formation and stockholder from his other rights such as the right to receive dividends, the right to organization of a close corporation, signed by all stockholders, shall survive the inspect the books of the corporation, the right to sell certain interests in the assets of incorporation of such corporation and shall continue to be valid and binding the corporation and other rights to which a stockholder may be entitled until the between and among such stockholders, if such be their intent, to the extent that liquidation of the corporation. However, in order to distinguish a voting trust such agreements are not inconsistent with the articles of incorporation, agreement from proxies and other voting pools and agreements, it must pass three irrespective of where the provisions of such agreements are contained, except criteria or tests, namely: (1) that the voting rights of the stock are separated from the those required by this Title to be embodied in said articles of incorporation. other attributes of ownership;; (2) that the voting rights granted are intended to be 2. An agreement between two or more stockholders, if in writing and signed irrevocable for a definite period of time;; and (3) that the principal purpose of the grant by the parties thereto, may provide that in exercising any voting rights, the shares of voting rights is to acquire voting control of the corporation. Both under the old and the new Corporation Codes there is no dispute as to the most held by them shall be voted as therein provided, or as they may agree, or as immediate effect of a voting trust agreement on the status of a stockholder who is a determined in accordance with a procedure agreed upon by them. 3. No provision in any written agreement signed by the stockholders, relating party to its execution — from legal titleholder or owner of the shares subject of the to any phase of the corporate affairs, shall be invalidated as between the parties voting trust agreement, he becomes the equitable or beneficial owner. on the ground that its effect is to make them partners among themselves. Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely affected by the simple act of such director being a party to a voting trust agreement inasmuch as he remains owner (although beneficial or equitable only) of the shares subject of the voting trust agreement pursuant to which a transfer of the stockholder's shares in favor of the trustee is required (section 36 of the old Corporation Code). No disqualification arises by virtue of the phrase "in his own right" provided under the old Corporation Code.

4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors.

5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the With the omission of the phrase "in his own right" the election of trustees and other stockholders shall be held to strict fiduciary duties to each other and among persons who in fact are not beneficial owners of the shares registered in their names themselves. Said stockholders shall be personally liable for corporate torts unless on the books of the corporation becomes formally legalized. Hence, this is a clear the corporation has obtained reasonably adequate liability insurance. indication that in order to be eligible as a director, what is material is the legal title to, • Based on the agreement of the stockholders – VALID à to direct the not beneficial ownership of, the stock as appearing on the books of the corporation. direction of the company The facts of this case show that the petitioners, by virtue of the voting trust • Written agreements by stockhodlers agreement executed in 1981 disposed of all their shares through assignment and

29

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) 4) Cumulative voting – Sec. 24 PREPARE TO ILLUSTRATE Section 24. Election of directors or trustees. – At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election;; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. (31a) NOTE: • . For example, if the election is for four directors and you hold 500 shares (with one vote per share), under the regular method you could vote a maximum of 500 shares for each one candidate (giving you 2,000 votes total—500 votes per each of the four candidates). With cumulative voting, you are afforded the 2,000 votes from the start and could choose to vote all 2,000 votes for one candidate, 1,000 each to two candidates, or otherwise divide your votes whichever way you wanted. • Proportional Voting

2013400036 •

•

In a cumulative voting system, the number of votes available to a shareholder in any given election is equal to the number of shares outstanding held by the shareholder times the number of positions up for vote. All positions are voted on at the same time, and the person with the highest amount of votes wins the election. The key difference between cumulative voting and plurality voting is that these votes may be voted in any possible combination and may all be cast for the same director. For example, if shareholders were asked for five directors, each share would be entitled to five votes, which could all be cast for the same candidate. It is important to remember that cumulative voting will only be used to elect the board of directors, and is not applicable for other votes held by shareholders or the board of directors. The formula to determine the number of shares necessary to elect a

majority of directors is: •

•

where X = number of shares needed to elect a given number of directors S = total number of shares at the meeting N = number of directors needed D = total number of directors to be elected The formula to determine how many directors can be elected by a faction

controlling a certain number of shares is: •

• •

with N becoming the number of directors which can be elected and X the number of shares controlled. Note that several sources include a variation of this formula using "X" rather than "(X-1)". Such a formulation does not assure you of having enough votes to elect a director if the "-1” is missing. Without the "-1" you will only be able to determine how many shares you must have to tie, not what you need to win. Of course not every shareholder votes perfectly every time, so the flawed formula may work in many practical instances despite it being conceptually flawed and mathematically wrong. Help minority in votings Director or member who is voted by stockholders cannot be removed

30


2013400036

without just cause 5. Increase or decrease of capital stock;; 6. Merger or consolidation of the corporation with another corporation or 5) Classification of shares – Sec. 6 other corporations;; Section 6. Classification of shares. – The shares of stock of stock corporations 7. Investment of corporate funds in another corporation or business in may be divided into classes or series of shares, or both, any of which classes or accordance with this Code;; and series of shares may have such rights, privileges or restrictions as may be stated in 8. Dissolution of the corporation. the articles of incorporation: Provided, That no share may be deprived of voting Except as provided in the immediately preceding paragraph, the vote necessary to rights except those classified and issued as "preferred" or "redeemable" shares, approve a particular corporate act as provided in this Code shall be deemed to refer unless otherwise provided in this Code: Provided, further, That there shall always only to stocks with voting rights. (5a) be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be 6) Control Test vs. Grandfather Rule provided for in the articles of incorporation: Provided, however, That banks, trust • control test or the liberal rule. The other is the Grandfather Rule, which companies, insurance companies, public utilities, and building and loan is known to be the stricter and more stringent test. associations shall not be permitted to issue no-par value shares of stock. • The control test provides that shares belonging to corporations or Preferred shares of stock issued by any corporation may be given preference in partnerships at least 60% of the capital of which is owned by Filipino the distribution of the assets of the corporation in case of liquidation and in the citizens shall be considered of Philippine nationality. This test is distribution of dividends, or such other preferences as may be stated in the articles straightforward and does not scrutinize further the ownership of the of incorporation which are not violative of the provisions of this Code: Provided, Filipino shareholdings. That preferred shares of stock may be issued only with a stated par value. The • On the other hand, the Grandfather Rule determines the actual Filipino board of directors, where authorized in the articles of incorporation, may fix the ownership and control in a corporation by tracing both the direct and terms and conditions of preferred shares of stock or any series thereof: Provided, indirect shareholdings in the corporation. “the Grandfather test was That such terms and conditions shall be effective upon the filing of a certificate originally intended to look into the citizenship of the individuals who thereof with the Securities and Exchange Commission. ultimately own and control the shares of stock of a corporation for Shares of capital stock issued without par value shall be deemed fully paid and purposes of determining compliance with the constitutional requirement non-assessable and the holder of such shares shall not be liable to the corporation of Filipino ownership”.The shareholdings should ideally be traced (i.e. or to its creditors in respect thereto: Provided;; That shares without par value may grandfathered) to the point where natural persons hold the shares. not be issued for a consideration less than the value of five (P5.00) pesos per However, this may be impractical and a limit must be set when tracing share: Provided, further, That the entire consideration received by the corporation through the corporate layers to attribute nationality. Citing a for its no-par value shares shall be treated as capital and shall not be available for memorandum from the Securities and Exchange Commission (SEC), distribution as dividends. the Supreme Court noted the suggestion of the SEC to apply the A corporation may, furthermore, classify its shares for the purpose of insuring Grandfather Rule on two levels of corporate relations for publicly-held compliance with constitutional or legal requirements. corporations or where shares are traded in the stock exchange, and to Except as otherwise provided in the articles of incorporation and stated in the three levels for closely held ones or those which are not traded in any certificate of stock, each share shall be equal in all respects to every other share. stock exchange. Clearly, the limits should not go beyond the level of Where the articles of incorporation provide for non-voting shares in the cases what is reasonable. allowed by this Code, the holders of such shares shall nevertheless be entitled to • The Court explained that the use of the Grandfather Rule is a vote on the following matters: supplement to the Control Test in implementing the wisdom of the 1. Amendment of the articles of incorporation;; “Filipinization” provisions of the Constitution. 2. Adoption and amendment of by-laws;; • The Court further discussed that the Grandfather Rule applies only 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or when the 60-40 Filipino-foreign ownership is in doubt or where substantially all of the corporate property;; there is reason to believe that there is non-compliance with the 4. Incurring, creating or increasing bonded indebtedness;;

31


2013400036

provisions of the Constitution on the nationality restriction. “Doubt” refers to various indicia that the “beneficial ownership” and “control” of the corporation do not in fact reside in Filipino shareholders but in foreign stakeholders. 7) Restriction on transfer of shares – Sec. 98 Section 98. Validity of restrictions on transfer of shares. – Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock;; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. 8) Prescribing qualifications for directors – Sec. 47 (5) Section 47. Contents of by-laws. – Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 5. The qualifications, duties and compensation of directors or trustees, officers and employees;; 9) Management contracts – Sec. 44 Section 44. Power to enter into management contract. – No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one- third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation;; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two- thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for

any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. (n) ***take note of the requirements 10) “Super” votes;; unusual voting/quorum reqs. – Sec. 97 Section 97. Articles of incorporation. – The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section;; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock;; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors;; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code;; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. • Unusual voting or quorum requirement – which is different from what is under the code… this is stipulated in the AOI (exampled: unanimous) • CONTROL: it would be harder to change the status quo – veto power when the super vote is not met, it would take a greated number fshares or members to pass a corporate act.

32

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) 11) Shares that cannot vote --- Sec. 89 vs. sec. 6 Section 89. Right to vote. – The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. (n) Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission. Depriving their right to vote – they cannot vote XV. RIGHT OF INSPECTION ----Secs 74 – 75;; •

TITLE VIII CORPORATE BOOKS AND RECORDS Section 74. Books to be kept;; stock transfer agent. – Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes;; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition,

2013400036 shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation’s records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged;; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment;; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made;; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. (51a and 32a;; P.B. No. 268.) Section 75. Right to financial statements. – Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the

33

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. (n) NOTE: • Corporation can refuse because of the volume of the documents • Copy at your own expense or can take a picture • MINUTES à need approval of the directors • WHO HAS JURISDICTION OVER DERIVATIVE SUIT à RTC Rule 7, Rules of Proc. On Intra-corp. Controversies Rule 7 INSPECTION OF CORPORATE BOOKS AND RECORDS Section 1. Cases covered. - The provisions of this Rule shall apply to disputes exclusively involving the rights of stockholders or members to inspect the books and records and/or to be furnished with the financial statements of a corporation, under Sections 74 and 75 of Batas Pambansa Blg. 68, otherwise known as the Corporation Code of the Philippines. Sec. 2. Complaint. - In addition to the requirements in section 4, Rule 2 of these Rules, the complaint must state the following: (1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or records and/or to be furnished with financial statements under Sections 74 and 75 of the Corporation Code of the Philippines;; (2) A demand for inspection and copying of books and records and/or to be furnished with financial statements made by the plaintiff upon defendant;;  (3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such refusals, if any;; and (4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the law and jurisprudence in support thereof.cralaw Sec. 3. Duty of the court upon the filing of the complaint. - Within two (2) days from the filing of the complaint, the court, upon a consideration of the allegations thereof, may dismiss the complaint outright if it is not sufficient in form and substance, or, if it is sufficient, order the issuance of summons which shall be served, together with a copy of the complaint, on the defendant within two (2) days from its issuance. Sec. 4. Answer. - The defendant shall file his answer to the complaint, serving a copy thereof on the plaintiff, within ten (10) days from the service of summons and

2013400036 the complaint. In addition to the requirements in Section 6, Rule 2 of these Rules, the answer must state the following:chanroblesvirtuallawlibrary (1) The grounds for the refusal of defendant to grant the demands of the plaintiff, stating the law and jurisprudence in support thereof;; (2) The conditions or limitations on the exercise of the right to inspect which should be imposed by the court;; and cralaw (3) The cost of inspection, including manpower and photocopying expenses, if the right to inspect is granted.cralaw Sec. 5. Affidavits, documentary and other evidence. - The parties shall attach to the complaint and answer the affidavits of witnesses, documentary and other evidence in support thereof, if any. Sec. 6. Effect of failure to answer. - If the defendants fails to file an answer within the period above provided, the court, within ten (10) days from the lapse of the said period, motu proprio or upon motion, shall render judgment as warranted by the allegations of the complaint, as well as the affidavits, documentary and other evidence on record. In no case shall the court award a relief beyond or different from that prayed for.cralaw Sec. 7. Decision. - The court shall render a decision based on the pleadings, affidavits and documentary and other evidence attached thereto within fifteen (15) days from receipt of the last pleading. A decision ordering defendants to allow the inspection of books and records and/or to furnish copies thereof shall also order the plaintiff to deposit the estimated cost of the manpower necessary to produce the books and records and the cost of copying, and state, in clear and categorical terms, the limitations and conditions to the exercise of the right allowed or enforced. Purpose;; requirements;; coverage;; remedies if denied;; Defenses available to D/T/O held liable ***REQUIREMENTS FOR DERIVATIVE SUITSà book of Aquino APPRAISAL RIGHTS à Instances Philpotts v. Phil. Mfg. Co. 40 Phil. 479 W. G. PHILPOTTS vs. PHILIPPINE MANUFACTURING COMPANY and F. N. BERRY GR. No. L-15568 November 8, 1919 FACTS:

34

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) W. G. Philpotts, a stockholder in the Philippine Manufacturing Company, one of the respondents herein, seeks by this proceeding to obtain a writ of mandamus to compel the respondents to permit the plaintiff, in person or by some authorized agent or attorney, to inspect and examine the records of the business transacted by said company since January 1, 1918. The petition is filed originally in this court under the authority of section 515 of the Code of Civil Procedure, which gives to this tribunal concurrent jurisdiction with the Court of First Instance in cases, among others, where any corporation or person unlawfully excludes the plaintiff from the use and enjoyment of some right to which he is entitled. The respondents interposed a demurrer, and the controversy is now before us for the determination of the questions thus presented. ISSUE: Whether or not the right to inspect records and transactions of the corporation is permitted. RULING: YES. Now it is our opinion, and we accordingly hold, that the right of inspection given to a stockholder in the provision above quoted can be exercised either by himself or by any proper representative or attorney in fact, and either with or without the attendance of the stockholder. This is in conformity with the general rule that what a man may do in person he may do through another;; and we find nothing in the statute that would justify us in qualifying the right in the manner suggested by the respondents. This conclusion is supported by the undoubted weight of authority in the United States, where it is generally held that the provisions of law conceding the right of inspection to stockholders of corporations are to be liberally construed and that said right may be exercised through any other properly authorized person. As was said in Foster vs. White (86 Ala., 467), "The right may be regarded as personal, in the sense that only a stockholder may enjoy it;; but the inspection and examination may be made by another. In order that the rule above stated may not be taken in too sweeping a sense, we deem it advisable to say that there are some things which a corporation may undoubtedly keep secret, notwithstanding the right of inspection given by law to the stockholder;; as for instance, where a corporation, engaged in the business of manufacture, has acquired a formula or process, not generally known, which has proved of utility to it in the manufacture of its products. It is not our intention to declare that the authorities of the corporation, and more particularly the Board of

2013400036 Directors, might not adopt measures for the protection of such process form publicity. There is, however, nothing in the petition which would indicate that the petitioner in this case is seeking to discover anything which the corporation is entitled to keep secret;; and if anything of the sort is involved in the case it may be brought out at a more advanced stage of the proceedings. Pardo v. Hercules Lumber 47 Phil. 965 ANTONIO PARDO vs. THE HERCULES LUMBER CO., INC., and IGNACIO FERRER G.R. No. L-22442 August 1, 1924 FACTS: The petitioner, Antonio Pardo, a stockholder in the Hercules Lumber Company, Inc., one of the respondents herein, seeks by this original proceeding in the Supreme Court to obtain a writ of mandamus to compel the respondents to permit the plaintiff and his duly authorized agent and representative to examine the records and business transactions of said company. To this petition the respondents interposed an answer, in which, after admitting certain allegations of the petition, the respondents set forth the facts upon which they mainly rely as a defense to the petition. To this answer the petitioner in turn interposed a demurrer, and the cause is now before us for determination of the issue thus presented. ISSUE: Whether or not the respondent have the right to deny inspection request by petitioner. RULING: YES. The general right given by the statute may not be lawfully abridged to the extent attempted in this resolution. It may be admitted that the officials in charge of a corporation may deny inspection when sought at unusual hours or under other improper conditions;; but neither the executive officers nor the board of directors have the power to deprive a stockholder of the right altogether. A by-law unduly restricting the right of inspection is undoubtedly invalid. Authorities to this effect are too numerous and direct to require extended comment. Under a statute similar to our own it has been held that the statutory right of inspection is not affected by the

35

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) adoption by the board of directors of a resolution providing for the closing of transfer books thirty days before an election. It will be noted that our statute declares that the right of inspection can be exercised "at reasonable hours." This means at reasonable hours on business days throughout the year, and not merely during some arbitrary period of a few days chosen by the directors. In addition to relying upon the by-law, to which reference is above made, the answer of the respondents calls in question the motive which is supposed to prompt the petitioner to make inspection;; and in this connection it is alleged that the information which the petitioner seeks is desired for ulterior purposes in connection with a competitive firm with which the petitioner is alleged to be connected. It is also insisted that one of the purposes of the petitioner is to obtain evidence preparatory to the institution of an action which he means to bring against the corporation by reason of a contract of employment which once existed between the corporation and himself. These suggestions are entirely apart from the issue, as, generally speaking, the motive of the shareholder exercising the right is immaterial. FACTS: Corporate secretary of Hercules Lumber refused to permit Pardo, a stockholder, or his agent to inspect the records and business transactions of the company at the times desired by Pardo. Basis of the refusal was the provision in the company’s by-laws which stipulated that every stockholder may examine the books of the company and other documents upon the days which the board annually fixes. ISSUE: When is the time or times within which the right of inspection may be exercised? HELD: The resolution of the board limiting the rights of stockholders to inspect its records to a period of 10 days prior to the annual SH meeting is an unreasonable restriction in accordance with the Corporation Code which provides that the right to inspect can be exercised at reasonable hours. The right of inspection was interpreted to mean that the right may be exercised at reasonable hours on business days throughout the year, and not merely during an arbitrary period of a few days chosen by the directors. Gonzales v. PNB 122 SCRA 490 • Primary Purpose ALICIA E. GALA, GUIA G. DOMINGO and RITA G. BENSON vs.

2013400036 ELLICE AGRO-INDUSTRIAL CORPORATION, MARGO MANAGEMENT AND DEVELOPMENT CORPORATION, RAUL E. GALA, VITALIANO N. AGUIRRE II, ADNAN V. ALONTO, ELIAS N. CRESENCIO, MOISES S. MANIEGO, RODOLFO B. REYNO, RENATO S. GONZALES, VICENTE C. NOLAN, NESTOR N. BATICULON G.R. No. 156819. December 11, 2003 FACTS: On March 28, 1979, the Ellice Agro-Industrial Corporation was formed and organized. The total subscribed capital stock of the corporation was P3.5 Million with 35,000 shares. Additional shares were acquired and subscribed from said corporation. Subsequently, on September 16, 1982, the Margo Management and Development Corporation (Margo) was incorporated. The total subscribed capital stock of Margo was 20,000 shares at P200, 000.00. Several transfers of shares of Ellice to Margo were made by the stockholders and some payments of subscription were made by transferring parcels of land by the Gala Spouses. In essence, petitioners want this Court to disregard the separate juridical personalities of Ellice and Margo for the purpose of treating all property purportedly owned by said corporations as property solely owned by the Gala spouses. The petitioners’ contention in support of this theory is that the purposes for which Ellice and Margo were organized should be declared as illegal and contrary to public policy. They claim that the respondents never pursued exemption from land reform coverage in good faith and instead merely used the corporations as tools to circumvent land reform laws and to avoid estate taxes. Specifically, they point out that respondents have not shown that the transfers of the land in favor of Ellice were executed in compliance with the requirements of Section 13 of R.A. 3844. Furthermore, they alleged that respondent corporations were run without any of the conventional corporate formalities. ISSUE: Whether or not the purpose of the creation of the two corporations is illegal and against public policy. RULING: NO. Impugning the legality of the purposes for which Ellice and Margo were organized, amount to collateral attacks which are prohibited in this jurisdiction. The best proof of the purpose of a corporation is its articles of incorporation and by-

36

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) laws. The articles of incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline the administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the accomplishment of said purpose. A perusal of the Articles of Incorporation of Ellice and Margo shows no sign of the allegedly illegal purposes that petitioners are complaining of. If a corporation’s purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue the certificate of incorporation. With regard to their claim that Ellice and Margo were meant to be used as mere tools for the avoidance of estate taxes, suffice it say that the legal right of a taxpayer to reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. Thus, even if Ellice and Margo were organized for the purpose of exempting the properties of the Gala spouses from the coverage of land reform legislation and avoiding estate taxes, the court cannot disregard their separate juridical personalities. G.R. No. L-24850;; March 1, 1926 FACTS: Gonzales instituted a suit, as a taxpayer, against Sec. of Public Works and Communications, the Commissioner of Public Highways, and PNB for alleged anomalies committed regarding the bank’s extension of credit to import public works equipment intended for the massive development program. The petitioner’s standing was questioned because he did not own any share in PNB. Consequently, Petitioner bought 1 share of PNB stocks in order to gain standing as a stockholder. Petitioner thereafter sought to inquire and ordered PNB to produce its books and records which the Bank refused, invoking the provisions from its charter created by Congress. The petitioner filed petition for mandamus to compel PNB to produce its books and records. The RTC dismissed the petition and it ruled that the right to examine and inspect corporate books is not absolute, but is limited to purposes reasonably related to the interest of the stockholder, must be asked for in good faith for a specific and honest purpose and not gratify curiosity or for speculative or vicious purposes. ISSUE: WON the right of inspection may be compelled by Gonzales. HELD: NO. The Code has prescribed limitations to the right of inspection, requiring as a condition for examination that the person requesting must not have been guilty

2013400036 of using improperly any information secured through a prior examination, and that the person asking for such must be acting in good faith and for a legitimate purpose. It is the stockholder seeking to exercise the right of inspection to set forth the reasons and purposes for which he desires such inspection. SC held that the purpose of Gonzales, which was to arm himself with evidence which he can use against the bank for acts done by the latter when he was still a total stranger (i.e. not a SH), were not deemed proper motives and his request was denied. Veraguth v. Isabela Sugar Co. 57 Phil. 266 FACTS: Veraguth, a director and stockholder of the Isabela Sugar Company, Inc., filed a petition with the lower court praying that: a final and absolute writ of mandamus be issued to each and all of the respondent directors to notify him within the reglementary period, of all regular and special meetings of the board of directors of the Company, and to place at his disposal at reasonable hours the minutes, documents, and books of said corporation for his inspection as director and stockholder. He likewise contends that when asked that he be permitted to inspect the books of the corporation, he was denied access on the ground that the board of directors adopted a resolution providing for inspection of the books and the taking of copies only by authority of the President of the corporation previously obtained in each case. ISSUE: WON Veraguth can exercise the right of inspection of the books prior to the approval of the Board. HELD: NO. Directors have the unqualified right to inspect the books and records of a corporation at all reasonable times. Pretexts may not be put forward by the officers to keep a director or stockholder from inspecting the books and minutes of the corporation, and the right to inspect cannot be denied on the grounds that the director or stockholders are on unfriendly terms with the officers. A director or stockholder has no absolute right to secure certified copies of the minutes until these minutes have been written up and approved by the directors. NOTE: TAKE NOTE OF THE CONFIDENTIALITY CLAUSE Gokongwei v. SEC L- 45911, April 11, 1979 ISSUE:

37

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) WON Gokongwei may be allowed to inspect the books of the corporation. HELD: YES. Where the right to inspect is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. The inspection has to be germane to the petitioner’s interest as a stockholder and has to be proper and lawful in character and not inimical to the interest of the corporation. The stockholder’s right to inspect is based on his ownership of the assets and property of the corporation. It is therefore an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, beneficial ownership, or quasi-ownership, and is predicated upon the necessity of self-protection. On application for mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder’s good faith and his purpose and motives in seeking inspection. But the impropriety of purpose such as will defeat enforcement must be set up by the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the law take from the stockholder the burden of showing the propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive. The foreign subsidiary is wholly-owned by SMC and therefore under its control, and would be more in accord with equity, good faith, and fair dealing to construe the statutory right of Gokongwei as stockholder to inspect the books of the parent as extending to the books of the subsidiary in its control. NOTE: • Principal and the subsidiary is different corporation BUT exception is discussed in Gokongwei vs SEC • INSPECTION o Good faith of stockholders is presumed therefore must allow the inspection o EXCEPT: if corporation can prove bad faith of the shareholder in suits, and that the purpose in not germane to his right as a shareholder. • XVl. DERIVATIVE SUIT - Rule 8, Rules of Proc. On Intra-corporate Controversies Rule 8 DERIVATIVE SUITS

2013400036 Section 1. Derivative action. — A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that:chanroblesvirtuallawlibrary (1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed;; (2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires;;   (3) No appraisal rights are available for the acts or acts complained of;; and cralaw   (4) The suits is not a nuisance or harassment suit.cralaw In case of nuisance of harassment suit, the court shall forthwith dismiss the case. Sec. 2. Discontinuance. - A derivative action shall not be discontinued, compromised or settled without approval of the court. During the pendency of the action, any sale of shares of the complaining stockholders shall be approved by the court. If the court determines that the interest of the stockholders or members will be substantially affected by the discontinuance, compromise or settlement, the court may direct that notice, by publication or otherwise, be given to the stockholders or members whose interest it determines will be so affected. NOTE: • • • • •

Derivative suit VS Individual Suit VS Class Suit Exhaust intra corporate remedies before going to court Harassment Suits Share should be in his own name Number of share is immaterial o He is suing in behalf of the corporation

• Evangelista v. Santos 86 Phil. 387 G.R. No. L-1721;; May 19, 1950 FACTS: Plaintiffs, minority stockholders of Vitali Lumber Company, alleges in their complaint that defendant as president, manager and treasurer of their company, through fault, neglect and abandonment allowed it lumber concession to lapse and its properties and assets to disappear causing the complete ruin of the corporation’s operation and total depreciation of its stocks. They pray for an accounting from the defendant of the corporate affairs and assets, payment to them of the value of their respective participation in said

38

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) assets on the basis of the value of the stocks held by each of them and to pay the cost of the suit. ISSUE: WON the plaintiff-stockholders has the right to bring suit in their benefit. HELD: NO. The complaint shows that the action is for damages resulting from mismanagement of the affairs and assets of the corporation by its principal officer, it being alleged that defendant's maladministration has brought about the ruin of the corporation and the consequent loss of value of its stocks. The injury complained of is thus primarily to the corporation, so that the suit for the damages claimed should be by the corporation rather than by the stockholders. The stockholders may not directly claim those damages for themselves for that would result in the appropriation by and the distribution among them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities something which cannot be legally done. But while it is to the corporation that the action should pertain in cases of this nature, however, if the officers of the corporation, who are the ones called upon to protect their rights, refuse to sue, or where a demand upon them to file the necessary suit would be futile because they are the very ones to be sued or because they hold the controlling interest in the corporation, then in that case any of the stockholders is allowed to bring suit. But in that case, the corporation is the real party in interest. Republic Bank v. Cuaderno 19 SCRA 671 G.R. No. L-22399;; March 30, 1967 FACTS: A derivative suit was brought against the officers and the board. Complaint alleged that the directors approved a resolution granting excessive compensation to the corporate officers. Suit was filed in order to prevent dissipation of the corporate funds for the payment of salaries of the said officers. Board claims the action cannot prosper for failure to compel the board to file the suit for and in behalf of the corporation. ISSUE: WON the action cannot prosper for failure to compel the board to file suit in behalf of the corporation. HELD: NO. It is settled that an individual stockholder is permitted to institute a

2013400036 derivative or representative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the 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 a nominal party, with the corporation as the real party in interest. Normally, it is the corporation through the board of directors which should bring the suit. But as in this case, the members of the board of directors of the bank were the nominees and creatures of respondent Roman and thus, any demand for an intra-corporate remedy would be futile, the stockholder is permitted to bring a derivative suit. Should the corporation be made a party? The English practice is to make the corporation a party plaintiff while the US practice is to make it a party defendant. What is important though is that the corporation should be made a party in order to make the court's ruling binding upon it and thus bar any future re- litigation of the issues. SMC v. Khan L- 85339 (Aug. 11, 1989) G.R. No. 85339;; August 11, 1989 FACTS: Fourteen corporations initially acquired shares of outstanding capital stock of SMC and constituted a Voting Trust thereon in favor of Andres Soriano, Jr. When the latter died Eduardo Cojuanco was elected as the substitute trustee. However, after the EDSA revolution, Cojuanco fled out of the country, and subsequently an agreement was entered into between the 14 corporations and Andres Soriano III (as an agent of several persons) for the purchase of the shares held by the former. Actually the buyer of the shares was Neptunia Corporation, a foreign corporation and wholly-owned subsidiary of another subsidiary wholly owned by SMC. Neptunia paid the downpayment from the proceeds of certain loans. PCGG then sequestered the shares subject of the sale so SMC suspended all the other installments of the price to the sellers. The 14 corporations then sued for rescission and damages. Meanwhile, PCGG directed SMC to issue qualifying shares to seven (7) individuals including Eduardo de los Angeles from the sequestered shares for them to hold in trust. Then, the SMC’s board of directors passed a resolution assuming the loans incurred by Neptunia for the downpayment. De los Angeles assailed the resolution alleging that it was not passed by the board aside from its deleterious effects on the corporation’s interest. When his efforts to obtain relief within the corporation proved futile, he filed this action with the SEC. Respondent directors alleged that de los Angeles has no legal standing having been merely “imposed” by the PCGG and that the twenty (20) shares owned by him personally cannot fairly and adequately represent the interest of the minority.

39

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) ISSUE: WON de los Angeles have the legal standing to sue. (Derivative suit) HELD: YES. The bona fide ownership by a stockholder in his own right suffices to invest him with the standing to bring a derivative suit for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him individually but in behalf and for the benefit of the corporation. The requisites of a derivative suit are: (1) the party bringing the suit should be a stockholder as of the time of the act or transactions complained of, the number of shares not being material;; (2) exhaustion of intra-corporate remedies (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 (3) the cause of action actually devolves on the corporation and not to the particular stockholder bringing the suit. Yu v. YukayguanGR 177549 (June 18, 2009) ANTHONY YU et al. vs. JOSEPH YUKAYGUAN et al. GR 177549, 18 June 2009 FACTS: Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc. On 15 October 2002, respondents filed against petitioners a verified Complaint forAccounting, Inspection of Corporate Books and Damages 1 through Embezzlement and Falsification of Corporate Records and Accounts [6] before the RTC of Cebu. The said Complaint was filed by respondents, in their own behalf and as a derivative suit on behalf of Winchester, Inc., and was docketed as SRC Case No. 022-CEB. The factual background of the Complaint was stated in the attached Affidavit executed by respondent Joseph. According to respondents, Winchester, Inc. was established and incorporated on 12 September 1977, with petitioner Anthony as one of the incorporators, holding 1,000 shares of stock worth P100,000.00. Petitioner Anthony paid for the said shares of stock with respondent Joseph’s money, thus, making the former a mere trustee of the shares for the latter.

1

2013400036 The case at bar was initiated before the RTC by respondents as a derivative suit, on their own behalf and on behalf of Winchester, Inc., primarily in order to compel petitioners to account for and reimburse to the said corporation the corporate assets and funds which the latter allegedly misappropriated for their personal benefit. ISSUE: Whether or not the derivative suit is valid. RULING: YES. The general rule is that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the 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 a nominal party, with the corporation as the real party in interest. A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit. And the relief which is granted is a judgment against a third person in favor of the corporation. Glaringly, a derivative suit is fundamentally distinct and independent from liquidation proceedings. They are neither part of each other nor the necessary consequence of the other. There is totally no justification for the Court of Appeals to convert what was supposedly a derivative suit instituted by respondents, on their own behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester, Inc. While it may be true that the parties earlier reached an amicable settlement, in which they agreed to already distribute the assets of Winchester, Inc., and in effect liquidate said corporation, it must be pointed out that respondents themselves repudiated said amicable settlement before the RTC, even after the same had been partially implemented;; and moved that their case be set for pre-trial. Attempts to again amicably settle the dispute between the parties before the Court of Appeals were unsuccessful. G.R. No. 177549;; June 18, 2009 FACTS: The case stemmed from the petition of Anthony Yu et. al. against his

40

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) younger half-brother Joseph Yukayguan et. al., who were all shareholders of Winchester Industrial Supply Inc., a company engaged in hardware and industrial equipment business. Accusing his older brother’s family of misappropriating funds and assets of the company, Yukayguan filed a derivative suit. After trial, the Cebu Regional Trial Court dismissed the case, saying Yukayguan failed to follow and observe the essentials for filing of a derivative suit or action. The ruling was upheld but later reversed by the Court of Appeals, prompting Yu to elevate the matter to the SC. ISSUE: Mandatory requirements before courts can give due course to derivative suits – or legal actions that may be taken by a stockholders on behalf of a corporation or association. HELD: The fact that Winchester, Inc. is a family corporation should not in any way exempt respondents from complying with the clear requirements and formalities of the rules for filing a derivative suit. A stockholder’s right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. However, there are mandatory requirements before a derivative suit can be given due course by the Court. Citing Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, the SC said derivative actions may be filed provided that the suing party was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed;; and he exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires. As additional requirements, the SC said there must be no appraisal rights — which would allow a stockholder to sell his holdings back to the company – available and the suit is not a nuisance or harassment suit. Pascual v. Orozco 19 Phil 83 Addition To: continuing injury incurred by stockholder, despite the fact he was not a stockholder at the beginning of the injury CANDIDO PASCUAL vs.

2013400036 EUGENIO DEL SAZ OROZCO, ET AL. G.R. No. L-5174. March 17, 1911 FACTS: This action was brought by the plaintiff Pascual, in his own right as a stockholder of the bank, for the benefit of the bank, and all the other stockholders thereof. The Banco Español-Filipino is a banking corporation, constituted as such by royal decree of the Crown of Spain in the year 1854, the original grant having been subsequently extended and modified by royal decree of July 14, 1897, and by Act No. 1790 of the Philippine Commission. It is alleged in the amended complaint that the only compensation contemplated or provided for the managing officers of the bank was a certain per cent of the net profits resulting from the bank's operations, as set forth in article 30 of its reformed charter or statutes. The gist of the first and second causes of action is as follows: The defendants constitute a majority of the present board of directors of the bank, who alone can authorize an action against them in the name of the corporation. It appears that during the years 1903, 1904, 1905, and 1907 the defendants and appellees, without the knowledge, consent, or acquiescence of the stockholders, deducted their respective compensation from the gross income instead of from the net profits of the bank, thereby defrauding the bank and its stockholders of approximately P20,000 per annum. The second cause of action sets forth that defendants' and appellees' immediate predecessors in office in the bank during the years 1899, 1900, 1901, and 1902, committed the same illegality as to their compensation as is charged against the defendants themselves. In the four years immediately following the year 1902, the defendants and appellees were the only officials or representatives of the bank who could and should investigate and take action in regard to the sums of money thus fraudulently appropriated by their predecessors. They were the only persons interested in the bank who knew of the fraudulent appropriation by their predecessors. The court below sustained the demurrer as to the first and second causes of action on the ground that in actions of this character the plaintiff must aver in his complaint that he was the owner of stock in the corporation at the time of the occurrences complained of, or else that the stock has since devolved upon him by operation of law. ISSUE: Whether or not the petitioner has a cause of action to file a derivative suit.

41

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) RULING: YES. As to the first cause of action: In suits of this character the corporation itself and not the plaintiff stockholder is the real party in interest. The rights of the individual stockholder are merged into that of the corporation. It is a universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the corporate property;; that both of these are in the corporation itself for the benefit of all the stockholders. So it is clear that the plaintiff, by reason of the fact that he is a stockholder in the bank (corporation) has a right to maintain a suit for and on behalf of the bank, but the extent of such a right must depend upon when, how, and for what purpose he acquired the shares which he now owns. As to the Second cause of action: It affirmatively appears from the complaint that the plaintiff was not a stockholder during any of the time in question in this second cause of action. Upon the question whether or not a stockholder can maintain a suit of this character upon a cause of action pertaining to the corporation when it appears that he was not a stockholder at the time of the occurrence of the acts complained of and upon which the action is based, the authorities do not agree. Cuav.OcampoTan GR 181455/182008 (12/04/2009) G.R. No. 181455-56, December 4, 2009 Chico-Nazario, J.: Facts: PRCI is a corporation organized and established under Philippine laws to carry on the business of a race course in all its branches and, in particular, to conduct horse races or races of any kind, to accept bets on the results of the races, and to construct grand or other stands, booths, stablings, paddocks, clubhouses, refreshment rooms and other erections, buildings, and conveniences, and to conduct, hold and promote race meetings and other shows and exhibitions.

2013400036 PRCI could continue to focus its efforts on pursuing its core business competence of horse racing. Instead of organizing and establishing a new corporation for the said purpose, PRCI management opted to acquire another domestic corporation, JTH Davies Holdings, Inc. The Board agreed to acquire the stocks of latter company through an exchange of their Makati property. Said move was made into a resolution but was opposed by some stockholders. The Board and petitioners continued to acquire the company, which was surrounded by fraud as alleged by the respondents. The petitioners proceeded with the plan despite the demand by respondents to appraise the stocks of JTH Davies Holdings. A case was filed by respondents and was granted by the RTC. Issue: Whether or not appraisal rights are available to respondents. Held: No. It bears to point out that every derivative suit is necessarily grounded on an alleged violation by the board of directors of its fiduciary duties, committed by mismanagement, misrepresentation, or fraud, with the latter two situations already implying bad faith. If the Court upholds the position of respondents Miguel, et al. – that the existence of mismanagement, misrepresentation, fraud, and/or bad faith renders the right of appraisal unavailable – it would give rise to an absurd situation. Inevitably, appraisal rights would be unavailable in any derivative suit. This renders the requirement in Rule 8, Section 1(3) of the IPRICC superfluous and effectively inoperative;; and in contravention of an elementary rule of legal hermeneutics that effect must be given to every word, clause, and sentence of the statute, and that a statute should be so interpreted that no part thereof becomes inoperative or superfluous. The import of establishing the availability or unavailability of appraisal rights to the minority stockholder is further highlighted by the fact that it is one of the factors in determining whether or not a complaint involving an intra-corporate controversy is a nuisance and harassment suit.

In case of nuisance or harassment suits, the court may, motu proprio or upon PRCI owns only two real properties, each covered by several transfer certificates of motion, forthwith dismiss the case. title. One is known as the Sta. Ana Racetrack located in Makati City, and the other is The availability or unavailability of appraisal rights should be objectively based on located in the towns of Naic and Tanza, Cavite. the subject matter of the complaint, i.e., the specific act or acts performed by the Following the trend in the development of properties in the same area, PRCI wished board of directors, without regard to the subjective conclusion of the minority to convert its Makati property from a racetrack to urban residential and commercial stockholder instituting the derivative suit that such act constituted mismanagement, use. Given the location and size of its Makati property, PRCI believed that said misrepresentation, fraud, or bad faith. property was severely under-utilized. Hence, PRCI management decided to transfer its racetrack from Makati to Cavite. Ching and Wellington v. Subic Bay Golf Sept. 10, 2014 Now as to its Makati property, PRCI management decided that it was best to spin off the management and development of the same to a wholly owned subsidiary, so that G.R. No. 174353 September 10, 2014

42

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) NESTOR CHING and ANDREW WELLINGTON, Petitioners, vs. SUBIC BAY GOLF AND COUNTRY CLUB, INC., HU HO HSIU LIEN alias SUSAN HU, HU TSUNG CHIEH alias JACK HU, HU TSUNG HUI, HU TSUNG TZU and REYNALD R. SUAREZ, Respondents. D E C I S I O N LEONARDO-DE CASTRO, J.: This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court 1 seeking the review of the Decision dated October 27, 2005 of the Court of Appeals 2 in CA-G.R. CV No. 81441, which affirmed the Order dated July 8, 2003 of the Regional Trial Court (RTC), Branch 72 of Olongapo City in Civil Case No. 03-001 dismissing the Complaint filed by herein petitioners.

2013400036 Petitioners claimed in the Complaint that defendant corporation did not disclose to them the above amendment which allegedly makes the shares non- proprietary, as it takes away the rightof the shareholders to participate in the pro- rata distribution of the assets of the corporation after its dissolution. According to petitioners, this is in fraud of the stockholders who only discovered the amendment when they filed a case for injunction to restrain the corporation from suspending their rights to use all the facilities of the club. Furthermore, petitioners alleged that the Board of Directors and officers of the corporation did not call any stockholders’ meeting from the time of the incorporation, in violation of Section 50 of the Corporation Code and the By-Laws of the corporation. Neither did the defendant directors and officers furnish the stockholders with the financial statements of the corporation nor the financial report of the operation of the corporation in violation of Section 75 of the Corporation Code. Petitioners also claim that on August 15, 1997, SBGCCI presented to the SEC an amendment to the By-Laws of the corporation suspending the voting rights of the shareholders except for the five founders’ shares. Said amendment was allegedly passed without any stockholders’ meeting or notices to the stockholders in violation of Section 48 of the Corporation Code.

On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a 3 Complaint with the RTC of Olongapo City on behalf of the members of Subic Bay Golf and Country Club, Inc. (SBGCCI) against the said country club and its Board of Directors and officers under the provisions of Presidential Decree No. 902-A in relation to Section 5.2 of the Securities Regulation Code. The Subic Bay Golfers and Shareholders Incorporated (SBGSI), a corporation composed of shareholders of the defendant corporation, was also named as plaintiff. The officers impleaded as The Complaint furthermore enumerated several instances of fraud in the defendants were the following: (1) itsPresident, Hu Ho Hsiu Lien alias Susan Hu;; (2) management of the corporation allegedly committed by the Board of Directors and its treasurer, Hu Tsung Chieh alias Jack Hu;; (3) corporate secretary Reynald Suarez;; officers of the corporation, particularly: and (4) directors Hu Tsung Hui and Hu Tsung Tzu. The case was docketed as Civil a. The Board of Directors and the officers of the corporation did not Case No. 03-001. The complaint alleged that the defendant corporation sold shares indicate in its financial report for the year 1999 the amount of P235,584,000.00 to plaintiffs at US$22,000.00 per share, presenting to them the Articles of collected from the subscription of 409 shareholders who paid U.S.$22,000.00 Incorporation which contained the following provision: for one (1) share of stock at the then prevailing rate of P26.18 to a dollar. The No profit shall inure to the exclusive benefit of any of its shareholders, hence, no stockholders were not informed how these funds were spent or its dividends shall be declared in their favor. Shareholders shall be entitled only to a pro- whereabouts. 4 rata share of the assets of the Club at the time of its dissolution or liquidation. b. The Corporation has been collecting green fees from the patrons of the However, on June 27, 1996, an amendment to the Articles of Incorporation was golf course at an average sum of P1,600.00 per eighteen (18) holes but the approved by the Securities and Exchange Commission (SEC), wherein the above income is not reported in their yearly report. The yearly report for the year provision was changed as follows: 1999 contains the report of the Independent Public Accountant who stated that the company was incorporated on April 1, 1996 but has not yet started its No profit shall inure to the exclusive benefit of any of its shareholders, hence, no regular business operation. The golf course has been in operation since 1997 dividends shall be declared in their favor. In accordance with the Lease and and as such has collected green fees from non-members and foreigners who Development Agreement by and between Subic Bay Metropolitan Authority and The played golf in the club. There is no financial report as to the income derived Universal International Group of Taiwan, where the golf courseand clubhouse from these sources. component thereof was assigned to the Club, the shareholders shall not have 5 proprietary rights or interests over the properties of the Club. x x x. (Emphasis c. There is reliable information that the Defendant Corporation has not supplied.) paid its rentals to the Subic Bay Metropolitan Authority which up to the present is estimated to be not less than one (1) million U.S. Dollars. Furthermore, the

43


2013400036

electric billings of the corporation [have] not been paid which amounts also to several millions of pesos.

(b) Contrary to the allegations in the Complaint, said subscriptions were 9 reflected inSBGCCI’s balance sheets for the fiscal years 1998 and 1999;;

d. That the Supreme Court sustained the pre-termination of its contract with the SBMA and presently the club is operating without any valid contract with SBMA. The defendant was ordered by the Supreme Court to yield the possession, the operation and the management of the golf course to SBMA. Up to now the defendants [have] defied this Order.

(c) Plaintiffs were never presented the original Articles of Incorporation of SBGCCI since their shares were purchased after the amendment of the Articles of Incorporation and such amendment was publicly known to all 10 members prior and subsequent to the said amendment;;

e. That the value of the shares of stock of the corporation has drastically declined from its issued value of U.S.$22,000.00 to only Two Hundred Thousand Pesos, (P200,000.00) Philippine Currency. The shareholders [have] lost in terms ofinvestment the sum estimated to be more than two hundred thousand pesos.This loss is due to the fact that the Club is mismanaged and the golf course is poorly maintained. Other amenities of the Club has (sic) not yet been constructed and are not existing despite the lapse of morethan five (5) years from the time the stocks were offered for sale to the public. The cause of the decrease in value of the sharesof stocks is the fraudulent mismanagement of the 6 club. Alleging that the stockholders suffered damages as a result of the fraudulent mismanagement of the corporation, petitioners prayed in their Complaint for the following: WHEREFORE, it is most respectfully prayed that upon the filing of this case a temporary restraining order be issued enjoining the defendants from acting as Officers and Board of Directors of the Corporation. After hearing[,] a writ of preliminary injunction be issued enjoining defendants to act as Board of Directors and Officers of the Corporation. In the meantime a Receiver be appointed by the Court to act as such until a duly constituted Board of Directors and Officers of the Corporation be elected and qualified.

(d) Shareholders’ meetingshad been held and the corporate acts complained 11 of were approved at shareholders’ meetings;; (e) Financial statements of SBGCCI had always been presented to 12 shareholders justifiably requesting copies;; (f) Green fees collected were reported in SBGCCI’s audited financial 13 statements;; (g) Any unpaid rentals are the obligation of UIGDC with SBMA and SBGCCI 14 continued to operate under a valid contract with the SBMA;; and (h) SBGCCI’s Board of Directors was not guilty of any mismanagement and in 15 fact the value of members’ shares have increased. Respondents further claimed by way ofdefense that petitioners failed (a) to show that it was authorized by SBGSI to file the Complaint on the said corporation’s behalf;; (b) to comply with the requisites for filing a derivative suit and an action for receivership;; and (c) to justify their prayer for injunctive relief since the Complaint may be considered a nuisance or harassment suit under Section 1(b), 16 Rule1 of the Interim Rules of Procedure for Intra-Corporate Controversies. Thus, they prayed for the dismissal of the Complaint. On July 8, 2003, the RTC issued an Order dismissing the Complaint. The RTC held that the action is a derivative suit, explaining thus:

That defendants be ordered to pay the stockholders damages in the sum of Two Hundred Thousand Pesos each representing the decrease in value of their shares of The Court finds that this case is intended not only for the benefit of the two stocks plus the sum of P100,000.00 as legal expense and attorney’s fees, as well as petitioners. This is apparentfrom the caption of the case which reads Nestor Ching, 7 appearance fee of P4,000.00 per hearing. Andrew Wellington and the Subic Bay Golfers and Shareholders, Inc., for and in behalf of all its members as petitioners. This is also shown in the allegations of the In their Answer, respondents specifically denied the allegations of the Complaint petition[.] x x x. and essentially averred that: On the bases of these allegations of the petition, the Court finds that the case (a) The subscriptions of the 409 shareholders were paid to Universal is a derivative suit. Being a derivative suit in accordance with Rule 8 of the Interim International Group Development Corporation (UIGDC), the majority shareholder Rules, the stockholders and members may bring an action in the name of the 8 of SBGCCI, from whom plaintiffs and other shareholders bought their shares;; corporation or association provided that he (the minority stockholder) exerted all

44

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) reasonable efforts and allege[d] the same with particularity in the complaint to exhaust of (sic) all remedies available under the articles of incorporation, by-laws or rules governing the corporation or partnership to obtain the reliefs he desires. An examination of the petition does not show any allegation that the petitioners applied for redress to the Board of Directors of respondent corporation there being no demand, oralor written on the respondents to address their complaints. Neither did the petitioners appl[y] for redress to the stockholders of the respondent corporation and ma[k]e an effort to obtain action by the stockholders as a whole. Petitioners should have asked the Board of Directors of the respondent corporation and/or its stockholders to hold a meeting for the taking up of the petitioners’ rights in this 17 petition.

2013400036 According to petitioners, the above provision (which should be read in relation to Section 5.2 of the Securities Regulation Code which transfers jurisdiction over such cases to the RTC) allows any stockholder to file a complaint against the Board of Directors for employing devices or schemes amounting to fraud and misrepresentation which is detrimental to the interest of the public and/or the stockholders.

In the alternative, petitioners allege that if this Court rules that the Complaint is a derivative suit, it should nevertheless reverse the RTC’s dismissal thereof on the ground of failure to exhaust remedies within the corporation. Petitioners cite 19 Republic Bank v. Cuaderno wherein the Court allowed the derivative suit even without the exhaustion of said remedies as it was futile to do so since the Board The RTC held that petitioners failed to exhaust their remedies within the ofDirectors were all members of the same family. Petitioners also point out that in respondent corporation itself. The RTC further observed that petitioners Ching and Cuadernothis Court held that the fact that therein petitioners had only one share of Wellington were not authorized by their co-petitioner Subic Bay Golfers and stock does not justify the denial of the relief prayed for. Shareholders Inc. to filethe Complaint, and therefore had no personality to file the To refute the lower courts’ ruling that there had been non-exhaustion of intra- same on behalf ofthe said shareholders’ corporation. According to the RTC, the shareholdings of petitioners comprised of two shares out of the 409 alleged corporate remedies on petitioners’ part, they claim that they filed in Court a case outstanding shares or 0.24% is an indication that the action is a nuisance or for Injunction docketed as Civil Case No. 103-0-01, to restrain the corporation from harassment suit which may be dismissed either motu proprio or upon motion in suspending their rights to use all the facilities of the club, on the ground that the accordance with Section 1(b) of the Interim Rules of Procedure for Intra-Corporate club cannot collect membership fees until they have completed the amenities as 18 advertised when the shares of stock were sold to them. They allegedly asked the Controversies. Club to produce the minutes of the meeting of the Board of Directors allowing the Petitioners Ching and Wellington elevated the case to the Court of Appeals, amendments of the Articles of Incorporation and By-Laws. Petitioners likewise where it was docketed as CA-G.R. CV No. 81441. On October 27, 2005, the Court of assail the dismissal of the Complaint for being a harassment ornuisance suit Appeals rendered the assailed Decision affirming that of the RTC. before the presentation of evidence. They claim that the evidence they were supposed to present will show that the members of the Board of Directors are not Hence, petitioners resort to the present Petition for Review, wherein they argue qualified managers of a golf course. that the Complaint they filed with the RTC was not a derivative suit. They claim that they filed the suit in their own right as stockholders against the officers and Board of We find the petition unmeritorious. Directors of the corporation under Section 5(a) of Presidential DecreeNo. 902-A, At the outset, it should be noted thatthe Complaint in question appears to have which provides: been filed only by the two petitioners, namely Nestor Ching and Andrew Sec. 5. In addition tothe regulatory and adjudicative functions of the Securities Wellington, who each own one stock in the respondent corporation SBGCCI. While and Exchange Commission over corporations, partnerships and other forms of the caption of the Complaint also names the "Subic Bay Golfers and Shareholders associations registered with it as expressly granted under existing laws and decrees, Inc. for and in behalf of all its members," petitioners did not attach any it shall have original and exclusive jurisdiction to hear and decide cases involving: authorization from said alleged corporation or its members to file the Complaint. Thus, the Complaint is deemed filed only by petitioners and not by SBGSI. (a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and On the issue of whether the Complaint is indeed a derivative suit, we are misrepresentation which may be detrimental to the interest of the public and/or of mindful of the doctrine that the nature of an action, as well as which court or body the stockholders, partners, members of associations or organizations registered has jurisdiction over it, isdetermined based on the allegations contained in the with the Commission. complaint of the plaintiff, irrespective of whether or not the plaintiff is entitled to

45

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) 20

recover upon all or some of the claims asserted therein. We have also held that the body rather than the title of the complaint determines 21 the nature of an action.

2013400036 interest." x x x x

Indeed, the Court notes American jurisprudence to the effect that a derivative 22 In Cua, Jr. v. Tan, the Court previously elaborated on the distinctions among a suit, on one hand, and individual and class suits, on the other, are mutually derivative suit, anindividual suit, and a representative or class suit: exclusive, viz.: A derivative suit must be differentiated from individual and representative or "As the Supreme Court has explained: "A shareholder’s derivative suit seeks class suits, thus: to recover for the benefit of the corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise be redressed "Suits by stockholders or members of a corporation based on wrongful or because of failureof the corporation to act. Thus, ‘the action is derivative, i.e., in the fraudulent acts of directors or other persons may be classified intoindividual suits, corporate right, if the gravamen of the complaint is injury to the corporation, or to class suits, and derivative suits. Where a stockholder or member is denied the right the whole body of its stock and property without any severance or distribution of inspection, his suit would be individual because the wrong is done to him among individual holders, or it seeks to recover assets for the corporation or to personally and not to the other stockholders or the corporation. Where the wrong is prevent the dissipation of its assets.’ x x x. In contrast, "a directaction [is one] filed done to a group of stockholders, as where preferred stockholders’ rights are violated, by the shareholder individually (or on behalf of a classof shareholders to which he a class or representative suitwill be proper for the protection of all stockholders or she belongs) for injury to his or her interestas a shareholder. x x x. [T]he two belonging to the same group. But where the acts complained of constitute a wrong to actions are mutually exclusive: i.e., the right of action and recovery belongs to the corporation itself, the cause of action belongs to the corporation and not to the either the shareholders (direct action) *651 or the corporation(derivative action)." x individual stockholder or member. Although in most every case of wrong to the x x. 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 Thus, in Nelson v. Anderson(1999), x x x, the **289 minority shareholder individual cause of action since the corporation is a person distinct and separate from alleged that the other shareholder of the corporation negligently managed the him, and can and should itself sue the wrongdoer. Otherwise, not only would the business, resulting in its total failure. x x x. The appellate court concluded that the theory of separate entity be violated, but there would be multiplicity of suits as well as plaintiff could not maintain the suit as a direct action: "Because the gravamen of a violation of the priority rights of creditors. Furthermore,there is the difficulty of the complaint is injury to the whole body of its stockholders, it was for the determining the amount of damages that should be paid to each individual corporation to institute and maintain a remedial action. x x x. A derivative action stockholder. would have been appropriate if its responsible officials had refused or failed to act." x x x. The court wenton to note that the damages shown at trial were the loss of However, in cases of mismanagement where the wrongful acts are committed by corporate profits. x x x. Since "[s]hareholders own neither the property nor the the directors or trustees themselves, a stockholder or member may find that he has earnings of the corporation," any damages that the plaintiff alleged that resulted no redress because the former are vested by law with the right to decide whether or from such loss of corporate profits "were incidental to the injury to the corporation." notthe corporation should sue, and they will never be willing to sue themselves. The (Citations omitted.) 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 The reliefs sought in the Complaint, namely that of enjoining defendants from stockholder to sue on behalf of a corporation in what eventually became known as a acting as officers and Board of Directors of the corporation, the appointment of a "derivative suit." It has been proven to be an effective remedy of the minority against receiver, and the prayer for damages in the amount of the decrease in the value of the abuses of management. Thus, an individual stockholder is permitted to institute a the sharesof stock, clearly show that the Complaint was filed to curb the alleged derivative suit on behalf of the corporation wherein he holds stock in order to protect mismanagement of SBGCCI. The causes of action pleaded by petitioners do not or vindicate corporate rights, whenever officials of the corporation refuse to sue orare accrue to a single shareholder or a class of shareholders but to the corporation the ones to be sued or hold the control of the corporation. In such actions, the suing itself. stockholder is regarded as the nominal party, with the corporation as the party in

46

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) However, as minority stockholders, petitioners do not have any statutory right to override the business judgments of SBGCCI’s officers and Board of Directors on the ground of the latter’s alleged lackof qualification to manage a golf course. Contraryto the arguments of petitioners, Presidential Decree No. 902-A, which is entitled REORGANIZATION OF THE SECURITIES AND EXCHANGE COMMISSION WITH ADDITIONAL POWERS AND PLACING THE SAID AGENCY UNDER THE ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE PRESIDENT, does not grant minority stockholders a cause of action against waste and diversion by the Board of Directors, but merely identifies the jurisdiction of the SEC over actionsalready authorized by law or jurisprudence. It is settled that a stockholder’s right to institute a derivative suit is not based on any express provisionof the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their 23 fiduciary duties. At this point, we should take note that while there were allegations in the Complaint of fraud in their subscription agreements, such as the misrepresentation of the Articles of Incorporation, petitioners do not pray for the rescission of their subscription or seekto avail of their appraisal rights. Instead, they ask that defendants be enjoined from managing the corporation and to pay damages for their mismanagement. Petitioners’ only possible cause of action as minority stockholders against the actions of the Board of Directors is the common law right to file a derivative suit. The legal standing of minority stockholders to bring derivative suits is not a statutory right, there being no provision in the Corporation Code or related statutes authorizing the same, but is instead a product of jurisprudence based on equity. However, a derivative suit cannot prosper without first complying with the 24 legal requisites for its institution.

2013400036 The RTC dismissed the Complaint for failure to comply with the second and fourth requisites above. Upon a careful examination of the Complaint, this Court finds that the same should not have been dismissed on the ground that it is a nuisance or harassment suit. Although the shareholdings of petitioners are indeed only two out of the 409 alleged outstanding shares or 0.24%, the Court has held that it is enough that a member or a minority of stockholders file a derivative suit for and in behalf of a 25 corporation. With regard, however, to the second requisite, we find that petitioners failed to state with particularity in the Complaint that they had exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, and laws or rules governing the corporation to obtain the relief they desire. The Complaint contained no allegation whatsoever of any effort to avail of intra- corporate remedies. Indeed, even if petitioners thought it was futile to exhaust intra-corporate remedies, they should have stated the same in the Complaint and specified the reasons for such opinion. Failure to do so allows the RTC to dismiss the Complaint, even motu proprio, in accordance with the Interim Rules. The requirement of this allegation in the Complaint is not a useless formality which may 26 be disregarded at will.1âwphi1 We ruled in Yu v. Yukayguan :

The wordings of Section 1, Rule8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are simple and do not leave room for statutory construction. The second paragraph thereof requires that the stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust all remedies availableunder the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires;; and to allege such fact with particularityin the complaint. The obvious intent behind the rule is to make the Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had failed. Controversies imposes the following requirements for derivative suits: WHEREFORE, the Petition for Review is hereby DENIED. The Decision of the (1) He was a stockholder or member at the time the acts or transactions subject Court of Appeals in CA-G.R. CV No. 81441 which affirmed the Order of the of the action occurred and at the time the action was filed;; Regional Trial Court (RTC) of Olongapo City dismissing the Complaint filed (2) He exerted all reasonable efforts, and alleges the same with particularity in thereon by herein petitioners is AFFIRMED. the complaint, to exhaust all remedies available under the articles of SO ORDERED. incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires;; MERGER AND CONSOLIDATION Sec. 76-80 (3) No appraisal rights are available for the act or acts complained of;; and TITLE IX (4) The suit is not a nuisance or harassment suit.

47

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) MERGER AND CONSOLIDATION Sec. 76. Plan or merger of consolidation. - Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation. The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: 1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations;;

2013400036 directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation. (n) Sec. 78. Articles of merger or consolidation. - After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation setting forth: 1. The plan of the merger or the plan of consolidation;;

2. The terms of the merger or consolidation and the mode of carrying the same into effect;;  

2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members;; and  

3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger;; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code;; and  

3. As to each corporation, the number of shares or members voting for and against such plan, respectively. (n)

4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. (n) Sec. 77. Stockholder's or member's approval. - Upon approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation, the same shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. Notice of such meetings shall be given to all stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code: Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished. Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of the respective boards of

Sec. 79. Effectivity of merger or consolidation. - The articles of merger or of consolidation, signed and certified as herein above required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. If the Commission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective. If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of the date, time and place of hearing shall be given to each constituent corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code. (n) Sec. 80. Effects or merger or consolidation. - The merger or consolidation shall have the following effects:cralaw 1. The constituent corporations shall become a single corporation which,

48


2013400036

in case of merger, shall be the surviving corporation designated in the plan of merger;; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation;;

•

MERGER : A + B = A absorbs B à A is automatically dissolved

•

MERGER : A + B = B absorbs A è B is automatically dissolved

2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation;;   3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code;; 4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations;; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed;; and 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations;; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation. (n)

o

All properties of A will be transferred to B

o

B issue shares of stocks to A

o

A becomes the stockholder of B

à CONSOLIDATION à it shall absorb all the liabilities of the consolidated company à Creditors or lien rights should not be impaired •

Corporation may agree what liabilities are absorbed as long as creditors right is not impaired à

Y-1 Leisure Case •

Surviving Company will be the one to absorb the absorbed company

DISSOLUTION TITLE XIV DISSOLUTION

NOTES: •

Sec. 117. Methods of dissolution. - A corporation formed or organized under the provisions of this Code may be dissolved voluntarily or involuntarily. (n)

CONSOLIDATION : A plus B = C… A and B are constituent, C is a new corporation Sec. 118. Voluntary dissolution where no creditors are affected. - If dissolution of a corporation does not prejudice the rights of any creditor having a o A and B is deemed dissolved claim against it, the dissolution may be effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of o C is the consolidated corporation the stockholders owning at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members of a meeting to be held upon call of the o A and B will transfer its properties to C directors or trustees after publication of the notice of time, place and object of the meeting for three (3) consecutive weeks in a newspaper published in the place o C will now issue stocks to A and B stockholders where the principal office of said corporation is located;; and if no newspaper is published in such place, then in a newspaper of general circulation in the o A and B will now be stockholders of C

49


2013400036

Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation. The Securities and Exchange Commission shall thereupon issue the certificate of dissolution. (62a)

the provisions of this Code on liquidation. (n)

Sec. 119. Voluntary dissolution where creditors are affected. - Where the dissolution of a corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and Exchange Commission. The petition shall be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members at a meeting of its stockholders or members called for that purpose.

Sec. 122. Corporate liquidation. - Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.

If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city. Upon five (5) day's notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed;; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation. (Rule 104, RCa) Sec. 120. Dissolution by shortening corporate term. - A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the amended articles of incorporation of the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings, subject to

Sec. 121. Involuntary dissolution. - A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations. (n)

At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a) NOTE: - Let the End the term - Amend articles to shorten it - Sec 22 à should always be notice and hearing for the dissolution of the company - Voluntary and involuntary dissolution: o Voluntary – 180 o Involuntary -

50

CORPORATION CODE OUTLINE 6 (ATTY. M.I.P ROMERO) - -

- -

2013400036

Liquidation comes after dissolution, purpose is to pay of the credit. Whatever is the net can now be distributed to the stockholder or members. Sec 94-95 Liquidation à o Juridical personality ceases in dissolutionà but there is winding up period à corporation can still go after debtors, creditors can still sue corporation. Corporation during this period cannot conduct business only. This period is only for LIQUIDATION o Trustees à appointed by the Board à they hold it in trust for the corporation and the stockholders. 3 year period of winding up à trustees may continue liquidation beyond the 3 year period. o Liquidation may continue after 3 years if a trustee is appointed by the board within the 3 year o ANOTHER WAY IS: Receivership à TRUST FUND DOCTRINE: LIQUIDATION and DISSOLUTION of Non Stock Corporation

51

Corporation Code Outline 6

Recommend Documents