GRACE CHRISTIAN HIGH SCHOOL vs COURT OF APPEALS

Grace Christian High School (GCHS) is an educational institution in Grace Village (QC?). Grace
Village Association, Inc. (GVAI)is the homeowners association in Grace Village. GVAI has an
existing by-lawswhich was already in effect since 1968. But in 1975, the board of directors made
a draft amending the by-laws whereby the representative of GCHS shall have a permanent seat in
the 15-seat board. The draft however was never presented to the general membership for approval.
But nevertheless, the representative of GCHS held a seat in the board for 15 years until in 1990
when a proposal was made to the board to reconsider the practice of allowing the GCHS
representative in taking a permanent seat. Thereafter, an election was scheduled for the 15 seat in
the board. GCHS opposed the election as it insists that the election should only be for 14 directors
because it has a permanent seat. GVAI argued that GCHS claim has no basis because the 1975
proposed amendment was never ratified. GCHS averred that it was ratified when it was allowed
to take the seat for 15 years and as such its right has already vested.

ISSUE: Whether or not the representative from Grace Christian High School should be allowed to
have a permanent seat in the board of directors.

HELD: No. The Corporation Code is clear when it provides that members of the board of a
corporation must be elected by the stockholders (stock corporation) or the members (non-stock
corporation). Admittedly, there are corporations who allow some of their directors to sit in the
board without being elected – but such practice cannot prevail over provisions of law. Practice, no
matter how long continued, cannot give rise to any vested right if it is contrary to law. Further,
there is no reason as to why a representative from GCHS should be given an automatic seat. It
should therefore go through the process of election. It cannot also be argued that the draft of the
by-laws in 1975 was ratified when GCHS was allowed to take its seat for 15 years without an
election. In the first place, the proposal was merely a draft and even if passed and approved by the
general membership, it cannot be given effect because it is void and contrary to the law. GCHS’
seat in the corporate board is at best merely tolerated by GVAI.

ZAMBOANGA TRANSPORTATION COMPANY, INC., plaintiff-appellee,

vs.
THE BACHRACH MOTOR CO., INC., defendant-appellant.

FACTS: CFI of Zamboanga held that the mortgage executed by the president and general
manager of plaintiff corporation is null and void.

Respondents alleged that CFI erred in not finding that the "board of directors" of
petitioners were mere puppets in the hands of Jose Erquiaga (president, general manager,
auditor, attorney, director) and that the pretended resolution of the so-called BOD
purporting to disapprove the chattel mortgage in question was mere contrivance of said
Equiaga for the purpose of evading obligation of the said mortgage.
(another case decided by CFI manila favored bachrach so Petitioners appealed and gave
evidence to prove that the other directors were not dummies... the cases were
consolidated)

ISSUE:
(1) Whether the chattel mortgage evidenced by Exhibits B and C, dated February 14, 1925,
and executed by Jose Erquiaga, president, general manager, attorney, and auditor of the
Zamboanga Transaportation Co., Inc., in behalf thereof is valid and binding upon said
corporation, after payments have been made to the Bachrach Motor Co., Inc., by virtue
thereof, notwithstanding the fact that it was disapproved by the mortgagor's board of
directors four months after its execution.

RULING: YES,
While it is true that said last chattel mortgage contract was not approved by the board of
directors of the Zamboanga Transportation Co., Inc., whose approval was necessary in
order to validate it according to the by-laws of said corporation, the broad powers vested
in Jose Erquiaga as president, general manager, auditor, attorney or legal adviser, and one
of the largest shareholders; the approval of his act in connection with said chattel mortgage
contract in question, with which two other directors expressed satisfaction, one of which is
also one of the largest shareholders, who together with the president constitute a majority:
The payments made under said contract with the knowledge of said three directors are
equivalent to a tacit approval by the board of directors of said chattel mortgage contract
and binds the Zamboanga Transportation Co., Inc. In truth and in fact Jose Erquiaga, in his
multiple capacity, was and is the factotum of the corporation and may be said to be the
corporation itself.

In the case of Halley First National Bank vs. G. V. B. Min. Co. (89 Fed., 439), the following
rule was laid down:
Where the chief officers of a corporation are in reality its owners, holding nearly all of its
stock, and are permitted to manage the business by the directors, who are only interested
nominally or to a small extent, and are controlled entirely by the officers, the acts of such
officers are binding on the corporation, which cannot escape liability as to third persons
dealing with it in good faith on the pretense that such acts were ultra vires.

We therefore conclude that when the president of a corporation, who is one of the principal
stockholders and at the same time its general manager, auditor, attorney or legal adviser, is
empowered by its by-laws to enter into chattel mortgage contracts, subject to the approval
of the board of directors, and enters into such contracts with the tacit approval of two other
members of the board of directors, one of whom is also a principal shareholder, both of
whom, together with the president, form a majority, and said corporation takes advantage
of the benefits afforded by said contract, such acts are equivalent to an implied ratification
of said contract by the board of directors and binds the corporation even if not formally
approved by said board of directors as required by the by-laws of the aforesaid
corporation.
BOARD OF SMB WORKERS VS TAN

Facts:On 17 January 1957 John de Castillo Et. Al., commenced a suit in the Court of First Instance
of Manilato declare null and void the election of the members of the board of directors of the SMB
Workers Savings andLoan Association, Inc. and of the members of the Election Committee for the
year 1957 held on 11 12 January; to compel the board of directors of the association to call for and
hold another election in accordance with its constitution and by-laws and the Corporation Law.
On 11 February, the Court rendered judgment declaring the election held on 11 and 12 January
null and void, ordering the defendants to call for and hold another election in accordance with the
constitution and by-laws of the association and the Corporation Law. In compliance with the
judgment rendered by the Court, on 26 March the election committee composed of Quintin
Tesalona, Manuel Dumaup and Jose Capino Santos set the meeting of the members of the
association for 28 March at 5:30 o’clock in the afternoon to elect the new members of the board
of directors (Annex J & 4).On 27 March the plaintiffs filed an ex-parte motion alleging that the
election committee that had called the meeting of members of the association is composed of the
same members that had conducted and supervised the election of the members of the board of
directors that was declared null and void by the Court; that in view thereof it would be inequitable
to allow them to conduct and supervise again the forth-coming election; that the election to be
conducted and supervised by the said committee would not be held in accordance with the
constitution and by-laws of the association providing for five days notice to the members before
the election, since the notice was posted and sent out only on 26 March, and the election would be
held on 28 March, or two days after notice. . . the Court hereby orders that the election scheduled
for March 28, 1957 be, as it hereby is, cancelled, and a committee of three is hereby constituted
and appointed to call, conduct and supervise the election of the members of the board of directors
of the association for 1957, said committee to be composed of: Mr. CandidoC. Viernes as
representative of the Court and to act as Chairman; and one representative each from the plaintiffs
and defendants, as members, as members. The committee is vested with the sole and exclusive
power and authority to call conduct and supervise the election of the members of the board of
directors of the association for the year 1957.

Issue: whether or not the prior notice requirement was complied with
Ruling: No
Section 3, article III, of the constitution and by-laws the association provides:
Notice of the time and place of holding of any annual meeting, or any special meeting, the
members, shall be given either by posting the same in a postage prepaid envelope,
addressed to each member on the record at the address left by such member with the
Secretary of the Association, or at his known post-office address or by delivering the same
person at least (5) days before the date set for such meeting. . . . In lieu of addressing or
serving personal notices to the members, notice of the members, notice of a regular annual
 meeting or of a special meeting of the members may be given by posting copies of said
notice at the different departments and plants of the San Miguel Brewery Inc., not less than
five (5) days prior to the date of the meeting. (Annex K.)
Notice of a special meeting of the members should be given at leasts five days before the date of
the meeting. Therefore, the five days previous notice required would not be complied with. Notice
is given two days before election.

PONCE VS ENCARNACION

Facts: This is a petition for a writ of certiorari to annul an order of the respondent court granting
Potenciano Gapol authority, pursuant to section 26, Act No. 1459, otherwise known as the
Corporation Law, to call a meeting of the stockholders of the Dagunoy Enterprises, Inc. and to
preside at such meeting by giving proper notice to the stockholders, as required by law or by laws
of the corporation, until after the majority of the stockholders present and qualified to vote shall
have chosen one of them to act as presiding officer of the meeting; another order denying a motion
of the petitioners to have the previous order set aside; and a third order denying a motion to the
same effect as the one previously filed. Daguhoy Enterprises, Inc., was duly registered at a meeting
duly called, the voluntary dissolution of the corporation and the appointment of Potenciano Gapol
as receiver were agreed upon. The respondent Potenciano Gapol, who is the largest stockholder,
charged his mind and filed a complaint
to compel the petitioners to render an accounting of the funds and assets of the corporation, to
reimburse it, jointly and severally because the contended that Domingo Ponce, the president of the
company, used the company funds for his own benefit. The petitioner filed an action with the TC
and prayed for an order directing him to a call a meeting of the stockholders of the corporation and
to preside at such meeting in accordance with section 26 of the Corporation law. TC granted their
petition.

Issue: WON under the corporation code, the TC can validly call for a stockholder’s meeting? / Are
the officers deprived of due process in the action of the TC?

Held: Yes. On the showing of good cause therefor, the court may authorize a stockholder to call a
meeting and to preside threat until the majority stockholders representing a majority strockholders
representing a majority of the stock present and permitted to be voted shall have chosen one among
them to preside it. And this showing of good cause therefor exists when the court is apprised of
the fact that the by-laws of the corporation require the calling of a general meeting of the
stockholders to elect the board of directors but call for such meeting has not been done.
With persistency petitioners claim that they have been deprived of their right without due process
of law. They had no right to continue as directors of the corporation unless reflected by the
stockholders in a meeting called for that purpose every even year. They had no right to a hold-over
brought about by the failure to perform the duty incumbent upon one of them. If they felt that they
were sure to be reelected, why did they fail, neglect, or refuse to call the meeting to elect the
members of the board? Or, why did they not seek their reelection at the meeting called to elect the
directors pursuant to the order of the respondent court.

DETECTIVE & PROTECTIVE BUREAU, INC.

vs.
HON. CLORIBEL and FAUSTO S. ALBERTO
1968 Nov 29, G.R. No. L-23428
FACTS:
Plaintiff filed against herein private defendant a complaint for accounting with
preliminary injunction and receivership. It alleged that defendant was managing
director of plaintiff corporation from 1952 until January 14, 1964; that in June 1963,
defendant 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; that on January 14, 1964, the stockholders, in a meeting,
removed defendant as managing director and elected Jose de la Rosa in his stead; that
defendant not only had refused to vacate his office and to deliver the assets and books
to Jose de la Rosa, but also continued to perform unauthorized acts for and in behalf
of plaintiff corporation; that defendant had been required to submit a financial
statement and to render an accounting of his administration from 1952 but defendant
has failed to do so; and that it continued disposing properties of the corporation
contrary to a Board resolution.
The writ of preliminary injunction was granted upon posting a bond. However,
the respondent filed a counter-bond which was granted, and the order for preliminary
injunction was lifted. Hence, petition for certiorari under Rule 65 was filed.

ISSUE:
Whether or not a writ of preliminary injunction against respondent should be
granted.

RULING:
NO.
Petitioner contended that respondent Alberto had arrogated to himself the
powers of the Board of Directors of the corporation because he refused to vacate the
office and surrender the same to Jose de la Rosa who had been elected managing
director by the Board to succeed him. This assertion, however, was disputed by
respondent Alberto who stated that Jose de la Rosa could not be elected managing
director because he did not own any stock in the corporation.
The Court ruled that 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 corporation."
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.

G.R. No. L-26555 November 16, 1926

BALDOMERO ROXAS, ENRIQUE ECHAUS and ROMAN
J. LACSON, petitioners,
vs.
Honorable MARIANO DE LA ROSA, Auxiliary Judge of
First Instance of Occidental Negros, AGUSTIN CORUNA,
MAURO LEDESMA and BINALBAGAN ESTATE, INC.,
respondents.

DOCTRINE: CONTROL AND MANAGEMENT OF

CORPORATION
Removal of Directors: Under the law the directors of a corporation can only be removed from
office by a vote of the stockholders representing at least two-thirds 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)

SUMMARY:
Representatives of the voting trust, holding majority of the shares, calls for a shareholders
meeting with the purpose of electing the members of the board of directors notwithstanding
the fact that all the positions in the board are
occupied by the members elected in a previous shareholders meeting. A civil action was filed
to enjoin such meeting and the petitioners filed a certiorari proceeding for the issuance of the
CFI judge of a restraining order to enjoin the meeting. SC held that the restraining order was
valid because in order to remove the current members of the BOD, a vote of at least 2/3 of
the shareholders is necessary.

FACTS:
Binalbagan Estate, Inc. (BEI), is a corporation having its principal plant in Occidental Negros
where it isengaged in the manufacture of raw sugar from canes grown upon farms accessible
to its central. In July, 1924, the possessors of a majority of the shares of the Binalbagan Estate,
Inc., formed a votingtrust composed of three members, namely, Salvador Laguna, Segunda
Monteblanco, and Arthur F. Fisher, as trustee. By the document constituting this voting trust,
the trustees were authorized to represent and vote the shares pertaining
to their constituents, and to this end the shareholders undertook to assign their shares to the
trustees on the books of the company. The 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 than3,000. On 26 Feb 1926, BEI held its General
Annual Shareholders Meeting at which Mr. J. P. Heilbronn appeared as representative of the
voting trust, his authority being recognized by the holders of all the other shares present at
this meeting. Heilbronn having the control of the majority of the shares (the case didn’t say
how that happened – maybe he owned several shares plus the shares of the voting trust he
was representing to make up the majority – it’s just an inference) was able to nominate and
elect a board of directors to his own liking, without opposition from the minority. After the
board of directors had been thus elected and had qualified, they chose a set of officers
constituting of Jose M. Yusay, president, Timoteo Unson, vice-president, Jose G. Montalvo,
secretary-treasurer, and H. W. Corp and Agustin Coruna, as members. Said officials
immediately entered
upon the discharged of their duties and have continued in possession of their respective
offices until the present time. Since the creation of the voting trust there have been a number
of vacancies caused by resignation or the absence
of members from the Philippine Islands, with the result that various substitutions have been
made in the personnel of the voting trust. At the present time the petitioners Roxas, Echaus,
and Lacson presumably constitute its membership. The current members of the voting trust
(petitioners) wanted to oust the current officers/directors of the corporation, even though it
was the previous representative of the voting trust (Heilbronn) who elected them. Thus, the
petitioners in their character as members of the voting trust, on August 2, 1926, caused the
secretary of the Binalbagan Estate, Inc., to issue to the shareholders a notice calling for a
special general meeting of shareholders to be held at 10 a. m., on August 16, 1926, "for the
election of the board of directors, for the amendment of the By-Laws, and for any other
business that can be dealt with in said meeting." Respondents Coruna and Ledesma, as
director and shareholder of the corporation respectively, filed a civil action before CFI to
enjoin the meeting to be held on Aug. 16, 1926. Respondent judge De La Rosa issued a
restraining order or preliminary injunction to enjoin the meeting which gave rise to the present
certiorari proceeding filed by petitioners.

ISSUE:
Whether or not it was within the judicial powers of Judge De
La Rosa to issue the restraining order or preliminary
injunction? (YES)
 MAIN ISSUE: W/N the petitioners can hold another
shareholders meeting for the election of board of directors
even though no vacancies have occurred to justify such
election? (NO)

RULING:
Vacancies in the Board of Directors occur either due to death, resignation, removal, or
otherwise. The law requires that for a director to be removed, a vote of at least two-thirds of
the subscribed capital stock is necessary. In this case, the voting trust only has the majority
of the shares. Majority is not equivalent to two-thirds. It must be noted that there are no
vacancies in the board of directors. Therefore, a call for an election of the board of directors
made by the petitioners is tantamount to an ousting of the current members of the board. The
present board of directors are de facto incumbents of the office whose acts will be valid until
they shall be lawfully removed from the office or cease from the discharge of their functions.
In this case it is not necessary for us to agitate ourselves over the question whether the
respondent judge properly exercised his judicial discretion in granting the order complained
of. If suffices to know that in making the order he was acting within the limits of his judicial
powers. Now, upon examining into the number of shares controlled by the voting trust, it will
be seen that, while the trust controls a majority of the stock, it does not have a clear two-
thirds 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 purpose of the meeting
was to removed 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 civil No. 3840 directly asserts that the members of the present
directorate were regularly elected at
the general annual meeting held in February, 1926; and 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 will be one 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 vs SANTOS
HIGINIO ANGELES, JOSE E. LARA and AGUEDO BERNABE, as stockholders for
an in behalf and for the benefit of the corporation, Parañaque 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.
August 31, 1937
 LAUREL, J.
Elevated to the SC by way of bill of exceptions (?)
SHORT VERSION: The minority group of the board of directors in Parañaque Rice Mill,
Inc. sued the majority group alleging mismanagement, unauthorized use of funds, and
corporate sabotage. They wanted the corporation be put under receivership and the majority
members held liable, then kicked out of the board. The lower court ruled for the minority
group and gave them everything they wanted. Majority members question the court’s power
to terminate them from their positions in the board9among other things).
RELEVANT PART]
FACTS: The Parties are all stockholders and member of the board of directors of the
"Parañaque Rice Mill, Inc., a corp
organized or the purpose of operating a rice mil. In 1962, Angeles et al (minority) filed a
complaint as stockholders, for
and in behalf of the corporation, against Santos et al (majority) in CFI Rizal. The complaint
alleged that:
 a special meeting was held in Feb. 1932 where the Board formed an investigation
committee (headed by the minority) to look into the losses of the corporation in the year
1931, however, Santos et al denied access to the properties, books and record of the
corporation which were in their possession
 According to the by-laws, said documents should be under the exclusive control and
possession of the secretary- treasurer, not Santos
 Santos had appropriated to his own benefit properties, funds, and income of the corporation
in the sum of P10,000
 he refused to sign over fully paid-up shares of stock to Higinio Angeles so that he can
control the affairs of the corp
 that he refused to hold monthly meetings of the board, even after due request, and
 Santos et al was disposing of the properties and records of the corporation without authority
from the board of directors or the stockholders of the corporation and suspended Jose Lara
from the office of general manager to prevent any interferrence with or examination of his
arbitrary acts.
The complaint prayed that:
Jose Lara be reinstated and appointed as receiver of the properties of the corporation, Santos
be ordered to make a detailed accounting of the properties, He be required to pay to the
corporation the amount of P10,000 and other amounts which may be found due to the said
corporation as damages be ordered to sign the certificate of stock subscribed to and paid by
the plaintiff Higinio Angeles, and the members of the board of directors of the Parañaque
Rice Mill, Inc., be removed and an exrtraodinary meeting of the stockholders called for the
purpose of electing a new board of directors. Santos et al filed an answer with general and
specific denials and allege that Santos did not sign over the paid-up shares due to Angeles for
600 shares valued at P15,000, because the board of directors decided to give Higinio Angeles
only 320 shares of stock worth P8,000. It also puts up a counter-claim for malicious
procurement of a receivership along with damages. They also included a cross-complaint
against the minority members based on the alleged failure of the Higinio Angeles to render a
report of his administration of the corporation from February to June 1928, during which time
the corporation is alleged to have accrued earnings.Angeles et al renewed their petition for
the appointment of a receiver pendent lite alleging pretty much the same stuff they did in the
complaint and that without the knowledge and consent of the stockholders and of the board
of directors, Santos 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. Santos
et al opposed saying that the court had no jurisdiction over the Parañaque Rice Mill, Inc.,
because it had not been include as party defendant and, therefore the court could not properly
appoint a receiver of the corporation pendente lite.

Preliminarily, Melchor de Lara was appointed by the court a receiver, then upon opposition
by Santos et al, Benigno Agco took his place. After trial, the court appointed Emilio Figueroa
as receiver of the corporation. Santos et al filed and
MR which was denied. After trial, the court ruled in favor of Angeles et al, ordering Santos
to render an accounting and pay whatever may be owing to the corporation, sign over to
Angeles the shares in the amount of 15,000, and that a new set of board of directors be elected
in a general meeting.

ISSUES:
WON Parañaque Rice Mill, Inc. was a neccessary party to the case and trial court had
jurisdiction to appoint a
receiver. (YES)

WON Santos was liable to render an accounting and to pay whatever may be owing to the
corporation (YES, but later)

WON it was proper for the court to order the removal of Santos et al from their offices as
members of the board of
directors of the corporation. (NO)

RATIO: There is ample evidence showing that Santos et al are guilty of breach of trust as
directors of the corporation. 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. Where corporate directors are guilty of a breach of trust — not of
mere error of judgment or abuse of discretion — and intracorporate remedy is futile or useless,
a stockholder may institute a suit in behalf of himself and other stockholders and for the
benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders.The contention of Santos et al that the
Parañaque Rice Mill, Inc., should have been brought in as necessary party and the action
maintained in its name and in its behalf directly states the general rule, but not the exception
recognize by this court in the case of Everrett vs. Asia Banking Corporation:
 “like most rules, the rule in question has its exceptions. It is alleged in the complaint and,
consequently, admitted through the demurrer that the corporation Teal & Company is under
the complete control of the principal defendants in the case, and, in these circumstances it is
obvious that a demand upon the board of directors to institute action and prosecute the same
effectively would have been useless, and the law does not require litigants to perform useless
acts.”The lower court in its decision not only orders Santos to account for the properties and
funds of the corporation, but it also and at the same time adjudges him to pay an undermine
amount which is made to depend upon the result of such accounting. This accounting should
better be filed with the new board of directors whose election has been ordered by the lower
court. 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 jugment of the lower
court to the new board of director to be elected by the stockholders.The Corporation Law, in
section 29 to 34, provide for the election and removal of the directors of a corporation. It does
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 a motion of the directors of a corporation. 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 may thereafter be remove 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, we are
of the opinion that the removal of the directors is, under the circumstances, unnecessary and
unwarranted.

JOSE A. BERNAS, et al. vs

JOVENCIO F. CINCO et al.
G.R. Nos. 163356-57; G.R. NOS.
163368-69
July 01, 2015
FACTS:
Makati Sports Club (MSC) is a domestic corporation duly organized and existing under Philippine
laws for the primary purpose of establishing, maintaining, and providing social, cultural,
recreational and athletic activities among its members. Petitioners in G.R. Nos. 163356-57, Jose
Bernas (Bernas), Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso, Ignacio T.
Macrohon and Paulino T. Lim (BERNAS GROUP) were among the Members of the Board of
Directors and Officers of the corporation whose terms were to expire either in 1998 or 1999.
Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea and Alex Y. Pardo (CINCO
GROUP) are the members and stockholders of the corporation who were elected Members of the
Board of Directors and Officers of the club during the 17 December 1997 Special Stockholders
Meeting. Alarmed with the rumored anomalies in handling the corporate funds, the MSC Oversight
Committee (MSCOC), composed of the past presidents of the club, demanded from the Bernas
Group, who were then incumbent officers of the corporation, to resign from their respective
positions to pave the way for the election of new set of officers. Agreeing with this were the
stockholders of the corporation representing at least 100 shares who sought the assistance of the
MSCOC to call for a special stockholders meeting for the purpose of removing the sitting officers
and electing new ones. Pursuant to such request, the MSCOC called a Special Stockholders’
Meeting and sent out notices to all stockholders and members stating therein the time, place and
purpose of the meeting. For failure of the Bernas Group to secure an injunction before the
Securities Commission (SEC), the meeting proceeded wherein Bernas, Cheng, Africa, Maramara,
Frondoso, Macrohon, Jr. and Lim were removed from office and, in their place and stead, Cinco,
Librea, Pardo, Aguiling, Villarosa, David, Maronilla, de Leon-Herlihy and Altura, were elected.
Aggrieved by the turn of events, the BERNAS GROUP sought the nullification of the 17 December
1997 Special Stockholders Meeting on the ground that it was improperly called before the
Securities Investigation and Clearing Department (SICD) of the SEC. Citing Section 28 of the
Corporation Code, the Bernas Group argued that the authority to call a meeting lies with the
Corporate Secretary and not with the MSCOC which functions merely as an oversight body and is
not vested with the power to call corporate meetings. For being called by the persons not authorized
to do so, the Bernas Group urged the SEC to declare the 17 December 1997 Special Stockholders’
Meeting, including the removal of the sitting officers and the election of new ones, be nullified.
For their part, the CINCO GROUP insisted that the 17 December 1997 Special Stockholders’
Meeting is sanctioned by the Corporation Code and the MSC by-laws. In justifying the call effected
by the MSCOC, they reasoned that Section 25 of the MSC by-laws merely authorized the
Corporate Secretary to issue notices of meetings and nowhere does it state that such authority
solely belongs to him. It was further asseverated by the Cinco Group that it would be useless to
course the request to call a meeting thru the Corporate Secretary because he repeatedly refused to
call a special stockholders’ meeting despite demands and even filed a suit to restrain the holding
of a special meeting. The newly elected directors initiated an investigation on the alleged
anomalies in administering the corporate affairs and after finding Bernas guilty of irregularities,
the Board resolved to expel him from the club by selling his shares at public auction. Due to the
filing of several petitions for and against the removal of the Bernas Group from the Board pending
before the SEC resulting in the piling up of legal controversies involving MSC, the SEC En Banc
resolved to supervise the holding of the 1999 Annual Stockholders’ Meeting. During the said
meeting, the stockholders once again approved, ratified and confirmed the holding of the 17
December 1997 Special Stockholders’ Meeting. The conduct of the 17 December 1997 Special
Stockholders’ Meeting was likewise ratified by the stockholders during the 2000 Annual
Stockholders’ Meeting which was held on 17 April 2000. SICD rendered a decision finding,
among others, that the 17 December 1997 Special Stockholders’ Meeting and the Annual
Stockholders’ Meeting conducted on 20 April 1998 and 19 April 1999 are invalid. The SICD
likewise nullified the expulsion of Bernas from the corporation and the sale of his share at the
public auction. Court of Appeals declared that 17 December 1997 Special Stockholders’ Meeting
invalid for being improperly called but affirmed the actions taken during the Annual Stockholders’
Meeting held on 20 April 1998, 19 April 1999 and 17 April 2000. The BERNAS GROUP agrees
with the disquisition of the appellate court that the Special Stockholders’ Meeting is invalid for
being called by the persons not authorized to do so, they urge the Court to likewise invalidate the
holding of the subsequent Annual Stockholders’ Meetings invoking the application of the holdover
principle. The CINCO GROUP insists that the holding of 17 December 1997 Special
Stockholders’ Meeting is valid and binding underscoring the overwhelming ratification made by
the stockholders during the subsequent annual stockholders’ meetings and the previous refusal of
the Corporate Secretary to call a special stockholders’ meeting despite demand.

ISSUES:
-Whether or not the Court of Appeals
erred in ruling that the 17
December 1997 Special
Stockholders’ Meeting is invalid.

-Whether or not the Court of Appeals

erred in failing to nullify the holding
of the annual stockholders’ meeting
on 20 April 1998, 19 April 1999 and
17 April 2000.

RULING:
YES. It is invalid.
The 17 December 1997 Special Stockholders’ Meeting is null and void and produces no effect;
the resolution expelling the Bernas Group from the corporation and authorizing the sale of Bernas’
shares at the public auction is likewise null and void. The Corporation Code laid down the rules
on the removal of the Directors of the corporation by providing, inter alia, the persons authorized
to call the meeting and the number of votes required for the purpose of removal, thus:
(See sec 28 of the corpo code).
Textually, only the President and the Board of Directors are authorized by the by-laws to call a
special meeting. In cases where the person authorized to call a meeting refuses, fails or neglects to
call a meeting, then the stockholders representing at least 100 shares, upon written request, may
file a petition to call a special stockholder’s meeting. In the instant case, there is no dispute that
the 17 December 1997 Special Stockholders’ Meeting was called neither by the President nor by
the Board of Directors but by the MSCOC. While the MSCOC, as its name suggests, is created for
the purpose of overseeing the affairs of the corporation, nowhere in the by-laws does it state that
it is authorized to exercise corporate powers, such as the power to call a special meeting, solely
vested by law and the MSC by-laws on the President or the Board of Directors. The board of
directors is the directing and controlling body of the corporation. It is a creation of the stockholders
and derives its power to control and direct the affairs of the corporation from them. The board of
directors, in drawing to itself the power of the corporation, occupies a position of trusteeship in
relation to the stockholders, in the sense that the board should exercise not only care and diligence,
but utmost good faith in the management of the corporate affairs. The underlying policy of the
Corporation Code is that the business and affairs of a corporation must be governed by a board of
directors whose members have stood for election, and who have actually been elected by the
stockholders, on an annual basis. The shareholder vote is critical to the theory that legitimizes the
exercise of power by the directors or officers over the properties that they do not own.
SEC. 23. The Board of Directors or Trustees. – Unless otherwise provided in this Code, the
corporate powers of all the corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors and
trustees x x x. A corporation’s board of directors is understood to be that body which (1) exercises
all powers provided for under the Corporation Code; (2) conducts all business of the corporation;
and (3) controls and holds all the property of the corporation. Its members have been characterized
as trustees or directors clothed with fiduciary character. It is ineluctably clear that the fiduciary
relation is between the stockholders and the board of directors and who are vested with the power
to manage the affairs of the corporation. The ordinary trust relationship of directors of a
corporation and stockholders is not a matter of statutory or technical law. It springs from the fact
that directors have the control and guidance of corporate affairs and property and hence of the
property interests of the stockholders. Equity recognizes that stockholders are the proprietors of
the corporate interests and are ultimately the only beneficiaries thereof. Should the board fail to
perform its fiduciary duty to safeguard the interest of the stockholders or commit acts prejudicial
to their interest, the law and the by- laws rovide echanisms o emove
and replace the erring director. It is apt to recall that illegal acts of a corporation which contemplate
the doing of an act which is contrary to law, morals or public order, or contravenes some rules of
public policy or public duty, are, like similar transactions between individuals, void. The same
principle can apply in the present case. The void election of 17 December 1997 cannot be ratified
by the subsequent Annual Stockholders’ Meeting. A distinction should be made between corporate
acts or contracts which are illegal and those which are merely ultra vires. The former contemplates
the doing of an act which are contrary to law, morals or public policy or public duty, and are, like
similar transactions between individuals, void. They cannot serve as basis of a court action nor
acquire validity by performance, ratification or estoppel. Mere ultra vires acts, on the other hand,
or those which are not illegal or void ab initio, but are not merely within the scope of the articles
of incorporation, are merely voidable and may become binding and enforceable when ratified by
the stockholders. The 17 December 1997 Meeting belongs to the category of the latter, that is, it
is void ab initio and cannot be validated. Consequently, such Special Stockholders’ Meeting called
by the Oversight Committee cannot have any legal effect. The Cinco Group cannot invoke the
application of de facto officership doctrine to justify the actions taken after the invalid election
since the operation of the principle is limited to third persons who were originally not part of the
corporation but became such by reason of voting of government- sequestered shares. Where there
is an officer authorized to call a meeting and that officer refuses, fails, or neglects to call a meeting,
the SEC can assume jurisdiction and issue an order to the petitioning stockholder to call a meeting
pursuant to its regulatory and administrative powers to implement the Corporation Code. This is
clearly provided for by Section 50 of the Corporation Code

Sec. 50. Regular and special meetings of stockholders or members. – x x x Whenever, for any
cause, there is no person authorized to call a meeting, the Securities and Exchange Commission,
upon petition of a stockholder or member, and on a showing of good cause therefore, may issue
an order to the petitioning stockholder or member directing him to call a meeting of the corporation
by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or
member shall preside thereat until at least majority of the stockholders or members present have
chosen one of their member[s] as presiding officer.

RAMON DE LA RAMA et.al

vs.
MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS. RAMON S.
ARANETA, ROMUALDO M. ARANETA, and RAMON A. YULO
G.r.No. L-17504 & l-17506; February 28, 1969
FACTS:
In 1950 the MSCCI through its President, J. Amado, subscribed for P300k
worth of capital stock of the Philippine Fiber Processing Co., Inc. (PFPC). Payments of
the subscription were made on 3 installments, but at the time the first two payments
were made there was no board resolution authorizing the investment; and that it was
only on November 26, 1951, that J. Amado was so authorized by the BOD, by the way,
making the third payment made in March 1952 authorized.
In addition, 355k shares of PFPC, owned by Luzon Industrial Corporation (LIC)
were transferred on May 31, 1952, to MSCCI. Again, the investment was made without
prior board resolution, the authorizing resolution having been subsequently approved
only on June 4, 1952. A derivative suit was filed by 4 minority SHs of MSCCI which
stated 5 causes of action: (1) for alleged illegal and ultra-vires acts consisting of self-
dealing, irregular loans, and unauthorized investments; (2) for alleged gross
mismanagement; (3) for alleged forfeiture of corporate rights warranting dissolution;
(4) for alleged damages and attorney's fees; and (5) for receivership.

ISSUE:
Whether or not a corporation can invest in another corporation.
RULING:
YES.
The law requiring the votes does not apply in the case because of MSCCI‘s
contention that since said PFPC was engaged in the manufacture of sugar bags it was
perfectly legitimate for MSCCI either to manufacture sugar bags or invest in another
corporation engaged in said manufacture.
SC also quoted the interpretation of Professor Guevara, a well-known authority
in Commercial Law: A private corporation, in order to accomplish its purpose as stated
in its articles of incorporation, and subject to the limitations imposed by the
Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of
shares, bonds, securities, and other evidences of indebtedness of any domestic or
foreign corporation. Such an act, if done in pursuance of the corporate purpose, does
not need the approval of the stockholders; but when the purchase of shares of another
corporation is done solely for investment and not to accomplish the purpose of its
incorporation, the vote of approval of the stockholders is necessary. In any case, the
purchase of such shares or securities must be subject to the limitations established by
the Corporation Law; namely, (a) that no agricultural or mining corporation shall in
anywise be interested in any other agricultural or mining corporation; or (b) that a
non-agricultural or non-mining corporation shall be restricted to own not more than
15% of the voting stock of any agricultural or mining corporation; and (c) that such
holdings shall be solely for investment and not for the purpose of bringing about a
monopoly in any line of commerce or combination in restraint of trade."
Power to invest corporate funds - A private corporation has the power to invest
its corporate funds 'in any other corporation or business, or for any purpose other
than the main purpose for which it was organized,' provided that 'its board of directors
has been so authorized in a resolution by the affirmative vote of stockholders holding
shares in the corporation entitling them to exercise at least two-thirds of the voting
power on such a proposal at a stockholders' meeting called for that purpose,' and
provided further, that no agricultural or mining corporation shall in anywise be
interested in any other agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in its articles of
incorporation, the approval of the stockholders is not necessary."

JOHN GOKONGWEI, JR., petitioner

vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO et.al.
respondents.
G.R. No. L-45911 April 11, 1979.
FACTS:
Petitioner alleged that on September 18, 1976, individual respondents amended
the by-laws of the corporation, basing their authority to do so on a resolution of the
stockholders adopted on March 13, 1961. 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.
Petitioner averred that the membership of the Board of Directors had changed since
the authority was given in 1961, there being six (6) new directors.
It was claimed that prior to the questioned March 13, 1961 amendment,
petitioner had all the qualifications to be a director of respondent corporation, being a
substantial stockholder thereof; that as a stockholder, petitioner had acquired rights
inherent in stock ownership, such as the rights to vote and to be voted upon in the
election of directors; and that in amending the by-laws, respondents purposely
provided for petitioner's disqualification and deprived him of his vested right as afore-
mentioned, hence the amended by-laws are null and void.

ISSUE:
Whether or not the disqualification of Gokongwei Jr. to run for directorship of
the corporation valid, as such was only provided in the amended by-laws of the
corporation.

RULING:
YES.
It is recognized by all authorities that 'every corporation has the inherent power
to adopt by-laws 'for its internal government, and to regulate the conduct and
prescribe the rights and duties of its members towards itself and among themselves in
reference to the management of its affairs.'" At common law, the rule was "that the
power to make and adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents.
Any person "who buys stock in a corporation does so with the knowledge that
its affairs are dominated by a majority of the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters within the limits of
the act of incorporation and lawfully enacted by-laws and not forbidden by law."
Under section 22 of the same law, the owners of the majority of the subscribed
capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said,
therefore, that petitioner has a vested right to be elected director, in the face of the fact
that the law at the time such right as stockholder was acquired contained the
prescription that the corporate charter and the by-law shall be subject to amendment,
alteration and modification.
It is a settled that corporations have the power to make by-laws declaring a
person employed in the service of a rival company to be ineligible for the corporation's
Board of Directors. ".An amendment which renders ineligible, or if elected, subjects to
removal, a director if he be also a director in a corporation whose business is in
competition with or is antagonistic to the other corporation is valid."