PHILPOTS VS PHIL
MANUFACTURING
ISSUE:
whether the right which the law
concedes to a stockholder to inspect
the records can be exercised by a
proper agent or attorney of the
stockholder as well as by the
stockholder in person. (YES!)
HELD:
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. Otherwise it
would be unavailing in many
instances." An observation to the
same effect is contained in Martin vs.
Bienville Oil Works Co. (28 La., 204),
where it is said: "The possession of
the right in question would be
futile if the possessor of it,
through lack of knowledge
necessary to exercise it, were
debarred the right of procuring in
his behalf the services of one who
could exercise it." In Deadreck vs.
Wilson (8 Baxt. [Tenn.], 108), the court
said: "That stockholders have the
right to inspect the books of the
corporation, taking minutes from
the same, at all reasonable times,
and may be aided in this by
experts and counsel, so as to
make the inspection valuable to
them, is a principle too well
settled to need discussion."
Authorities on this point could be
accumulated in great abundance, but
as they may be found cited in any
legal encyclopedia or treaties devoted
to the subject of corporations, it is
unnecessary here to refer to other
cases announcing the same rule.
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
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 VS HERCULES
ISSUE:
WON THE PETITIONER HAS LOST HIS
RIGHT TO INSPECT ON THE GROUND
OF THE RESOLUTION PASSED BY THE
BOARD (NO!)
HELD:
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.
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.
VERAGUTH VS ISABELA SUGAR
ISSUE:
WON PETITIONER HAS A RIGHT TO
INSPECT AND ASK FOR A COPY OF THE
BOOKS AND RECORDS OF
CORPORATION (YES!/NO!)
HELD:
The Corporation Law, section 51,
provides that:
All business corporations shall keep
and carefully preserve a record of all
business transactions, and a minute of
all meetings of directors, members, or
stockholders, in which shall be set
forth in detail the time and place of
holding the meeting was regular or
special, if special its object, those
present and absent, and every act
done or ordered done at the meeting. .
..
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.
The above puts in statutory form the
general principles of Corporation Law.
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. (See
Fisher's Philippine Law of Stock
Corporations, sec. 153, and Fletcher
Cyclopedia Corporations, vol. 4, Chap.
45.)
Combining the facts and the law, we
do not think that anything improper
occurred when the secretary declined
to furnish certified copies of minutes
which had not been approved by the
board of directors, and that while so
much of the last resolution of the
board of directors as provides for prior
approval of the president of the
corporation before the books of the
corporation can be inspected puts an
illegal obstacle in the way of a
stockholder or director, that resolution,
so far as we are aware, has not been
enforced to the detriment of anyone.
In addition, it should be said that this
is a family dispute, the petitioner and
the individual respondents belonging
to the same family; that a test case
between the petitioner and the
respondents has not been begun in
the Court of First Instance of
Occidental Negros involving hundreds
of thousands of pesos, and that the
appellate court should not intrude its
views to give an advantage to either
party. We rule that the petitioner has
not made out a case for relief by
mandamus.
GONZALES VS PNB
ISSUE:
Whether or not Petitioner may compel
PNB to produce its books and records
(NO!)
HELD:
The records of all business
transactions of the corporation and the
minutes of any meeting 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,
trustee, 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,
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.
As may be noted from the above-
quoted provisions, ***among the
changes introduced in the new
Code with respect to the right of
inspection granted to a
stockholder are the following the
records must be kept at the
principal office of the corporation;
the inspection must be made on
business days; the stockholder
may demand a copy of the
excerpts of the records or
minutes; and the refusal to allow
such inspection shall subject the
erring officer or agent of the
corporation to civil and criminal
liabilities. However, while
seemingly enlarging the right of
inspection, the new Code has
prescribed limitations to the
same. It is now expressly required
as a condition for such
examination that the one
requesting it must not have been
guilty of using improperly any
information through a prior
examination, and that the person
asking for such examination must
be "acting in good faith and for a
legitimate purpose in making his
demand."

***The unqualified provision on
the right of inspection previously
contained in Section 51, Act No.
1459, as amended, no longer
holds true under the provisions of
the present law. The argument of
the petitioner that the right
granted to him under Section 51
of the former Corporation Law
should not be dependent on the
propriety of his motive or purpose
in asking for the inspection of the
books of the respondent bank
loses whatever validity it might
have had before the amendment
of the law. If there is any doubt in
the correctness of the ruling of
the trial court that the right of
inspection granted under Section
51 of the old Corporation Law
must be dependent on a showing
of proper motive on the part of
the stockholder demanding the
same, it is now dissipated by the
clear language of the pertinent
provision contained in Section 74
of Batas Pambansa Blg. 68.
Although the petitioner has claimed
that he has justifiable motives in
seeking the inspection of the books of
the respondent bank, he has not set
forth the reasons and the purposes for
which he desires such inspection,
except to satisfy himself as to the
truth of published reports regarding
certain transactions entered into by
the respondent bank and to inquire
into their validity. The circumstances
under which he acquired one
share of stock in the respondent
bank purposely to exercise the
right of inspection do not argue in
favor of his good faith and proper
motivation. Admittedly he sought
to be a stockholder in order to pry
into transactions entered into by
the respondent bank even before
he became a stockholder. His
obvious purpose was to arm
himself with materials which he
can use against the respondent
bank for acts done by the latter
when the petitioner was a total
stranger to the same. He could
have been impelled by a laudable
sense of civic consciousness, but
it could not be said that his
purpose is germane to his interest
as a stockholder.
RICHARDSON VS ARIZONA FUELS
CORP
ISSUE:
whether the court erred in
certifying this matter as a class
action. It is alleged in the amended
complaint that "some" of the causes of
action found therein belong to Major,
and that as to those causes plaintiffs
bring the suit derivatively on behalf of
the corporation pursuant to Rule 23.1.
(YES! THE COURT ERRED!)
HELD:
A class action and a derivative
action rest upon fundamentally
different principles of substantive
law; to ignore those differences is not
a minor procedural solecism. A
derivative action must necessarily
be 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 on behalf of the
corporation.
A class action, on the other hand,
is predicated on 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.
The difference in the two procedures
and their relationship to underlying
substantive law has been stated as
follows:
***Suits which are said to be
derivative, and therefore come
within the rule, are those which
seek to enforce any right which
belongs to the corporation and is
not being enforced, such as the
liability of corporate officers or
majority shareholders for
mismanagement, to recover
corporate assets and related
claims, to enforce rights of the
corporation by virtue of its
contract with a third person, and
to enjoin those in charge of the
corporation from causing it to
commit an ultra vires act.
***In this case, neither the
memorandum decision nor the
order of the district court does
any more than recite that the suit
may be maintained as a class
action. Furthermore, the amended
complaint in alleging that the action
should be maintained as a class
action, does no more than mimic the
language of Rule 23. As was pointed
out in Jones v. Diamond, 519 F.2d
1090, 1098 (5th Cir.1975), "Without
more, mere mimicry is insufficient to
undergird a decision either way on the
propriety of class certification."
There is no doubt that the first
eight 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 ninth,
tenth and eleventh 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.
Although class actions have historical
antecedents in rules of equity that go
back several centuries in English
jurisprudence,[1] it is not to be
gainsaid that the modern class action
rule is one of the most farreaching and
important changes in legal procedure
in many a decade. Its impact on the
enforcement of consumer rights,
antitrust claims, securities claims and
civil rights actions, to name but a few
areas, has been monumental.
However, the class action device,
if used inappropriately and in lieu
of a 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 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.
We therefore reverse the district
court's certification of this suit as
a class action and remand for
further proceedings not
inconsistent with this opinion.
BITONG VS CA
ISSUE:
WON petitioner is the true holder of
stock certificates to be able institute a
derivative suit. (NO!)
HELD:
NO.
Sec 63 of the Corporation Code
envisions a formal certificate of stock
which can be issued only upon
compliance with certain requisites.
First, the certificates must be
signed by the president or vice-
president, countersigned by the
secretary or assistant secretary,
and sealed with the seal of the
corporation. A mere typewritten
statement advising a stockholder
of the extent of his ownership in a
corporation without qualification
and/or authentication cannot be
considered as a formal certificate
of stock. Second, delivery of the
certificate is an essential element
of its issuance. Hence, there is no
issuance of a stock certificate
where it is never detached from
the stock books although blanks
therein are properly filled up if
the person whose name is
inserted therein has no control
over the books of the company.
Third, the par value, as to par
value shares, or the full
subscription as to no par value
shares, must first be fully paid.
Fourth, the original certificate
must be surrendered where the
person requesting the issuance of
a certificate is a transferee from a
stockholder.(REQUISITES!)
***The certificate of stock itself
once issued is a continuing
affirmation or representation 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. Aside from petitioners
own admissions, several corporate
documents disclose that the true
party-in-interest is not petitioner
but JAKA. It should be emphasized
that JAKA executed, a deed of sale
over 1,000 Mr. & Ms. shares in
favor of respondent Eugenio D.
Apostol. On the same day,
respondent Apostol signed a
declaration of trust stating that
she was the registered owner of
1,000 Mr. & Ms. shares covered by
a Certificate of Stock. And, there
is nothing in the records which
shows that JAKA had revoked the
trust it reposed on respondent
Eugenia D. Apostol. Neither was
there any evidence that the
principal had requested her to
assign and transfer the shares of
stock to petitioner. In fine, the
records are unclear on how
petitioner allegedly acquired the
shares of stock of JAKA.
***Thus, for a valid transfer of
stocks, the requirements are as
follows: (a) There must be
delivery of the stock certificate;
(b) The certificate must be
endorsed by the owner or his
attorney-in-fact or other persons
legally authorized to make the
transfer; and, (c) to be valid
against third parties, the transfer
must be recorded in the books of
the corporation. At most, in the
instant case, petitioner has
satisfied only the third
requirement. Compliance with the
first two requisites has not been
clearly and sufficiently shown.
*The basis of a stockholders suit is
always one in equity. However, it
cannot prosper without first complying
with the legal requisites for its
institution. The most important of
these is the bona fide ownership by a
stockholder of a stock in his own right
at the time of the transaction
complained of which invests him with
standing to institute a derivative
action for the benefit of the
corporation.
SMC VS KHAN
ISSUE:
WON THE DERIVATIVE SUIT IS PROPER
(YES!)
HELD:
The dispute concerns acts of the board
of directors claimed to amount to
fraud and misrepresentation which
may be detrimental to the interest of
the stockholders, or is one arising out
of intra-corporate relations between
and among stockholders, or between
any or all of them and the corporation
of which they are stockholders . 30
2. The theory that de los Angeles has
no personality to bring suit in behalf of
the corporation because his
stockholding is minuscule, and there is
a "conflict of interest" between him
and the PCGG cannot be sustained,
either.
It is claimed that since de los Angeles
20 shares (owned by him since 1977)
represent only. 00001644% of the total
number of outstanding shares (1
21,645,860), 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
31 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; 32
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. 34
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.
3. Neither can the "conflict-of-
interest" theory be upheld. From the
conceded premise that de los Angeles
now sits in the SMC Board of Directors
by the grace of the PCGG, it does not
follow that he is legally obliged to vote
as the PCGG would have him do, that
he cannot legitimately take a position
inconsistent with that of the PCGG, or
that, not having been elected by the
minority stockholders, his vote would
necessarily never consider the latter's
interests. The proposition is not only
logically indefensible, non sequitur,
but also constitutes an erroneous
conception of a director's role and
function, it being plainly a director's
duty to vote according to his own
independent judgment and his own
conscience as to what is in the best
interests of the company. Moreover, it
is undisputed that apart from the
qualifying shares given to him by the
PCGG, he owns 20 shares in his own
right, as regards which he cannot from
any aspect be deemed to be
"beholden" to the PCGG, his ownership
of these shares being precisely what
he invokes as the source of his
authority to bring the derivative suit.
4. It is also theorized, on the
authority of the BASECO decision, that
the PCGG has no power to vote
sequestered shares of stock as an act
of dominion but only in pursuance
to its power of administration. The
inference is that the PCGG's act of
voting the stock to elect de los
Angeles to the SMC Board of Directors
was unauthorized and void; hence, the
latter could not bring suit in the
corporation's behalf. The argument is
strained and obviously of no merit. As
already more than plainly indicated, it
was not necessary for de los Angeles
to be a director in order to bring a
derivative action; all he had to be was
a stockholder, and that he was owning
in his own right 20 shares of stock, a
fact not disputed by the respondents.
Nor is there anything in the Baseco
decision which can be interpreted as
ruling that sequestered stock may not
under any circumstances be voted by
the PCGG to elect a director in the
company in which such stock is held.
On the contrary, that it held such act
permissible is evident from the context
of its reference to the Presidential
Memorandum of June 26, 1986
authorizing the PCGG, "pending the
outcome of proceedings to determine
the ownership of .. sequestered shares
of stock,"'to vote such shares .. at all
stockholders' meetings called for the
election of directors ..," the only
caveat being that the stock is not to
be voted simply because the power to
do so exists, whether it be to oust and
replace directors or to effect
substantial changes in corporate
policy, programs or practice, but only
"for demonstrably weighty and
defensible grounds" or "when essential
to prevent disappearance or wastage
of corporate property."
PASCUAL VS OROZCO
ISSUE:
WON A STOCKHOLDER CAN INITIATE A
SUIT
HELD:
The right of individual stockholders to
maintain suits for and on behalf of the
corporation was denied until within a
comparatively short time, but his
right is now no longer doubted. On
this point Cook on Corporations, 5th
ed. (1903), secs. 644, 645, and 646,
says:
Notwithstanding this fact, however,
that it was the duty and right of the
corporation to bring suit remedy these
wrongs, it gradually became apparent
that frequently the corporation was
helpless and unable to institute the
suit. It was found, where the guilty
parties themselves controlled the
directors and also a majority of
the stock, that the corporation
was in their power, was unable to
institute suit, and that the
minority of the stockholders were
being defrauded of their rights
and were without remedy. The
time came when the minority of
the stockholders of the defrauded
corporation the corporation
itself being controlled by the
guilty parties were given a
standing in court for the purpose
of taking up the cause of the
corporation, and, in its name and
stead, of bringing the guilty
parties to an account. Accordingly,
in 1843, in the leading case of Foss vs.
Harbottle,**** a stockholder
brought suit in the name of
himself and other defrauded
stockholders, and for the benefit
of the corporation, against the
directors, for a breach of their
duty to the corporation. This case
was decided against the
complaining stockholder, on the
ground that the complainant had
not proved that the corporation
itself was under the control of the
guilty parties, and had not proved
that it was unable to institute
suit. The court, however, broadly
intimated that a case might arise
when a suit instituted by
defrauded stockholders would be
entertained by the court and
redress given. Acting upon this
suggestion, and impelled by the
utter inadequacy of suits
instituted by the corporation,
defrauded stockholders continued
to institute these suits and to
urge the courts of equity to grant
relief. These efforts were unsuccessful
in clearly establishing the right of
stockholders herein until the cases of
Atwol against Merriwether, in England,
1867, and of Dodge vs. Woolsey, in
this country, in 1855. These two great
and leading cases have firmly
established the law for England and
America, ***that where corporate
directors have committed a
breach of trust either by their
frauds, ultra vires acts, or
negligence, and the corporation is
unable or unwilling to institute
suit to remedy the wrong, a single
stockholder may institute that
suit, suing on behalf of himself
and other stockholders and for
the benefit of the corporation, to
bring about a redress of the
wrong done directly to the
corporation and indirectly to the
stockholders.
It is now no longer doubted, said Mr.
Justice Wayne, in the case of Dodge
vs. Woolsey, 18 How. (U.S.), 331
either in England or the United States,
that courts of equity, in both, have a
jurisdiction over corporations, at the
instance of one or more of their
members; to apply preventive
remedies by injunction, to restrain
those who administer them from doing
acts which would amount to a violation
of charters, or to prevent any
misapplication of their capitals or
profits, which might result in lessening
the dividends of stockholders, or the
value of their shares, as either may be
protected by the franchises of a
corporation, if the acts intended to be
done create what is in the law
denominated a breach of trust. And
the jurisdiction extends to inquire into,
and to enjoin, as the case may require
that to be done, any proceedings by
individuals, in whatever character they
may profess to act, if the subject of
complaint is an imputed violation of a
corporate franchise, or the denial of a
right growing out of it, for which there
is not an adequate remedy at law.
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. In the determination of
these questions we can not see
how, if it be true that the bank is
a quasi-public institution, it can
affect in any way the final result.
EVANGELISTA VS SANTOS
ISSUE:
WON THE PLAINTIFF HAS CAUSE OF
ACTION TO INSTITUTE A DERIVATIVE
SUIT. (NO!)
HELD:
*** 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 (3 Fletcher's Cyclopedia of
Corporations, pp. 977-980). 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
(Pascual vs. Del Saz Orosco, 19 Phil.
82, 85). 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 (13 Fletcher,
Cyclopedia of Corporations, p. 295).
In the present case, the plaintiff
stockholders have brought the
action not for the benefit of the
corporation but for their own
benefit, since they ask that the
defendant 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 plaintiff's
complaint shows no cause of
action in their favor so that the
lower court did not err in
dismissing the complaint on that
ground.
While plaintiffs ask for remedy to
which they are not entitled unless the
requirement of section 16 of the
Corporation Law be first complied
with, we note that the action
stated in their complaint is
susceptible of being converted
into a derivative suit for the
benefit of the corporation by a
mere change in the prayer. Such
amendment, however, is not possible
now, since the complaint has been
filed in the wrong court, so that the
same last to be dismissed.
The order appealed from is therefore
affirmed, but without prejudice to the
filing of the proper action in which the
venue shall be laid in the proper
province. Appellant's shall pay costs.
So ordered.
REPUBLIC BANK VS CUADERO
ISSUE:
WON THERE IS CAUSE OF ACTION IN
FILING THE DERIVATIVE SUIT (YES!)
HELD:
***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. In such
actions, the suing stockholder is
regarded as a nominal party, with
the corporation as the real party
in interest (Pascual vs. Del Saz
Orozco, 19 Phil. 82, 85; Everett vs.
Asia Banking Corp., 45 Phil. 518;
Angeles vs. Santos, 64 Phil. 697;
Evangelista vs. Santos, 86 Phil. 388).
Plaintiff-appellant's action here is
precisely in conformity, with these
principles. He is neither alleging
nor vindicating his own individual
interest or prejudice, but the
interest of the Republic Bank and
the damage caused to it. 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
(Complaint, p. 6). The frauds
charged by plaintiff are frauds
against the Bank that redounded
to its prejudice.
The complaint expressly pleads that
the appointment of Cuaderno as
technical consultant, and of
Bienvenido Dizon to head the Board of
Directors of the Republic Bank, were
made only to shield Pablo Roman from
criminal prosecution and not to further
the interests of the Bank, and avers
that both men are Roman's alter egos.
***There is no denying that the
facts thus pleaded in the
complaint constitute a cause of
action for the bank: if the
questioned appointments were
made solely to protect Roman
from criminal prosecution, by a
Board composed by Roman's
creatures and nominees, then the
moneys disbursed in favor of
Cuaderno and Dizon would be an
unlawful wastage or diversion of
corporate funds, since the
Republic Bank would have no
interest in shielding Roman, and
the directors in approving the
appointments would be
committing a breach of trust; the
Bank, therefore, could sue to
nullify the appointments, enjoin
disbursement of its funds to pay
them, and recover those paid out
for the purpose, as prayed for in
the complaint in this case (Angeles
vs. Santos, supra.).
Facts pleaded in the complaint are to
be deemed accepted by the
defendants who file a motion to
dismiss the complaint for failure to
state a cause of action. This is the
cardinal principle in the matter. And, it
has been ruled that the test of
sufficiency of the facts alleged is
whether or not the Court could render
a valid judgment as prayed for,
accepting as true the exclusive facts
set forth in the complaint.1So rigid is
the norm prescribed that if the Court
should doubt the truth of the facts
averred it must not dismiss the
complaint but require an answer and
proceed to trial on the merits.2
These circumstances permit a
stockholder to bring a derivative
suit (Evangelista vs. Santos, 86
Phil. 394). That no other
stockholder has chosen to make
common cause with plaintiff Perez
is irrelevant, since the smallness
of plaintiff's holdings is no ground
for denying him relief (Ashwander
vs. TVA, 80 L. Ed. 688). At any
rate, it is yet too early in the
proceedings for the absence of
other stockholders to be of any
significance, no issues having
even been joined.
In view of the foregoing, the order
dismissing the complaint is reversed
and set aside.
REYES VS TAN
ISSUE:
WON a derivative suit is proper. (YES!)
HELD:
In the eyes of the court below, as well
as in our own, the importation of
textiles instead of raw materials, as
well as the failure of the Board of
Directors to take action against those
directly responsible for the misuse of
dollar allocations constitute fraud, or
consent thereto on the part of the
directors. Therefore, a breach of
trust was committed which
justified the derivative suit by a
minority stockholder on behalf of
the corporation.
***It is well settled in this
jurisdiction that where corporate
directors are guilty of a breach of
trust not of mere error of
judgment or abuse of discretion
and intracorporate remedy is
futile or useless, a stockholder
may institute a suit in behalf of
himself and other stockholders
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.
An illustration of a suit of this kind is
found in the case of Pascual vs. Del
Saz Orozco (19 Phil. 82), decided by
this Court as early as 1911. In that
case, the Banco Espaol-Filipino
suffered heavy losses due to
fraudulent connivance between a
depositor and an employee of the
bank, which losses, it was contended,
could have been avoided if the
president and directors had been more
vigilant in the administration of the
affairs of the bank. The stockholders
constituting the minority brought
a suit in behalf of the bank
against the directors to recover
damages, and this over the
objection of the majority of the
stockholders and the directors.
This court held that the suit could
properly be maintained. (64 Phil.,
Angeles vs. Santos [G.R. No. L-43413,
prom. August 31, 1937] p. 697).
The claim that respondent Justiniani
did not take steps to remedy the illegal
importation for a period of two years is
also without merit. During that period
of time respondent had the right to
assume and expect that the directors
would remedy the anomalous situation
of the corporation brought about by
their own wrong doing. Only after such
period of time had elapsed could
respondent conclude that the directors
were remiss in their duty to protect the
corporation property and business.
Counsel for petitioner claims that
respondent Justiniani was treasurer of
the corporation for sometime and had
control of funds and this
notwithstanding, she had not taken
the steps to remedy the situation. In
answer we state that the fraud
consisted in importing finished textile
instead of raw cotton for the textile
mill; the fraud, therefore, was
committed by the manager of the
business and was consented to by the
directors, evidently beyond reach of
respondent.
The directors permitted the fraudulent
transaction to go unpunished and
nothing appears to have been done to
remove the erring purchasing
managers. In a way the appointment
of a receiver may have been thought
of by the court below so that the dollar
allocation for raw material may be
revived and the textile mill placed on
an operating basis. It is possible that if
a receiver in which the Central Bank
may have confidence is appointed, the
dollar allocation for raw material may
be restored. Claim is made that if a
receiver is appointed, the Philippine
National Bank to which the corporation
owes considerable sums of money
might be led to foreclose the
mortgage. Precisely the appointment
of a receiver in whom the bank may
have had confidence might
rehabilitate the business and bring a
restoration of the dollar allocation
much needed for raw material and an
improvement in the business and
assets the corporation, thus insuring
the collection of the bank's loan.
Considering the above
circumstances we are led to agree
with the judge below that 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. The first
assignment of error is, therefore,
overruled.
RURAL BANK VS OCFEMIA
ISSUE:
Whether the board of directors of a
rural banking corporation be
compelled to confirm a deed of
absolute sale of real property which
deed of sale was executed by the bank
manager without prior authority of the
board of directors of the rural banking
corporation. (YES!)
HELD:
the bank acknowledged, 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 due thereon. If the
bank management believed that it had
title to the property, it should have
taken some measures to prevent the
infringement or invasion of its 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. 14
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. Thus,
this Court has ruled in Board of
Liquidators v. Kalaw: 15
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. So
also,
. . . authority to act for and bind a
corporation may be presumed from
acts of recognition in other instances
where the power was in fact exercised.
. . . Thus, when, in the usual course of
business of a corporation, an officer
has been allowed in his official
capacity to manage its affairs, his
authority to represent the corporation
may be implied from the manner in
which he has been permitted by the
directors to manage its business.
Notwithstanding the putative authority
of the manager to bind the bank in the
Deed of Sale, petitioner has failed to
file an answer to the Petition below
within the reglementary period, let
alone present evidence controverting
such authority. Indeed, when one of
herein respondents, Marife S. Nino,
went to the bank to ask for the board
resolution, she was merely told to
bring the receipts. The bank failed to
categorically declare that Tena had no
authority. This Court stresses the
following:
. . . Corporate transactions would
speedily come to a standstill were
every person dealing with a
corporation held duty-bound to
disbelieve every act of its responsible
officers, no matter how regular they
should appear on their face. This Court
has observed in Ramirez vs. Orientalist
Co., 38 Phil. 634, 654-655, that
In passing upon the liability of a
corporation in cases of this kind it is
always well to keep in mind the
situation as it presents itself to the
third party with whom the contract is
made. Naturally he can have little or
no information as to what occurs in
corporate meetings; and he must
necessarily rely upon the external
manifestation of corporate consent.
The integrity of commercial
transactions can only be maintained
by holding the corporation strictly to
the liability fixed upon it by its agents
in accordance with law; and we would
be sorry to announce a doctrine which
would permit the property of man in
the city of Paris to be whisked out of
his hands and carried into a remote
quarter of the earth without recourse
against the corporation whose name
and authority had been used in the
manner disclosed in this case. As
already observed, it is familiar doctrine
that if a corporation knowingly permits
one of its officers, or any other agent,
to do acts within the scope of an
apparent authority, and thus holds him
out to the public as possessing power
to do those acts, the corporation will,
as against any one who has in good
faith dealt with the corporation
through such agent, be estopped from
denying his authority; and where it is
said "if the corporation permits this
means the same as "if the thing is
permitted by the directing power of
the corporation." 16
In this light, the bank is estopped from
questioning the authority of the bank
manager to enter into the 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 agent's authority.
LEE VS CA
FACTS:
November 15, 1985: a complaint for
a sum of money was filed by the
International Corporate Bank, Inc.
(ICB) against the private respondents
March 17, 1986: private
respondents, in turn, filed a 3rd-party
complaint against ALFA and ICB
September 17, 1987: petitioners
filed a motion to dismiss the third
party complaint - denied
July 12, 1988: trial court issued an
order requiring the issuance of
an alias summons upon ALFA through
the DBP
consequence of the petitioner's
letter that ALFA management was
transferred to DBP
July 22, 1988: DBP claimed that it
was not authorized to receive
summons on behalf of ALFA
August 4, 1988: trial court issued an
order advising the private respondents
to take the appropriate steps to serve
the summons to ALFA
September 12, 1988: 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 -
denied
January 19, 1989: 2nd motion for
reconsideration was filed by the
petitioners reiterating their stand that
by virtue of the voting trust agreement
they ceased to be officers and
directors of ALFA
attached a copy of the voting trust
agreement between all the
stockholders of ALFA and the DBP
whereby the management and control
of ALFA became vested upon the DBP
April 25, 1989: trial court reversed
itself by setting aside its previous
Order dated January 2, 1989 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
October 17, 1989: trial court (NOT
notified of the petition for certiorari)
declared final its decision on April 25,
1989
ISSUE:
W/N the voting trust agreement is
valid despite being contrary to the
general principle that a corporation
can only be bound by such acts which
are within the scope of its officers' or
agents' authority
HELD:
voting trust
trust created by an agreement
between a group of the stockholders of
a corporation and the trustee or by a
group of identical agreements
between individual stockholders and a
common trustee, whereby it is
provided that for a term of years, or
for a period contingent upon a certain
event, or until the agreement is
terminated, control over the stock
owned by such stockholders, either for
certain purposes or for all purposes, is
to be lodged in the trustee, either with
or without a reservation to the owners,
or persons designated by them, of the
power to direct how such control shall
be used (Ballentine's Law Dictionary)
Sec. 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 share for a
period rights pertaining to the shares
for a period not exceeding 5 years at
any one 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 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.
GOKONGWEI VS SEC
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
corps and businesses outside the
primary purpose clause of the
corporation in violation of the
Corporation Code.
ISSUE:
Are amendments valid?
HELD:
The validity and reasonableness of a
by-law is purely a question of law.
Whether the by-law is in conflict with
the law of the land, or with the charter
of the corporation or is in legal sense
unreasonable and therefore unlawful is
a question of law. However, this is
limited where the reasonableness of a
by-law is a mere matter of judgment,
and one upon which reasonable minds
must necessarily differ, a court would
not be warranted in substituting its
judgment instead of the judgment of
those who are authorized to make by-
laws and who have exercised
authority. The Court held that a
corporation has authority
prescribed by law to prescribe the
qualifications of directors. It 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. A
corporation, under the
Corporation law, may prescribe in
its by-laws the qualifications,
duties and compensation of
directors, officers, and employees.
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 he impliedly
contracts that the will of the
majority shall govern in all
matters within the limits of the
acts of incorporation and lawfully
enacted by-laws and not
forbidden by law.
***Any corporation may amend its
by-laws by the owners of the
majority of the subscribed stock.
It cannot thus be said that
petitioners has the vested right,
as a stock holder, to be elected
director, in the face of the fact
that the law at the time such
stockholder's right was acquired
contained the prescription that
the corporate charter and the by-
laws shall be subject to
amendment, alteration and
modification. A Director stands in
a fiduciary relation to the
corporation and its shareholders,
which is characterized as a trust
relationship. An amendment to
the corporate by-laws which
renders a stockholder ineligible to
be director, if he be also director
in a corporation whose business is
in competition with that of the
other corporation, has been
sustained as valid. This is based
upon the principle that where the
director is employed in the service of a
rival company, he cannot serve both,
but must betray one or the other. The
amendment in this case serves to
advance the benefit of the
corporation and is good.
Corporate officers are also not
permitted to use their position of
trust and confidence to further
their private needs, and the act
done in furtherance of private
needs is deemed to be for the
benefit of the corporation. This is
called the doctrine of corporate
opportunity.
DETECTIVE AND PROTECTIVE
BUREAU VS CLORIBEL
ISSUE:
WON RESPONDENT IS A DIRECTOR.
(NO!)
HELD:
The fourth reason alleged by petitioner
in support of its stand is that public
interest demanded that the writ
enjoining respondent Fausto Alberto
from exercising the functions of
managing director be maintained.
Petitioner contended that respondent
Alberto had arrogated to himself the
power of the Board of Directors of the
corporation because he refused to
vacate the office and surrender the
same to Jose de la Rosa who had been
elected managing director by the
Board to succeed him. This assertion,
however, was disputed by respondent
Alberto who stated that Jose de la Rosa
could not be elected managing
director because he did not own any
stock in the corporation.
There is in the record no showing
that Jose de la Rosa owned a
share of stock in the corporation.
If he did not own any share of
stock, certainly he could not be a
director pursuant to the
mandatory provision of Section 30
of the Corporation Law, which in
part provides:
There is in the record no showing
that Jose de la Rosa owned a
share of stock in the corporation.
If he did not own any share of
stock, certainly he could not be a
director pursuant to the
mandatory provision of Section 30
of the Corporation Law, which in
part provides:
Sec. 30. Every director must
own in his own right at least one
share of the capital stock of the
stock corporation of which he is a
director, which stock shall stand in
his name on the books of the
corporations....
If he could not be a director, he
could also not be a managing
director of the corporation,
pursuant to Article V, Section 3 of
the By-Laws of the Corporation
which provides that:
The manager shall be elected by
the Board of Directors from
among its members.... (Record, p.
48)
If the managing director-elect was
not qualified to become managing
director, respondent Fausto
Alberto could not be compelled to
vacate his office and cede the
same to the managing director-
elect because the by-laws of the
corporation provides in Article IV,
Section 1 that "Directors shall
serve until the election and
qualification of their duly qualified
successor."
GRACE CHRISTIAN HS VS CA
ISSUE:
W/N the 1975 provision giving the
petitioner a permanent board seat was
valid.
HELD:
No.
The present Corporation Code (B.P.
Blg. 68), which took effect on May 1,
1980, 12 similarly 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. (Emphasis
added)
These provisions of the former and
present corporation law leave no room
for doubt as to their meaning: the
board of directors of corporations
must be elected from among the
stockholders or members. There
may be corporations in which there are
unelected members in the board but it
is clear that in the examples cited by
petitioner the unelected members sit
as ex officio members, i.e., by virtue of
and for as long as they hold a
particular office. But in the case of
petitioner, there is no reason at all
for its representative to be given
a seat in the board. Nor does
petitioner claim a right to such
seat by virtue of an office held. In
fact it was not given such seat in
the beginning. It was only in 1975
that a proposed amendment to
the by-laws sought to give it one.

***Since the provision in question
is contrary to law, the fact that for
fifteen years it has not been
questioned or challenged but, on
the contrary, appears to have
been implemented by the
members of the association
cannot forestall a later challenge
to its validity. Neither can it attain
validity through acquiescence
because, if it is contrary to law, it
is beyond the power of the
members of the association to
waive its invalidity. For that
matter the members of the
association may have formally
adopted the provision in question,
but their action would be of no
avail because no provision of the
by-laws can be adopted if it is
contrary to law. 13
I***t is probable that, in allowing
petitioner's 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
petitioner's representative as an
unelected member of the board of
directors. It is more accurate to
say that the members merely
tolerated petitioner's
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
petitioner's claim that its right is
"coterminus with the existence of the
association."