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Detective & Protective Bureau Inc. v. Hon. Gaudenciao Cloribel, Faustino AlbertoYsa
Doctrine
Every director must own at least one (1) share of the capital stock of the
corporation.
Facts
Petitioner is a philippine corporation and respondent Fausto s. Alberto was the
managing director of petitioner corporation from 1952 until January 14, 1964. In
June 1963, respondent Alberto illegally seized and took control of all the assets as
well as the books, records, vouchers and receipts of the corporation from the
accountant-cashier, concealed them illegally and refused to allow any member of
the corporation to see and examine the same.
On January 14, 1964, the stockholders, in a meeting, removed respondent as
managing director and elected Jose de la Rosa instead. Plaintiff alleged that
respondent Alberto refused to vacate his office and to deliver the assets and books
to Jose de la Rosa, and also continued to perform unauthorized acts for and in
behalf of the corporation. Alberto was required to submit a financial statement and
to render an accounting of his administration from 1952 but failed to do so. He has
also been allegedly disposing corporate funds contrary to a resolution adopted by
the Board of Directors on November 24, 1963.
Petitioner filed a case against respondent Alberto for accounting with preliminary
injunction and receivership (Jose Barredo).
Respondent judge Gaudencio Cloribel granted writ of preliminary injunction
restraining defendant Alberto from exercising the functions of managing director
and from disbursing and disposing of corporate funds. But respondent judge
admitted the counterbond and set aside the writ of preliminary injunction. Hence,
this appeal for certiorari.
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.

Issue
WON respondent Alberto should be restrained from exercising the functions of
managing director and be replaced by Jose Dela Rosa.
Held
No. It was disputed by respondent Alberto 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:
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....
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."
Gokongwei v. SEC, et al.- Nikki & Ali (Facts from Tricias digest)
DOCTRINES: An amendment to the corporation by-law which renders a stockholder
ineligible to be a 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.
Mere ultra vires acts or those which are not illegal and void ab initio, but are not
within the scope of the articles of incorporation are merely voidable and may
become binding and enforceable when ratified by the stockholders.
FACTS:
- John Gokongwei Jr. (stockholder of San Miguel Corporation/SMC) filed with the
Securities and Exchange Commission 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.
o First cause of action: Gokongwei alleged that on 18 September 1976,
respondents Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas,
Emeterio Buao, Walthrode B. Conde, Miguel Ortigas, and Antonio Prieto amended
the bylaws of the corporation, basing their authority to do so on a resolution of the
stockholders adopted on 13 March 1961, when the outstanding capital stock of the

corporation was only P70,139.740.00, divided into 5,513,974 common shares at

P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time of
the amendment, the outstanding and paid up shares totalled 30,127,043, with a
total par value of P301,270,430.00. It was contended that according to section 22 of
the Corporation Law and Article VIII of the by-laws of the corporation, the power to
amend, modify, repeal or adopt new by-laws may be delegated to the Board of
Directors only by the affirmative vote of stockholders representing not less than 2/3
of the subscribed and paid up capital stock of the corporation, which 2/3 should
have been computed on the basis of the capitalization at the time of the
amendment. Since the amendment was based on the 1961 authorization, petitioner
contended that the Board acted without authority and in usurpation of the power of
the stockholders.
o Second cause of action: It was alleged that the authority granted in 1961
had already been exercised in 1962 and 1963, after which the authority of the
Board ceased to exist.
o Third cause of action: Gokongwei averred that the membership of the Board
of Directors had changed since the authority was given in 1961, there being 6 new
directors.
o Fourth cause of action: It was claimed that prior to the questioned
amendment, Gokongwei 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 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.
o Addtl cause 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; that Andres M. Soriano, Jr. and/or Jose M.
Soriano, while representing other corporations, entered into contracts (specifically a
management contract) with the corporation, which was avowed because the
questioned amendment gave the Board itself the prerogative of determining
whether they or other persons are engaged in competitive or antagonistic business;
that the portion of the amended by-laws which states that in determining whether
or not a person is engaged in competitive business, the Board may consider such
factors as business and family relationship, is unreasonable and oppressive and,
therefore, void; and that the portion of the amended by-laws which requires that "all
nominations for election of directors shall be submitted in writing to the Board of
Directors at least five (5) working days before the date of the Annual Meeting" is
likewise unreasonable and oppressive.
- It was, therefore, prayed that the amended by-laws be declared null and void and
the certificate of filing thereof be cancelled, and that Soriano, et. al. be made to pay
damages, in specified amounts, to Gokongwei.
- On 28 October 1976, in connection with the same case, Gokongwei filed with the
Securities and Exchange Commission an "Urgent Motion for Production and
Inspection of Documents", alleging that the Secretary of the corporation refused to
allow him to inspect its records despite request made by Gokongwei for production
of certain documents enumerated in the request, and that the corporation had been
attempting to suppress information from its stockholders despite a negative reply
by the SEC to its query regarding their authority to do so.

- The motion was opposed by respondents alleging among others that it has no
legal basis; demand is not based on good faith; that the motion is premature; and
that it fails to show good cause and constitutes continued harassment and some
parts of records are privileged.
- Meanwhile, on 10 December 1976, while the petition was yet to be heard, the
corporation issued a notice of special stockholders' meeting for the purpose of
"ratification and confirmation of the amendment to the By-laws", setting such
meeting for 10 February 1977. This prompted Gokongwei to ask the SEC for a
summary judgment insofar as the first cause of action is concerned, for the alleged
reason that by calling a special stockholders' meeting for the aforesaid purpose, the
respondents admitted the invalidity of the amendments of 18 September 1976.
- The motion for summary judgment was opposed by the respondents. Pending
action on the motion, Gokongwei filed an "Urgent Motion for the Issuance of a
Temporary Restraining Order", praying that pending the determination of
Gokongwei's application for the issuance of a preliminary injunction and/or
Gokongwei's motion for summary judgment, a TRO may be issued, restraining
Soriano, et. al. from holding the special stockholders' meeting as scheduled. This
motion was duly opposed by the respondents.
- On 10 February 1977, Respondent Commission issued an order denying the motion
for issuance of temporary restraining order. After receipt of the order of denial, the
respondents conducted the special stockholders' meeting wherein the amendments
to the by-laws were ratified.
- On 14 February 1977, Gokongwei filed a consolidated motion for contempt and for
nullification of the special stockholders' meeting.
- A motion for reconsideration of the order denying Gokongwei's motion for
summary judgment was filed by Gokongwei before the SEC on 10 March 1977.
- SEC Case 1423: Gokongwei alleged that, having discovered that the corporation
has been investing corporate funds in other corporations and businesses outside of
the primary purpose clause of the corporation, in violation of section 17-1/2 of the
Corporation Law, he filed with SEC, on 20 January 1977, a petition seeking to have
Andres M. Soriano, Jr. and Jose M. Soriano, as well as the corporation declared guilty
of such violation, and ordered to account for such investments and to answer for
damages.
- On 4 February 1977, motions to dismiss were filed by the respondents to which a
consolidated motion to strike and to declare Soriano, et. al. in default and an
opposition ad abundantiorem cautelam were filed by Gokongwei. Despite the fact
that said motions were filed as early as 4 February 1977, the Commission acted
thereon only on 25 April 1977, when it denied the respondent's motions to dismiss
and gave them 2 days within which to file their answer, and set the case for hearing
on April 29 and May 3, 1977.
- The respondents issued notices of the annual stockholders' meeting, including in
the Agenda thereof, the "reaffirmation of the authorization to the Board of Directors
by the stockholders at the meeting on 20 March 1972 to invest corporate funds in
other companies or businesses or for purposes other than the main purpose for
which the Corporation has been organized, and ratification of the investments
thereafter made pursuant thereto." By reason of the foregoing, on 28 April 1977,
Gokongwei filed with the SEC an urgent motion for the issuance of a writ of
preliminary injunction to restrain the respondents from taking up Item 6 of the
Agenda at the annual stockholders' meeting, requesting that the same be set for

hearing on 3 May 1977, the date set for the second hearing of the case on the
merits.
- The SEC, however, cancelled the dates of hearing originally scheduled and reset
the same to May 16 and 17, 1977, or after the scheduled annual stockholders'
meeting.
- For the purpose of urging the Commission to act, Gokongwei filed an urgent
manifestation on 3 May 1977, but this notwithstanding, no action has been taken up
to the date of the filing of the instant petition.
- Gokongwei filed a petition for petition for certiorari, mandamus and injunction,
with prayer for issuance of writ of preliminary injunction, with the Supreme Court,
alleging that there appears a deliberate and concerted inability on the part of the
SEC to act.
ISSUES:
1) Whether a corporation has the power to set a qualification to disqualify a
stockholder from being a board member. YES.
2) Whether respondent SEC gravely abused its discretion in allowing the
stockholders of respondent corporation to ratify the investment of corporate funds
in a foreign corporation. NO. (Note: 7 Justices thought that this issue was moot.
Thus dismissing the case as to this particular issue.)
HELD:
1) YES. The Supreme Court upheld the validity of the additional qualifications as a
necessary means to safeguard the corporation of its trade secrets and highly
confidential information wherein the access of such information to Gokongwei would
be detrimental to the corporations management and prosperity.
Based on U.S. authorities, in the absence of positive legislative provisions
limiting it, every private corporation has this inherent power as one of its necessary
and legal inseparable legal incidents, independent of any specific enabling provision
in its charter or in general law, such power of self-government being essential to
enable the corporation to accomplish the purposes of its creation. Sec. 21 of of the
Corporation Law allows a corporation to prescribe in its by-laws the qualifications
duties and compensation of directors, officers and employees. This refers to
additional qualifications that may be imposed aside from those provided for under
Sec. 30 of the Corporation Code.
Additional Note: SMC Board members may access: (1) marketing strategies and
pricing structure, (2) budget for expansion and diversification, (3) research and
development, and (4) sources of funding, availability of personnel, proposals of
mergers or tie-ups with other firms.
2) NO. Section 17- of the Corporation Law allows a corporation to invest its
funds in any other corporation or business or for any other purpose other than the
main purpose for which it is organized
If not within corporate purpose (purchase of shares solely for investment) - Board of
Directors must be authorized by the affirmative vote of stockholders holding shares
entitling them to exercise at least of voting power

If investment is made in pursuance to the corporate purpose - does not need the
approval of stockholders.
The purchase of beer manufacturing facilities by SMC was an investment in the
same business stated in its main purpose in its Articles of Incorporation which is to
manufacture and market beer. The court cited De la Rama v Ma-ao Sugar Central
Co. Inc. where it said that if the investment is made in a corporation whose
business is important to the investing corporation and would aid its purpose, to
require authority of the stockholders would be to unduly curtail the power of the
Board of Directors (BoD)
Assuming arguendo that the BoD does not have authority to make the investment,
its act however, may be ratified by the stockholders.
Mere ultra vires acts or those which are not illegal and void ab initio, but are not
within the scope of the articles of incorporation are merely voidable and may
become binding and enforceable when ratified by the stockholders.
Note: submission of assailed investment for ratification at the annual meeting
cannot be construed as admission the respondent corp. had committed and ultra
vires act considering the common practice of corporation to periodically submitting
for the ratification of their stockholders the acts of their directors, officers and
managers.
Roxas, et al v. De la Rosa, et al - Em Asiddao
DOCTRINE:

Under the Law, directors can only be removed from office by a vote of the
stockholders representing 2/3 of subscribed capital stock, while vacancies can be
filled by a mere majority. A director cannot be removed by a mere majority by
disguising it as filling a vacancy.
FACTS:

BINALBAGAN ESTATE, INC. is a corporation having its principal plant in Negros

Occidental where it is engaged in the manufacture of raw sugar from canes, grown
upon farms accessible to its central.

In July 1924, majority shareholders of BINALBAGAN ESTATE, INC. formed a

Voting Trust composed of 3 members (Laguda, Monteblanco, and Fisher, as
trustees).
a)
the shareholders undertook to assign their shares to the trustees on the
books of the company.
b)
the trustees were authorized to represent and vote the shares pertaining to
their constituents
c)
total number of outstanding shares of the corporation is somewhat over
5,500, while the number of shares controlled by the voting trust is less than 3,000
(majority but less than 2/3).

In February 1926 the General Annual Meeting of the Shareholders took

place and:
a)
Mr. Heilbronn appeared as representative of the voting trust, his authority
being recognized by the holders of all the other shares present at this meeting.

b)
Mr. Heilbronn (by virtue of controlling the majority of the shares) was able to
nominate and elect a Board of Directors to his own liking, without opposition from
the minority.

At the present time the Petitioners Roxas, Echaus, and Lacson presumably
constitute membership of voting trust.

Although the Board of Directors of BINALBAGAN ESTATE, INC. were

elected by the representative of the voting trust, the present trustees are
apparently desirous of ousting said officers, without awaiting the
termination of their official term at the expiration of one year from the
date of their election.

In August 1926Petitioners (members of the voting trust) caused the

secretary of the BINALBAGAN ESTATE, INC. to issue to the shareholders a notice
calling for a special general meeting of shareholders on August 16, 1926, 10:00
a.m:
a)
for the election of the Board of Directors
b)
for the amendment of the By-Laws, and
c)
for any other business that can be dealt with in said meeting

A few days after said notice was issued- Corua (as member of the existing
Board of Directors) and Ledesma (as a simple shareholder) instituted before CFI
Negros Occidental a civil action against the trustees and the BINALBAGAN ESTATE,
INC. for the purpose of enjoining the meeting contemplated in the notice abovementioned

CFI:
issued restraining order. In the dispositive part of said order the
Binalbagan Estate, Inc., its lawyers, agents, representatives, and all others who may
be assisting or corroborating with them, are restrained from holding the general
shareholders' meeting called for the date mentioned and from electing new
directors for the company in substitution of the present incumbents, said injunction
to be effective until further order of the court.

It is now asserted here by the petitioners that the making of this order was
beyond the legitimate powers of the respondent judge, and it is accordingly prayed
that said order be set aside.

Petitioners file before the Supreme Court a Petition contending that the
making of this order was beyond the legitimate powers of the respondent judge
ISSUE:
Whether or not the Respondent judge acted within his legitimate powers in making
the order against which relief is sought.
HELD: YES.

Under the law the directors of a corporation can only be removed from office
by a vote of the stockholders representing at least 2/3 of the subscribed capital
stock entitled to vote (Act No. 1459, sec. 34); while vacancies in the board,
when they exist, can be filled by mere majority vote (Act No. 1459, sec. 25).
Moreover, the law requires that when action is to be taken at a special meeting to
remove the directors, such purpose shall be indicated in the call (Act No. 1459, sec.
34).

While the voting trust controls a majority of the stock, it does not
have a clear 2/3 majority. It was therefore impolitic for the petitioners, in forcing
the call for the meeting of August 16, to come out frankly and say in the notice that
one of the purposes of the meeting was to remove the directors of the corporation
from office. Instead, the call was limited to the election of the board of directors, it

being the evident intention of the voting trust to elect a new board as if the
directorate had been then vacant.

But the complaint in the civil action directly asserts that the members of the
present directorate were regularly elected at the general annual meeting held in
February, 1926. If that assertion be true, the proposal to elect another directorate,
as per the call of August 2, if carried into effect, would result in the election of a
rival set of directors, who would probably need the assistance of judgment of court
in an independent action of quo warranto to get them installed into office, even
supposing that their title to the office could be maintained. That the trial judge had
jurisdiction to forestall that step and enjoin the contemplated election is a matter
about which there cannot be the slightest doubt.

The law contemplates and intends that there shall be one set of directors at a
time and that new directors shall be elected only as vacancies occur in the
directorate by death, resignation, removal, or otherwise.
Angeles, et al v. Santos, et al- Tricia Cruz
HIGINIO ANGELES, JOSE E. LARA and AGUEDO BERNABE,
as stockholders for an in behalf and for the benefit of the corporation,
Paraaque Rice Mill, Inc. and the other stockholders who may desire to
join, plaintiffs-appellees,
vs.
TEODORICO B. SANTOS, ESTANISLAO MAYUGA, APOLONIO PASCUAL, and
BASILISA RODRIGUEZ,defendant-appellants.
DOCTRINE:
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
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.
FACTS:
Plaintiff and the defendant are all stockholders and member of the board of
directors (BoD) of the "Paraaque Rice Mill, Inc.," - a corporation organized for the
purpose of operating a rice mill in the municipality of Paraaque, Province of Rizal.
On September 6, 1932, a complaint was filed with the CFI of Rizal.
The complaint avers substantially the following:
(a) That the plaintiffs are stockholders and constitute the minority and the
defendants are also stockholders and constitute the majority of the board
of directors of the Paraaque Rice Mill, Inc.;
(b) that at an extraordinary meeting held on February 21, 1932, the stockholders
appointed an investigation committee of which the plaintiff Jose de Lara was
chairman and the stockholders Dionisio Tomas and Aguedo Bernabe were members,
to investigate and determine the properties, operations, and losses of the
corporation as shown in the auditor's report corresponding to the year 1931, but
the defendants, particularly Teodorico B. Santos, who was the president of
the corporation, denied access to the properties, books and record of the
corporation which were in their possession
(c) That the defendant Teodorico B. Santos, in violation of the by-laws of
the corporation, had taken possession of the books, vouchers, and
corporate records as well as of the funds and income of the Paraaque

Rice Mill, Inc., all of which, according to the by-laws, should be under the exclusive
control and possession of the secretary-treasurer, the plaintiff Aguedo Bernabe;
(d) That the said Teodorico B. Santos, had appropriated to his own benefit
properties, funds, and income of the corporation in the sum of P10K.
(e) that Teodoro B. Santos, for the purpose of illegally controlling the
affairs of the corporation, refuse to sign and issue the corresponding
certificate of stock for the 600 fully paid-up share of the plaintiff, Higinio
Angeles, of the total value of P15,000;
( f ) that notwithstanding written requests made in conformity with the by-laws of
the corporation of 3 members of the BoD who are holders of more than 1/3 of the
subscribed capital stock of the corporation, the defendant Teodorico B. Santos as
president of the corporation refuse to call a meeting of the board of
directors and of the stockholders;
(g) that in violation of the by-laws of the corporation, the defendant who
constitute the majority of the board of directors refused to hold ordinary
monthly meetings of the board since March, 1932;
(h) that Teodorico B. Santos as president of the corporation, in connivance
with his co-defendants, was disposing of the properties and records of the
corporation without authority from the board of directors or the
stockholders of the corporation and without making any report of his
acts and that, to prevent any interference with or examination of his arbitrary
acts, he arbitrarily suspended plaintiff Jose de Lara from the office of
general manager to which office the latter had been lawfully elected by
the stockholders;
(i) that the corporation had gained about P4K during the first half of the year 1932,
but that because of the illegal and arbitrary acts of the defendants not only the
funds but also the books and records of the corporation are in danger of
disappearing.
The complaint likewise prays:
(a) Melchor de Lara be appointed receiver of the properties, funds and
business of the Paraaque Rice Mill, Inc., as well as the books and record
thereof, with authority to continue the business of the corporation;
(b) Teodorico B. Santos be ordered to render a detailed accounting of the properties,
funds and income of the corporation from the year 1927 to date;
(c) Defendant be required to pay to the corporation the amount of P10K and other
amounts which may be found due to the said corporation as damages or for my
other cause,
(d) Defendant be ordered to sign the certificate of stock subscribed to and paid by
the plaintiff Higinio Angeles; and
(e) Members of the BoD of the Paraaque Rice Mill, Inc., be removed and
an extraordinary meeting of the stockholders called for the purpose of
electing a new board of directors.
The court issued an ex parte order of receivership appointing Melchor de
Lara as receiver of the corporation upon the filing of a bond of P1K by the plaintiffs.
The bond of the receiver was fixed at P4K.
Upon an urgent motion of the defendants setting forth the reasons why
Melchor de Lara should NOT have been appointed receiver, the trial court
appointed Benigno Agco, as receiver, in lieu of Melchor de Lara. However,

the court, after considering the memoranda filed by both parties revoked its order
appointing Agco as receiver a month after.
On July 12, 1933, the defendants presented their amended answer to the
complaint, containing a general and specific denial, and alleging as special defense
that the defendant Teodorico B. Santos refused to sign the certificate of stock in
favor of the plaintiff Higinio Angeles for 600 shares valued at P15 because the board
of directors decided to give Higinio Angeles only 320 shares of stock worth P8K.
A cross-complaint was filed against the plaintiffs based on the alleged failure
of Higinio Angeles to render a report of his administration of the corporation from
February 14 to June 30, 1928, during which time the corporation is alleged to have
accrued earnings of approximately P3K. In both the counter claim and crosscomplaint Paraaque Rice Mill, Inc. is joined as party defendant.
The plaintiffs renewed their petition for the appointment of a receiver
pendente lite alleging, among other things, that defendant Teodorico B. Santos was
using the funds of the corporation for purely personal ends; that said Teodorico B.
Santos was managing to the interest of the Corporation and its stockholders; that
said defendant did not render any account of his management or for the condition
of the business of the corporation; that since 1932 said defendant called no
meeting of the board of directors or of the stockholders thus enabling him to
continue holding, without any election, the position of present and, finally, that of
manager; and that, without the knowledge and consent of the stockholders and of
the board of directors, the said defendant installed a small rice mill for converting
rice husk into "tiqui-tiqui", the income of which was never turned over or reported
to the treasurer of the corporation.
The defendants objected to the petition for the appointment of a receiver
OTG that the court had no jurisdiction over the Paraaque Rice Mill, Inc., because it
had not been included as party defendant in this case and that, therefore the court
could not properly appoint a receiver of the corporation pendente lite.
On October 31, 1934, the trial court appointed Emilio Figueroa, as receiver of
the corporation, after giving a bond in the amount of P2K. An urgent for the
reconsideration of this order was subsequently filed by counsel for the defendant
but was later on denied by the court.
On November 8, 1934, the trial court, having heard the case on its merits
rendered a decision, the dispositive part of which is as follows: (text in Spanish but I
read it in line with the defendants assignment of errors na lang to understand)
Trial Court (TC) appointed a receiver of the corporation "Paraaque Rice Mill,
Inc.," on October 31, 1934.
Paraaque Rice Mill, Inc. is not a necessary party to the case.
TC ordered the defendant Teodorico B. Santos to pay the corporation
whatever sum or sums which may be found owing to said corporation, in
accordance with the said accounting to be one by him.
TC ordered the removal of the defendants from their office as members of the
board of directors of the corporation.
Higino Angeles is entitled to have in his name 600 shares of stock of the par
value of P15,000.
On November 21, 1934, the defendants-appellants, moved for
reconsideration of the decision and at the same time prayed for the dismissal of the
case, because of defect of parties defendant.
On December 6, 1934, the Paraaque Rice Mill, Inc., thru counsel for the
defendants, entered a special appearance for the sole purpose of objecting to the

order of the court of October 31, 1934, appointing a receiver, on the ground that the
Paraaque Rice Mill, Inc., was not a party to the proceedings.
On December 8, 1934, the defendants excepted to the decision of the trial
court and moved for a new trial on the ground that the evidence presented was
insufficient to justify the decision and that said decision was contrary to law. The
motions for reconsideration and new trial and the special appearance were, by
separate orders bearing date of December 19, 1934, denied by the trial court.
Case was elevated to the SC by bill of exceptions.
Defendants contentions: (in case Sir asks)
1. The lower court erred in holding that it has jurisdiction to appoint a
receiver of the corporation, "Paraaque Rice Mill, Inc.," on October 31, 1934.
2. The lower court erred in overruling the motion of the defendants the
include the defendant corporation as party defendant and in holding that it is
not a necessary party.
3. The lower court erred in not granting a motion for a new trial because
there is a defect of party defendant.
4. The lower court erred in not dismissing the case because a necessary
defendant was not made a party in the case.
5. The lower court erred in ordering the defendant Teodorico B. Santos to
render a detailed accounting of the properties, funds and income of the
corporation "Paraaque Rice Mill, Inc.," from the year 1931 to this date.
6. The lower court erred in condemning the defendant Teodorico B. Santos to
pay the corporation whatever sum or sums which may be found owing to said
corporation, in accordance with the said accounting to be one by him.
7. The lower court erred in ordering the destitution of the defendants from
their office as members of the board of directors of the corporation, until the
new election of the stockholders which shall be held once the decision has
become final.
8. The lower court erred in declaring that Higino Angeles is entitled to have in
his name 600 shares of stock of the par value of P15,000.
9. The lower court erred in overruling and denying appellants' motion for the
reconsideration and the dismissal of the case dated November 21, 1934.
10. The lower court erred in denying the motion of these appellants for new
trial.
ISSUES: (in relation to removal of directors Sec. 28)
W/N the lower court has jurisdiction in appointing a receiver of the
corporation pendente lite?
W/N lower court erred in ordering the removal of the defendants from their
offices as members of the board of directors of the corporation.
HELD:
*First, second, third and fourth assignment of error: OVERRULED
*Fifth and sixth assignment of error: MODIFIED. The decision of the lower court in
this respect is therefore modified so that the defendant Santos shall render a
complete accounting of all the corporate properties and funds that may have come
to his possession during the period mentioned in the judgment of the lower court to
the new board of director to be elected by the stockholders.
*Seventh assignment of error: SUSTAINED.

*Eighth assignment of error: No error in the decision of the lower court ordering the
issuance of a certificate for 600 shares of stock of the total par value of P15,000 to
Higinio Angeles.
*Ninth and tenth assignment of error: UNNECESSARY to discuss accdg to SC.
RATIO:
1. YES. There is ample evidence in the present case to show that the defendants
have been guilty of breach of trust as directors of the corporation and the lower
court so found. The board of directors of a corporation is a creation of the
stockholders and controls and directs the affairs of the corporation by allegation of
the stockholders. But the board of directors, or the majority thereof, in drawing to
themselves the power of the corporation, occupies a position of trusteeship in
relation to the minority of the stock in the sense that the board should exercise
good faith, care and diligence in the administration of the affairs of the corporation
and should protect not only the interest of the majority but also those of the
minority of the stock.
Where a majority of the board of directors wastes or dissipates the funds of
the corporation or fraudulently disposes of its properties, or performs ultra vires
acts, the court, in the exercise of its equity jurisdiction, and upon showing that intracorporate remedy is unavailing, will entertain a suit filed by the minority members
of the board of directors, for and in behalf of the corporation, to prevent waste and
dissipation and the commission of illegal acts and otherwise redress the injuries of
the minority stockholders against the wrongdoing of the majority. The action in such
a case is said to be brought derivatively in behalf of the corporation to protect the
rights of the minority stockholders thereof.
(Everett vs. Asia Banking)
GEN RULE: Shareholders cannot ordinarily sue in equity to redress wrong
done to the corporation, but that the action must be brought by the board of
directors.
EXCEPTION: However, if the defendants in a case constitute the majority of
the BoD and that the plaintiff is under the complete control of the
former/principal defendants, it is obvious that a demand upon the BoD to
institute action and prosecute the same effectively would have been useless,
and the law does not require litigants to perform useless acts.
The action having been properly brought and by the lower court entertained
it was within its power, upon proper showing, to appoint a receiver of the
corporation pendente lite (secs. 173, 174 Code of Civil Procedure). The
appointment of a receiver upon application of the minority stockholders is power to
be exercised with great caution. But this does not mean that right of the minority
stockholders may be entirely disregarded, and where the necessity has arisen, the
appointment of a receiver for a corporation is a matter resting largely in the sound
discretion of the trial court.
Counsel for appellants argue that the appointment of a receiver pendente lite
in the present case has deprived the corporation, Paraaque Rice Mill, Inc., of
property without due process of law. This arguments holds no water since the
receiver was precisely appointed to preserve the properties of the corporation. The
receivership in this case shall continue until a new board of directors shall have
been elected and the corporation.

2. YES. The appellants contend (7th assignment of error) that the lower court erred
in ordering the removal of the defendants from their offices as members of the
board of directors of the corporation. Error sustained.
The Corporation Law, (Act. No. 1459 Corp Law at this time), in section 29 to 34,
provide for the election and removal of the directors of a corporation. These
sections do not confer expressly upon the court the power to remove a
director of a corporation. In some jurisdictions, statutes expressly provide a
more or less summary method for the confirmation of the election and for the
motion of the directors of a corporation. This is true in New York, New Jersey,
Virginia and other states of the American Union. There are abundant authorities,
however, which hold that if the court has acquired jurisdiction to appoint a
receiver because of the mismanagement of directors, these directors may
thereafter be removed and others appointed in their place by the court in
the exercise of its equity jurisdiction.
In the present case, however, the properties and assets of the corporation being
amply protected by the appointment of a receiver and view of the statutory
provisions above referred to, the Court is of the opinion that the removal of the
directors is, under the circumstances, unnecessary and unwarranted.
DISPOSITIVE PORTION:
(1) That the action in the present case was properly instituted by the plaintiff as
stockholders for and in behalf of the corporation Paraaque Rice Mill, Inc., and other
stockholders of the said corporation;
(2) That the lower court committed no reviewable error in appointing a receiver of
the corporation pendente lite;
(3) That the lower court committed no error in ordering an election of the new board
of directors, which election shall be held within thirty days from the date this
decision becomes final;
(4) That Teodorico B. Santos shall render an accounting of all the properties, funds
and income of the corporation which may have come into his possession to the new
board of directors;
(5) That the receiver, Emilio Figueroa, shall continue in office until the election and
qualification of the members of the new board of directors;
(6) That upon the constitution of the new board of directors, the said receiver shall
turn over all the properties of the corporation in his possession to the corporation,
or such person or persons as may be duly authorized by it; and.
(7) That Higinio Angeles, or his successor in interest, is entitled to 600 shares of
stock at the par value of P15,000 and the lower court committed no error in
ordering the issuance of the corresponding certificate of stock.

Campbell v. Leows Incorporated

Campbell vs leows incorporated
Plaintiff = Campbell
respondent = loews inc
DOCTRINE: a director sought to be removed for a cause is entitled to an opportunity
to be heard before the stockholders vote.
Stockholders have the power to vote for the removal of a director.

NATURE: decision on plaintiffs request for a preliminary injunction to restrain the

holding of a stockholders meeting from considering certain matters or to prevent
the voting of certain proxies.
NOTE: number 8-14 ung related sa directors since eto ung topic sa campos.
FACTS: two factions have been fighting for leows control. One faction is lead by
joseph Tomlinson (Tomlinson faction) and the other is headed by leows president,
Joseph Vogel (Vogel faction).
At the annual meeting in February, each factions nominated 6 directors and they
nominated a 13th director or a neutral director. July 17-18, 2 out of 6 Vorgel
directors and the 13th director resigned. A quorum is seven.
On the 19th of July, Tomlinson faction asked that a meeting be called for July 30 to
address the problem of filling director vacancies. On the eve of this meeting, one of
Tomlinson director resigned. This left 5 tomlinson director and 4 vogel directors.
Only the 5 tomlinson director attended the meeting. The court ruled in Tomlinson vs
leows inc that the election of 2 directors attended by 5 tomlinson directors was not
valid for want of quorum.
ON july 29, the day before the noticed directors meeting, vogel as president sent
out a notice calling a stockholders meeting for September 12 for the following
purposes:
1. To fill director vacancies
2. To amend by-laws to increase the number of the board from 13-19; to increase
the quorum from 7-10 and to elect six additional directors
3.
To remove Stanley Meyer and Joseph Tomlinson as directors and fill such
vacancies.
Later, another notice for September 12 was sent as well as a proxy statement went
out over the signature of Joseph R. Vogel as president. It was accompanied by a
letter from Vogel soliciting stockholder support for the matters abovementioned.
Thereafter, plaintiff began this action.
Plaintiff contentions:
1)
Plaintiff contends that president had not authority in fact to call a special
meeting of stockholders to act upon policy matters which have not been defined by
the board of directors
ANSWER: bylaws: Sec 7 of Article I provides: special meetings of the stockholders
for any purpose other than those regulated by statute, may be called by the
president. Even though Sec 8(11) of Article 2 provides that a board may call a
special meeting of stockholders for any purpose, still according to the by-laws of
leows, president has the power to state these broad purposes in his call.
2) Plaintiff argues that if this by-law purports to give the president the power to
call special stockholders meetings for the purposes here stated, then it is contrary
to 8 DEL. C. S 141 (a) which provides:
the business of every corporation organized under the provision of this chapter
shall be managed by a board of directors except as hereinafter or in its certificate of
incorporation otherwise provided.
ANSWER: the call of stockholders meeting for the purposes mention would not
impinge upon the power given the directors by the statute. A by law giving the
president the power to submit matters for stockholder action presumably only
embraced matters which are appropriate for stockholder action.

3) Plaintiff contends that president has no authority, without board approval to

propose an amendment of the by-laws to enlarge the BODs.
ANSWER: the by-law of section 7 which is broad covers this action; hence the
president has the power to do so.
4) Plaintiff contends that the president had no power to call stockholders meeting
to fill vacancies on the board.
ANSWER: first of all, the by-laws permit the president to call a meeting for any
purpose and therefore include the power to call a meeting to fill vacancies. The fact
that the stockholders may on their initiative have the right to call a meeting for that
purpose does not seem to be a sufficient reason for implying that the president is
thereby deprived of such power.
(note: ART V S 2 of the bylaws provide the power of the stockholders to fill
vacancies)
5) Plaintiff contends that the presidents action in calling a stockholders meeting
to fill vacancies was unlawful because it was in conflict with the previously
scheduled action by the board on the same subject. (note: diba sabi sa facts
nagschedule na ng meeting ung isang faction, tapos later si president nag send ng
notice of meeting)
ANS: the proxy statement sent out by the president states that the stockholders
would ONLY fill the two vacancies, IF their election by the board was held to be
INVALID. (eh invalid ung meeting nung TOMLINSON FACTION kasi want of quorum
hence, the issue is moot)
6) Plaintiff contends that the president had no power to fix the record date for
voting purposes.
ANSWER: president had the power to call the meeting for the purpose noticed
because it turned out that the executive committee fixed the record date and
PLAINTIFFs counsel did not attack the action of the executive committee, in effect,
plaintiff abandoned this contention.
7) Plaintiff argues that since Loews by-laws provide that the stockholders may fill
vacancies, and since the courts have construed vacancy not to embrace newly
created directorships, the attempt call by the president for the purpose of filing
newly created directorships was invalid.
ANSWER: according to jurisprudence, stockholders of have the right between annual
meetings to elect directors to fill newly created directorships, hence the action of
the president is valid.
8) Plaintiff argues that the stockholders of a Delaware Corporation have no power
to remove directors from office even for cause and thus the call for that purpose is
invalid.
ANSWER: stockholders have the power to remove a director for a cause. This power
must be implied when we consider that the director who is guilty of the worst sort of
violation of his duty could nevertheless remain on the board. It is hardly to be
believed that a director who is disclosing corporations trade secrets to a competitor
would be immune from removal by the stockholders. PLAINTIFF correctly states that
there is no provision in our law providing for the removal of directors by stockholder
action. Plaintiff also notes that the Loews by-laws provide for the removal of officers
and employees but not directors. But the court considered it pertinent to consider
whether the absence of the power can be said to subject the corporation to the
possibility of real damage. Considering the damage a director might be able to
inflict upon his corporation, the court believed that the doubt must be resolved by
construing the statutes and by-laws as leaving untouched the question of director

removal for cause. the court is to conclude on reason that the stockholders have
such inherent power. The stockholders do have the power to remove directors for
cause.
9) Plaintiff argues that the removal of Tomlinson and Meyer as directors would
violate the right of minority shareholder to representation on the board and would
be contrary to the policy of the Delaware regarding cumulative voting.
ANSWER: stockholders have the power to remove a director for cause even where
there is a provision for cumulative voting. To remove such power would open the
corporation for real damage because directors are now open to fraudulent
transactions and stockholders cannot remove them for any cause.
10)
Plaintiff contends that the stockholders can vote to remove a director for
cause only after such director has been given adequate notice of charges of grave
impropriety and afforded an opportunity to be heard. Defendant contends that a
stockholder has no standing to make the contention that the foregoing
requirements have not been met.
ANSWER: a stockholder has standing for such. Otherwise a director could be
removed and his successor could be appointed and participate in important board
action before the illegality of the removal was judicial established. Court conclude
that the plaintiff can raise the issue as to the propriety of the removal procedure.
11) Plaintiff contention that there must be notice of charges as mentioned above
in number 10.
ANSWER: yes, the court agrees with plaintiff that the power of removal cannot be
exercised in an arbitrary manner.
12)
Plaintiff asserts that no specific charges have been served upon the two
directors sought to be ousted; notice of special meeting fails to contain a specific
statement of the charges; the proxy statement which accompanied the notice also
failed to notify the stockholders of the specific charges; and that it does not inform
the stockholders that the accused must be afforded an opportunity to meet the
accusations before a vote is taken.
ANSWER: the proxy statement specifically recites that the two directors are sought
to be removed for the reasons stated in the presidents accompanying letter. The
court said that the accompanying letter was sufficient compliance with the notice
requirement.
13) Plaintiff contends that the charges against the two directors do not constitute
cause as a matter of law.
ANSWER: court first narrated the presidents letter. (Tomlinson and meyer failed to
cooperate with Vogel in his announced program for rebuilding the company; that
their purpose has been to put themselves in control; that they made baseless
accusations against him and other management personnel; and immediately
proceeded upon a planned scheme of harrament; they were rude to the personnel;
Tomlinson sent daily letters to the directors making serious charges directly)
Eto na sagot : a charge that the directors desired to take over control of the
corporation is not a reason for their ouster. However, a charge in calculated plan of
harassment to the detriment of corporation is a valid cause. In so concluding, the
court expresses no opinion as to the truth of the charges. Therefore, a planned
scheme of harassment as detailed in the letter constitutes a justifiable legal basis
for removing a director.
14) Next issue to consider : whether the directors sought to be removed have
been given a reasonable opportunity to be heard by the stockholders on the
charges made

ANSWER: NO, defendant corporation flatly refused to give Tomlinson director of a

stockholders list. By this action, the corporation through the Vogel group has
deliberately refused to afford the directors in question an adequate opportunity to
be heard by the stockholders on the charges made. This is contrary to the legal
requirements which must be met before a director can be removed for a cause.
Also, only the Vogel accusations accompanied the request for a proxy, thus while
the stockholder could for or against removal, he would be voting with only one
viewpoint presented. In sum, an opportunity must be provided such directors to
present their defense to the stockholders by a statement which must accompany or
precede the initial solicitation of proxies seeking authority to vote for the removal of
such director for cause. corporation has a duty to see that this opportunity was
given the two directors involved.
Therefore, proxy solicited by the Vogel group based upon unilateral presentation of
the facts by those in control of the corporate facilities, must be declared invalid
insofar as they purport to give authority to vote for the removal of the directors for
cause.
A preliminary injunction will issue restraining the corporation from recognizing or
counting any proxies held by the VOGEL group and others insofar as such proxies
purport to grant authority to vote for the removal of Tomlinson and Meyer as
directors of the corporation.

De la Rama v. Ma-Ao Sugar Central - Jez Zapanta

Doctrine: 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.
Facts:
This was a representative or derivative suit commenced on October 20, 1953, in the
Court of First Instance of Manila by four minority stockholders against the Ma-ao
Sugar Central Co., Inc. and J. Amado Araneta and three other directors of the
corporation.
The complaint stated five causes of action, to wit: (1) for alleged illegal and ultravires 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.
Plaintiff-Appellants alleged that Ma-ao Sugar Central, through its President
(Araneta), subscribed for Php 300,000 worth of capital stock of the Philippine Fiber
Processing Co.
that payments on the subscription were made on September 20, 1950, for
P150,000.00, on April 30, 1951, for P50,000.00, and on March 6, 1952, for
P100,000.00; that at the time the first two payments were made there was no board
resolution authorizing the investment
it was only on November 26, 1951, that the President of Ma-ao Sugar Central
Co., Inc., was so authorized by the Board of Directors.
- It was also alleged that 355,000 shares of stock of Philippine Fiber, owned by
Luzon Industrial, were transferred to Ma-ao without prior board resolution in May
31, 1952. Such transfer however was subsequently approved on June 4, 1952

The lower court held that the investment of corporate funds was not a violation
of the Corporation Law. It considered the defendants correct in contending that
since the company was engaged in the manufacture of sugar bags it was
legitimate for Ma-ao to either manufacture sugar bags or invest in another
corporation engaged in said manufacture.
Stating in part of their decision that while Sec. 17-1/2 of the Corporation Law
provides that:
No corporation organized under this act shall invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it
was organized unless 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 proposal at the
stockholders' meeting called for the purpose.
the Court is convinced that that law should be understood to mean that it is
prohibited to the Corporation to invest in shares of another corporation unless such
an investment is authorized by two-thirds of the voting power of the stockholders, if
the purpose of the corporation in which investment is made is foreign to the
purpose of the investing corporation because surely 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; ; the only trouble here is that the investment was made without any
previous authority of the Board of Directors but was only ratified afterwards; this of
course would have the effect of legalizing the unauthorized act but it is an
indication of the manner in which corporate business is transacted by the Ma-ao
Sugar administration, the fact that off and on, there would be passed by the Board
of Directors, resolutions ratifying all acts previously done by the management, e.g.
resolutions passed on February 25, 1947, and February 25, 1952, by the Board of
Directors
The lower court dismissed the petition for dissolution but condemns Amando
Araneta to pay onto Ma-Ao Sugar Central Co ., Inc P46,270.00 with 8% interest from
the date of the filing of this complaint, plus the costs. Making permanent the
preliminary injunction restraining Ma-Ao Sugar Central Co ., Inc management from
giving out loans and advances to its officers and also and orders it to refrain from
making investments in Acoje Mining, Mabuhay Printing, and any other company
whose purpose is not connected with the Sugar Central business.
Both parties appealed directly to the Supreme Court.
- Issue: Whether the investment of the corporate funds by Ma-ao in Philippine
Fiber constitutes a violation of the Corporation Law.
Held: No, The SC agrees with the finding of the Lower Court that the investment in
question does not fall under the purview of Sec. 17- of the Corporation Law.
Plaintiffs-appellants contend that even assuming, arguendo, that the said Board
Resolutions are valid, the transaction, is still wanting in legality, no resolution
having been approved by the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the voting power, as
required in Sec. 17- of the Corporation Law.
Defendant-Appellees on the other hand, invoked Sec. 13, par. 10 of the Corporation
Law, which provides:
SEC. 13. Every corporation has the power:

(9) To enter into any obligation or contract essential to the proper

administration of its corporate affairs or necessary for the proper
transaction of the business or accomplishment of the purpose for which the
corporation was organized;
(10) Except as in this section otherwise provided, and in order to accomplish its
purpose as stated in the articles of incorporation, to acquire, hold, mortgage,
pledge or dispose of shares, bonds, securities and other evidences of indebtedness
of any domestic or foreign corporation.
To reconcile the provisions, the SC Quoted Professor Sulpico Guevarra in his book:
j. Power to acquire or dispose of shares or securities 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.
40. 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. When the investment is necessary to accomplish its purpose or
purposes as stated in it articles of incorporation, the approval of the stockholders is
not necessary
The portion "to refrain from making investments in Acoje Mining, Mabuhay
Printing and any other company whose purpose is not connected with the sugar
central business." Should be reversed because, Sec. 17- of the Corporation Law
allows a corporation to "invest its fund 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. All
other parts, affirmed.
Gokongwei v. SEC - Ali Zapata (consolidated w/ Nikki's digest)
In re Giant Portland Cement Co. - J.r.
DOCTRINE: IN THE ELECTION OF DIRECTORS, VOTES MADE BY A PROXY OF THE
RECORD OWNER USING STOCK SOLD WITHIN 20 DAYS OF THE ELECTION IS VALID;
PROVIDED IT IS NOT INJURIOUS TO THE TRANSFEREE OF STOCK
FACTS:

The case stems from the results of an Election for the Board of Directors of
the Giant Portland Cement Co. held in February 24, 1941


Nine Directors of the Corporation were to be elected, and two tickets were
nominated: The Management and The Opposition. However, four persons were
nominated on both tickets resulting in their unquestionable election.

The Election resulted with the 4 nominees on both tickets and the 5 nominees
from The Opposition being elected.

Petitioners Brown and Murray question the results of the Election, filling a
case in the Court of Chancery of Delaware

Petitioners contend that the election inspectors were incorrect in counting

certain votes for The Opposition

The contention is based on these facts:

o In February 4, 1941 (20 days prior to the Election), in a resolution, the
Board of Directors closed the Stock Transfer Books of the Corporation
o In Sec. 17 of the General Corporation Law, it states:
(1) each stockholder, shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital
stock
(2) except where the transfer books of the corporation shall
have been closed or a date shall have been fixed as a record date for
the determination of its stockholders entitled to vote xxx no share of
stock shall be voted on at any election for directors which shall
have been transferred on the books of the corporation within
twenty days next preceding such election of directors
(4) only such stockholders, as shall be stockholders of record on
the date so fixed, shall be entitled to xxx vote at such meeting
o Section 17 was also incorporated in the by-laws of the Corporation
o
During this period, no stock was transferred on the corporate
records.
o However, certain shares were sold by the record owners and the
stock certificates were duly assigned and delivered to the purchasers prior to
the stockholders meeting.
o The record owners who sold their shares assigned proxies to vote based
on shares they already sold
o Of the shares sold within the 20 day period, 5,472 were voted in favor of
The Opposition while 1,384 shares were voted for The Management. In
essence, if these votes are not counted it may affect the result of the
election in favor of The Management
ISSUE: W/N certain votes for The Opposition should not be counted
HELD: NO

In accordance with the first and second paragraph of Section 17, stock
transferred on the books within 20 days prior to stockholders meeting for the
election of directors are temporarily disfranchised and cannot be voted either by
the transferor or the transferee

However, based on the fourth paragraph of Section 17, the stockholders of

record on the date fixed are the ones entitled to vote

The proxies who voted at the stockholders meeting were proxies assigned by
the record owners, and NOT the purchasers

As between the transferor (record owner) and the transferee (purchaser), the
legal title of the stock is with the transferee.


However, in relation to the corporation, until such transfer of stock is
recorded, the recognized owner is the one on record.

The votes of the proxy assigned by the record owners are, therefore, valid in
the elections.

It is true that the record owner/transferor would be liable to the

purchaser/transferee if the votes were injurious to the latter. However, no evidence
was presented that showed the purchasers of the stock objected to the votes made
by the proxies of the record owners. In fact, evidence was presented wherein the
votes casted by the proxies were in accordance with the wishes of the purchasers.

In any case, absent evidence, consent is presumed.

State ex. Rel. Everett Trust & Savings Bank v. Pacific Waxed Paper Co., et al - Klaire
Esden
DOCTRINE:
The general rule is that a proxy is revocable even though by its express terms it is
irrevocable. The exceptions are: (a) when authority is coupled with interest; (b)
where authority is given as part of a security and is necessary to effectuate such a
security. It is coupled with interest when there is interest in the share themselves
(such as a right of first refusal in case of sale) and the rights inherent in the shares
(such as voting rights; capacity to obtain majority)
When a corporation is dissolved by its voluntary acts, the corporation remains
bound by its outstanding executory contracts.
FACTS:
- Alvah H.B. Jordan (Jordan) was the owner of all the capital stock of Paine Mitchell
Co and ONE preferred share of Pacific Wax Paper Company
- Engle was was the owner of preferred and common stocks of Pacific Waxed Paper
Co, all stocks have voting power.
- On July 20, 1931 Paine Mitchell owned common stock of Pacific Waxed such that
the combined shares of Engle and Paine Mitchell in the company were more than
majority of all the issued stocks.
- Along with this,Engle and Paine Mitchell entered into an agreement of first refusal
in case one would decide to sell his share. " The other party had the exclusive right
and option to purchase the stock proposed to be sold for the price and upon the
terms and conditions stated in the notice"
- Other than this, Engle and Jordan (as owners) entered into an agreement (March
24, 1932) which had the ff. conditions:
1) Continued cooperation between the companies for its efficiency even after the
death of Engle or Jordan
2) In case of Engle's death, and if Paine Mitchell still owns stocks of Pacific Waxed,
Paine Mitchell should be entitled to vote in behalf of Engle's shares at ALL meetings
of stockholders of Pacific Waxed Company
3) Paine Mitchell will then be an irrevocable proxy of Engle's heirs and legal
representatives.
4) It was provided that in the event of Jordan's death, the same method shall apply.
- Unfortunately, Jordan died first, testate. He named Everett Trust and Savings Bank
as his executor

- Everett cause the voluntary dissolution of Paine Mitchell and as a result, the stock
owned it in Pacific Waxed was transferred to Everett (as executor)
- Everett (as executor) sought to vote for the transfer of such shares in the
stockholder's meeting. Pacific Waxed did not recognize his right and upheld the
validity of the irrevocable proxy agreement in favor of Engle
ISSUE:
WON the irrevocable proxy agreement was valid?
HELD: YES. When a corporation is dissolved by its voluntary acts, the corporation
remains bound by its outstanding executory contracts.
General rule: Proxy given by a stockholder to vote his corporate stock at a meeting
of stockholders is revocable by him even though the proxy by its terms is expressly
made revocable
Exceptions:
A) Where the authority or power if coupled with an interest
- Engle has this. More than being an agent of Paine Mitchell, he has interest in its
share because it is linked with his voting power to control the affairs of Pacific
Waxed.
B) Where the authority is given as part of a security or is necessary to effectuate
such a security
It was clear was the agreement that the parties intended that Paine Mitchell stock
should be used in conjunction with Engle's stock so that policies of Pacific Waxed
could be controlled. The control of affairs of the corp was of such importance to
Engle that this merging of share made him more secure of his dominance in Pacific
Waxed

Alejandrino v. De Leon - Gab Uy

Alejandrino vs De Leon
Doctrine: a.The right of stockholder to vote his shares is incidental from his
ownership.The ownership of any kind of property goes with it the right to
manage and control it. If the owner can dispose of the property itself, he can
also dispose of the right to control and manage it. Hence, one can transfer
the right to vote(proxy)
Facts:
Petitioner Alejandrino and respondent de leon are candidates for a director position
in Pampanga sugar development co.,Inc (PASUDECO) . Petitioner received 14,305
votes while the nine respondents,including de leon, received 19,000 plus votes
each.
Petitioner,aside from the shares voted in his favor, held proxies given to him by 18
other stockholders representing an aggregate 6,094 shares.

Petitioner offered to register and vote said proxies but the chairman and secretary
refused to register and permit him to vote the said shares. Petitioner would have
received 20,300 votes had he been permitted.
Before the abovementioned facts happened:
PAMBUL is a financing corporation. It was organized pursuant to a resolution of
PASUDECO and all its stock is purchased by PASUDECO. These stocks were
distributed to stockholders of PASUDECO. With this, all the stockholders of
PASUDECO became stockholders of PAMBUL. The controlling stockholder of the
former became controlling stockholder of the latter.
Stockholders of PASUDECO are allowed to obtain ordinary loans from PAMBUL. For
security, PAMBUL requires shares of stock of PASUDECO and its voting rights. As an
inducement to the stockholders of PASUDECO to borrow money from it, PAMBUL
offers the most lenient terms and conditions.
For some years,only two families which own 30% of the outstanding capital stock
have monopolized the directorship and executive positions
Petitioner and respondents arguments:
Respondents contend that the said eighteen stockholders had previously executed
contracts of pledge in favor of Pambul Inc. (PAMBUL) The stipulation of such pledge
was the the pledger(stockholders) grants in favor of the President of the pledgee
the irrevocable right to vote(proxy) the shares in any meeting of PASUDECO.
Petitioner has three arguments. First,Petitioners contend that the pledge-proxy
clause abovementioned in favor of PAMBUL is void as contrary to good morals and
public policy.Second, They also aver that PAMBUL is an alter ego of PASUDECO and
its principal stockholder, De leon,and to allow the use of corporate fiction of
seperate entity will allow fraud against the stockholders of Pasudeco by allowing its
said principal stockolder to monopolize the directorship and perpetuate themselves
in office especially when the pledger stockolders wishes to vote because of any
corporate abuses. Third,Petitioner asserts that on account of the scheme, 2
families ,which own scarcely 30% of the capital stock of PASUDECO, have
monopolized the directorship through this loan- pledge-proxy scheme.
Issue
1.
whether the pledge with proxy is contrary to good morals and public policy
Held: No
2.
whether the peculiar circumstances of this case( getting proxies through lenient
and liberal loans) are contrary to public policy and ,therefore, void.
Held: No
3.
wether or not the transfer of the right to vote is contrary to public policy
Held: No
Ratio:
1.It is not contrary to public policy or morals due to a number of reasons.
a.The right of stockholder to vote his shares is incidental from his
ownership.The ownership of any kind of property goes with it the right to
manage and control it. If the owner can dispose of the property itself, he can
also dispose of the right to control and manage it.
b.Viewed from the perspective of the pledgee, he has the right to protect his
investment by exercising the right to vote the stock or to manage the
property delivered to him as security.
c.It is to be noted that, in the pledge contract, there is a power conferred to
sell the stock pledged in addition to the power to vote the said stock. Yet no

a.

b.
c.

d.

e.

criticism is voiced against the grant of more inclusive and onerous power to
the pledgee (the power to sell the stock).
d.Fletcher, an eminent author on Corporation law, said that a proxy is
generally irrevocable when it is with consideration and not contrary to public
policy.
2. The peculiar circumstances (getting proxies through liberal loans by the) are not
contrary to public policy for a number of reasons.
there is no showing that PAMBUL and PASUDECO ,in procuring said irrevocable
proxies, through liberal loans, intended to commit fraud against anybody or to
secure full control over PASUDECO in order to commit injustice ahgainst any
stockholder.
The desire and design of majority of the stockholders of a private corp. to control
its management is legitimate
The stockholders who own the majority of the stock may appoint themselves as
direcotors and form and carry into effect policies of management as freely as if the
business were their own as long as they act honestly and do not prejudice the
stockholders.
Petitioner asserts that on account of the scheme, 2 families which own scarcely
30% of the capital stock of PASUDECO have monopolized the directorship.
SC answered this by saying that,in the 1 st place, monopoly without allegation of
fraud is not actionable perse. They also said that stockholders owning scarcely 30%
of the outstanding stock of a copr cant secure its control without willingness or
support from the other stockholders. Assuming that the two families was able to
procure support because of the pledge-proxy sceme,petitioner would have to admit
that the PAMBUL was accomplished by vote of the majority of the capital stocks of
PASUDECO.
Since the stockholders of PAMBUL are also the stockholders of PASUDECO, PAMBUL
cant be said to be under the control of the two families because the two families do
not have majority shares or even voting proxies over PAMBUL. The stockholders of
PAMBUL are free to vote their stock and elect the directors that they want. The
B.O.D of PAMBUL can change the conditions of the contract of pledge.
Also, the alleged principal stockholder De leon owns only 20% shares of PASUDECO.
Assuming he controls PASUDECO through the voting proxies, he doesnt control
PAMBUL because she doesnt own majority of the shares nor has voting proxies over
it.
Nobody forced the stockholders to pledge and loan in the first place.
3. petitioners contend that the right to vote cant be transferred because it is sacred
and ,therefore, beyond the commerce of men. They aver that they sold their sacred
right to vote and that the power of majority in a corp goes unchecked because of
this.
The court held It is not. This is because the pledge wasnt for the exclusive private
Interest of the majority stockholders. It was made with consideration .
Campbell v. Leows Inc. - Eunice
NOTE: aaminin ko na hindi ko talaga siya maintindihan. hahaha hindi pa naman
pasok yung proxy topic sa page 477 so susubukan ko parin ayusin to. just in case
you want to see lang what the case is all about. sorry! aayusin ko pa, promise :)

SAME FACTS WITH JEROMES DIGEST, HOWEVER THIS EMPHASIZES ON A DIFFERENT

MATTER.
FACTS: relevant to PROXY TOPIC (number 14)
DOCTRINE:
Directors against whom proxies are solicited must be allowed to send a statement in
their defense with the proxy statement.
FACTS:
Vogel was President of Loews Inc, which was divided by two factions. Vigel called a
special meeting of shareholders for the purpose of enlarging the directorate and
ousting two directors from the rival faction, Tomlinson and Meyer. Vogel sent out a
proxy statement which accused the directors of various acts of misfeasance. The
directors were not offered the opportunity to include rebutting statements.
Campbell, a shareholder, brought an action seeking to enjoin the meeting.
ISSUE:
Must directors against whom proxies are solicited be allowed to send a statement in
their defense with the proxy statement?
HELD:
YES. Directors against whom proxies are solicited must be allowed to send a
statement in their defense with the proxy statement. While a director may seek
proxies pursuant to an effort to remove another director for cause, state regulations
require that the accused directors be permitted to present their case to the
stockholders. For this opportunity to be realistically afforded, the directors must be
provided the opportunity to present a statement which must accompany or precede
the initial proxy solicitation. This was not done in this instance, and therefore, the
proxy solicitation was invalid.
Proxy solicitation: a statement containing specified information by the SEC, in order
to provide shareholders with adequate information upon which to make an informed
decision regarding the solicitation of their proxies.

Rosenfield v. Fairchild Engine and Airplane Co. - Aiyu (SOBRANG SABOG NG CASE KO
AS IN, TRY KO NA LANG I-KWENTO BUKAS KUNG DI NYO GETS)
FACTS:
Rosenfeld = lawyer; owns 25 out of 2.3M shares of the the Fairchild Engine &
Airplane Corp.
Rosenfeld seeks to compel the return of $261,522 paid out of the money of
the corporation to reimburse both parties involved in a proxy contest, who
incurred respective expenses.
The policy question behind the proxy contest was the long-term and very
expensive pension contract of a former director, Carlton Ward.
lower court affirmed the judgment of the official referee that dismissed
appellant's complaint.
Lower court DISMISSED Rosenfelds complaint. Hence this appeal to Court of
Appeals of New York.
ISSUE: is the reimbursement made to expenses incurred in a proxy contest valid?
YES

HELD:
CA affirmed lower court
Appellees acted in good faith in a contest over policy, they had the right to
incur reasonable and proper expenses for the solicitation of proxies and in
defense of their corporate policies, and were not obliged to sit idly by.
Stockholders had the right to reimburse successful contestants for reasonable
and bona fide expenses incurred by them in any such policy contest, subject
to court scrutiny.
court noted that appellant did not argue that the funds were fraudulently
extracted from the corporation, but instead admitted that the charges were
fair and reasonable.
DESMOND, J. CONCURRING
VAN VOORHIS, J. - DISSENTING
Duffy v. Loft, Inc. - Vanessa
DOCTRINE: PROXY may refer to the person duly authorized by a stockholder to
vote in his behalf in a stockholders meeting. He is an agent for a special purpose
and thus, general rules on agency would normally apply.
Nature: Petition for a summary order for Election of Directors.
FACTS:
1.
The annual meeting of stockholders for the election of directors was regularly
called for March 19, 1930, and was attempted to be held on that date at the hour
specified in the call.
2.
Two principal factions were contesting for the control of the meeting: Miller
Faction v. Guth Faction
Miller Faction contends that the meeting resulted in NO ACTION recognizable as
legal. Alfred Miller, who claims to be president, admitted the allegations of the
petition that the stockholders had FAILED to elect directors.
Guth Faction proceedings of the meeting lawfully resulted in the election of a new
board of directors. Charles Guth, who ALSO claims as president, denies that the
stockholders failed to elect directors. He avers that the stockholders were duly
convened in meeting and duly elected a board of directors.
ISSUES and HELD: The was an election that took place.
1.
Whether the meeting which convened on March 19 was an invalid one
because Miller was NOT allowed to preside after the meeting was convened? NO!
(According to Miller, he had not yet called the meeting. He took the position that the
election of a chairman was not necessary and therefore all motions looking to such
election were out of order.)
It was not in the power of the president to PREVENT the meeting by refusing
or neglecting to formally announce its opening.
The right to preside imposes a LIMITATION on his (presidents) right.
The presence of the president ready and willing to preside CANNOT OUST
the stockholders of their right to choose a chairman on any such theory that the
presidents presence made such choice unnecessary, for the plain reason, that the
by-law proceeds expressly to say that stockholders may choose the president
himself as chairman, a thing which if done bespeaks his presence.
ABSENCE OF THE PRESIDENT IS NOT A PRE-REQUISITE TO THE RIGHT OF
THE STOCKHOLDERS TO ELECT.
A chairman was ELECTED.

2.
Whether or not a quorum was present for the transaction of business?
Whether or not 232, 840 shares for which the Miller committee held proxies can be
properly counted as present? (If yes = quorum; If No = no quorum)
Proxies for those shares ran in favour of Miller, Stevenson and/or Gray. They
are appointed as...
"true and lawful attorney or attorneys, agent or agents, and proxy or proxies of
the undersigned, with power of substitution, for, and in the name, place and stead
of the undersigned to attend the annual meeting of the stockholders * * * and then
and there to vote all steck held or owned by the undersigned * * * to represent and
to vote all shares of stock of the undersigned, according to the number of votes
which the undersigned would be entitled to cast if personally present. * * *"
Shares for which Mr. Miller and his associates held proxies were present.
The proxies were solicited on the theory that the shares represented by
them would be represented at the meeting and the agents designated to represent
them were in fact present having a great deal to say.
The absence or failure to show the written evidence of their authority, as
already stated, cannot destroy the fact of its existence.
The fact that they were not the owners but only the representatives of the owners
does not, under the circumstances shown, make any difference in the result. As
they had the power and did take their principals into the meeting, so they could not
take them out of the meeting, just as the principals could not have legally taken
themselves out if they had been personally present and had done what their
representatives did
Everett vs. The Asia Banking Corporation - Jon
(Note: Sabog yung case pero if ever you have questions, you can ask me
personally)
Plaintiff-Appellants: Harrie Everett, Cral Clifford, Ellis Teal, George Robinson
Stockholders of the Teal and Company
Note: Teal and Company Engaged in the business of merchandising of
automobiles, trucks, tractors, spare parts and accessories and the repairing thereof
Defendants-Appellees: Asia Banking Corporation; Nicholas E. Mullen, Eric Barclay,
Alfred Kelly, John Mears, Charles Macintosh Officers of Asia Banking Corporation
Nature: Appeal from a decision of the CFI sustaining a demurrer to the complaint
Facts:
In the year 1921, Teal and Company (TAC) has become indebted to the firm of H.W.
Peabody and Company in the sum of P300,000 for the tractors, plows and parts
which it has ordered and which have been delivered to it.
The Asia Banking Corporation (ABC) and other banks in Manila held drafts accepted
by TAC under said H.W. Peabody and Companys guarantee.

TAC made payments on its indebtedness through ABC to H.W. Peabody and
Company, amounting to the sum of at least P150,000.
TAC had ordered another lot of tractors from Smith, Kirkpatrick and Company but
that shipment of such tractors had been delayed until credit had been rescinded by
ABC and that upon such rescission Smith, Kirkpatrick and Co., had been advised by
telegraph that the order was cancelled and not to ship the tractors.
Regardless of having been advised, Smith Kirkpatrick and Co. still shipped the
tractors which were stored in a warehouse in Manila with the concurrence of ABC.
On March 1921, ABC persuaded TAC and H.W. Peabody and Co. and Smith,
Kirkpatrick and Co. to enter into a creditors agreement with itself, wherein it was
mutually agreed that neither of the parties should take action to collect its debts
from TAC for the term of two years after the date thereof.
On 29 December 1922, TAC was indebted to ABC in about the sum of P750000
which said sum was secured by a mortgage.
Toward the end of the year 1922, ABC, through its manager Mullen, represented to
TAC and its managers that:
* For the protection of both ABC and TAC, it was advisable for them both that
the ABC should temporarily obtain control of the management and affairs of
TAC in order that the affairs of TAC could be conducted by ABC without
interference or hindrance from outside
* It would be necessary for the stockholders in the Company to place their
shares in a Voting Trust to be held by ABC.
* ABC would then finance TAC under its own supervision on the condition that
if TAC would be successful and in a position to resume independently its
operation, the said trust would be terminated and the stocks returned to its
true owners.
* The stocks would also be returned if ABC would decide to discontinue its
operation under the said trust.
It was further represented by ABC and Mullen that in order to protect the mutual
interests of ABC and TAC, it was necessary to carry into effect the said proposed
voting trust without the knowledge of its creditors (H.W. Peabody and Company and
Smith, Kirkpatrick and Co.) and thereby place ABC in an advantageous position with
regard to TAC.
ABC and TAC signed the Memorandum of Agreement and the Voting Trust
Agreement
Shortly thereafter, Mullen caused and procured by the virtue of the powers
delegated in the said voting trust: (1) the displacement and removal from the Board
of Directors of TAC of each and every person who was at the time of the execution
of the said voting trust a stockholder in TAC and (2) the substitution thereto by the
defendants (Mullen, etc.) or of other employees of ABC.

On 18 August 1923, the defendants (Mullen, etc.) made, executed and filed in the
Bureau of Commerce and Industry of the Philippine Islands, articles of incorporation
of a corporation called the Philippine Motors Corporation
At the time of such incorporation, all of the defendants were an officer or employee
of ABC.
Subsequently, ABC turned over to the Philippine Motors Corporation all of the
business and assets of TAC.
Philippine Motors Corporation continued to conduct the business of TAC to the
disregard and detriment to the rights of plaintiffs (Everett, etc.)
ABC prevented the plaintiffs (Everett, etc.) from obtaining any information regarding
any transactions which it had performed with Philippine Motors Corporation and
TAC.
Because of the aforesaid circumstances, the plaintiffs filed a complaint:
a.
Enjoining and restraining the defendants and each of them from transferring
the corporation called Philippine Motors Corporation or any of the capital stock
therein to any person or corporation during the pendency of this action
b.
Ordering defendants to cancel the Voting trust and to return to these plantifss
their shares of stock of Teal and Company.
c.
Decreeing that the defendants and each of them make a full and true
discovery of all the facts in relation to the formation, incorporation and ownership of
Philippine Motors Corporation and all dealings and transactions between ABC and
the Philippine Motors Corporation for plaintiffs to know whether said Philippine
Motors Corporation is in fact ABC operating under a disguise.
To this complaint, the defendants filed a demurrer on the grounds that (1) it is
ambiguous, unintelligible and uncertain; (2) that the plaintiffs have not the legal
capacity to bring this action; (3) that the complaint does not state facts sufficient to
constitute a cause of action, and (4) that there is a defect or misjoinder of parties
defendant.
RTC: Sustained defendants demurrer; dismissed the case.
Issue: Whether the demurrer of the complaint is in order.
Held: No;
The complaint is a bill of discovery and the proceeding is primarily one for equitable
relief, though it may eventually develop into an action at law.
Invoking the well-known rule that shareholders cannot ordinarily sue in equity to
redress wrongs done to the corporation, but that action must be brought by the
Board of Directors, the defendants and the court below held- that TAC is a
necessary party plaintiff and that the plaintiff stockholders, not having made any
demand on the Board to bring the action, are not the proper parties.

BUT, it is alleged in the complaint and admitted through the demurrer that TAC is
under the complete control of the principal defendants and it would be obvious that
a demand upon the Board of Directors to institute an action and prosecute the same
effectively would have been useless.
Dispositive Portion: In our opinion, the plaintiffs state a good cause of action for
equitable relief and their complaint is not in any respect fatally defective. The
judgment of the court below is therefore reversed, the defendants demurrer is
overruled, and it is ordered that the return of the record to the Court within ten
days from the return of the records to the CFI. So ordered.
Mackin, et al v. Nicollet Hotel, Inc. - Kelsey
Mackin et al vs. Nicollet Hotel Inc., et al.
Doctrine: Stockholders may not impugn the validity of voting trust entered into by
the other stockholders especially when the said voting trust is purposeful and
advantageous to the corporations and is without fraud. They may also not impugn
when they have purchased trust agreements pursuant to voting trusts as they are
presumed have knowledge of the same when the trust was created.
Court below found for the defendants and the plaintiffs brought the cause through
an appeal.
Facts: Defendant Glen S. Dixon, was the owner of a leasehold interest in a tract of
land in Minneapolis which therein stood the Nicollet Hotel Inc. which was a Delaware
Corporation. It was organized at the instance of a group of men interested in the
commercial welfare of the city by adding to the hotel accommodation therein.
Arrangements were made to have Dixon take 2,500 shares of common stock for his
lease and to erect a new Nicollet Hotel upon his property. The cost of the hotel was
to be about $3M, to be raised by the sale of $1.8M of first mortgage bonds (on said
property) and $1,250,000 of preferred stock. On Feb, 1923, Minnesota Loan & Trust
Company, together with other trust companies in Minneapolis accepted the
application of defendant corp. for a loan of $1.8M to be secured by first mortgage
bonds and a trust deed covering the hotel property.
An Application to the State Securities Commission of Minnesota for a license to sell
its preferred and the commission issued said license to the corp subject to the
condition that the common stock be trusted. A voting trust was made with A.E.
Zonne, Glen Dixon and Joseph Chapman as voting trustees. Said trust recited the
following: Under the trust agreement, the trust shall continue for 10 years or until
all outstanding preferred stock shall be retired and if it shall not be retired before
the expiration of 10 years, the trust shall continue in 2-year periods and provided
further that the holders of trust certificates representing one-half of the common
stock may cause the expiration of the trust at the end of the ten-year or any twoyear period. The trustees are required to select themselves as directors and to reelect the incumbent board so long as they are suitable.
Mr. Dixon then executed the trust agreement and deposited 2,500 of his shares of
common stock while Haglin & Sons Company and Holabird & Roach, the other
common stockholders, likewise executed the agreement and deposited 1,600 and

400 of their shares, respectively. Accumulated, was the common stock of the org.
The trust deed securing the $1.8M of bonds was delivered and the money pain to
the corp.
Plaintiffs Mackin and Cooper are the owners of trust certificates representing 80 and
1,520 shares, respectively of the common stock held by the defendant trustees.
They claim that the voting trust is void because it denies them their right as
common stockholders because they do not approve of the management and they
ask the court to declare the agreement void and to appoint a receiver until they and
the rest of the beneficial owners of the common stock can organize and elect a
board of directors of their own to take over and manage the hotel property.
Issue: WON the voting trust was valid whereby the stockholders of the no par value
common stock of the hotel agreed that said stock should be voted by 3 designated
trustees for at least a period of ten years.
Held: No statute on voting trusts can be found among the laws of Delaware of
Minnesota at the time the herein transactions were made nor when the plaintiffs
bill of complaint was filed but Delaware subsequent to the commencement of this
suit passed a law authorizing voting agreements. However, legislation must be
considered as addressed to the future and not the past.
Numerous cases were cited by the SC and they all sustain the conclusion that voting
trust agreements are not illegal per se. In the case at bar, there is no want of
consideration or fraud alleged or shown. The voting power in the three trustees is
coupled with an interest because one of the trustees is a substantial owner of
common stock of the corporation, and all are charged with the duty of protecting
and conserving the property for the benefit of those who became purchasers of
preferred stock and bonds upon the strength of the trust agreement itself. And the
purpose of the agreement was and is legitimate and wholesome. The plan was
originally conceived as a matter of civic pride by enterprising citizens of Minneapolis
to have an outstanding hostelry commensurate with the generally progressive
character of the city. To make this possible, it involved the matter of inviting
combinations of capital in substantial amounts. This feature of adequate financing
was covered by the trust agreement controlling the voting power of the common
stock over a period of years under certain circumstances and conditions, and the
securities and stock were sold to the public upon the basis of this representation. It
would be a manifest injustice to the large number of holders of bonds and preferred
stocks, not parties to this suit, to adjudge and hold illegal a trust agreement upon
the strength of which they had invested their money in the enterprises.
Not only for the reasons stated, but it appears that both the plaintiff and intervener
here became purchasers of the trust certificates after the creation of the trust
agreement and thereby presumably had full knowledge of the limitation of their
rights which went with such holdings at the time of purchase. Their equities would
at least appear to be inferior to those innocent purchasers of preferred stock and
bonds whose purchases were made because of the agreement. For the reasons
stated, the decree of the trial court should be and is affirmed.

National Investment & Development Corp. v. Aquino - Kikoy