Lopez Realty v.

Fontecha
Gr. No. 76801, August 11, 1995
Facts:
Lopez Realty, Inc., is a corporation engaged in real estate business. Petitioner
Asuncion Lopez Gonzales is one of its majority shareholders. Sometime in 1978,
Arturo Lopez submitted a proposal relative to the distribution of certain assets of
Petitioner Corporation among its three main shareholders. The proposal had 3
aspects which are:(1) the sale of assets of the company to pay for its obligations;
(2) the transfer of certain assets of the company to its three (3) main shareholders,
while some other assets shall remain with the company; and (3) the reduction of
employees with provision for their gratuity pay. The proposal was deliberated upon
and approved in a special meeting of the board of directors held on April 17, 1978.

It appears that petitioner corporation approved 2 resolutions providing for the

gratuity pay of its employees which are: (a) Resolution No. 6, Series of 1980
resolving to set aside, twice a year, a certain sum of money for the gratuity pay of
its retiring employees and to create a Gratuity Fund for the said contingency; and
(b) Resolution No. 10, Series of 1980, setting aside the amount of P157,750.00 as
Gratuity Fund covering the period from 1950 up to 1980.

On August 17, 1981, the remaining members of the Board of Directors,

namely: Rosendo de Leon, Benjamin Bernardino, and Leo Rivera, convened a special
meeting and passed a resolution which provides that: (a) Those who will be laid of
be given the full amount of gratuity; (b) Those who will be retained will receive 25%
of their gratuity (pay) due on September 1, 1981, and another 25% on January 1,
1982, and 50% to be retained by the office in the meantime.

Private respondents were the retained employees of herein petitioner. In a

letter, dated August 31, 1981, private respondents requested for the full payment of
their gratuity pay. Their request was granted in a special meeting held on
September 1, 1981.

However, petitioner Asuncion Lopez Gonzales was still abroad. While she was
still out of the country, she sent a cablegram to the corporation, objecting to certain
matters taken up by the board in her absence, such as the sale of some of the
assets of the corporation.
Issue:
1. Whether the subject resolutions requires stockholders
approval to be valid.
2. Was it an were ultra vires for lack of notice?

Held:

Ist: Yes, 2nd: No. Jurisprudence tells us that an action of the board of directors
during a meeting, which was illegal for lack of notice, may be ratified either
expressly, by the action of the directors in subsequent legal meeting, or impliedly,
by the corporation's subsequent course of conduct.
 In the case at bench, it was established that petitioner corporation did not
issue any resolution revoking nor nullifying the board resolutions granting gratuity
pay to private respondents. Instead, they paid the gratuity pay, particularly, the first
2 installments thereof to some employees.

Despite the alleged lack of notice to petitioner Asuncion Lopez Gonzales at

that time the assailed resolutions were passed, the court can glean from the records
that she was aware of the corporation's obligation under the said resolutions. More
importantly, she acquiesced thereto. As pointed out by private respondents,
petitioner Asuncion Lopez Gonzales affixed her signature on Cash Voucher Nos. 81-
10-510 and 81-10-506, both dated October 15, 1981, evidencing the 2nd
installment of the gratuity pay. This conduct of petitioners after the passage of
resolutions dated August, 17, 1951 and September 1, 1981, had estopped them
from assailing the validity of said board resolutions.

Assuming, arguendo, that there was no notice given to Asuncion Lopez

Gonzalez during the special meetings held on August 17, 1981 and September 1,
1981, it is erroneous to state that the resolutions passed by the board during the
said meetings were ultra vires. In legal parlance, "ultra vires" act refers to one
which is not within the corporate powers conferred by the Corporation Code or
articles of incorporation or not necessary or incidental in the exercise of the powers
so conferred.

The assailed resolutions before us cover a subject which concerns the benefit
and welfare of the company's employees. To stress, providing gratuity pay for its
employees is one of the express powers of the corporation under the Corporation
Code, hence, petitioners cannot invoke the doctrine of ultra vires to avoid any
liability arising from the issuance the subject resolutions.

Section 40 of the Corporation Code is not applicable to the case at bench as it

refers to the sale, lease, exchange or disposition of all or substantially all of the
corporation's assets, including its goodwill. In such a case, the action taken by the
board of directors requires the authorization of the stockholders on record.

It will be observed that, except for Arturo Lopez, the stockholders of

petitioner corporation also sit as members of the board of directors. Under the
circumstances in field, it will be illogical and superfluous to require the stockholders'
approval of the subject resolutions. Thus, even without the stockholders' approval of
the subject resolutions, petitioners are still liable to pay private respondents'
gratuity pay.
 Gokongwei v. SEC
Gr. No. L-45911 April 11, 1979

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 BODs upon an affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid uo 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 n 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. While this was pending, the corporation called for a stockholders 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
corporation and businesses outside the primary purpose clause of the corporation in
violation of the Corporation Code.
Issue:
Whether the use of corporate fund in other corporation or
business outside the primary purpose clause of the corporation is in
violation of the Corporation Code

Held:
No. Section 17-1/2 (Sec. 40) of the Corporation Law allows a corporation to
"invest its funds in any other corporation or business or for any purpose other than
the main purpose for which it was organized" provided that its Board of Directors
has been so authorized by the affirmative vote of stockholders holding shares
entitling them to exercise at least two-thirds of the voting power. If the investment
is made in pursuance of the corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done solely for investment
and not to accomplish the purpose of its incorporation that the vote of approval of
the stockholders holding shares entitling them to exercise at least two-thirds of the
voting power is necessary.
 As stated by respondent corporation, the purchase of beer manufacturing
facilities by SMC was an investment in the same business stated as its main
purpose in its Articles of Incorporation, which is to manufacture and market beer.

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central

Co., Inc., the lower court said that "there is more logic in the stand that if the
investment is made in a corporation whose business is important to the investing
corporation and would aid it in its purpose, to require authority of the stockholders
would be to unduly curtail the power of the Board of Directors."

Assuming arguendo that the Board of Directors of SMC had no authority to

make the assailed investment, there is no question that a corporation, like an
individual, may ratify and thereby render binding upon it the originally unauthorized
acts of its officers or other agents. This is true because the questioned investment
is neither contrary to law, morals, public order or public policy. It is a corporate
transaction or contract which is within the corporate powers, but which is defective
from a supported failure to observe in its execution the. requirement of the law that
the investment must be authorized by the affirmative vote of the stockholders
holding two-thirds of the voting power. This requirement is for the benefit of the
stockholders. The stockholders for whose benefit the requirement was enacted may,
therefore, ratify the investment and its ratification by said stockholders obliterates
any defect which it may have had at the outset. "Mere ultra vires acts", said this
Court in Pirovano, "or those which are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are merely voidable and
may become binding and enforceable when ratified by the stockholders.

Besides, the investment was for the purchase of beer manufacturing and
marketing facilities which is apparently relevant to the corporate purpose. The mere
fact that respondent corporation submitted the assailed investment to the
stockholders for ratification at the annual meeting of May 10, 1977 cannot be
construed as an admission that respondent corporation had committed an ultra
vires act, considering the common practice of corporations of periodically
submitting for the gratification of their stockholders the acts of their directors,
officers and managers.
 Dela Rama v. Ma-ao Sugar
Gr. No. L-17504 & l-17506, February 28, 1969

Facts:

In 1950 the MSCCI (MA-AO SUGAR CENTRAL CO., INC.) through its
President, Amado, subscribed for P300k worth of capital stock of the Philippine Fiber
Processing Co., Inc. (PFPC). Payments of the subscription were made on 3
installments, but at the time the first two payments were made there was no board
resolution authorizing the investment; and that it was only on November 26, 1951,
that J. Amado was so authorized by the BOD, by the way, making the third payment
made in March 1952 authorized.

In addition, 355k shares of PFPC, owned by Luzon Industrial Corporation (LIC)

were transferred on May 31, 1952, to MSCCI. Again, the investment was made
without prior board resolution, the authorizing resolution having been subsequently
approved only on June 4, 1952. A derivative suit was filed by 4 minority SHs of
MSCCI which stated 5 causes of action: (1) for alleged illegal and ultra-vires acts
consisting of self-dealing, irregular loans, and unauthorized investments; (2) for
alleged gross mismanagement; (3) for alleged forfeiture of corporate rights
warranting dissolution; (4) for alleged damages and attorney's fees; and (5) for
receivership.

Issue:

Whether or not a corporation can invest in another corporation.

Held:

Yes. The law requiring the votes does not apply in the case because of
MSCCIs contention that since said PFPC was engaged in the manufacture of sugar
bags it was perfectly legitimate for MSCCI either to manufacture sugar bags or
invest in another corporation engaged in said manufacture.

The court quoted the interpretation of Professor Guevara, a well-known

authority in Commercial Law: A private corporation, in order to accomplish its
purpose as stated in its articles of incorporation, and subject to the limitations
imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge
or dispose of shares, bonds, securities, and other evidences of indebtedness of any
domestic or foreign corporation. Such an act, if done in pursuance of the corporate
purpose, does not need the approval of the stockholders; but when the purchase of
shares of another corporation is done solely for investment and not to accomplish
the purpose of its incorporation, the vote of approval of the stockholders is
necessary. In any case, the purchase of such shares or securities must be subject to
the limitations established by the Corporation Law; namely, (a) that no agricultural
or mining corporation shall in anywise be interested in any other agricultural or
mining corporation; or (b) that a non-agricultural or non-mining corporation shall be
restricted to own not more than 15% of the voting stock of any agricultural or
mining corporation; and (c) that such holdings shall be solely for investment and not
for the purpose of bringing about a monopoly in any line of commerce or
combination in restraint of trade."

Power to invest corporate funds - A private corporation has the power to

invest its corporate funds 'in any other corporation or business, or for any purpose
other than the main purpose for which it was organized,' provided that 'its board of
directors has been so authorized in a resolution by the affirmative vote of
stockholders holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power on such a proposal at a stockholders' meeting called
for that purpose,' and provided further, that no agricultural or mining corporation
shall in anywise be interested in any other agricultural or mining corporation. When
the investment is necessary to accomplish its purpose or purposes as stated in its
articles of incorporation, the approval of the stockholders is not necessary." As
provided for by Sec. 17- (Sec. 40) of the Corporation Law.