#137 LEE v.

CA A complaint for a sum of money was filed by International Corporate Bank against Lee and the other directors of Alfa Integrated Textile Mills. Lee and the other directors in turn filed a 3rd party complaint against ALFA. In the case, the TC issued an order requiring the issuance of an alias summon to ALFA thru DBP after Lee informed the court that the summons for ALFA have been erroneously served considering that the management of ALFA has been transferred to DBP. In a manifestation, DBP informed the court that it was not authorized to receive the summons for ALFA since DBP has not taken over the said company which has a separate and distinct personality. In view of this manifestation, the TC ordered DBP to serve summon to ALFA. DBP again in a manifestation suggested that service of summons can be had to Lee and his group, being directors of ALFA. Lee and his group filed for MR on the ground that they were no longer officers of ALFA based on the VTA executed between all the stockholders of ALFA and DBP hence it could no longer receive summons or any court processes for or on behalf of ALFA. But TC upheld the validity of the service of summons on ALFA thru Lee and the other directors. Lee and his group filed another MR. TC reversed itself and held that Lee and his group were no longer corporate officers of ALFA thus the service of summons on them for ALFA is not proper. CA reversed the decision so Lee and his group appealed to the SC. Lee and his group maintain that with the execution of the VTA between them and the other stockholders of ALFA, as one party and the DBP as the other party, where they assigned and transferred all their shares in ALFA to DBP as trustee, they can no longer be considered directors of ALFA since under the corporation law, a director must in his own right hold at least one share. Issue: WON Lee and the other directors are no longer directors of ALFA due to the execution of the VTA Held: No longer directors. Considering that the VTA between ALFA and the DBP transferred legal ownership of the stock covered by the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the said shares of stocks. In the absence of a showing that DBP had caused to be transferred in their names one share of stock for the purpose of qualifying as directors of ALFA, Lee and his group can no longer be deemed to have retained their status as officers of ALFA which was the case before the execution of the VTA. Not being directors of ALFA, service of summons upon them is not proper. It would have been proper if made upon DBP since there appears to be no dispute from the records that DBP has indeed taken over the full management and control of ALFA.

VTA is an agreement in writing whereby one or more shareholders of a corporation consent to transfer his or her shares to a trustee in order to vest in the latter voting or other rights pertaining to said shares for a period of 5 years upon the fulfillment of statutory conditions and such other terms and conditions specified in the agreement. The 5 year-period may be extended in cases where the voting trust is executed pursuant to a loan agreement whereby the period is made contingent upon full payment of the loan. Criteria to distinguish VTA from proxy and pooling agreements: a) The voting of rights of the stock are separated from the other attributes of ownership b) The voting rights granted are intended to be irrevocable for a definite period of time c) The principal purpose of the grant of voting rights is to acquire voting control of the corporation 138. NIDC VS. AQUINO Facts: Badjak ( Basic Agricultural Traders Jointly Administered Kasamahan) is a corporation engaged in the manufacture of coconut oil and copra cake for export. When the corporations financial condition deteriorated to the point of bankruptcy they mortgaged the 3 coco processing mills to different banks. In need of additional operating capital, Badjak applied to PNB for additional financial assistance, it was approved and they entered into a Financial Agreement which includes the investment of PNB to the corporation in the form of preferred stock convertible within 5 years to common stock. Then, a Voting Trust Agreement was executed in favor of the NIDC (a wholly-owned subsidiary of PNB) by the stockholders representing 60% of the outstanding paid-up and subscribed shares of Badjak. Due to the insolvency of Badjak, PNB instituted extrajudicial foreclosure proceedings against the oil mills, which were sold to the PNB as the highest bidder and the latter failed to exercise the right of redemption. Subsequently, PNB transferred the ownership of oil mills to NIDC. After 3 years, Badjak asked the NIDC if they are still interested to the renewal of the Voting Trust Agreement and requested the latter to account the assets, properties, management and operation of Badjak which the latter refused to comply. Then, Badjak filed a civil action for mandamus with preliminary injunction which was favored by the respondent judge who issued a restraining order against the petitioner. Hence, the consolidate petitions seeking to annul and set aside the decision of the respondent judge. Issue: Whether or not the order of the respondent judge in granting the petition for mandamus of Badjak should be annulled and set aside? Ruling: The petitions are granted and the order of the respondent judge was annulled and set aside.

Notes:

The Court finds no clear right in Badjak to be entitled to the writ prayed for. It should be noted that the petition for mandamus filed by it prayed that NIDC and PNB be ordered to surrender, relinquish and turn-over to them the assets, management and operation of Badjak and particularly to submit complete accounting of assets. What Badjak seeks to recover is title to, possession of the 3 oil mills which the records shows already belong to NIDC. It is not disputed that 0the mortgages on the 3 oil mills were foreclosed by PNB and NIDC. The Court said that the writ of mandamus will not issue to give to the applicant anything to which he is not entitled by law. After NIDC acquired ownership of the 3 oil mills there is no doubt, that NICD not only has possession of, but also tile to the 3 oil mills. The PNB-NIDC of the properties in question was not made or affected under the capacity 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. 139. PHILPOTTS VS PHILIPPINE MANUFACTURING CO. (Right to inspect by stockholders;

Case# 140: ANTONIO PARDO, petitioner, vs. THE HERCULES LUMBER CO., INC., and IGNACIO FERRER, respondents. August 1, 1924 G.R. No. L-22442 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. The Corporate secretary, Ferrer refused to permit petitioner or his agent to inspect the records and business transactions to the Company . The basis for the refusal was the provision in the Companys bylaws which declared that every stockholder may examine the books of the Company and other documents pertaining the same upon the days which the BOD shall annually fix. The board resolved to call the usual general (meeting of shareholders) for March 30 of the present year, with notice to the shareholders that the books of the company are at their disposition from the 15th to 25th of the same month for examination, in appropriate hours or for 10 days only, for that year. Respondent contended that the board constitutes a lawful restriction on the right conferred by statute; and it is insisted that as the petitioner has not availed himself of the permission to inspect the books and transactions of the company within the ten days thus defined, his right to inspection and examination is lost, at least for this year. Issue: Whether petitioner has the right to inspect the books of the Company despite the limitations set by the BOD on their Bylaws? Held: Yes. The Court held that the resolution of the BOD of the Corporation limiting the rights of stockholders to inspect its records to a period of 10 days shortly prior to the annual stockholders meeting is an unreasonable restriction given by Section 51 of the Corporation Law, which declares that the right to inspection can be exercised at reasonable hours. It means that the right of inspection may be exercised at reasonable hours on business day throughout the year and not merely during an arbitrary period of a few days chosen by the Directors. The general right given by the statute may not be lawfully abridged to the extent attempted in the 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. The statutory right of inspection is not affected by the adoption by the board of directors of a resolution providing for the closing of transfer books thirty days before an election. Case#141

remedies)
Facts: Petitioner as stockholder of respondent prayed for a writ of mandamus to compel the Board of Directors of respondent corporation to permit the petitioner or his authorized agent or attorney the records of the transactions of respondent. Respondent refused on the grounds that, the secretary as custodian of the records must be impleaded along with the corporation as a proper party and, that an agent or attorney of a stockholder do not have the right to inspect the records of respondent. Issue: 1. 2. Is the corporate secretary a proper party that should be impleaded in this case? Can an agent or attorney of a stockholder inspect the records of the corporation? Held: 1. The propriety of naming the secretary of the corporation as a codefendant cannot be questioned, since such official is customarily charged with the custody of all documents, correspondence, and records of a corporation, and he is presumably the person against whom the personal orders of the court would be made effective in case the relief sought should be granted. The right of inspection given 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. However, there are some things which a corporation may undoubtedly keep secret, notwithstanding the right of inspection given by law to the stockholder like a secret formula or process (trade secrets). But since the petitioner is not seeking to discover any trade secret of the corporation, the writ of mandamus was ordered to be issued.

2.

VERAGUTH V ISABELA SUGAR Facts: The parties to this action are Eugenio Veraguth, a director and stockholder of the Isabela Sugar Company, Inc., who is the petitioner, and the Isabela Sugar Company, Inc., Gil Montilla, acting president of the company, and Agustin B. Montilla, secretary of the company, who are the respondents.Director Veraguth telegraphing the secretary of the company asking the latter to forward in the shortest possible time a certified copy of the resolution of the board of directors concerning the payment of attorney's fees in the case against the Isabela Sugar Company and others. To this the secretary made answer by letter stating that, since the minutes of the meeting in question had not been signed by the directors present, a certified copy could not be furnished and that as to other proceedings of the stockholders a request should be made to the president of the Isabela Sugar Company, Inc. It further appears that the board of directors adopted a resolution providing for inspection of the books and the taking of copies "by authority of the President of the corporation previously obtained in each case."ISSUE: WON the Secretary can refuse to furnish Veraguth on the grounds that is on unfriendly terms with the officers of the corporation. HELD: No. Directors of a corporation have the unqualified right to inspect the books and records of the corporation at all reasonable times. Pretexts may not be put forward by officers of corporations to keep a director or shareholder from inspecting the books and minutes of the corporation, and the right of inspection is not to be denied on the ground that the director or shareholder is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. A director or stockholder can not of course make copies, abstracts, and memoranda of documents, books, and papers as an incident to the right of inspection, but cannot, without an order of a court, be permitted to take books from the office of the corporation. We do not conceive, however, that a director or stockholder has any absolute right to secure certified copies of the minutes of the corporation until these minutes have been written up and approved by the directors.

case against the said company. The lower court held that the inspection of corporate records may be denied on the ground that it is intended for an improper motive or purpose, the law having granted such right to a stockholder in clear and unconditional terms. Petitioner however uses as its defense Section 51 of Act No. 1459 stating that: Sec. 51. ... The record of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours.

Issue: Whether or not Gonzales has a right to inspect the books and records of PNB pursuant to Sec. 51? Held: The inspection sought to be exercised by the petitioner would be violative of the provisions of its charter. (Republic Act No. 1300, as amended.) Sections 15, 16 and 30 of the said charter provide respectively as follows: Sec. 15. Inspection by Department of Supervision and Examination of the Central Bank. The National Bank shall be subject to inspection by the Department of Supervision and Examination of the Central Bank' Sec. 16. Confidential information. The Superintendent of Banks and the Auditor General, or other officers designated by law to inspect or investigate the condition of the National Bank, shall not reveal to any person other than the President of the Philippines, the Secretary of Finance, and the Board of Directors the details of the inspection or investigation, nor shall they give any information relative to the funds in its custody, its current accounts or deposits belonging to private individuals, corporations, or any other entity, except by order of a Court of competent jurisdiction,' Sec. 30. Penalties for violation of the provisions of this Act. Any director, officer, employee, or agent of the Bank, who violates or permits the violation of any of the provisions of this Act, or any person aiding or abetting the violations of any of the provisions of this Act, shall be punished by a fine not to exceed ten thousand pesos or by imprisonment of not more than five years, or both such fine and imprisonment. The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides: SEC. 4. Corporations created by special laws or charters. Corporations created

142. Gonzales vs. PNB

Facts: Petitioner Ramon A. Gonzales filed a case against PNB for its refusal to allow him to look into the books and records of the respondent bank in order to satisfy himself as to the truth of the published reports that the respondent has guaranteed the obligation of Southern Negros Development Corporation in the purchase of a US$ 23 million sugar-mill to be financed by Japanese suppliers and financiers; that the respondent is financing the construction of the P 21 million Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron Philippines, Inc., as well as to inquire into the validity of Id transactions. The trial court having dismissed the petition for mandamus, the instant appeal to review the said dismissal was filed. Prior to Gonzales' acquisition of 1 share of stock of PNB he already filed a

by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them. supplemented by the provisions of this Code, insofar as they are applicable. The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to the right of a stockholder to demand an inspection or examination of the books of the corporation may not be reconciled with the abovequoted provisions of the charter of the respondent bank. It is not correct to claim, therefore, that the right of inspection under Section 74 of the new Corporation Code may apply in a supplementary capacity to the charter of the respondent bank. Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as amended, regarding the right of a stockholder to inspect and examine the books and records of a corporation. The former Corporation Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg. 68, otherwise known as the "Corporation Code of the Philippines."

Issue: WON the district court erred in certifying the suit as a class action Held: Reversed the decision of the district court The 9th cause of action alleges initially that the defendants breached their fiduciary duties to Major Oil and its stockholders. As a general rule, directors and other officers of a corporation stand in a fiduciary to the corporation. But while the statement is made that directors and officers stand in like relation to stockholders of the corporation, it is clear that the relation is to stockholders collectively. The distinction between a fiduciary duty owed to the corporation as a whole as opposed to the stockholders collectively does not appear to be one in substance in this case. Although plaintiffs frames this claim, as one belonging to the shareholders, the claim for relief belongs to the corporation. The 10th cause of action alleges that the defendants defrauded the stockholders of Major. The fraud is premised on defendants fiduciary duty owed to the shareholders of the corporation. However, in nor regard can the 10th cause of action be interpreted as stating a claim belonging to the stockholders individually and therefore that claim for relief will not support a class action. The 11th cause of action alleges the possibility of other conversion of Majors assets and alleges that defendants should be required to account to the stockholders for all the assets of Major and disgorge themselves of any assets so converted. This claim also clearly belongs to the corporation. The class action device, if used inappropriately and in lieu of derivative action is likely to result in grave injustices, not the least of which is the diversion of assets recovered in a lawsuit from creditors of a

#143 RICHARDSON v. ARIZONA FUELS Plaintiffs Richardson and his group are stockholders of Major Oil Corporation. Defendants are Arizona Fuels, Eugene Dalton and Deanna Dalton. Eugene Dalton is alleged to be a controlling stockholder and director of Arizona and Major. Arizona Fuels alleges to be the legal or beneficial owner of 47% of the issued and outstanding shares of stocks of Major. The amended complaint filed with the district court of Salt Lake City by the plaintiffs described the action filed therein as one brought as a class action. Plaintiffs in the district court moved for an order certifying the said suit as a class action and for the appointment of a receiver for Major. Both motions were granted by the district court. Arizona Fuels attack the said orders. The amended complaint states 12 causes of action, the first 8 of which allege some fraudulent appropriation of or scheme to appropriate Majors assets by defendants. These causes of action seek to require the defendants to disgorge and return to Major the assets wrongfully obtained. Of the remaining 4 causes, 3 seek compensatory or punitive damages for injury attributable to alleged breaches of fiduciary duty implicit in the fraudulent acts enumerated in the first 8 causes. The final cause of action seeks appointment of a receiver. There is no that the first of the 8 causes of action allege injury to the corporation only. The injury alleged can be asserted by plaintiffs only derivatively as stockholders on behalf of the corporation. This leaves the 9th, 10th, and 11th causes of action to be analyzed to determine if they state claims which may be pursued by the stockholders as a class to redress injuries to the stockholders as individuals.

corporation to stockholders, thereby reversing long established substantive rules of law as to the relative priorities of the claims of creditors and stockholders to the assets of an insolvent corporation. Notes:
A derivative action must necessarily based on a claim for relief which is owned by the stockholders corporation. Indeed, a prerequisite for filing a derivative action is the failure of the corporation to initiate the action in its own name. The stockholder, as a nominal party, has no right, title or interest whatsoever in the claim itself- whether the action is brought by the corporation or by the stockholder in behalf of the corporation. A class action on the other hand is a predicated ownership of the claim for relief sued upon in the representative of the class and all other class members in their capacity as individuals. Shareholders of the corporation may of course have claims for relief directly against their corporation because the corporation itself has violated rights possessed by the shareholders, and a class action would be an appropriate means for enforcing their claims. A recovery in a class action is a recovery which belongs directly to the shareholders. However, in a derivative action, the plaintiff shareholder recovers nothing and the judgment runs in favor of the corporation. #144 Bitong v. CA

Facts: Petitioner Nora Bitong filed a derivative suit before the SEC, for the benefit of Mr. & Ms. Publishing Co. She complained of irregularities committed by the Apostols as officers of the Company. Nora claimed that she had been the Treasurer and a Member of the Board of Directors of Mr & Ms, and was the registered owner of 1,000 shares of stock. She claimed that all transactions and agreements entered into by the Company, except that made with the PDI, were not supported by any bond and/or stockholders resolution. She also claimed that Apostol instructed that several cash advances be made to PDI, without any board or stockholders resolution, nor any document or contract which would legally authorize such transactions. Such cash advances made to PDI were said to be payment for subscriptions made by Apostol et al in PDI. The petition sought to have the Apostols enjoined from further committing similar acts, and to recover the amounts taken from the corporation. The respondents refuted the allegations. The SEC dismissed the derivative suit. The Apostol spouses thereafter sold the PDI shares, registered under the name of JAED Corp. to Espiritu. Bitong appealed to SEC en banc, which reversed the decision of the SEC Hearing Panel, and ordered the Apostols to return the sums taken from the Company, as well as the fruits of the investment in PDI. It also declared the sale of the PDI shares to Espiritu was null and void, for being tainted with fraud. The CA however reversed the said decision, on the ground that petitioner could not file the instant action, not being an owner of any share of stock in the Company. Issue: Whether petitioner is an owner of shares of stock in the Company to allow her to file a derivative suit. Held: No. As found by the Hearing Panel and the CA, there is overwhelming evidence that despite what appears on the certificate of stock and the stock and transfer book, petitioner was not a bona fide stockholder of the Company at the time the acts complained of were carried out by the Apostols. The true party in interest was actually JAKA, from whom petitioner acquired her shares of stock. A certificate of stock can only be issued after compliance with the following requisite: 1) the certificates must be signed by the president or VP, countersigned by the corporate secretary or assistant secretary; 2) delivery of the certificate, essential to its issuance; 3) the par value or the full subscription must be fully paid; and 4) the original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder. Once so issued, the certificate becomes a continuing affirmation or representation of that the stock described therein is valid and genuine and is at least prima facie evidence that it was legally issued in the absence of evidence to the contrary. However, this presumption may be rebutted by entries in the books and records of the corporation, as well as parol evidence may be admitted to supply omissions to the books and records. In this case, the certificate of stock of petitioner, when it was issued to her, was not yet signed by the president of the company. The same was fraudulently antedated by petitioner who had possession of the Certificate Book and the Stock and Transfer Book. Petitioner admitted this when she stated in her reply that the certificate was issued to her by the corporate secretary years before it was signed by the President, and other certificates were not yet signed by the same at the time of the filing of the complaint with the SEC.

Thus, the certificate could not be considered issued in contemplation of law unless signed by the president or VP and countersigned by the secretary or assistant secretary. In the absence of a special authority from the board of directors to institute a derivative suit for and in its behalf, the managing officer is disqualified by law to sue in her own name. The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the BOD that exercises its corporate powers and not in the president or officer thereof. But where corporate directors are guilty of a breach of trust, not of mere error of judgment or abuse of discretion, and intra-corporate remedy is futile or useless, a SH may institute a derivative suit in behalf of himself and other SHs and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders. 145. SAN MIGUEL CORPORATION vs. KAHN FACTS: 33,133,266 shares of the outstanding capital stock of the San Miguel Corporation were acquired by 14 other corporations, and were placed under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. When the latter died, Eduardo M. Cojuangco, Jr. was elected Substitute Trustee with power to delegate the trusteeship in writing to Andres Soriano III. Shortly after the Revolution of February, 1986, Cojuangco left the country. An "Agreement" was executed between Andres Soriano III, as "Buyer," and the 14 corporations, as "Sellers," for the purchase by Soriano, "for himself and as agent of several persons," of the 33,133,266 shares of stock. Actually, according to Soriano and the other private respondents, the buyer of the shares was a foreign company, Neptunia Corporation Limited (of Hongkong), a wholly owned subsidiary of San Miguel International which is, in turn, a wholly owned subsidiary of San Miguel Corporation; and it was Neptunia which on or about April 1, 1986 had made the down payment of P500,000,000.00, "from the proceeds of certain loans". At this point the 33,133,266 SMC shares were sequestered by the Presidential Commission on Good Government (PCGG), on the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a close associate and dummy of former President Marcos. In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the loans incurred by Neptunia for the down payment ((P500M)) on the 33,133,266 shares. However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los Angeles, one of the PCGG representatives in the SMC board, impugned said Resolution No. 86-12-2, denying that it was ever adopted, and stating that what in truth was agreed upon at the meeting of December 4, 1986 was merely a "further study" by Director Ramon del Rosario of a plan presented by him for the assumption of the loan. De los Angeles also pointed out certain "deleterious effects" thereof. He was however overruled by private respondents. 14 When his efforts to obtain relief within the corporation and later the PCGG proved futile, he repaired to the Securities and Exchange Commission.

De los Angeles filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of San Miguel Corporation, against ten (10) of the fifteen-member Board of Directors who had "either voted to approve and/or refused to reconsider and revoke Board Resolution No. 86-12-2." The respondents filed motion to dismiss. ISSUE: W/N de los Angeles has the personality to bring suit in behalf of the corporation.

However, petitioners cause of action covered the period when he was not yet a stockholder of the corporation. Issue: Whether petitioner has the right to bring the suit against the BOD for and in behalf of the Corporation? Held: No.The SC held that a stockholder of a corporation who was not such at the time when alleged objectionable transaction took place, or whose shares of stock have not since devolved upon him by operation of law, cannot maintain suits of this character, unless such transactions continue and are injurious to such stockholder or affect him especially or specifically in some other way. A close reading of this case would show that the rationale for the rule was that there is in the US jurisdiction, two sets of court system- the federal judicial system and the state judicial system. In order to prevent forum shopping, the rule in the US is such that when a derivative suit is brought, it is essential that the relator should have been a stockholder both at the time the act complained of occurred and at the time the derivative suit is filed. The prevailing rule then was that a shareholder who was one at the time of the institution of the action may bring a derivative suit. It was then quite easy and in possible to bring a suit out of state court and bring it to federal court by just making sure that you transfer a share to someone outside of the state, If the suit is filed in California, what can be done is transfer one share to a resident of Florida, to grant federal courts jurisdiction. In order to correct this collusion, the requisite was imposed that the relator must be a shareholder at the time the cause of action accrued. However, in this case, it was held that a stockholder in a corporation who was not such at the time when alleged objectionable transactions took place or whose shares of stock have not since devolved upon him, by operation law, cannot maintain suits of this character, unless such transaction continue and are injurious to such stockholder or affect him especially or specifically in some other way. 147. Evangelista v Santos Facts: Juan D. Evangelista, et. al. are minority stockholders of the Vitali Lumber Company, Inc., a Philippine corporation organized for the exploitation of a lumber concession in Zamboanga, Philippines, while Rafael Santos holds more than 50% of the stocks of said corporation and also is and always has been the president, manager, and treasurer thereof. Santos, in such triple capacity, through fault, neglect, and abandonment allowed its lumber concession to lapse and its properties and assets, among them machineries, buildings, warehouses, trucks, etc., to disappear, thus causing the complete ruin of the corporation and total depreciation of its stocks. Evangelista, et. al. therefore prays for judgment requiring Santos: (1) to render an account of his administration of the corporate affairs and assets: (2) to pay plaintiffs the value of t heir respective participation in said assets on the basis of the value of the stocks held by each of them; and (3) to pay the costs of suit. Evangelista, et. al. also ask for such other remedy as may be and equitable. The complaint does not give Evangelista, et. al.'s residence, but, but purposes of venue, alleges that Santos resides at 2112 Dewey Boulevard, corner Libertad Street, Pasay, province of Rizal. Having been served with summons at that place, Santos filed a motion for the

HELD: The theory that de los Angeles has no personality to bring suit in behalf of the corporation because his stockholding is minuscule cannot be sustained. It is claimed that since de los Angeles 20 shares represent only .00001644% of the total number of outstanding shares, he cannot be deemed to fairly and adequately represent the interests of the minority stockholders. The implicit argument that a stockholder, to be considered as qualified to bring a derivative suit, must hold a substantial or significant block of stock finds no support whatever in the law. The requisites for a derivative suit are as follows: a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material; b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; 33 and c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a derivative action 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. Case#146 CANDIDO PASCUAL, plaintiff-appellant, vs. EUGENIO DEL SAZ OROZCO, ET AL, defendantsappellees. March 17, 1911 G.R. No. 5174 Facts: Candido Pascual, petitioner is a minority stockholder of a corporation bank, Banco Espanol Filipino who brought a suit for and in behalf of the corporation against the BOD. The AOI provided that the compensation of the directors comprises a certain percentage (10%) of the net income of the corporation. But the directors, instead of determining the compensation from the net income, used as basis the gross income which resulted in losses to the corporation.

dismissal of the complaint on the ground of improper venue and also on the ground that the complaint did not state a cause of action in favor of Evangelista, et. al. After hearing, the lower court rendered its order, granting the motion for dismissal. Reconsideration of the order was denied. Evangelista, et. al. appealed to the Supreme Court. Issue: Whether Evangelista, et. al. had the right to bring the action for damages resulting from mismanagement of the affairs and assets of the corporation by its principal officer, it being alleged that Santos' maladministration has brought about the ruin of the corporation and the consequent loss of value of its stocks. Held: The injury complained of is 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 in view of section 16 of the Corporation Law, which provides that "No shall corporation shall make or declare any stock or bond dividend or any dividend whatsoever from the profits arising from its business, or divide or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution." 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 one of the stockholders is allowed to bring suit. But in that case it is the corporation itself and not the plaintiff stockholder that is the real property in interest, so that such damages as may be recovered shall pertain to the corporation. In other words, it is a derivative suit brought by a stockholder as the nominal party plaintiff for the benefit of the corporation, which is the real property in interest. Herein, Evangelista, et. al. have brought the action not for the benefit of the corporation but for their own benefit, since they ask that Santos make good the losses occasioned by his mismanagement and pay to them the value of their respective participation in the corporate assets on the basis of their respective holdings. Clearly, this cannot be done until all corporate debts, if there be any, are paid and the existence of the corporation terminated by the limitation of its charter or by lawful dissolution in view of the provisions of section 16 of the Corporation Law. It results that Evangelista, et. al.'s complaint shows no cause of action in their favor. 148. REPUBLIC BANK vs. CUADERNO FACTS: Damaso Perez had complained to the Monetary Board of the Central Bank certain frauds allegedly committed by defendant Pablo Roman, as chairman of the Board of Directors of the Republic Bank, and of its Executive Loan Committee. Miguel Cuaderno (then Governor of the Central Bank) and the Monetary Board ordered an investigation. Bank Examiners reported that certain mortgage loans were granted in violation of sections 77, 78 and 88 of the General Banking Act; that acting on said reports, the Monetary Board, of which defendant Cuaderno was a member, ordered a new Board of Directors of the Republic Bank to

be elected, which was done, and subsequently approved by the Monetary Board. The latter accepted the offer of Pablo Roman to put up adequate security for the questioned loans made by the Republic Bank, and such security was made a condition for the resumption of the Bank's normal operations; that subsequently, the Central Bank through its Governor, Miguel Cuaderno, referred to special prosecutors of the Department of Justice the banking frauds and violations of the Banking Act, reported for investigation and prosecution, but no information was filed up to the time of the retirement of Cuaderno. To neutralize the impending action against him, Pablo Roman engaged Miguel Cuaderno as technical consultant and selected Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank. The Board of Directors composed of individuals personally selected and chosen by Roman, allegedly connived and confederated in approving the appointment and selection of Cuaderno and Dizon to protect Pablo Roman from criminal prosecution. ISSUE: W/N appellant Perez can question the appointment and selection of defendants Cuaderno and Dizon. HELD: Yes, Perez can question the appointment The Defendants mainly controvert the right of plaintiff to question the appointment and selection of defendants Cuaderno and Dizon, which they contend to be the result of corporate acts with which plaintiff, as stockholder, cannot interfere. Normally, this is correct, but Philippine jurisprudence is settled that an individual stockholder is permitted to institute a 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. The action he has brought is a derivative one, expressly manifested to be for and in behalf of the Republic Bank, because it was futile to demand action by the corporation, since its Directors were nominees and creatures of defendant Pablo Roman. The frauds charged by plaintiff are frauds against the Bank that redounded to its prejudice. #149 REYES V. TAN, ET AL Facts: This is an action instituted by a stockholder of Roxas-Kalaw Textile Mills, Inc. praying for the appointment of a receiver of the said corporation. The case is filed against the corporations board of directors for the purchases made by the manager in New York supposedly for raw materials but it turned out that what was bought were finished products from companies where said manger had interests. Said purchases led to the central banks stoppage of all dollar allocations in favor of said corporation which in turn paralyzed the entire operation of the corporation.

It is alleged that said directors failed to act on the fraudulent purchases for a period of two (2) years, thus, forcing plaintiff to bring this derivative suit. Issue: Whether or not the derivative suit is warranted. Ruling: Yes. The importation of textiles instead of raw materials as well as the failure of the board of directors to take actions against those directly responsible for the misuse of the dollar allocations constitute fraud or consent thereto on the part of the directors. Therefore, a breach of trust was committed which justifies the minority stockholders to institute a derivative suit on behalf of the corporation. The appointment of a receiver was not only expedient but also necessary to restore the faith and confidence of the Central Bank authorities in the administration of the affairs of the corporation, thus ultimately leading to a restoration of the dollar allocation so essential to the operation of the textile mills Notes: The remedies of minority stockholders (by the institution of a derivative suit) include the appointment of a receiver or constitution of a management committee or removal of a director As regards the exhaustion of intra-corporate remedies, it is sufficient to allege that there was an actual exhaustion or that it is futile to resort to such remedy. #150 Rural Bank of Milaor vs. Francisca Ocfemia et al. G.R. No 137686, February 8, 2000 FACTS: Several parcels of land were mortgaged by the respondents during the lifetime of the respondents grandparents to the Rural bank of Milaor as shown by the Deed of Real Estate Mortgage and the Promissory Note. Spouses Felicisimo Ocfemia and Juanita Ocfemia, one of the respondents, were not able to redeem the mortgaged properties consisting of seven parcels of land and so the mortgage was foreclosed and thereafter ownership was transferred to the petitioner bank. Out of the seven parcels of land that were foreclosed, five of them are in the possession of the respondents because these five parcels of land were sold by the petitioner bank to the respondents as evidenced by a Deed of Sale. However, the five parcels of land cannot be transferred in the name of the parents of Merife Nino, one of the respondents, because there is a need to have the document of sale registered. The Register of deeds, however, said that the document of sale cannot be registered without the board resolution of the petitioner bank confirming both the Deed of sale and the authority of the bank manager, Fe S. Tena, to enter such transaction.

The petitioner bank refused her request for a board resolution and made many alibis. Respondents initiated the present proceedings so that they could transfer to their names the subject five parcel of land and subsequently mortgage said lots and to use the loan proceeds for the medical expenses of their ailing mother. ISSUE: May the Board of Directors of a rural banking corporation be compelled to confirm a deed of absolute sale of real property owned by the corporation which deed of sale was executed by the bank manager without prior authority of the board of directors of the rural banking corporation? HELD: YES. The bank acknowledges, by its own acts or failure to act, the authority of Fe S. Tena to enter into binding contracts. After the execution of the Deed of Sale, respondents occupied the properties in dispute and paid the real estate taxes. If the bank management believed that it had title to the property, it should have taken measured to prevent the infringement and invasion of title thereto and possession thereof. Likewise, Tena had previously transacted business on behalf of the bank, and the latter had acknowledged her authority. A bank is liable to innocent third persons where representation is made in the course of its normal business by an agent like Manager Tena even though such agent is abusing her authority. Clearly, persons dealing with her could not be blamed for believing that she was authorized to transact business for and on behalf of the bank. When a bank, by its acts and failure to act, has clearly clothed its manager with apparent authority to sell an acquired asset in the normal course of business, it is legally obliged to confirm the transaction by issuing a board resolution to enable the buyers to register the property in their names. It has a duty to perform necessary and lawful acts to enable the other parties to enjoy all benefits of the contract which it had authorized. The bank is estopped from questioning the authority of the bank to enter into contract of sale. If a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds the agent out to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority. 151. LEE VS COURT OF APPEALS (Qualifications of directors or trustees) Facts: A complaint for a sum of money was filed by the International Corporate Bank, Inc. against the private respondents (DBP) who, in turn, filed a third party complaint against ALFA and the petitioners. The DBP claimed that it was not authorized to receive summons on behalf of ALFA since the DBP had not taken over the company which has a separate and distinct corporate personality and existence. Petitioners filed a motion for reconsideration submitting 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. Private respondents argued that the voting trust agreement 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.

The petitioners moved for a reconsideration of the decision of the public respondent which resolved to deny the same. Hence, the petitioners filed this certiorari petition imputing grave abuse of discretion amounting to lack of jurisdiction on the part of the public respondent in holding that there was proper service of summons on ALFA through the petitioners. Issue: Did a director of the corporation cease to be such upon the creation of the voting trust agreement? Ruling: The petitioners can no longer be considered directors of ALFA. In support of their contention, the petitioners invoke section 23 of the Corporation Code which provides, in part, that: 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 director. Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of the stock covered by the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the said shares of stocks. In the absence of a showing that the DBP had caused to be transferred in their names one share of stock for the purpose of qualifying as directors of ALFA, the petitioners can no longer be deemed to have retained their status as officers of ALFA which was the case before the execution of the subject voting trust agreement. There appears to be no dispute from the records that DBP has taken over full control and management of the firm. Case#152 Gokongwie v. SECGR NO. L- 45911 April 11, 1979

to be voted upon in the election of directors; and that in amending the by-laws, Soriano, et. al. purposely provided for Gokongwei's disqualification and deprived him of his vested right as aforementioned, hence the amended by-laws are null and void. As additional causes of action, it was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void. Issue:Whether the corporation has the power to provide for the(additional) qualifications of its directors? Held:YES. It is recognized by all authorities that "every corporation has the inherent power to adopt by-laws 'for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs.'" In this jurisdiction under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and employees." This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director." Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern inall matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law." To this extent, therefore, the stockholder may be considered to have "parted with his personal right or privilege to regulate the disposition of his property which hehas invested in the capital stock of the corporation, and surrendered itto the will of the majority of his fellow incorporators. It cannot therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed by any act of theformer which is authorized by a majority." Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation. If the amendment changes, diminishes or restricts the rights of the existing shareholders, then the dissenting minority has only one right, viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that Gokongwei has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification. Note:A corporation is authorized to prescribe qualifications of its directors; such is not invalid, provided, however that before such nominee is disqualified, he should be given due process to show that he is not covered by such disqualification. A director stands in fiduciary relation to the corporation and its stockholders. The disqualification of a competition from being elected to the board of directors is a reasonable exercise of corporate authority. Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty to loyalty may require that he discloses this information to a competitive rival. CASE# 153.

Antonio, J.:
Facts: John Gokongwei Jr., as stockholder of San Miguel Corporation, filed with the SEC a petition for "declaration of nullity of amended by-laws, cancellation of certificate of filing of amended by-laws, injunction and damages with prayer for a preliminary injunction "against the majority of the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. Gokongwei alleged that the Board amended the bylaws of the corporation, prescribing additional qualifications for its directors, that no person shall qualify or be eligible for nomination if he is engaged in any business which competes with that of the Corporation. The board based their authority to do so on a resolution of the stockholders. 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 paidup 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 1961authorization, Gokongwei contended that the Board acted without authority and in usurpation of the power of the stockholders. Gokongwei claimed that prior to the questioned amendment, he had all the qualifications to be a director of the corporation, being a substantial stockholder thereof; that as a stockholder, Gokongwei had acquired rights inherent in stock ownership, such as the rights to vote and

Detective & Protective Bureau vs. Cloribel Facts: Plaintiff Corporation filed an action to enjoin the defendant Fausto Alberto from exercising the functions of a managing director. It is alleged that the latter illegally seized and took control of all the assets as well as the books, records , vouchers and receipts of the corporation from the accountant; that he concealed said records and refuse to allow any member of the corporation to examine the same; that he refused to vacate the office and surrender to the newly elected director, Jose Dela Rosa. Issue: W/N Alberto can be compelled to vacate the office in favor of Jose Dela Rosa. Held: SC held that Alberto cannot be compelled to vacate the office since it was found that Jose Dela Rosa could not be elected as managing director because he did not own any stock in the corporation pursuant to Sec. 30 of the Corporation Code and Sec. 3 of the company's by-laws (Every director must own at least 1 share in the capital stock of the corporation of which he is a director). It further held that if the managing director-elect was not qualified to become as such, Alberto could not be compelled to vacate his office and cede the same to the managing director-elect. The by-laws of the corporation provided that Directors shall serve until the election and qualification of their duly qualified successors.

petitioners representative had been recognized as a permanent director of the association. But on February 13, 1990, petitioner received notice from the associations committee on election that the latter was reexamining (actually, reconsidering) the right of petitioners representative to continue as an unelected member of the board. As the board denied petitioners request to be allowed representation without election, petitioner brought an action for mandamus in the Home Insurance and Guaranty Corporation. Its action was dismissed by the hearing officer whose decision was subsequently affirmed by the appeals board. Petitioner appealed to the CA, which in turn upheld the decision of the HIGCs appeals board. Issue: (1) WON the 1975 Amendment is valid despite not having been approved by the General Assembly (2) WON the Corporate Code grants Grace Christian High School a right to a seat at the Board Held: (1) This provision of the by-laws actually implements 22 of the Corporation Law which provides that the owners of a majority of the subscribed capital stock, or a majority of the members if there be no capital stock, may, at a regular or special meeting duly called for the purpose, amend or repeal any by-law or adopt new by-laws. The owners of two-thirds of the subscribed capital stock, or two-thirds of the members if there be no capital stock, may delegate to the board of directors the power to amend or repeal any by-law or to adopt new by-laws: Provided, however, That any power delegated to the board of directors to amend or repeal any by-law or adopt new by-laws shall be considered as revoked whenever a majority of the stockholders or of the members of the corporation shall so vote at a regular or special meeting. The proposed amendment to the by-laws was never approved by the majority of the members of the association as required by these provisions of the law and by-laws. But petitioner contends that the members of the committee which prepared the proposed amendment were duly authorized to do so and that because the members of the association thereafter implemented the provision for fifteen years, the proposed amendment for all intents and purposes should be considered to have been ratified by them. Petitioner contends: Considering, therefore, that the agents or committee were duly authorized to draft the amended by-laws and the acts done by the agents were in accordance with such authority, the acts of the agents from the very beginning were lawful and binding on the homeowners (the principals) per se without need of any ratification or adoption. The more has the amended by-laws become binding on the homeowners when the homeowners followed and implemented the provisions of the amended by-laws. This is not merely tantamount to tacit ratification of the acts done by duly authorized agents but express approval and confirmation of what the agents did pursuant to the authority granted to them. (2) The present Corporation Code (B.P. Blg. 68) provides: 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified. This provision leave no room for doubt as to the meaning: the board of directors of corporations must be elected from among the stockholders or members. There may be corporations in which there are

Case#154 Grace Christian High School v CA [(October 23, 1997)] Right of Share Holders to Vote for the Board of Directors Facts: Petitioner Grace Christian High School is an educational institution offering preparatory, kindergarten and secondary courses at the Grace Village in Quezon City. Private respondent Grace Village Association, Inc., on the other hand, is an organization of lot and/or building owners, lessees and residents at Grace Village. In 1968, the by-laws of the association provided in Article IV, as follows: The annual meeting of the members of the Association shall be held on the first Sunday of January in each calendar year at the principal office of the Association at 2:00 P.M. where they shall elect by plurality vote and by secret balloting, the Board of Directors, composed of eleven (11) members to serve for one year until their successors are duly elected and have qualified. On December 20, 1975, a committee of the board of directors prepared a draft of an amendment to the by-laws, reading as follows: The Annual Meeting of the members of the Association shall be held on the second Thursday of January of each year. Each Charter or Associate Member of the Association is entitled to vote. He shall be entitled to as many votes as he has acquired thru his monthly membership fees only computed on a ratio of TEN (P10.00) PESOS for one vote. The Charter and Associate Members shall elect the Directors of the Association. The candidates receiving the first fourteen (14) highest number of votes shall be declared and proclaimed elected until their successors are elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION. This draft was never presented to the general membership for approval. Nevertheless, from 1975, after it was presumably submitted to the board, up to 1990, petitioner was given a permanent seat in the board of directors of the association. From 1975 until 1989

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unelected members in the board but it is clear that in the examples cited by petitioner the unelected members sit as ex officio members, i.e., by virtue of and for as long as they hold a particular office. But in the case of petitioner, there is no reason at all for its representative to be given a seat in the board. Nor does petitioner claim a right to such seat by virtue of an office held. In fact it was not given such seat in the beginning. It was only in 1975 that a proposed amendment to the by-laws sought to give it one. Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall a later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to law, it is beyond the power of the members of the association to waive its invalidity. For that matter the members of the association may have formally adopted the provision in question, but their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. It is probable that, in allowing petitioners representative to sit on the board, the members of the association were not aware that this was contrary to law. It should be noted that they did not actually implement the provision in question except perhaps insofar as it increased the number of directors from 11 to 15, but certainly not the allowance of petitioners representative as an unelected member of the board of directors. It is more accurate to say that the members merely tolerated petitioners representative and tolerance cannot be considered ratification. Nor can petitioner claim a vested right to sit in the board on the basis of practice. Practice, no matter how long continued, cannot give rise to any vested right if it is contrary to law. Even less tenable is petitioners claim that its right is coterminus with the existence of the association.

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