Gokongwei vs.

Securities and Exchange Commission

[GR L-45911, 11 April 1979]

Facts: [SEC Case 1375] On 22 October 1976, John Gokongwei Jr., as stockholder of San Miguel Corporation, filed
with the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by-laws, injunction and damages with prayer for a preliminary injunction"
against the majority of the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. As
a first cause of action, Gokongwei alleged that on 18 September 1976, Andres Soriano, Jr., Jose M. Soriano, Enrique
Zobel, Antonio Roxas, Emeterio Buñao, Walthrode B. Conde, Miguel Ortigas, and Antonio Prieto amended by 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, Gokongwei contended that the Board acted without
authority and in usurpation of the power of the stockholders. As a 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.
As a 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. As a fourth cause of action, it was claimed that prior to the
questioned amendment, Gokogwei 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 afore-mentioned, hence the
amended by-laws are null and void. As additional causes of action, it was alleged that corporations have no inherent
power to disqualify a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and
void; 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 Soriano, et. al. The Corporation, Soriano, et. al. filed their answer, and their opposition to
the petition, respectively. 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, Soriano, et. al. admitted the invalidity of the amendments of 18 September 1976.
The motion for summary judgment was opposed by Soriano, et. al. 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 temporary restraining order be issued, restraining Soriano, et. al. from holding the special stockholders' meeting as
scheduled. This motion was duly opposed by Soriano, et. al. On 10 February 1977, Cremation issued an order denying
the motion for issuance of temporary restraining order. After receipt of the order of denial, Soriano, et. al. 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 Soriano, et. al., 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 Soriano, et. al.'s motions to dismiss and gave them two (2) days
within which to file their answer, and set the case for hearing on April 29 and May 3, 1977. Soriano, et. al. 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 Soriano, et. al. 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.

Issue:
1. Whether the corporation has the power to provide for the (additional) qualifications of its directors.
2. Whether the disqualification of a competitor from being elected to the Board of Directors is a reasonable
exercise of corporate authority.
3. Whether the SEC gravely abused its discretion in denying Gokongwei's request for an examination of
the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation.
4. Whether the SEC gravely abused its discretion in allowing the stockholders of San Miguel Corporation
to ratify the investment of corporate funds in a foreign corporation.
Held:

1. It is recognized by all authorities that "every corporation has the inherent power to adopt by-laws 'for its internal
government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs.'" In this jurisdiction under section 21 of the Corporation Law,
a corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and
employees." This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation
Law, which provides that "every director must own in his right at least one share of the capital stock of the stock
corporation of which he is a director." Any person "who buys stock in a corporation does so with the knowledge that its
affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall
govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law."
To this extent, therefore, the stockholder may be considered to have "parted with his personal right or privilege to
regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it
to the will of the majority of his fellow incorporators. It can not therefore be justly said that the contract, express or
implied, between the corporation and the stockholders is infringed by any act of the former which is authorized by a
majority." Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a
vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the
corporation. If the amendment changes, diminishes or restricts the rights of the existing shareholders, then the
dissenting minority has only one right, viz.: "to object thereto in writing and demand payment for his share." Under
section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law
or adopt new by-laws. It cannot be said, therefore, that Gokongwei has a vested right to be elected director, in the face
of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate
charter and the by-law shall be subject to amendment, alteration and modification.

2. Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot
be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are
concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders,
"they occupy a fiduciary relation, and in this sense the relation is one of trust." "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." A director is a fiduciary. Their powers are powers in trust. He who is in such fiduciary position cannot serve
himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment and in disregard
of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept
against serving two masters. He cannot utilize his inside information and strategic position for his own preferment. He
cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot
violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot use his
power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms
that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times
subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the
fiduciary to the exclusion or detriment of the cestuis. The doctrine of "corporate opportunity" is precisely a recognition
by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with
competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or
director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls
for protection. It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to
sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for
expansion and diversification; (c) research and development; and (d) sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms. It is obviously to prevent the creation of an opportunity for an officer or
director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage
of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San
Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where
two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if
he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his
corporation duties above his personal concerns. The offer and assurance of Gokongwei that to avoid any possibility of
his taking unfair advantage of his position as director of San Miguel Corporation, he would absent himself from meetings
at which confidential matters would be discussed, would not detract from the validity and reasonableness of the by-laws
involved. Apart from the impractical results that would ensue from such arrangement, it would be inconsistent with
Gokongwei's primary motive in running for board membership — which is to protect his investments in San Miguel
Corporation. More important, such a proposed norm of conduct would be against all accepted principles underlying a
director's duty of fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate
management.

3. Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business transactions of
the corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of
the corporation at reasonable hours." The stockholder's right of inspection of the corporation's books and records is
based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of
the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or
a quasi-ownership. This right is predicated upon the necessity of self-protection. It is generally held by majority of the
courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by
him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the
corporation. In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to
be proper and lawful in character and not inimical to the interest of the corporation. The "general rule that stockholders
are entitled to full information as to the management of the corporation and the manner of expenditure of its funds, and
to inspection to obtain such information, especially where it appears that the company is being mismanaged or that it is
being managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion of others."
While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of
law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of the corporation in
which he is a stockholder is a different thing. Stockholders are entitled to inspect the books and records of a corporation
in order to investigate the conduct of the management, determine the financial condition of the corporation, and generally
take an account of the stewardship of the officers and directors. herein, considering that the foreign subsidiary is wholly
owned by San Miguel Corporation and, therefore, under Its control, it would be more in accord with equity, good faith
and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the
corporation as extending to books and records of such wholly owned subsidiary which are in the corporation's
possession and control.

4. Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business
or for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been
so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the
voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of
its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds
of the voting power is necessary. As stated by the corporation, the purchase of beer manufacturing facilities by SMC
was an investment in the same business stated as its main purpose in its Articles of Incorporation, which is to
manufacture and market beer. It appears that the original investment was made in 1947-1948, when SMC, then San
Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture
and marketing of San Miguel beer thereat. Restructuring of the investment was made in 1970-1971 thru the organization
of SMI in Bermuda as a tax free reorganization. Assuming arguendo that the Board of Directors of SMC had no authority
to make the assailed investment, there is no question that a corporation, like an individual, may ratify and thereby render
binding upon it the originally unauthorized acts of its officers or other agents. This is true because the questioned
investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or contract which
is within the corporate powers, but which is defective from a purported failure to observe in its execution the requirement
of the law that the investment must be authorized by the affirmative vote of the stockholders holding two-thirds of the
voting power. This requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement
was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect which
it may have had at the outset. Besides, the investment was for the purchase of beer manufacturing and marketing
facilities which is apparently relevant to the corporate purpose. The mere fact that the corporation submitted the assailed
investment to the stockholders for ratification at the annual meeting of 10 May 1977 cannot be construed as an
admission that the corporation had committed an ultra vires act, considering the common practice of corporations of
periodically submitting for the ratification of their stockholders the acts of their directors, officers and managers.

Lee vs. Court of Appeals

[GR 93695, 4 February 1992]

Facts: On 15 November 1985, a complainant for sum of money was filed by the International Corporate Bank, Inc.
against Sacoba Manufacturing Corp., Pablo Gonzales Jr., and Tomas Gonzales who, in turn, filed a third party complaint
against Alfa Integrated Textile Mills (ALFA), Ramon C. Lee (ALFA's president) and Antonio DM. Lacdao (ALFA's vice
president) on 17 March 1986. On 17 September 1987, Lee and Lacdao filed a motion to dismiss the third party complaint
which the Regional Trial Court of Makati, Branch 58 denied in an Order dated 27 June 1988. On 18 July 1988, Lee and
Lacdao filed their answer to the third party complaint. Meanwhile, on 12 July 1988, the trial issued an order requiring
the issuance of an alias summons upon ALFA through the DBP as a consequence of Lee and Lacdao's letter informing
the court that the summons for ALFA was erroneously served upon them considering that the management of ALFA
had been transferred to the DBP. In a manifestation dated 22 July 1988, the DBP claimed that it was not authorized to
receive summons on behalf of ALFA since the DBP had not taken over the company which has a separate and distinct
corporate personality and existence. On 4 August 1988, the trial court issued an order advising Sacoba Manufacturing,
et. al. to take the appropriate steps to serve the summons to ALFA. On 16 August 1988, Sacoba Manufacturing, et. al.
filed a Manifestation and Motion for the Declaration of Proper Service of Summons which the trial court granted on 17
August 1988.

On 12 September 1988, Lee and Lacdao filed a motion for reconsideration submitting that the Rule 14, section 13 of
the Revised Rules of Court is not applicable since they were no longer officers of ALFA and Sacoba Manufacturing, et.
al. should have availed of another mode of service under Rule 14, Section 16 of the said Rules, i.e., through publication
to effect proper service upon ALFA. On 2 January 1989, the trial court upheld the validity of the service of summons on
ALFA through Lee and Lacdao, thus, denying the latter's motion for reconsideration and requiring ALFA to file its answer
through Lee and Lacdao as its corporate officers. On 19 January 1989, a second motion for reconsideration was filed
by Lee and Lacdao reiterating their stand that by virtue of the voting trust agreement they ceased to be officers and
directors of ALFA, hence, they could no longer receive summons or any court processes for or on behalf of ALFA. In
support of their second motion for reconsideration, Lee and Lacdao attached thereto a copy of the voting trust agreement
between all the stockholders of ALFA (Lee and Lacdao included), on the one hand, and the DBP, on the other hand,
whereby the management and control of ALFA became vested upon the DBP. On 25 April 1989, the trial court reversed
itself by setting aside its previous Order dated 2 January 1989 and declared that service upon Lee and Lacdao who
were no longer corporate officers of ALFA cannot be considered as proper service of summons on ALFA. On 15 May
1989, Sacoba Manufacturing, et. al. moved for a reconsideration of the Order which was affirmed by the court in is Order
dated 14 August 1989 denying Sacoba Manufacturing, et. al.'s motion for reconsideration.

On 18 September 1989, a petition for certiorari was belatedly submitted by Sacoba Manufacturing, et. al. before the
Court of Appeals which, nonetheless, resolved to give due course thereto on 21 September 1989. On 17 October 1989,
the trial court, not having been notified of the pending petition for certiorari with the appellate court issued an Order
declaring as final the Order dated 25 April 1989. Sacoba Manufacturing, et. al. in the said Order were required to take
positive steps in prosecuting the third party complaint in order that the court would not be constrained to dismiss the
same for failure to prosecute. Subsequently, on 25 October 1989 Sacoba Manufacturing, et. al. filed a motion for
reconsideration on which the trial court took no further action. On 19 March 1990, after Lee and Lacdao filed their answer
to Sacoba Manufacturing, et. al.'s petition for certiorari, the appellate court rendered its decision, setting aside the orders
of trial court judge dated 25 April 1989 and 14 August 1989. On 11 April 1990, Lee and Lacdao moved for a
reconsideration of the decision of the appellate court which resolved to deny the same on 10 May 1990. Lee and Lacdao
filed the petition for certiorari. In the meantime, the appellate court inadvertently made an entry of judgment on 16 July
1990 erroneously applying the rule that the period during which a motion for reconsideration has been pending must be
deducted from the 15-day period to appeal. However, in its Resolution dated 3 January 1991, the appellate court set
aside the aforestated entry of judgment after further considering that the rule it relied on applies to appeals from
decisions of the Regional Trial Courts to the Court of Appeals, not to appeals from its decision to the Supreme Court
pursuant to the Supreme Court's ruling in the case of Refractories Corporation of the Philippines v. Intermediate
Appellate Court, 176 SCRA 539 [1989].

Issue:
1. Whether the execution of the voting trust agreement by Lee and Lacdao whereby all their shares to the
corporation have been transferred to the trustee deprives the stockholder of their positions as directors of the
corporation.
2. Whether the five-year period of the voting trust agreement in question had lapsed in 1986 so that the
legal title to the stocks covered by the said voting trust agreement ipso facto reverted to Lee and Lacdao as
beneficial owners pursuant to the 6th paragraph of section 59 of the new Corporation Code.
3. Whether there was proper service of summons on ALFA through Lee and Lacdao, to bind ALFA.
Held:

1. Lee and Lacdao, by virtue of the voting trust agreement executed in 1981 disposed of all their shares through
assignment and delivery in favor of the DBP, as trustee. Consequently, Lee and Lacdao ceased to own at least one
share standing in their names on the books of ALFA as required under Section 23 of the new Corporation Code. They
also ceased to have anything to do with the management of the enterprise. Lee and Lacdao ceased to be directors.
Hence, the transfer of their shares to the DBP created vacancies in their respective positions as directors of ALFA. The
transfer of shares from the stockholders of ALFA to the DBP is the essence of the subject voting trust agreement.
Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of the stocks
covered by the agreement to the DBP as trustee, the latter because the stockholder of record with respect to the said
shares of stocks. In the absence of a showing that the DBP had caused to be transferred in their names one share of
stock for the purpose of qualifying as directors of ALFA, Lee and Lacdao can no longer be deemed to have retained
their status as officers of ALFA which was the case before the execution of the subject voting trust agreement. There is
no dispute from the records that DBP has taken over full control and management of the firm.

2. The 6th paragraph of section 59 of the new Corporation Code reads that "Unless expressly renewed, all rights granted
in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as
well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the transferors." However, it is manifestly clear from the terms of
the voting trust agreement between ALFA and the DBP that the duration of the agreement is contingent upon the
fulfillment of certain obligations of ALFA with the DBP. Had the five-year period of the voting trust agreement expired in
1986, the DBP would not have transferred an its rights, titles and interests in ALFA "effective June 30, 1986" to the
national government through the Asset Privatization Trust (APT) as attested to in a Certification dated 24 January 1989
of the Vice President of the DBP's Special Accounts Department II. In the same certification, it is stated that the DBP,
from 1987 until 1989, had handled s account which included ALFA's assets pursuant to a management agreement by
and between the DBP and APT. Hence, there is evidence on record that at the time of the service of summons on ALFA
through Lee and Lacdao on 21 August 1987, the voting trust agreement in question was not yet terminated so that the
legal title to the stocks of ALFA, then, still belonged to the DBP.

3. It is a basic principle in Corporation Law that a corporation has a personality separate and distinct from the officers
or members who compose it. Thus, the role on service of processes on a corporation enumerates the representatives
of a corporation who can validly receive court processes on its behalf. Not every stockholder or officer can bind the
corporation considering the existence of a corporate entity separate from those who compose it. The rationale of the
rule is that service must be made on a representative so integrated with the corporation sued as to make it a priori
supposable that he will realize his responsibilities and know what he should do with any legal papers served on him.
Herein, Lee and Lacdao do not fall under any of the enumerated officers. The service of summons upon ALFA, through
Lee and Lacdao, therefore, is not valid. To rule otherwise will contravene the general principle that a corporation can
only be bound by such acts which are within the scope of the officer's or agent's authority.
Valle Verde Country Club, Inc. v. Africa, G.R. No.151969, September 4, 2009.

FACTS
On February 27, 1996, during the Annual Stockholders’ Meeting of petitioner Valle Verde Country Club, Inc. (VVCC), the
VVCC Board of Directors were elected including Eduardo Makalintal (Makalintal) among others. In the years 1997, 1998,
1999, 2000, and 2001, however, the requisite quorum for the holding of the stockholders’ meeting could not be
obtained. Consequently, the directors continued to serve in the VVCC Board in a hold-over capacity. Later, Makalintal
resigned as member of the VVCC Board. He was replaced by Jose Ramirez (Ramirez), who was elected by the remaining
members of the VVCC Board on March 6, 2001. Respondent Africa (Africa), a member of VVCC, questioned the election of
Ramirez as members of the VVCC Board with the Regional Trial Court (RTC), respectively. Africa claimed that a year after
Makalintal’s election as member of the VVCC Board in 1996, his [Makalintal’s] term – as well as those of the other
members of the VVCC Board – should be considered to have already expired. Thus, according to Africa, the resulting
vacancy should have been filled by the stockholders in a regular or special meeting called for that purpose, and not by the
remaining members of the VVCC Board, as was done in this case. The RTC sustained Africa’s complaint.

ISSUE
Whether the remaining directors of the corporation’s Board, still constituting a quorum, can elect another director to fill in
a vacancy caused by the resignation of a hold-over director.

RULING
NO.
When Section 23 of the Corporation Code declares that “the board of directors…shall hold office for one (1) year until their
successors are elected and qualified,” we construe the provision to mean that the term of the members of the board of
directors shall be only for one year; their term expires one year after election to the office. The holdover period – that
time from the lapse of one year from a member’s election to the Board and until his successor’s election and qualification
– is not part of the director’s original term of office, nor is it a new term; the holdover period, however, constitutes part of
his tenure. Corollary, when an incumbent member of the board of directors continues to serve in a holdover capacity, it
implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term.
[Here], when remaining members of the VVCC Board elected Ramirez to replace Makalintal, there was no more unexpired
term to speak of, as Makalintal’s one-year term had already expired. Pursuant to law, the authority to fill in the vacancy
caused by Makalintal’s leaving lies with the VVCC’s stockholders, not the remaining members of its board of directors. To
assume – as VVCC does – that the vacancy is caused by Makalintal’s resignation in 1998, not by the expiration of his term
in 1997, is both illogical and unreasonable. His resignation as a holdover director did not change the nature of the
vacancy; the vacancy due to the expiration of Makalintal’s term had been created long before his resignation.

RANIEL vs JOCHICO

Facts:

Petitioners first questioned their removal in SEC Case No. 02-98-5902 for Declaration of Nullity of the Illegal Acts of
Respondents, Damages and Injunction. Petitioners, together with respondents Paul Jochico (Jochico), John Steffens and
Surya Viriya, were incorporators and directors of Nephro, with Raniel acting as Corporate Secretary and Administrator. The
conflict started when petitioners questioned respondents' plan to enter into a joint venture with the Butuan Doctors' Hospital
and College, Inc. sometime in December 1997. Because of this, petitioners claim that respondents tried to compel them to
waive and assign their shares with Nephro but they refused. Thereafter, Raniel sought an indefinite leave of absence due to
stress, but this was denied by Jochico, as Nephro President. Raniel, nevertheless, did not report for work, causing Jochico to
demand an explanation from her why she should not be removed as Administrator and Corporate Secretary. Raniel replied,
expressing her sentiments over the disapproval of her request for leave and respondents' decision with regard to the Butuan
venture.

On January 30, 1998, Jochico issued a Notice of Special Board Meeting on February 2, 1998. Despite receipt of the
notice, petitioners did not attend the board meeting. In said meeting, the Board passed several resolutions ratifying the
disapproval of Raniel's request for leave, dismissing her as Administrator of Nephro, declaring the position of Corporate
Secretary vacant, appointing Otelio Jochico as the new Corporate Secretary and authorizing the call of a Special Stockholders'
Meeting on February 16, 1998 for the purpose of the removal of petitioners as directors of Nephro.
 Otelio Jochico issued the corresponding notices for the Special Stockholders' Meeting to be held on February 16,
1998 which were received by petitioners on February 2, 1998. Again, they did not attend the meeting. The stockholders who
were present removed the petitioners as directors of Nephro. Thus, petitioners filed SEC Case No. 02-98-5902.

On October 27, 2000, the SEC rendered its Decision, the dispositive portion of which reads:

WHEREFORE, the Commission so holds that complainants cannot be awarded the reliefs prayed for in
reinstating Nectarina S. Raniel as secretary and administrator.

The corporation acting thru its Board of Directors can validly remove its corporate officers, particularly
complainant Nectarina S. Raniel as corporate secretary, treasurer and administrator of the Dialysis Clinic.

Also, the Commission cannot grant the relief prayed for by complainants in restraining the respondents from
interfering in the administration of the Dialysis Clinic owned by the corporation and the use of corporate funds.

The administration of the Dialysis Clinic of the corporation and the use of corporate funds, rightfully belong to
the officers of the corporation, which in this case are the respondents.

The counterclaim of respondents to return or assign back the complainants' shares in favor of respondent
Paul Jochico or his nominee is hereby denied for lack of merit.

The respondents failed to show any clear and convincing evidence to rebut the presumption of the validity
and truthfulness of documents submitted to the Commission in the grant of corporate license.

The claim for attorney's fees and damages of both parties are likewise denied for lack of merit, as neither
party should be punished for vindicating a right, which he/she believes should be protected or enforced.

SO ORDERED.

Dissatisfied, petitioners filed a petition for review with the CA.

Both the SEC and the CA held that Pag-ong's removal as director and Raniel's removal as director and officer of
Nephro were valid. For its part, the SEC ruled that the Board of Directors had sufficient ground to remove Raniel as officer
due to loss of trust and confidence, as her abrupt and unauthorized leave of absence exhibited her disregard of her
responsibilities as an officer of the corporation and disrupted the operations of Nephro. The SEC also held that the Special
Board Meeting held on February 2, 1998 was valid and the resolutions adopted therein are binding on petitioners.

The CA upheld the SEC's conclusions, adding further that the special stockholders' meeting on February 16, 1998
was likewise validly held. The CA also ruled that Pag-ong's removal as director of Nephro was justified as it was due to her
undenied delay in the release of Nephro's medical supplies from the warehouse of the Fly-High Brokerage where she was an
officer, on top of her and her co-petitioner Raniel's absence from the aforementioned directors' and stockholders' meetings of
Nephro despite due notice.

Issue:

Whether or not the removal of Pag-Ong and Raniel by the Board of Directors is proper.

Held:

Yes. A corporation exercises its powers through its board of directors and/or its duly authorized officers and agents, except
in instances where the Corporation Code requires stockholders approval for certain specific acts.

Based on Section 23 of the Corporation Code which provides:

SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the corporate powers
of all corporations formed under this Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees x x x.

A corporations 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 property of the corporation. Its
members have been characterized as trustees or directors clothed with a fiduciary character. Moreover, the directors may
appoint officers and agents and as incident to this power of appointment, they may discharge those appointed.

In this case, petitioner Raniel was removed as a corporate officer through the resolution of Nephro's Board of Directors
adopted in a special meeting on February 2, 1998. As correctly ruled by the SEC, petitioners' removal was a valid exercise of
the powers of Nephro's Board of Directors, viz.:
 In the instant complaint, do respondents have sufficient grounds to cause the removal of Raniel from her positions as
Corporate Secretary, Treasurer and Administrator of the Dialysis Clinic? Based on the facts proven during the hearing of this
case, the answer is in the affirmative.

Raniel's letter of January 26, 1998 speaks for itself. Her request for an indefinite leave, immediately effective yet
without prior notice, reveals a disregard of the critical responsibilities pertaining to the sensitive positions she held in the
corporation. Prior to her hasty departure, Raniel did not make a proper turn-over of her duties and had to be expressly
requested to hand over documents and records, including keys to the office and the cabinets.

xxxx

Since Raniel occupied all three positions in Nephro, it is not difficult to foresee the disruption that her immediate and
indefinite absence can inflict on the operations of the company. By leaving abruptly, Raniel abandoned the positions she is
now trying to reclaim. Raniel's actuation has been sufficiently proven to warrant loss of the Board's confidence.

The SEC also correctly concluded that petitioner Raniel was removed as an officer of Nephro in compliance with
established procedure, thus:

The resolutions of the Board dismissing complainant Raniel from her various positions in Nephro are valid.
Notwithstanding the absence of complainants from the meeting, a quorum was validly constituted. x x x.

xxxx

Based on its articles of incorporation, Nephro has five directors two of the positions were occupied by complainants
and the remaining three are held by respondents. This being the case, the presence of all three respondents in the Special
Meeting of the Board on February 2, 1998 established a quorum for the conduct of business. The unanimous resolutions
carried by the Board during such meeting are therefore valid and binding against complainants.

Petitioners Raniel and Pag-ong's removal as members of Nephro's Board of Directors was likewise valid.

Only stockholders or members have the power to remove the directors or trustees elected by them, as laid down in
Section 28 of the Corporation Code, which provides in part:

SEC. 28. Removal of directors or trustees. -- Any director or trustee of a corporation may be removed from
office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock,
or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote:
Provided, that such removal shall take place either at a regular meeting of the corporation or at a special meeting
called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the
intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation
for the purpose of removal of directors or trustees or any of them, must be called by the secretary on order of the
president or on the written demand of the stockholders representing or holding at least a majority of the outstanding
capital stock, or if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote.
x x x Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given
by publication or by written notice as prescribed in this Code. x x x Removal may be with or without cause: Provided,
That removal without cause may not be used to deprive minority stockholders or members of the right of
representation to which they may be entitled under Section 24 of this Code. (Emphasis supplied)

Petitioners do not dispute that the stockholders' meeting was held in accordance with Nephro's By-Laws. The
ownership of Nephro's outstanding capital stock is distributed as follows: Jochico - 200 shares; Steffens - 100 shares; Viriya
- 100 shares; Raniel - 75 shares; and Pag-ong - 25 shares,[17] or a total of 500 shares. A two-thirds vote of Nephro's
outstanding capital stock would be 333.33 shares, and during the Stockholders' Special Meeting held on February 16, 1998,
400 shares voted for petitioners' removal. Said number of votes is more than enough to oust petitioners from their respective
positions as members of the board, with or without cause.

ANTONIO CARAG vs. NLRC

G.R. No. 147590 April 2, 2007
FACTS: National Federation of Labor Unions and Mariveles Apparel Corporation Labor Union (collectively,
complainants), on behalf of all of Mariveles Apparel Corporation’s rank and file employees, filed a complaint
against MAC for illegal dismissal brought about by its illegal closure of business. In their position paper dated 3
January 1994, NAFLU and MACLU moved to implead Atty. Antonio Carag and Armando David, being owners of
the MAC Corporation, to guarantee the satisfaction of any judgment award on the basis of Article 212(c) of the
Philippine Labor Code. Atty. Joshua Pastores, as counsel for respondents, submitted a position paper dated 21
February 1994 and stated that complainants should not have impleaded Carag and David because MAC is
actually owned by a consortium of banks. Carag and David own shares in MAC only to qualify them to serve as
MAC's officers. Without any further proceedings, Arbiter Ortiguerra rendered her Decision dated 17 June 1994
granting the motion to implead Carag and David. In the same Decision, Arbiter Ortiguerra declared Carag and
David solidarily liable with MAC ruling that corporate officers who dismissed employees in bad faith or wantonly
violate labor standard laws or when the company had already ceased operations and there is no way by which a
judgment in favor of employees could be satisfied, corporate officers can be held jointly and severally liable with
the company. Carag, through a separate counsel, filed an appeal dated 30 August 1994 before the NLRC.
He also filed a motion to reduce bond. In a Resolution promulgated on 5 January 1995, the NLRC Third Division
denied the motion to reduce bond. The NLRC stated that to grant a reduction of bond on the ground that the
appeal is meritorious would be tantamount to ruling on the merits of the appeal. On February 13, 1995, Carag
filed his petition for certiorari before CA. The CA affirmed the decision of Arbiter Ortiguerra and the resolution of
NLRC. Motion for reconsideration was likewise denied. Hence this petition for review on certiorari.

ISSUE: Whether or not Antonio Carag shall be held personally liable for the payment of illegally dismissed
employees.

RULING: Section 31 makes a director personally liable for corporate debts if he wilfully and knowingly votes for
or assents to patently unlawful acts of the corporation. Section 31 also makes a director personally liable if he is
guilty of gross negligence or bad faith in directing the affairs of the corporation. Complainants did not allege in
their complaint that Carag wilfully and knowingly voted for or assented to any patently unlawful act of MAC.
Complainants did not present any evidence showing that Carag wilfully and knowingly voted for or assented to
any patently unlawful act of MAC. Neither did Arbiter Ortiguerra make any finding to this effect in her Decision.

Complainants did not also allege that Carag is guilty of gross negligence or bad faith in directing the affairs of
MAC. Complainants did not present any evidence showing that Carag is guilty of gross negligence or bad faith in
directing the affairs of MAC. Neither did Arbiter Ortiguerra make any finding to this effect in her Decision. After
stating what she believed is the law on the matter, Arbiter Ortiguerra stopped there and did not make any finding
that Carag is guilty of bad faith or of wanton violation of labor standard laws. Arbiter Ortiguerra did not specify
what act of bad faith Carag committed, or what particular labor standard laws he violated.

To hold a director personally liable for debts of the corporation, and thus pierce the veil of corporate fiction, the
bad faith or wrongdoing of the director must be established clearly and convincingly. Bad faith is never
presumed. Bad faith does not connote bad judgment or negligence. Bad faith imports a dishonest purpose. Bad
faith means breach of a known duty through some ill motive or interest. Bad faith partakes of the nature of fraud.
Neither does bad faith arise automatically just because a corporation fails to comply with the notice requirement
of labor laws on company closure or dismissal of employees. The failure to give notice is not an unlawful act
because the law does not define such failure as unlawful. Such failure to give notice is a violation of procedural
due process but does not amount to an unlawful or criminal act. Such procedural defect is called illegal dismissal
because it fails to comply with mandatory procedural requirements, but it is not illegal in the sense that it
constitutes an unlawful or criminal act.

For a wrongdoing to make a director personally liable for debts of the corporation, the wrongdoing approved or
assented to by the director must be a patently unlawful act. Mere failure to comply with the notice requirement of
labor laws on company closure or dismissal of employees does not amount to a patently unlawful act. Patently
unlawful acts are those declared unlawful by law which imposes penalties for commission of such unlawful acts.
There must be a law declaring the act unlawful and penalizing the act.

In this case, Article 283 of the Labor Code, requiring a one-month prior notice to employees and the Department
of Labor and Employment before any permanent closure of a company, does not state that non-compliance with
the notice is an unlawful act punishable under the Code. There is no provision in any other Article of the Labor
Code declaring failure to give such notice an unlawful act and providing for its penalty. Complainants did not
allege or prove, and Arbiter Ortiguerra did not make any finding, that Carag approved or assented to any
patently unlawful act to which the law attaches a penalty for its commission. On this score alone, Carag cannot
be held personally liable for the separation pay of complainants.
 FILIPINAS PORT SERVICES, INC vs. GO

G.R. No. 161886 March 16, 2007

FACTS: FilPort is a domestic corporation engaged in stevedoring services with principal office in Davao City. On 4 September
1992, petitioner Eliodoro Cruz, Filport’s president from 1968 until he lost his bid for re-election as Filport’s president during
the general stockholders’ meeting in 1991, wrote a letter to the corporation’s Board of Directors questioning the board’s
creation of the positions of Assistant Vice-Presidents for Corporate Planning, Operations, Finance and Administration, and
the creation of the additional positions of Special Assistants to the President and the Board Chairman with a monthly
remuneration of P13,050.00 each, and the election thereto of certain members of the board. In his aforesaid letter, Cruz
requested the board to take necessary action/s to recover from those elected the salaries they have received. However, it
was not shown on the records that action was taken. On 14 June 1993, Cruz, purportedly in representation of Filport and its
stockholders, among which is herein co-petitioner Mindanao Terminal and Brokerage Services, Inc., filed with the SEC a
petition which he describes as a derivative suit against the herein respondents who were then the incumbent members of
Filport’s Board of Directors, for alleged acts of mismanagement detrimental to the interest of the corporation and its
shareholders at large. With the enactment of R.A. No. 8799, the case was first turned over to the RTC of Manila, Branch 14,
sitting as a corporate court. Thereafter, on respondents’ motion, it was eventually transferred to the RTC of Davao City. On
10 December 2001, RTC-Davao City rendered its decision in the case. Even as it found that (1) Filport’s Board of Directors
has the power to create positions not provided for in the by-laws of the corporation since the board is the governing body;
and (2) the increases in the salaries of the board chairman, vice-president, treasurer and assistant general manager are
reasonable, the trial court nonetheless rendered judgment against the respondents by ordering the directors holding the
positions of Assistant Vice President for Corporate Planning, Special Assistant to the President and Special Assistant to the
Board Chairman to refund to the corporation the salaries they have received as such officers "considering that Filipinas Port
Services is not a big corporation requiring multiple executive positions" and that said positions "were just created for
accommodation." On appeal, the CA taking exceptions to the findings of the trial court that the creation of the positions of
Assistant Vice President for Corporate Planning, Special Assistant to the President and Special Assistant to the Board
Chairman was merely for accommodation purposes, granted the respondents’ appeal, reversed and set aside the appealed
decision of the trial court and accordingly dismissed the so-called derivative suit filed by Cruz, et al. Hence this petition for
review on certiorari.

ISSUE: Whether or not Filport’s Board of Directors has the power to create positions not provided for in the by-laws of the
corporation.

RULING: The governing body of a corporation is its board of directors. Section 23 of the Corporation Code explicitly provides
that unless otherwise provided therein, the corporate powers of all corporations formed under the Code shall be exercised,
all business conducted and all property of the corporation shall be controlled and held by a board of directors. Thus, with
the exception only of some powers expressly granted by law to stockholders (or members, in case of non-stock
corporations), the board of directors (or trustees, in case of non-stock corporations) has the sole authority to determine
policies, enter into contracts, and conduct the ordinary business of the corporation within the scope of its charter, i.e., its
articles of incorporation, by-laws and relevant provisions of law. Verily, the authority of the board of directors is restricted
to the management of the regular business affairs of the corporation, unless more extensive power is expressly conferred.

The raison d’etre behind the conferment of corporate powers on the board of directors is not lost on the Court. Indeed, the
concentration in the board of the powers of control of corporate business and of appointment of corporate officers and
managers is necessary for efficiency in any large organization. Stockholders are too numerous, scattered and unfamiliar with
the business of a corporation to conduct its business directly. And so the plan of corporate organization is for the
stockholders to choose the directors who shall control and supervise the conduct of corporate business.

In the present case, the board’s creation of the positions of Assistant Vice Presidents for Corporate Planning, Operations,
Finance and Administration, and those of the Special Assistants to the President and the Board Chairman, was in accordance
with the regular business operations of Filport as it is authorized to do so by the corporation’s by-laws, pursuant to the
Corporation Code.

Amended Bylaws of Filport provides the following:

Officers of the corporation, as provided for by the by-laws, shall be elected by the board of directors at their first meeting
after the election of Directors. xxx
The officers of the corporation shall be a Chairman of the Board, President, a Vice-President, a Secretary, a Treasurer, a
General Manager and such other officers as the Board of Directors may from time to time provide, and these officers shall
be elected to hold office until their successors are elected and qualified. (Emphasis supplied.)

Unfortunately, the bylaws of the corporation are silent as to the creation by its board of directors of an executive committee.
Under Section 35 of the Corporation Code, the creation of an executive committee must be provided for in the bylaws of
the corporation. Notwithstanding the silence of Filport’s bylaws on the matter, the creation of the executive committee by
the board of directors cannot be ruled as illegal or unlawful. One reason is the absence of a showing as to the true nature
and functions of said executive committee considering that the "executive committee," referred to in Section 35 of the
Corporation Code which is as powerful as the board of directors and in effect acting for the board itself, should be
distinguished from other committees which are within the competency of the board to create at anytime and whose actions
require ratification and confirmation by the board. Another reason is that, ratiocinated by both the 2 courts below, the
Board of Directors has the power to create positions not provided for in Filport’s bylaws since the board is the corporation’s
governing body, clearly upholding the power of its board to exercise its prerogatives in managing the business affairs of the
corporation.

As well, it may not be amiss to point out that, as testified to and admitted by petitioner Cruz himself, it was during his
incumbency as Filport president that the executive committee in question was created, and that he was even the one who
moved for the creation of the positions of the AVPs for Operations, Finance and Administration. By his acquiescence and/or
ratification of the creation of the aforesaid offices, Cruz is virtually precluded from suing to declare such acts of the board
as invalid or illegal. And it makes no difference that he sues in behalf of himself and of the other stockholders. Indeed, as his
voice was not heard in protest when he was still Filport’s president, raising a hue and cry only now leads to the inevitable
conclusion that he did so out of spite and resentment for his non-reelection as president of the corporation.

GRACE CHRISTIAN HIGH SCHOOL, petitioner,vs. THE COURT OF APPEALS, GRACE VILLAGE ASSOCIATION,
INC., ALEJANDRO G. BELTRAN, and ERNESTO L. GO, respondents.

G.R. No. 108905 October 23, 1997

MENDOZA, J.:

Petitioner Grace Christian High School is an educational institution located at the Grace Village in Quezon City, while
Private respondent Grace Village Association, Inc. ["Association'] is an organization of lot and/or building owners, lessees
and residents at Grace Village.The original 1968 by-laws provide that the Board of Directors, composed of eleven (11)
members, shall serve for one (1) year until their successors are duly elected and have qualified.

On 20 December 1975, a committee of the board of directors prepared a draft of an amendment to the
by-laws which provides that "GRACE CHRISTIAN HIGH SCHOOL representative is a permanent
Director of the ASSOCIATION."

However, this draft was never presented to the general membership for approval. Nevertheless, from 1975 to 1990,
petitioner was given a permanent seat in the board of directors of the association.

On 13 February 1990, the association's committee on election sought to change the by-laws and informed the Petitioner's
school principal "the proposal to make the Grace Christian High School representative as a permanent director of the
association, although previously tolerated in the past elections should be reexamined."

Following this advice, notices were sent to the members of the association that the provision on election of directors of the
1968 by-laws of the association would be observed. Petitioner requested the chairman of the election committee to change
the notice to honor the 1975 by-laws provision, but was denied. The school then brought suit for mandamus in the Home
Insurance and Guaranty Corporation (HIGC) to compel the board of directors to recognize its right to a permanent seat in
the board.

Meanwhile, the opinion of the SEC was sought by the association, and SEC rendered an opinion to the effect that the
practice of allowing unelected members in the board was contrary to the existing by-laws of the association and to §92 of
the Corporation Code (B.P. Blg. 68). This was adopted by the association in its Answer in the mandamus filed with the
HIGC.

The HIGC hearing officer ruled in favor of the association, which decision was affirmed by the HIGC Appeals Board and the
Court of Appeals.

Issue: W/N the 1975 provision giving the petitioner a permanent board seat was valid.

Ruling: No.

Section 23 of the Corporation Code (and its predecessor Section 28 and 29 of the Corporation Law) leaves no room for
doubt that the Board of Directors of a Corporation must be elected from among the stockholders or members. There may be
corporations in which there are unelected members in the board but it is clear that in these instances, the unelected
members sit as ex officio members, i.e., by virtue of and for as long as they hold a particular office (e.g. whoever is the
Archbishop of Manila is considered a member of the board of Cardinal Santos Memorial Hospital, Inc.)

But in the case of petitioner, there is no reason at all for its representative to be given a seat in the board. Nor does
petitioner claim a right to such seat by virtue of an office held. In fact it was not given such seat in the beginning. It was only
in 1975 that a proposed amendment to the by-laws sought to give it one.

Since the provision in question is contrary to law, the fact that it has gone unchallenged for fifteen years cannot forestall a
later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to law, it is beyond
the power of the members of the association to waive its invalidity. It is more accurate to say that the members merely
tolerated petitioner's representative and tolerance cannot be considered ratification.

Nor can petitioner claim a vested right to sit in the board on the basis of "practice." Practice, no matter how long continued,
cannot give rise to any vested right if it is contrary to law.

People's Aircargo and Warehousing Co. Inc. vs. Court of Appeals

[GR 117847, 7 October 1998]

Facts: People's Aircargo and Warehousing Co. Inc. (PAWCI) is a domestic corporation, which was organized in the
middle of 1986 to operate a customs bonded warehouse at the old Manila International Airport in Pasay City. To obtain
a license for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the corporation president, solicited a
proposal from Stefani Saño for the preparation of a feasibility study. Saño submitted a letter-proposal dated 17 October
1986 ("First Contract") to Punsalan, for the project feasibility study (market, technical, and financial feasibility) and
preparation of pertinent documentation requirements for the application, worth P350,000. Initially, Cheng Yong, the
majority stockholder of PAWCI, objected to Saño's offer, as another company priced a similar proposal at only
P15,000. However, Punsalan preferred Saño's services because of the latter's membership in the task force, which was
supervising the transition of the Bureau of Customs from the Marcos government to the Aquino Administration. On 17
October 1986, PAWCI, through Punsalan, sent Saño a letter confirming their agreement.

Accordingly, Saño prepared a feasibility study for PAWCI which eventually paid him the balance of the contract price,
although not according to the schedule agreed upon. On 4 December 1986, upon Punsalan's request, Saño sent PAWCI
another letter-proposal ("Second Contract") formalizing its proposal for consultancy services in the amount of P400,000.
On 10 January 1987, Andy Villaceren, vice president of PAWCI, received the operations manual prepared by Saño.
PAWCI submitted said operations manual to the Bureau of Customs in connection with the former's application to
operate a bonded warehouse; thereafter, in May 1987, the Bureau issued to it a license to operate, enabling it to become
one of the three public customs bonded warehouses at the international airport. Saño also conducted, in the third week
of January 1987 in the warehouse of PAWCI, a three-day training seminar for the latter's employees. On 25 March
1987, Saño joined the Bureau of Customs as special assistant to then Commissioner Alex Padilla, a position he held
until he became technical assistant to then Commissioner Miriam Defensor-Santiago on 7 March 1988. Meanwhile,
Punsalan sold his shares in PAWCI and resigned as its president in 1987. On 9 February 1988, Saño filed a collection
suit against PAWCI. He alleged that he had prepared an operations manual for PAWCI, conducted a seminar-workshop
for its employees and delivered to it a computer program; but that, despite demand, PAWCI refused to pay him for his
services. PAWCI, in its answer, denied that Saño had prepared an operations manual and a computer program or
conducted a seminar-workshop for its employees. It further alleged that the letter-agreement was signed by Punsalan
without authority, in collusion with Saño in order to unlawfully get some money from PAWCI, and despite his knowledge
that a group of employees of the company had been commissioned by the board of directors to prepare an operations
manual. The Regional Trial Court (RTC) of Pasay City, Branch 110, rendered a Decision dated 26 October 1990
declared the Second Contract unenforceable or simulated. However, since Saño had actually prepared the operations
manual and conducted a training seminar for PAWCI and its employees, the trial court awarded P60,000 to the former,
on the ground that no one should be unjustly enriched at the expense of another (Article 2142, Civil Code). The trial
Court determined the amount "in light of the evidence presented by defendant on the usual charges made by a leading
consultancy firm on similar services." Upon appeal, and on 28 February 1994, the appellate court modified the decision
of the trial court, and declared the Second Contract valid and binding on PAWCI, which was held liable to Saño in the
full amount of P400,000, representing payment of Saño services in preparing the manual of operations and in the
conduct of a seminar for PAWCI. As no new ground was raised by PAWCI, reconsideration of the decision was denied
in the Resolution promulgated on 28 October 1994. PAWCI filed the Petition for Review.

Issue: Whether a single instance where the corporation had previously allowed its president to enter into a contract with
another without a board resolution expressly authorizing him, has clothed its president with apparent authority to execute
the subject contract.

Held: Apparent authority is derived not merely from practice. Its existence may be ascertained through (1) the general
manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent
authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual
or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. It requires presentation
of evidence of similar act(s) executed either in its favor or in favor of other parties. It is not the quantity of similar acts
which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation. Herein,
PAWCI, through its president Antonio Punsalan Jr., entered into the First Contract without first securing board approval.
Despite such lack of board approval, PAWCI did not object to or repudiate said contract, thus "clothing" its president
with the power to bind the corporation. The grant of apparent authority to Punsalan is evident in the testimony of Yong
— senior vice president, treasurer and major stockholder of PAWCI. The First Contract was consummated, implemented
and paid without a hitch. Hence, Sano should not be faulted for believing that Punsalan's conformity to the contract in
dispute was also binding on petitioner. It is familiar doctrine that if a corporation knowingly permits one of its officers, or
any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power
to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent,
be estopped from denying the agent's authority. Furthermore, Saño prepared an operations manual and conducted a
seminar for the employees of PAWCI in accordance with their contract. PAWCI accepted the operations manual,
submitted it to the Bureau of Customs and allowed the seminar for its employees. As a result of its aforementioned
actions, PAWCI was given by the Bureau of Customs a license to operate a bonded warehouse. Granting arguendo
then that the Second Contract was outside the usual powers of the president, PAWCI's ratification of said contract and
acceptance of benefits have made it binding, nonetheless. The enforceability of contracts under Article 1403(2) is ratified
"by the acceptance of benefits under them" under Article 1405.

Tan versus Sycip

G.R. No. 153468; August 17, 2006

Facts:
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with fifteen (15) regular
members, who also constitute the board of trustees. During the annual members meeting held on April 6, 1998, there
were only eleven (11) living member-trustees, as four (4) had already died. Out of the eleven, seven (7) attended the
meeting through their respective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the
objection of Atty. Antonio C. Pacis, who argued that there was no quorum. In the meeting, Petitioners Ernesto Tanchi,
Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased member-trustees.
When the controversy reached the Securities and Exchange Commission (SEC), petitioners maintained that the deceased
member-trustees should not be counted in the computation of the quorum because, upon their death, members
automatically lost all their rights (including the right to vote) and interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of quorum. She held that
the basis for determining the quorum in a meeting of members should be their number as specified in the articles of
incorporation, not simply the number of living members.

Issue:
Whether or not in NON-STOCK corporations, dead members should still be counted in determination of quorum for
purpose of conducting the Annual Members Meeting.

Ruling:

In nonstock corporations, the voting rights attach to membership. Members vote as persons, in accordance with the law
and the bylaws of the corporation. Each member shall be entitled to one vote unless so limited, broadened, or denied in
the articles of incorporation or bylaws. We hold that when the principle for determining the quorum for stock
corporations is applied by analogy to nonstock corporations, only those who are actual members with voting rights should
be counted.
Under Section 52 of the Corporation Code, the majority of the members representing the actual number of voting rights,
not the number or numerical constant that may originally be specified in the articles of incorporation, constitutes the
quorum.

Section 25 of the Code specifically provides that a majority of the directors or trustees, as fixed in the articles of
incorporation, shall constitute a quorum for the transaction of corporate business (unless the articles of incorporation or
the bylaws provide for a greater majority). If the intention of the lawmakers was to base the quorum in the meetings of
stockholders or members on their absolute number as fixed in the articles of incorporation, it would have expressly
specified so. Otherwise, the only logical conclusion is that the legislature did not have that intention.

In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor
or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a
settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor.
On the other hand, membership in and all rights arising from a nonstock corporation are personal and non-transferable,
unless the articles of incorporation or the bylaws of the corporation provide otherwise. In other words, the determination
of whether or not dead members are entitled to exercise their voting rights (through their executor or administrator),
depends on those articles of incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the
member. Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of
the corporation, unless otherwise provided in the articles of incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster in the
manner and for the cause provided for in the By-Laws of GCHS are not to be counted in determining the requisite vote in
corporate matters or the requisite quorum for the annual members meeting. With 11 remaining members, the quorum in
the present case should be 6. Therefore, there being a quorum, the annual members meeting, conducted with six
members present, was valid.

Expert Travel & Tours vs. CA

G.R. No. 152392; May 26, 2005

FACTS:
Korean Airlines (KAL) is a corporation established and registered in the Republic of South Korea and licensed
to do business in the Philippines. Its general manager in the Philippines is Suk Kyoo Kim, while its appointed counsel
was Atty. Mario Aguinaldo and his law firm.
KAL, through appointed counsel, filed a complaint against Expert Travel with the RTC for the collection of sum
of money. The verification and certification against forum shopping was signed by the same appointed counsel, who
indicated therein that he was the resident agent and legal counsel of KAL and had caused the preparation of the
complaint. Expert Travel filed a motion to dismiss the complaint on the ground that the appointed counsel was not
authorized to execute the verification and certificate of non-forum shopping as required by the Rules of Court. KAL
opposed the motion, contending that he is a resident agent and was registered as such with the SEC as required by the
Corporation Code. He also claimed that he had been authorized to file the complaint through a resolution of the KAL
Board of Directors approved during a special meeting, wherein the board of directors conducted a special
teleconference which he attended. It was also averred that in the same teleconference, the board of directors approved
a resolution authorizing him to execute the certificate of non-forum shopping and to file the complaint. Suk Kyoo Kim
alleged, however, that the corporation had no written copy of the aforesaid resolution. TC denied motion to dismiss.
CA affirms.

ISSUE:
Can a special teleconference be recognized as legitimate means to approved a board resolution and authorize
an agent to execute an act in favor of the corporation?

HELD:
YES. In this age of modern technology, the courts may take judicial notice that business transactions may be
made by individuals through teleconferencing. teleconferencing and videoconferencing of members of board of
directors of private corporations is a reality, in light of Republic Act No. 8792. The Securities and Exchange Commission
issued SEC Memorandum Circular No. 15, on November 30, 2001, providing the guidelines to be complied with related
to such conferences.
HOWEVER, in the case at bar, even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in
a teleconference along with the respondent’s Board of Directors, the Court is not convinced that one was conducted;
even if there had been one, the Court is not inclined to believe that a board resolution was duly passed specifically
authorizing Atty. Aguinaldo to file the complaint and execute the required certification against forum shopping. Facts
and circumstances show that there was gross failure on the part of company to prove that there was indeed a special
teleconference such as failure to produce a written copy of the board resolution via teleconference.

NOTE: Read SEC Memo Circular No. 15-2001, the guidelines for the conduct of teleconferencing and
videoconferencing.