Self-Dealing Director/Officer

REPUBLIC OF THE PHILIPPINES

vs.
EDUARDO CONJUANGCO
GR 166859, 12 April 2011

FACTS:

Danding Cojuangco is being accused of using public funds to finance his

acquisition of shares in the San Miguel Corporation. Through the coconut levy fund,
was is being accused of buying out shareholders in the corporation in order to
become a substantial shareholder himself. To carry out his scheme, he used dummy
shareholders who shall be trustors of the shares on his behalf.
Contention rises on his culpability as a public official during the time that he
bought the shares. It is claimed by the Sandiganbayan that he was able to amass vast
shares of the corporation through the use of the coconut levy fund, which is public in
nature. Therefore, it but apparent that he be held liable for his actions in taking
control of the corporation.

ISSUE:

Whether or not Conjuangco illegally used ill-gotten wealth to buy shares of

SMC.

RULING:

NO.

The funds are in fact loaned from UCPB, which was organized as a depositary of
the coconut levy funds of the corporation. Also, the Government failed to adduce
substantial evidence linking Cojuangco to the use of Marcos ill-gotten wealth.
All these judicial pronouncements demand two concurring elements to be
present before assets or properties were considered as ill-gotten wealth, namely: (a)
they must have “originated from the government itself,” and (b) they must have been
taken by former President Marcos, his immediate family, relatives, and close
associates by illegal means.
But settling the sources and the kinds of assets and property covered by E.O.
No. 1 and related issuances did not complete the definition of ill-gotten wealth. The
further requirement was that the assets and property should have been amassed by
former President Marcos, his immediate family, relatives, and close associates both
here and abroad. In this regard, identifying former President Marcos, his immediate
family, and relatives was not difficult, but identifying other persons who might be the
close associates of former President Marcos presented an inherent difficulty, because
it was not fair and just to include within the term close associates everyone who had
had any association with President Marcos, his immediate family, and relatives.
It does not suffice, as in this case, that the respondent is or was a government
official or employee during the administration of former Pres. Marcos. There must be a
prima facie showing that the respondent unlawfully accumulated wealth by virtue of
his close association or relation with former Pres. Marcos and/or his wife. This is so
because otherwise the respondent’s case will fall under existing general laws and
procedures on the matter.

CHARLES W. MEAD
vs.
E.C. MCCULLOUGH, et. al.
GR 6217, 26 December 2011

FACTS:

On March 15, 1902, the plaintiff (Mead will be referred to as the plaintiff in this
opinion unless it is otherwise stated) and the defendant organized the "Philippine
Engineering and Construction Company.
Shortly after the organization, the directors held a meeting and elected the
plaintiff as general manager. The plaintiff held this position with the company for nine
months, when he resigned to accept the position of engineer of the Canton and
Shanghai Railway Company.
The contract and work undertaken by the company during the management of
Mead were the wrecking contract with the Navy Department at Cavite for the raising of
the Spanish ships sunk by Admiral Dewey; the contract for the construction of certain
warehouses for the quartermaster department; the construction of a wharf at Fort
McKinley for the Government; The supervision of the construction of the Pacific
Oriental Trading Company's warehouse; and some other odd jobs not specifically set
out in the record.
Shortly after the plaintiff left the Philippine Islands for China, the other
directors, the defendants in this case, held a meeting on December 24, 1903, for the
purpose of discussing the condition of the company at that time and determining what
course to pursue.
The assignees of the wrecking contract, including McCullough, formed was not
known as the "Manila Salvage Association." This association paid to McCullough
$15,000 Mexican Currency cash for the assignment of said contract. In addition to
this payment, McCullough retained a one-sixth interest in the new company or
association.

ISSUE:

Whether or not the respondents are self-dealing directors.

RULING:

NO.
 While a corporation remains solvent, there is no reason why a director or
officer, by the authority of a majority of the stockholders or board of managers, may
not deal with the corporation, loan it money or buy property from it, in like manner as
a stranger. So long as a purely private corporation remains solvent, its directors are
agents or trustees for the stockholders. They owe no duties or obligations to others.
But the moment such a corporation becomes insolvent, its directors are trustees of all
the creditors, whether they are members of the corporation or not, and must manage
its property and assets with strict regard to their interest; and if they are themselves
creditors while the insolvent corporation is under their management, they will not be
permitted to secure to themselves by purchasing the corporate property or otherwise
any personal advantage over the other creditors. Nevertheless, a director or officer may
in good faith and for an adequate consideration purchase from a majority of the
directors or stockholders the property even of an insolvent corporation, and a sale
thus made to him is valid and binding upon the minority.

PRIME WHITE CEMENT

vs.
INTERMEDIATE APPELLATE COURT, ALEJANDRO TE
GR 68555, 19 March 1993

FACTS:

On the 16th day of July, 1969, plaintiff and defendant corporation thru its
President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the Board, entered
into a dealership agreement (Exhibit A) whereby said plaintiff was obligated to act as
the exclusive dealer and/or distributor of the said defendant corporation of its cement
products in the entire Mindanao area.
Prime, however, amended the agreement made with Te, forcing the latter to
demand the performance of the conditions stated in the original contract. Aside from
that, Prime entered into a dealership contract with Napoleon Co, therefore violating
the exclusive rights of Te in Mindanao. Te thereafter filed for specific performance
against Prime.
Prime questioned the validity of the contract, claiming it is null and void due to
the fact that Te is a Director and the Auditor of the cement company.

ISSUE:

Whether or not the dealership contract between Prime and Te is valid.

RULING:

NO.
 The requisites for the approval of a contract with a ‘self dealing director’ was not
satisfied. A director of a corporation holds a position of trust and as such, he owes a
duty of loyalty to his corporation. In case his interests conflict with those of the
corporation, he cannot sacrifice the latter to his own advantage and benefit. As
corporate managers, directors are committed to seek the maximum amount of profits
for the corporation. This trust relationship "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."
A director's contract with his corporation is not in all instances void or voidable.
If the contract is fair and reasonable under the circumstances, it may be ratified by
the stockholders provided a full disclosure of his adverse interest is made.
Granting arguendo that the "dealership agreement" involved here would be valid
and enforceable if entered into with a person other than a director or officer of the
corporation, the fact that the other party to the contract was a Director and Auditor of
the petitioner corporation changes the whole situation. First of all, the contract was
neither fair nor reasonable. The "dealership agreement" entered into in July, 1969,
was to sell and supply to respondent Te 20,000 bags of white cement per month, for
five years starting September, 1970, at the fixed price of P9.70 per bag. Respondent Te
is a businessman himself and must have known, or at least must be presumed to
know, that at that time, prices of commodities in general, and white cement in
particular, were not stable and were expected to rise. At the time of the contract,
petitioner corporation had not even commenced the manufacture of white cement, the
reason why delivery was not to begin until 14 months later. He must have known that
within that period of six years, there would be a considerable rise in the price of white
cement. In fact, respondent Te's own Memorandum shows that in September, 1970,
the price per bag was P14.50, and by the middle of 1975, it was already P37.50 per
bag. Despite this, no provision was made in the "dealership agreement" to allow for an
increase in price mutually acceptable to the parties. Instead, the price was pegged at
P9.70 per bag for the whole five years of the contract. Fairness on his part as a
director of the corporation from whom he was to buy the cement, would require such a
provision.

Contracts Between Corporations with Interlocking Directors

PEDRO PALTING
vs.
SAN JOSE PETROLEUM, INC.
GR L-14441, 17 December 1966

FACTS:

San Jose Petroleum filed with the Philippine Securities and Exchange
Commission a sworn registration statement, for the registration and licensing for sale
in the Philippines Voting Trust Certificates representing 2,000,000 shares of its capital
stock with a par value of $0.35 a share, at P1.00 per share
Pedro R. Palting and others, allegedly prospective investors in the shares of San
Jose Petroleum, filed with the Securities and Exchange Commission an opposition to
the registration and licensing of the securities on the grounds that (1) the tie-up
between the issuer, San Jose Petroleum, a Panamanian corporation, and San Jose Oil,
a domestic corporation, violates the Constitution of the Philippines, the Corporation
Law and the Petroleum Act of 1949; (2) the issuer has not been licensed to transact
business in the Philippines; (3) the sale of the share of the issuer is fraudulent, and
works or tends to work a fraud upon Philippine purchasers; and (4) the issuer as an
enterprise, as well as its business, is based upon unsound business principles.

ISSUE:

Whether or not San Jose Petroleum can validly engage in business in the
Philippines.

RULING:

NO.

It does not have the required percentage of Filipino capital to validly exercise its
business in the Philippines. In the two lists of stockholders, there is no indication of
the citizenship of these stockholders, or of the total number of authorized stocks of
each corporation for the purpose of determining the corresponding percentage of these
listed stockholders in relation to the respective capital stock of said corporation.
These provisions are in direct opposition to the corporation law and corporate
practices in this country. These provisions alone would outlaw any corporation locally
organized or doing business in this jurisdiction. Consider the unique and unusual
provision that no contract or transaction between the company and any other
association or corporation shall be affected except in case of fraud, by the fact that any
of the directors or officers of the company may be interested in or are directors or
officers of such other association or corporation; and that none of such contracts or
transactions of this company with any person or persons, firms, associations or
corporations shall be affected by the fact that any director or officer of this company is
a party to or has an interest in such contract or transaction or has any connection
with such person or persons, firms, associations or corporations: and that any and all
persons who may become directors or officers of this company are hereby relieved of
all responsibility which they would otherwise incur by reason of any contract entered
into which this company either for their own benefit, or for the benefit of any person,
firm, association or corporation in which they may be interested.

DEVELOPMENT BANK OF THE PHILIPPINES

vs.
COURT OF APPEALS, REMINGTON INDUSTRIAL SALES
GR 126200, 16 August 2001

FACTS:
 Between July 1981 and April 1984, Marinduque Mining entered into 3
mortgage agreements with PNB and DBP involving its real properties located in
Surigao del Norte, Negros Occidental, and Rizal, as well as its equipment located
therein. Marinduque failed to pay its loans, causing the foreclosure of the said
mortgages. PNB and DBP thereafter gained control of the said properties.
In the meantime, between July 16, 1982 to October 4, 1983, Marinduque
Mining purchased and caused to be delivered construction materials and other
merchandise from Remington Industrial Sales Corporation. The purchases remained
unpaid as of August 1, 1984 when Remington filed a complaint for a sum of money
and damages against Marinduque Mining for the value of the unpaid construction
materials and other merchandise purchased by Marinduque Mining, as well as
interest, attorney’s fees and the costs of suit.
Remington’s original complaint was amended to include PNB, DBP, Maricalum
Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island
Cement) as co-defendants. Remington asserted that Marinduque Mining, PNB, DBP,
Nonoc Mining, Maricalum Mining and Island Cement must be treated in law as one
and the same entity by disregarding the veil of corporate fiction since the personnel,
key officers and rank-and-file workers and employees of co-defendants NMIC,
Maricalum and Island Cement creations of co-defendants PNB and DBP were the
personnel of co-defendant MMIC such that practically there has only been a change of
name for all legal purpose and intents.

ISSUE:

Whether or not the takeover of PNB and DBP over Marinduque Mining is in bad
faith.

RULING:

NO.

Their actions are mandated under the law. Where the corporations have
directors and officers in common, there may be circumstances under which their
interest as officers in one company may disqualify them in equity from representing
both corporations in transactions between the two. Thus, where one corporation was
‘insolvent and indebted to another, it has been held that the directors of the creditor
corporation were disqualified, by reason of self-interest, from acting as directors of the
debtor corporation in the authorization of a mortgage or deed of trust to the former to
secure such indebtedness In the same manner that when the corporation is insolvent,
its directors who are its creditors cannot secure to themselves any advantage or
preference over other creditors. They cannot thus take advantage of their fiduciary
relation and deal directly with themselves, to the injury of others in equal right. If they
do, equity will set aside the transaction at the suit of creditors of the corporation or
their representatives, without reference to the question of any actual fraudulent intent
on the part of the directors, for the right of the creditors does not depend upon fraud
in fact, but upon the violation of the fiduciary relation to the directors.
Directors of insolvent corporation, who are creditors of the company, can not
secure to themselves any preference or advantage over other creditors in the payment
of their claims. It is not good morals or good law. The governing body of officers
thereof are charged with the duty of conducting its affairs strictly in the interest of its
existing creditors, and it would be a breach of such trust for them to undertake to give
any one of its members any advantage over any other creditors in securing the
payment of his debts in preference to all others.

Disloyalty

JOHN GOKONGWEI
vs.
SEC, ANDRES SORIANO, et al.
GR L-45911, 11 April 1979

FACTS:

Gokonwei alleged that on September 18, 1976, individual respondents amended

by bylaws of San Miguel Corporation, basing their authority to do so on a resolution of
the stockholders adopted on March 13, 1961, when the outstanding capital stock of
respondent corporation was only P70,139.740.00, divided into 5,513,974 common
shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the
time of the amendment, the outstanding and paid up shares totalled 30,127,043, with
a total par value of P301,270,430.00. It was contended that according to section 22 of
the Corporation Law and Article VIII of the by-laws of the corporation, the power to
amend, modify, repeal or adopt new by-laws may be delegated to the Board of
Directors only by the affirmative vote of stockholders representing not less than 2/3 of
the subscribed and paid up capital stock of the corporation, which 2/3 should have
been computed on the basis of the capitalization at the time of the amendment. Since
the amendment was based on the 1961 authorization, petitioner contended that the
Board acted without authority and in usurpation of the power of the stockholders.
It was claimed that prior to the questioned 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 SMC’s BoD acted in bad faith in making the amendment which
disqualified Gokongwei from being elected as Director.

RULING:

NO.

SMC is merely protecting its interest from Gokongwei, who owns companies in
direct competition with SMC’s business. 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. It springs from the fact that
directors have the control and guidance of corporate affairs and property; 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
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.

ELEANOR ERICA STRONG, ET AL.

vs.
FRANCISCO GUTIERREZ REPIDE
G.R. No. L-7154. February 21, 1912

FACTS:

Eleanor Strong was the owner of 800 shares of the capital stock of Philippine
Sugar Estate Development Company. Gutierrez Rapide, owner of three-fourths shares
of the company’s stock , 1 of the 5 directors of the company and was elected by the
board as administrator general of such company, took steps to purchase the 800
shares owned by Strong, which he knew were in the possession of F. Stuart Jones, as
her agent. Instead of seeing Jones, who had an office next door, Repide employed one
Kauffman. Kaufmann, in turn, employed Mr. Sloan, a broker, to purchase the stock
for him. Kauffman told Sloan that the stock to be purchased was for a member of his
wife’s family. This action by Repide was due to the negotiations initiated by the
government where the latter will purchase the company’s lands (together with other
friar lands) at a price which greatly enhance the value of the stock.
As a result of the negotiations, Jones, assuming he had the power and without
consulting Strong, sold the 800 shares. Strong filed a case to recover the shares from
Repide on the ground that the shares had been sold and delivered by Strong’s agent
without authority to do so and on the ground that Repide fraudulently concealed from
Strong’s agent the facts affecting the value of the stock so sold and delivered.

ISSUE:

Whether or notRepide, acting in good faith, has the duty to disclose to the agent
of Strong the facts bearing upon or which might affect the value of the stocks.

RULING:

YES.
 The Court ruled that there is no relationship of a fiduaciary nature exists
between a director and a shareholder in a business corporation. There are cases,
however, where, by reason of special facts, such duty of a director to disclose to a
shareholder the knowledge which he may possess regarding the value of the shares of
the company before he purchases any from a shareholder. Some special facts are
present in this case such as the fact the Repide is not only a director of the
corporation but an owner of three-fourths shares of its stock. He was the chief
negotiator for the sale of all the lands and was acting substantially as the agent of the
shareholders by reason of his ownership of the shares. Thus, a purchase of stock in a
corporation by a director and owner of three-fourths of the entire capital stock, who
was also administrator general of the company and engaged in the negotiations which
finally led to the sale of company’s lands to the government at a price which greatly
enhanced the value of the stock, was fraudulent as procured by insidious machination
where he employed an agent to make the purchase, concealing both his identity as
purchaser and his knowledge of the state of the negotiations and their probable
successful result

Watered Stocks

LIRAG TEXTILE MILLS and BASILIO LIRAG

vs.
SSS, HON. PACIFICO DE CASTRO
GR L-33205, 31 August 1987

FACTS:

That on September 4, 1961, the SSS and Lirag Textile Mills, Inc. and Basilio
Lirag entered into a Purchase Agreement under which the plaintiff agreed to purchase
from the said defendant preferred shares of P1,000,000.00 subject to the conditions
set forth in such agreement. Pursuant to the Purchase Agreement of September 4,
1961, SSS, on January 31, 1962, paid Lirag Textile Mills, Inc. the sum of P500,000.00
for which the said defendant issued to plaintiff 5,000 preferred shares with a par value
of P100.00 per share.
To guarantee the redemption of the stocks purchased by the plaintiff, the
payment of dividends, as well as the other obligations of the Lirag Textile Mills, Basilio
signed the Purchase Agreement of September 4, 1961 not only as president of the
defendant corporation, but also as surety so that should the Lirag Textile Mills, Inc.
fail to perform any of its obligations in the said Purchase Agreement, the surety shall
immediately pay to the vendee the amounts then outstanding.
 Notwithstanding such letters of demand to the defendant Basilio L. Lirag, Stock
Certificates Nos. 128 and 139 issued to plaintiff are still unredeemed and no dividends
have been paid on said stock certificates;

ISSUE:

Whether or not Lirag Textile is liable to SSS.

RULING:

YES.

It failed to comply with its contractual stipulations. The Purchase Agreement is,
indeed, a debt instrument. Its terms and conditions unmistakably show that the
parties intended the repurchase of the preferred shares on the respective scheduled
dates to be an absolute obligation which does not depend upon the financial ability of
petitioner corporation. This absolute obligation on the part of petitioner corporation is
made manifest by the fact that a surety was required to see to it that the obligation is
fulfilled in the event of the principal debtor's inability to do so. The unconditional
undertaking of petitioner corporation to redeem the preferred shares at the specified
dates constitutes a debt which is defined "as an obligation to pay money at some fixed
future time, or at a time which becomes definite and fixed by acts of either party and
which they expressly or impliedly, agree to perform in the contract.
A stockholder sinks or swims with the corporation and there is no obligation to
return the value of his shares by means of repurchase if the corporation incurs losses
and financial reverses, much less guarantee such repurchase through a surety.

RICARDO NAVA
vs.
PEERS MARKETING CORP., RENATO CUSI and AMPARO CUSI
GR L-28120, 25 November 1976

FACTS:

Teofilo Po as an incorporator subscribed to eighty shares of Peers Marketing

Corporation at one hundred pesos a share or a total par value of eight thousand
pesos. Po paid two thousand pesos or twenty-five percent of the amount of his
subscription. No certificate of stock was issued to him or, for that matter, to any
incorporator, subscriber or stockholder.
On April 2, 1966 Po sold to Ricardo A. Nava for two thousand pesos twenty of
his eighty shares. In the deed of sale Po represented that he was "the absolute and
registered owner of twenty shares" of Peers Marketing Corporation.
Nava requested the officers of the corporation to register the sale in the books of
the corporation. The request was denied because Po has not paid fully the amount of
his subscription. Nava was informed that Po was delinquent in the payment of the
balance due on his subscription and that the corporation had a claim on his entire
subscription of eighty shares which included the twenty shares that had been sold to
Nava.

ISSUE:

Whether or not Peers may be compelled by mandamus to register the stocks in

Nava’s name.

RULING:

NO.

There’s no certificate of stock issued in favor of Po. Shares of stock may be

transferred by delivery to the transferee of the certificate properly indorsed. "Title may
be vested in the transferee by delivery of the certificate with a written assignment or
indorsement thereof" There should be compliance with the mode of transfer prescribed
by law.
The usual practice is for the stockholder to sign the form on the back of the
stock certificate. The certificate may thereafter be transferred from one person to
another. If the holder of the certificate desires to assume the legal rights of a
shareholder to enable him to vote at corporate elections and to receive dividends, he
fills up the blanks in the form by inserting his own name as transferee. Then he
delivers the certificate to the secretary of the corporation so that the transfer may be
entered in the corporation's books. The certificate is then surrendered and a new one
issued to the transferee.
That procedure cannot be followed in the instant case because, as already
noted, the twenty shares in question are not covered by any certificate of stock in Po's
name. Moreover, the corporation has a claim on the said shares for the unpaid
balance of Po's subscription. A stock subscription is a subsisting liability from the
time the subscription is made. The subscriber is as much bound to pay his
subscription as he would be to pay any other debt. The right of the corporation to
demand payment is no less incontestable.
In this case no stock certificate was issued to Po. Without the stock certificate,
which is the evidence of ownership of corporate stock, the assignment of corporate
shares is effective only between the parties to the transaction.
 Derivative Suit: Remedies to Enforce Personal Liability

JUANITO ANG, for and in behalf of SUNRISE MARKETING (BACOLOD), INC.

vs.
SPOUSES ROBERTO and RACHEL ANG
G.R. No. 201675. June 19, 2013

FACTS:

Sps. Roberto and Rachel Ang took over the active management of [SMBI].
Through the employment of sugar coated words, they were able to successfully
manipulate the stocks sharings between themselves at 50-50 under the condition that
the procedures mandated by the Corporation Code on increase of capital stock be
strictly observed (valid Board Meeting). No such meeting of the Board to increase
capital stock materialized. It was more of an accommodation to buy peace.
Juanito claimed that payments to Nancy and Theodore ceased sometime after
2006. On 24 November 2008, Nancy and Theodore, through their counsel here in the
Philippines, sent a demand letter to "Spouses Juanito L. Ang/Anecita L. Ang and
Spouses Roberto L. Ang/Rachel L. Ang" for payment of the principal amounting to
$1,000,000.00 plus interest at ten percent (10%) per annum, for a total of
$2,585,577.37 within ten days from receipt of the letter. 12 Roberto and Rachel then
sent a letter to Nancy and Theodore’s counsel on 5 January 2009, saying that they are
not complying with the demand letter because they have not personally contracted a
loan from Nancy and Theodore.

ISSUE:

Whether or not the Honorable Court of Appeals erred in ordering the dismissal
of the Complaint on the ground that the case is not a derivative suit.

RULING:

NO.

The Complaint is not a derivative suit. A derivative suit is an action brought by

a stockholder on behalf of the corporation to enforce corporate rights against the
corporation’s directors, officers or other insiders. Under Sections 23 and 36 of the
Corporation Code, the directors or officers, as provided under the by-laws, have the
right to decide whether or not a corporation should sue. Since these directors or
officers will never be willing to sue themselves, or impugn their wrongful or fraudulent
decisions, stockholders are permitted by law to bring an action in the name of the
corporation to hold these directors and officers accountable. In derivative suits, the
real party ininterest is the corporation, while the stockholder is a mere nominal party.
 LISAM ENTERPRISES, INC. represented by LOLITA A. SORIANO, and LOLITA A.
SORIANO
vs.
BANCO DE ORO UNIBANK, INC. (formerly PHILIPPINE COMMERCIAL
INTERNATIONAL BANK),* LILIAN S. SORIANO, ESTATE OF LEANDRO A.
SORIANO, JR., REGISTER OF DEEDS OF LEGASPI CITY, and JESUS L. SARTE
G.R. No. 143264               April 23, 2012

FACTS:

On August 13, 1999, petitioners filed a Complaint against respondents for

Annulment of Mortgage with Prayer for Temporary Restraining Order & Preliminary
Injunction with Damages with the RTC of Legaspi City. Petitioner Lolita A. Soriano
alleged that she is a stockholder of petitioner Lisam Enterprises, Inc. (LEI) and a
member of its Board of Directors, designated as its Corporate Secretary.
On or about 28 March 1996, defendant Lilian S. Soriano and the late Leandro
A. Soriano, Jr., as husband and wife Spouses Soriano, in their personal capacity and
for their own use and benefit, obtained a loan from defendant PCIB (Legaspi Branch)
(Banco de Oro Unibank, Inc.) in the total amount of P20 Million.

ISSUE:

Whether or not the case will prosper.

RULING:

YES.

The courts should be liberal in allowing amendments to pleadings to avoid a

multiplicity of suits and in order that the real controversies between the parties are
presented, their rights determined, and the case decided on the merits without
unnecessary delay. This liberality is greatest in the early stages of a lawsuit, especially
in this case where the amendment was made before the trial of the case, thereby
giving the petitioners all the time allowed by law to answer and to prepare for trial.
The Court enumerated the requisites for filing a derivative suit, as follows: a)
the party bringing the suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material; b) he has
tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea;
and c) the cause of action actually devolves on the corporation, the wrongdoing or
harm having been, or being caused to the corporation and not to the particular
stockholder bringing the suit.
A reading of the amended complaint will reveal that all the foregoing requisites
had been alleged therein. Hence, the amended complaint remedied the defect in the
original complaint and now sufficiently states a cause of action.

STRATEGIC ALLIANCE DEV. CORPORATION

vs.
RADSTOCK SECURITIES
GR 178158, 04 December 2009

FACTS:

CCDCP Mining Corporation (CDCP Mining), an affiliate of CDCP, obtained loans

from Marubeni Corporation of Japan (Marubeni). A CDCP official issued letters of
guarantee for the loans although there was no CDCP Board Resolution authorizing the
issuance of such letters of guarantee. CDCP Mining secured the Marubeni loans when
CDCP and CDCP Mining were still privately owned and managed.
In 1983, CDCP’s name was changed to Philippine National Construction
Corporation (PNCC) in order to reflect that the Government already owned 90.3% of
PNCC and only 9.70% is under private ownership. Meanwhile, the Marubeni loans to
CDCP Mining remained unpaid.
On 20 October 2000 and 22 November 2000, the PNCC Board of Directors
(PNCC Board) passed Board Resolutions admitting PNCC’s liability to Marubeni.
Previously, for two decades the PNCC Board consistently refused to admit any liability
for the Marubeni loans.
In January 2001, Marubeni assigned its entire credit to Radstock Securities
Limited (Radstock), a foreign corporation. Radstock immediately sent a notice and
demand letter to PNCC.
PNCC and Radstock entered into a Compromise Agreement. Under this
agreement, PNCC shall pay Radstock the reduced amount of P6,185,000,000.00 in full
settlement of PNCC’s guarantee of CDCP Mining’s debt allegedly totaling
P17,040,843,968.00 (judgment debt as of 31 July 2006). To satisfy its reduced
obligation, PNCC undertakes to (1) "assign to a third party assignee to be designated
by Radstock all its rights and interests" to the listed real properties of PNCC; (2) issue
to Radstock or its assignee common shares of the capital stock of PNCC issued at par
value which shall comprise 20% of the outstanding capital stock of PNCC; and (3)
assign to Radstock or its assignee 50% of PNCC’s 6% share, for the next 27 years, in
the gross toll revenues of the Manila North Tollways Corporation.
Luis Sison, a stockholder and former PNCC President and Chairman, filed a
derivative suit questioning the legality of the compromise agreement.

ISSUE:

Whether or not Sison’s derivative suit is valid.

RULING:

YES.

Sison has legal standing to challenge the Compromise Agreement. Although

there was no allegation that Sison filed the case as a derivative suit in the name of
PNCC, it could be fairly deduced that Sison was assailing the Compromise Agreement
as a stockholder of PNCC.
A derivative action is a suit by a stockholder to enforce a corporate cause of
action. Under the Corporation Code, where a corporation is an injured party, its power
to sue is lodged with its board of directors or trustees. However, an individual
stockholder may file a derivative suit on behalf of the corporation to protect or
vindicate corporate rights whenever the officials of the corporation refuse to sue, or are
the ones to be sued, or hold control of the corporation. In such actions, the
corporation is the real party-in-interest while the suing stockholder, on behalf of the
corporation, is only a nominal party.
In this case, the PNCC Board cannot conceivably be expected to attack the
validity of the Compromise Agreement since the PNCC Board itself approved the
Compromise Agreement. In fact, the PNCC Board steadfastly defends the Compromise
Agreement for allegedly being advantageous to PNCC.

ANTHONY YU et al.
vs.
JOSEPH YUKAYGUAN et al.
GR 177549, 18 June 2009

FACTS:

Petitioners and the respondents were all stockholders of Winchester Industrial

Supply, Inc. On 15 October 2002, respondents filed against petitioners a verified
Complaint forAccounting, Inspection of Corporate Books and Damages through
Embezzlement and Falsification of Corporate Records and Accounts 1[6] before the RTC
of Cebu. The said Complaint was filed by respondents, in their own behalf and as a

1
derivative suit on behalf of Winchester, Inc., and was docketed as SRC Case No. 022-
CEB. The factual background of the Complaint was stated in the attached Affidavit
executed by respondent Joseph.
According to respondents, Winchester, Inc. was established and incorporated
on 12 September 1977, with petitioner Anthony as one of the incorporators, holding
1,000 shares of stock worth P100,000.00. Petitioner Anthony paid for the said shares
of stock with respondent Joseph’s money, thus, making the former a mere trustee of
the shares for the latter.
The case at bar was initiated before the RTC by respondents as a derivative
suit, on their own behalf and on behalf of Winchester, Inc., primarily in order to
compel petitioners to account for and reimburse to the said corporation the corporate
assets and funds which the latter allegedly misappropriated for their personal benefit.

ISSUE:

Whether or not the derivative suit is valid.

RULING:

YES.

The general rule is that where a corporation is an injured party, its power to sue
is lodged with its board of directors or trustees. Nonetheless, an individual
stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stocks in order to protect or vindicate corporate rights, whenever the
officials of the corporation refuse to sue, or are the ones to be sued, or hold the control
of the corporation. In such actions, the suing stockholder is regarded as a nominal
party, with the corporation as the real party in interest. A derivative action is a suit by
a shareholder to enforce a corporate cause of action. The corporation is a necessary
party to the suit. And the relief which is granted is a judgment against a third person
in favor of the corporation.
Glaringly, a derivative suit is fundamentally distinct and independent from
liquidation proceedings. They are neither part of each other nor the necessary
consequence of the other. There is totally no justification for the Court of Appeals to
convert what was supposedly a derivative suit instituted by respondents, on their own
behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding for the
liquidation of Winchester, Inc. 
While it may be true that the parties earlier reached an amicable settlement, in
which they agreed to already distribute the assets of Winchester, Inc., and in effect
liquidate said corporation, it must be pointed out that respondents themselves
repudiated said amicable settlement before the RTC, even after the same had been
partially implemented; and moved that their case be set for pre-trial. Attempts to
again amicably settle the dispute between the parties before the Court of Appeals were
unsuccessful.
VIRGINIA GOCHAN et al.
vs.
RICHARD YOUNG, et al.
GR 131889, 12 March 2001

FACTS:
 Felix Gochan and Sons Realty Corporation (Gochan Realty, for brevity) was
registered with the SEC on June, 1951, with Felix Gochan, Sr., Maria Pan Nuy Go
Tiong, Pedro Gochan, Tomasa Gochan, Esteban Gochan and Crispo Gochan as its
incorporators.
Felix Gochan Sr.'s daughter, Alice, mother of respondents, inherited 50 shares
of stock in Gochan Realty from the former. She died in 1955, leaving the 50 shares to
her husband, John Young, Sr.
In 1962, the Regional Trial Court of Cebu adjudicated 6/14 of these shares to
her children, Richard Young, David Young, Jane Young Llaban, John Young Jr., Mary
Young Hsu and Alexander Thomas Young.
Having earned dividends, these stocks numbered 179 by 20 September 1979.
Five days later (25 September), at which time all the children had reached the age of
majority, their father John Sr., requested Gochan Realty to partition the shares of his
late wife by cancelling the stock certificates in his name and issuing in lieu thereof,
new stock certificates in the names of the children.

ISSUE:

Whether or not respondents have the legal personality to file a derivative suit on
behalf of the corporation.

RULING:

NO.

Where corporate directors have committed a breach of trust either by their

frauds, ultra vires acts, or negligence, and the corporation is unable or unwilling to
institute suit to remedy the wrong, a single stockholder may institute that suit, suing
on behalf of himself and other stockholders and for the benefit of the corporation, to
bring about a redress of the wrong done directly to the corporation and indirectly to
the stockholders.
In the present case, the Complaint alleges all the components of a derivative
suit. The allegations of injury to the Spouses Uy can coexist with those pertaining to
the corporation. The personal injury suffered by the spouses cannot disqualify them
from filing a derivative suit on behalf of the corporation. It merely gives rise to an
additional cause of action for damages against the erring directors. This cause of
action is also included in the Complaint filed before the SEC.
The Spouses Uy have the capacity to file a derivative suit in behalf of and for
the benefit of the corporation. The reason is that, as earlier discussed, the allegations
of the Complaint make them out as stockholders at the time the questioned
transaction occurred, as well as at the time the action was filed and during the
pendency of the action.
As to the Intestate Estate of John Young, Sr., permitting an executor or
administrator to represent or to bring suits on behalf of the deceased, do not prohibit
the heirs from representing the deceased. These rules are easily applicable to cases in
which an administrator has already been appointed. But no rule categorically
addresses the situation in which special proceedings for the settlement of an estate
have already been instituted, yet no administrator has been appointed. In such
instances, the heirs cannot be expected to wait for the appointment of an
administrator; then wait further to see if the administrator appointed would care
enough to file a suit to protect the rights and the interests of the deceased; and in the
meantime do nothing while the rights and the properties of the decedent are violated
or dissipated.

WESTERN INSTITUTE OF TECHNOLOGY, et al.

vs.
RICARDO SALAS
GR 113032, 21 August 1997

FACTS:

The minority stockholders of WIT, sometime on June 1, 1986 in the principal

office of WIT at La Paz, Iloilo City, a Special Board Meeting was held. In attendance
were other members of the Board including one of the petitioners Reginald Villasis.
Prior to aforesaid Special Board Meeting, copies of notice thereof, dated May 24, 1986,
were distributed to all Board Members, regarding the compensation of the school’s
officers, which was eventually passed.
A few years later, that is, on March 13, 1991, petitioners Homero Villasis,
Prestod Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-complaint
against private respondents before the Office of the City Prosecutor of Iloilo, as a result
of which two (2) separate criminal informations, one for falsification of a public
document under Article 171 of the Revised Penal Code and the other for estafa under
Article 315, par. 1(b) of the RPC, were filed before Branch 33 of the Regional Trial
Court of Iloilo City. The charge for falsification of public document was anchored on
the private respondents' submission of WIT's income statement for the fiscal year
1985-1986 with the Securities and Exchange Commission (SEC) reflecting therein the
disbursement of corporate funds for the compensation of private respondents based
on Resolution No. 4, series of 1986, making it appear that the same was passed by the
board on March 30, 1986, when in truth, the same was actually passed on June 1,
1986, a date not covered by the corporation's fiscal year 1985-1986 (beginning May 1,
1985 and ending April 30, 1986).
WIT questioned the legal standing of the petitioners to sue on its behalf,
claiming it did not give them authority to do do. Petitioner, however, contended that
the case is a derivative suit.

ISSUE:

Whether or not the case at bar is a derivative suit.

RULING:

NO.

A derivative suit is an action brought by minority shareholders in the name of

the corporation to redress wrongs committed against it, for which the directors refuse
to sue. It is a remedy designed by equity and has been the principal defense of the
minority shareholders against abuses by the majority. Here, however, the case is not a
derivative suit but is merely an appeal on the civil aspect of Criminal Cases Nos.
37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public
document. Among the basic requirements for a derivative suit to prosper is that the
minority shareholder who is suing for and on behalf of the corporation must allege in
his complaint before the proper forum that he is suing on a derivative cause of action
on behalf of the corporation and all other shareholders similarly situated who wish to
join. This is necessary to vest jurisdiction upon the tribunal in line with the rule that it
is the allegations in the complaint that vests jurisdiction upon the court or quasi-
judicial body concerned over the subject matter and nature of the action. This was not
complied with by the petitioners either in their complaint before the court a quo nor in
the instant petition which, in part, merely states that "this is a petition for review on
certiorari on pure questions of law to set aside a portion of the RTC decision in
Criminal Cases Nos. 37097 and 37098" since the trial court's judgment of acquittal
failed to impose any civil liability against the private respondents. By no amount of
equity considerations, if at all deserved, can a mere appeal on the civil aspect of a
criminal case be treated as a derivative suit.

FIRST PHILIPPINE INTERNATIONAL BANK

vs.
COURT OF APPEALS, CARLOS EJERCITO, et al.
GR 115849, 24 January 1996

FACTS:

Janolo and Demetria and Producers Bank, through its bank manager Mercurio
Rivera, entered into a contract to sell involving parcels of land in Laguna owned by the
bank. The sale, however, was disapproved by the bank’s conservator (the bank is
under receivership). Ejercito insisted that there was already a perfected contract
between him and the bank, considering that the offer that he made was already
approved by the bank’s board of directors. He then instituted a case for specific
performance against the bank.
On July 11, 1992, during the pendency of the proceedings in the Court of
Appeals, Henry Co and several other stockholders of the Bank filed an action,
purportedly a “derivative suit”, against Encarnacion, Demetria and Janolo “to declare
any perfected sale of the property as unenforceable and to stop Ejercito from enforcing
or implementing the sale.” In his answer, Janolo argued that the Second Case was
barred by litis pendentia by virtue of the case then pending in the Court of Appeals.
During the pre-trial conference in the Second Case, plaintiffs filed a Motion for Leave
of Court to Dismiss the Case Without Prejudice. “Private respondent opposed this
motion on the ground, among others, that plaintiff’s act of forum shopping justifies the
dismissal of both cases, with prejudice.

ISSUE:

Whether or not the case filed by the stockholders of the bank is a ‘derivative
suit’.

RULING:

NO.
 An individual stockholder is permitted to institute a derivative suit on behalf of
the corporation wherein he holds stock in order to protect or vindicate corporate
rights, whenever the officials of the corporation refuse to sue, or are the ones to be
sued or hold the control of the corporation. In such actions, the suing stockholder is
regarded as a nominal party, with the corporation as the real party in interest.
In the face of the damaging admissions taken from the complaint, petitioners,
quite strangely, sought to deny that the Second Case was a derivative suit, reasoning
that it was brought, not by the minority shareholders, but by Henry Co et al., who not
only own, hold or control over 80% of the outstanding capital stock, but also
constitute the majority in the Board of Directors of petitioner Bank. That being so,
then they really represent the Bank. So, whether they sued “derivatively” or directly,
there is undeniably an identity of interests/entity represented.

COMMART PHILIPPINES, INC.

vs.
SEC, ALICE MAGLUTAC
GR 85318, 03 June 1991

FACTS:

Commart (Phils.), Inc., (Commart for short) is a corporation organized by two

brothers, Jesus and Mariano Maglutac, to engage in the brokerage business for the
importation of fertilizers and other products/commodities.
Sometime in June 1984, the two brothers agreed to go their separate ways, with
Mariano being persuaded to sell to Jesus his shareholdings in Commart amounting to
25% of the outstanding capital stock. As part of the deal, a "Cooperative Agreement"
was signed, between Commart (represented by Jesus) and Mariano, in which, among
others, Commart ceded to Mariano or to an "acceptable entity" he may create, a
portion of its business, with a pledge of mutual cooperation for a certain period so as
to enable Mariano to get his own corporation off the ground, so to speak.
Mariano's wife, Alice M. Maglutac, has been for years a stockholder and director of
Commart, did not dispose of her shareholdings, and thus continued as such even after
the sale of Mariano's equity.
As broker and indentor, Commart's principal income came from commissions
paid to it in U.S. dollars by foreign suppliers of fertilizers and other commodities
imported by Planters Products, Inc. and other local importers.
ISSUE:

Whether or not Alice has the legal standing to file the derivative suit.

RULING:

YES.

A derivative suit has been the principal defense of the minority shareholder
against abuses by the majority. It is a remedy designed by equity for those situations
where the management, through fraud, neglect of duty, or other cause, declines to
take the proper and necessary steps to assert the corporation's rights. Indeed, to grant
to Commart the light of withdrawing or dismissing the suit, at the instance of majority
stockholders and directors who themselves are the persons alleged to have committed
breaches of trust against the interest of the corporation, would be to emasculate the
right of minority stockholders to seek redress for the corporation. To consider the
Notice of Dismissal filed by Commart as quashing the complaint filed by Alice
Maglutac in favor of the corporation would be to defeat the very nature and function of
a derivative suit and render the right to institute the action illusory.

ELTON CHASE
vs.
DR. VICTOR BUENCAMINO
GR L-20395, 13 May 1985

FACTS:

Plaintiff Elton Chase, on the other hand, was the owner of Production
Manufacturing Company, of Portland, Oregon, USA, a corporation primarily dedicated
to the operation of a machine shop and heat-treating plant for the production of
tractor parts.
 Sometime in 1954, Chase was notified by the Highway Commission of the State
of Oregon that his factory was going to be in the path of a proposed highway. He was
then advised to sell or face expropriation and warned to remove his plant within a
year. His distributor Craig Carrol told him of a Dr. Buencamino of Manila who he said
was interested in establishing a manufacturing plant in the Philippines. Craig Carrol
contacted Buencamino who told him to contact his associate William Cranker in the
United States. 8 Thereafter, a series of negotiations took place both here in Manila,
and in the United States, between Chase on the one hand, and Cranker and
Buencamino, on the other, for the purchase of Chase's factory (Production
Manufacturing Company) and the establishment of a new factory in Manila which was
to be called the American Machinery Engineering Parts, Inc. (Amparts for short). These
negotiations culminated in a final agreement to the effect that - Elton Chase was to be
paid One Hundred Thousand Dollars ($100,000.00) and he would also be given a one-
third interest in Amparts, with the other two, Dr. Buencamino and Cranker, as the
owner of the other two-thirds (2/3) interest, 1/3 interest each; that in exchange for
said $100,000.00 and the 1/3 interest, Chase was to transfer to Amparts his tractor
plant, ship his machineries to Manila, assuming all costs of dismantling, preserving
and crating for shipment to Manila, install said machineries at Amparts plant with the
aid of five technicians and finally, he has to be the production manager of Amparts.
Chase had shipped his machineries and had them installed in the Amparts
plant in Pasig, Rizal. Amparts then began operation with Dr. Buencamino as
President, William Cranker as Manager and Elton Chase as Production Manager. For
sometime the three maintained harmonious relations but later on distrust came in
until finally Chase tendered his letter of resignation as Production Manager. He then
filed a derivative suit against Buencamino and Chase, who allegedly stole from the
corporation. He sought for the dissolution of the corporation.

ISSUE:

Whether or not the corporation may be dissolved.

RULING:

NO.

The case is of derivative in nature, therefore, it was filed for the benefit of the
corporation. The Court grant a dissolution because the action is a derivative one for
the benefit of Amparts and not for the personal benefit of Chase, and Amparts can not
be benefited by its extinction; as to the ouster of Dr. Buencamino from management, it
should not be forgotten that Dr. Buencamino is not only a manager, but is in fact 2/3
owner of Amparts and to oust him from management would amount to his
disenfranchisement as owner of the majority of the enterprise apart from the fact that
it is also established in the proofs that Amparts is already picking up and has been a
going concern after Cranker left unto him the direction of its affairs; the Court
therefore having in mind all these finds that the solution most equitable and just
would be to limit its decision to imposing a monetary judgment upon the guilty parties
for the benefit of Amparts.
 SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES
vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS,
ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH
KAHN and RAMON DEL ROSARIO, JR.
G.R. No. 85339. August 11, 1989

FACTS:

33,133,266 shares of the outstanding capital stock of SMC were acquired 14

other corporations, and were placed under a Voting Trust Agreement in favor of the
late Andres Soriano, Jr. However, 33,133,266 SMC shares were sequestered by the
PCGG, on the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a
close associate and dummy of former President Marcos. SMC promptly suspended
payment of the other installments of the price to the 14 seller corporations.
On December, 1986, the SMC Board, by Resolution No. 86-122, "decided to
assume the loans incurred by Neptunia for the down payment ((P500M)) on the
33,133,266 shares." The Board opined that there was "nothing illegal in this
assumption (of liability for the loans)," since Neptunia was "an indirectly wholly owned
subsidiary of SMC," there "was no additional expense or exposure for the SMC Group,
and there were tax and other benefits which would redound to the SMC group of
companies. However, at the meeting of the SMC Board, Eduardo de los Angeles, one of
the PCGG representatives in the SMC board, impugned said Resolution No. 86-122.

ISSUE:

Whether or not de los Angeles can file a derivative suit in behalf of the
corporation.

RULING:

YES.

The Court ruled that it is claimed that since de los Angeles 20 shares represent
only .00001644% of the total number of outstanding shares (1 21,645,860), he cannot
be deemed to fairly and adequately represent the interests of the minority
stockholders. The implicit argument — that a stockholder, to be considered as
qualified to bring a derivative suit, must hold a substantial or significant block of
stock — finds no support whatever in the law. The requisites for a derivative suit are
as follows: (a) the party bringing suit should be a shareholder as of the time of the act
or transaction complained of, the number of his shares not being material; (b) he has
tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his
plea; and (c) the cause of action actually devolves on the corporation, the wrongdoing
or harm having been, or being caused to the corporation and not to the particular
stockholder bringing the suit.
The bona fide ownership by a stockholder of stock in his own right suffices to
invest him with standing to bring a derivative action for the benefit of the corporation.
The number of his shares is immaterial since he is not suing in his own behalf, or for
the protection or vindication of his own particular right, or the redress of a wrong
committed against him, individually, but in behalf and for the benefit of the
corporation.

HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W.

ROBINSON
vs.
THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC BARCLAY,
ALFRED F. KELLY, JOHN W. MEARS and CHARLES D. MACINTOSH
G.R. No. L-25241. November 3, 1926

FACTS:

In order more effectually to plunder the Company and to defraud these

plaintiffs the said defendants, Mullen, Barclay, Mears and Macintosh, made, executed
and filed in the Bureau of Commerce and Industry of the Philippine Islands, articles of
incorporation of a corporation called the "Philippine Motors Corporation," having its
principal office in the City of Manila, a capital stock of P25,000, of which the sum of
P5,000, was alleged to have been subscribed and paid as follows: the defendant
Barclay P200, defendant Mears P1,200, defendant Kelly P1,200, defendant Macintosh
P1,200, defendant Mullen P1,200, the treasurer thereof being the defendant Mears.
And these plaintiffs beg leave to refer to the original articles of Incorporation on file in
the said Bureau for greater certainty.
          That at the time of such incorporation each and every one of the last above
named defendants was an officer or employee of the defendant Bank. That these
plaintiffs have nor information nor means of obtaining information as to whether the
money alleged to have been described by them for their shares of stock was of their
personal funds and property or whether it was money furnished them by the Bank of
purpose moneys such incorporation was a fraud upon these plaintiffs for the reason
that it was intended for the sole purpose of taking over the assets of the Company and
said defendants were enabled to effectuate such intent by reason of their positions as
officers and employees of the Bank.

ISSUE:

Whether or not plaintiffs have the capacity to sue.

RULING:

YES.

 Invoking the well-known rule that shareholders cannot ordinarily sue in equity
to redress wrongs done to the corporation, but that the action must be brought by the
Board of Directors, the appellees argue — and the court below held — that the
corporation Teal and Company is a necessary party plaintiff and that the plaintiff
stockholders, not having made any demand on the Board to bring the action, are not
the proper parties plaintiff. But, 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 and 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 an action and prosecute the same
effectively would have been useless, and the law does not require litigants to perform
useless acts.
The conclusion of the court below that the plaintiffs, not being stockholders in
the Philippine Motors Corporation, had no legal right to proceed against that
corporation in the manner suggested in the complaint evidently rest upon a
misconception of the character of the action. In this proceeding it was necessary for
the plaintiffs to set forth in full the history of the various transactions which
eventually led to the alleged loss of their property and, in making a full disclosure,
references to the Philippine Motors Corporation appear to have been inevitable. It is to
be noted that the plaintiffs seek no judgment against the corporation itself at this
stage of the proceedings.
RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA, EDUARDO DE
LA RAMA, and the HEIRS OF MERCEDES DE LA RAMA-BORROMEO
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First Instance of
Negros Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN LOPUE, JR.,
LEONITO LOPUE, and LUISA U. DACLES
G.R. No. L-40620. May 5, 1979

FACTS:

The herein petitioners were sued by herein defendants to nullify the issuance of
823 shares of stock of the Inocentes de la Rama, Inc. in favor of the petitioners.
On April 4, 1972, the respondents, are the owners of 1,328 shares of stock of
the Inocentes de la Rama, Inc., a domestic corporation, with an authorized capital
stock of 3,000 shares, with a par value of P100.00 per share, 2,177 of which were
subscribed and issued, thus leaving 823 shares unissued. Then President and Vice-
President of the corporation, respectively, the defendants Mercedes R. Borromeo,
Honorio de la Rama, and Ricardo Gamboa, remaining members of the board of
directors of the corporation, in order to forestall the takeover by the plaintiffs of the
afore-named corporation, surreptitiously met and elected Ricardo L. Gamboa and
Honorio de la Rama as president and vice-president of the corporation, respectively,
and passed a resolution authorizing the sale of the 823 unissued shares of the
corporation to the defendants, at par value, after which the petitioners were elected to
the board of directors of the corporation.
The respondents claimed that the sale of the unissued 823 shares of stock of
the corporation was in violation of the plaintiffs' and pre-emptive rights and made
without the approval of the board of directors representing 2/3 of the outstanding
capital stock, and is in disregard of the strictest relation of trust existing between the
defendants, as stockholders. The respondents prayed that a writ of preliminary
injunction be issued restraining the defendants from committing, or continuing the
performance of an act tending to prejudice, diminish or otherwise injure the plaintiffs'
rights in the corporate properties and funds of the corporation, and from disposing,
transferring, selling, or otherwise impairing the value of the 823 shares of stock
illegally issued. The respondent court granted the prayer.

ISSUES:

Whether or not the proper action is a derivative suit.

RULING:

YES.

An individual stockholder is permitted to institute a derivative suit on behalf of

the corporation wherein he holds stock in order to protect or vindicate corporate
rights, whenever the officials of the corporation refuse to sue, or are the ones to be
sued or hold the control of the corporation. In such actions, the suing stockholder is
regarded as a nominal party, with the corporation as the real party in interest. 12 In
the case at bar, however, the plaintiffs are alleging and vindicating their own
individual interests or prejudice, and not that of the corporation. At any rate, it is yet
too early in the proceedings since the issues have not been joined. Besides, misjoinder
of parties is not a ground to dismiss an action.

CATALINA R. REYES
vs.
HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of Manila,
Branch XIII and FRANCISCA R. JUSTINIANI
G.R. No. L-16982. September 30, 1961

FACTS:

The corporation, Roxas-Kalaw Textile Mills, Inc., was organized on June 5, 1954
by defendants Cesar K. Roxas, Adelia K. Roxas, Benjamin M. Roxas, Jose Ma.
Barcelona and Morris Wilson, for and on behalf of the following primary principals
with the following shareholdings: Adelia K. Roxas, 1200 Class A shares; I. Sherman,
900 Class A shares; Robert W. Born, 450 Class A shares and Morris Wilson, 450 Class
A shares; that the respondent holds both Class A and Class B shares and number and
value thereof are is follows: Class A — 50 shares, Class B — 1,250 shares.
On May 8, 1957, the Board of Directors approved a resolution designating one
Dayaram as co-manager and Morris Wilson was likewise designated as co-manager
with responsibilities for the management of the factory only’. An office in New York
was opened for the purpose of supervising purchases, which purchases must have the
unanimous agreement of Cesar K. Roxas, New York resident member of the board of
directors, Robert Born and Wadhumal Dalamal or their respective representatives.
Several purchases aggregating $289,678.86 were made in New York for raw materials
and shipped to the Philippines, which shipment were found out to consist not of raw
materials but already finished products, for which reasons the Central Bank of the
Philippines stopped all dollar allocations for raw materials for the corporation which
necessarily led to the paralyzation of the operation of the textile mill and its business.

ISSUES:

Whether or not a derivative suit will prosper.

RULING:

NO.

The claim that respondent Justiniani did not take steps to remedy the illegal
importation for a period of two years is without merit. During that period of time
respondent had the right to assume and expect that the directors would remedy the
anomalous situation of the corporation brought about by their own wrong doing. Only
after such period of time had elapsed could respondent conclude that the directors
were remiss in their duty to protect the corporation property and business. The fraud
consisted in importing finished textile instead of raw cotton for the textile mill; the
fraud, therefore, was committed by the manager of the business and was consented to
by the directors, evidently beyond reach of respondent as treasurer for that period.
The directors permitted the fraudulent transaction to go unpunished and
nothing appears to have been done to remove the erring purchasing managers. In a
way the appointment of a receiver may have been thought of by the court below so
that the dollar allocation for raw material may be revived and the textile mill placed on
an operating basis.

CANDIDO PASCUAL
vs.
EUGENIO DEL SAZ OROZCO, ET AL.
G.R. No. L-5174. March 17, 1911

FACTS:

This action was brought by the plaintiff Pascual, in his own right as a
stockholder of the bank, for the benefit of the bank, and all the other stockholders
thereof. The Banco Español-Filipino is a banking corporation, constituted as such by
royal decree of the Crown of Spain in the year 1854, the original grant having been
subsequently extended and modified by royal decree of July 14, 1897, and by Act No.
1790 of the Philippine Commission.
It is alleged in the amended complaint that the only compensation
contemplated or provided for the managing officers of the bank was a certain per cent
of the net profits resulting from the bank's operations, as set forth in article 30 of its
reformed charter or statutes.
The gist of the first and second causes of action is as follows: The defendants
constitute a majority of the present board of directors of the bank, who alone can
authorize an action against them in the name of the corporation. It appears that
during the years 1903, 1904, 1905, and 1907 the defendants and appellees, without
the knowledge, consent, or acquiescence of the stockholders, deducted their respective
compensation from the gross income instead of from the net profits of the bank,
thereby defrauding the bank and its stockholders of approximately P20,000 per
annum.
The second cause of action sets forth that defendants' and appellees' immediate
predecessors in office in the bank during the years 1899, 1900, 1901, and 1902,
committed the same illegality as to their compensation as is charged against the
defendants themselves. In the four years immediately following the year 1902, the
defendants and appellees were the only officials or representatives of the bank who
could and should investigate and take action in regard to the sums of money thus
fraudulently appropriated by their predecessors. They were the only persons interested
in the bank who knew of the fraudulent appropriation by their predecessors.
The court below sustained the demurrer as to the first and second causes of action on
the ground that in actions of this character the plaintiff must aver in his complaint
that he was the owner of stock in the corporation at the time of the occurrences
complained of, or else that the stock has since devolved upon him by operation of law.

ISSUE:

Whether or not the petitioner has a cause of action to file a derivative suit.

RULING:

YES.

As to the first cause of action: In suits of this character the corporation itself and
not the plaintiff stockholder is the real party in interest. The rights of the individual
stockholder are merged into that of the corporation. It is a universally recognized
doctrine that a stockholder in a corporation has no title legal or equitable to the
corporate property; that both of these are in the corporation itself for the benefit of all
the stockholders. So it is clear that the plaintiff, by reason of the fact that he is a
stockholder in the bank (corporation) has a right to maintain a suit for and on behalf
of the bank, but the extent of such a right must depend upon when, how, and for what
purpose he acquired the shares which he now owns.
As to the Second cause of action: It affirmatively appears from the complaint
that the plaintiff was not a stockholder during any of the time in question in this
second cause of action. Upon the question whether or not a stockholder can maintain
a suit of this character upon a cause of action pertaining to the corporation when it
appears that he was not a stockholder at the time of the occurrence of the acts
complained of and upon which the action is based, the authorities do not agree.
POWERS OF CORPORATION
Theory of Special Capacities v. Theory of General Capacities

ACEBEDO OPTICAL COMPANY, INC.

vs.
THE HONORABLE COURT OF APPEALS, Hon. MAMINDIARA MANGOTARA, in his
capacity as Presiding Judge of the RTC, 12th Judicial Region, Br. 1, Iligan City;
SAMAHANG OPTOMETRIST Sa PILIPINAS — Iligan City Chapter, LEO T.
CAHANAP, City Legal Officer, and Hon. CAMILO P. CABILI, City Mayor of Iligan
G.R. No. 100152. March 31, 2000

FACTS:

Petitioner applied with the Office of the City Mayor of Iligan for a business
permit. After consideration of petitioner's application and the opposition interposed
thereto by local optometrists, respondent City Mayor issued Business Permit No. 5342
subject to the following conditions that since it is a corporation, Acebedo cannot put
up an optical clinic but only a commercial store; it cannot examine and/or prescribe
reading and similar optical glasses for patients, because these are functions of optical
clinics; it cannot sell reading and similar eyeglasses without a prescription having first
been made by an independent optometrist (not its employee) or independent optical
clinic and can only sell directly to the public, without need of a prescription, Ray-Ban
and similar eyeglasses; it cannot advertise optical lenses and eyeglasses, but can
advertise Ray-Ban and similar glasses and frames; and is allowed to grind lenses but
only upon the prescription of an independent optometrist.
Private respondent Samahan ng Optometrist Sa Pilipinas (SOPI), Iligan Chapter,
through its Acting President, Dr. Frances B. Apostol, lodged a complaint against the
petitioner before the Office of the City Mayor, alleging that Acebedo had violated the
conditions set forth in its business permit and requesting the cancellation and/or
revocation of such permit.

ISSUES:

Whether or not the act of the Respondent Mayor was lawful.

RULING:

NO.

The authority of city mayors to issue or grant licenses and business permits is
beyond cavil. However, the power to grant or issue licenses or business permits must
always be exercised in accordance with law, with utmost observance of the rights of all
concerned to due process and equal protection of the law. In the case under
consideration, the business permit granted by respondent City Mayor to petitioner was
burdened with several conditions.
Distinction must be made between the grant of a license or permit to do
business and the issuance of a license to engage in the practice of a particular
profession. The first is usually granted by the local authorities and the second is
issued by the Board or Commission tasked to regulate the particular profession. A
business permit authorizes the person, natural or otherwise, to engage in business or
some form of commercial activity. A professional license, on the other hand, is the
grant of authority to a natural person to engage in the practice or exercise of his or her
profession.
A business permit is issued primarily to regulate the conduct of business and
the City Mayor cannot, through the issuance of such permit, regulate the practice of a
profession, like that of optometry. Such a function is within the exclusive domain of
the administrative agency specifically empowered by law to supervise the profession,
in this case the Professional Regulations Commission and the Board of Examiners in
Optometry.

Express, Implied and Incidental Powers, Distinguished

PILIPINAS LOAN COMPANY, INC.

vs.
HON. SECURITES AND EXCHANGE COMMISSION AND FILIPINAS PAWNSHOP,
INC.
 G.R. No. 104720. April 4, 2001

FACTS:

Private respondent Filipinas Pawnshop, Inc. is a duly organized corporation

registered with the Securities and Exchange Commission on February 9, 1959. The
articles of incorporation of private respondent states that its primary purpose is to
extend loans at legal interest on the security of either personal properties or on the
security of real properties, and to finance installment sales of motor vehicles, home
appliances and other chattels.
Petitioner is a lending corporation duly registered with the SEC on July 27,
1989. Based on its articles of incorporation, the primary purpose of petitioner is “to
act as a lending investor or, otherwise, to engage in the practice of lending money or
extending loans on the security of real or personal, tangible or intangible properties
whether as pledge, real or chattel mortgage or otherwise, xxx without however,
engaging in pawnbroking as defined under PD 114."
Private respondent filed a complaint with the Prosecution and Enforcement
Department (PED) of the SEC and alleged that: (1) petitioner, contrary to the
restriction set by the Commission, has been operating and doing business as a
pawnbroker, pawnshop or "sanglaan" in the same neighborhood where private
respondent has had its own pawnshop for 30 years in violation of its primary purpose
and without the imprimatur of the Central Bank to engage in the pawnshop business
thereby causing unjust and unfair competition with private respondent. Petitioner
denied that it is engaged in the pawnshop business, alleging that it is a lending
investor duly registered with the Central Bank.

ISSUES:

Whether or not petitioner violated its primary franchise.

RULING:

YES.

A corporation, under the Corporation Code, has only such powers as are
expressly granted to it by law and by its articles of incorporation, those which may be
incidental to such conferred powers, those reasonably necessary to accomplish its
purposes and those which may be incident to its existence.
In the case at bar, the limit of the powers of petitioner as a corporation is very
clear, it is categorically prohibited from "engaging in pawnbroking as defined under PD
114". Hence, in determining what constitutes pawnbrokerage, the relevant law to
consider is PD 114.
Indispensable therefore to the determination of whether or not petitioner had
violated its articles of incorporation, was an inquiry by the SEC if petitioner was
holding out itself to the public as a pawnshop. It must be stressed that the
determination of whether petitioner violated PD 114 was merely incidental to the
regulatory powers of the SEC, to see to it that a corporation does not go beyond the
powers granted to it by its articles of incorporation.
 LUNETA MOTOR COMPANY
vs.
A.D. SANTOS, INC., ET AL.
G.R. No. L-17716. July 31, 1962

FACTS:

On December 31, 1941, to secure payment of a loan evidenced by a promissory

note executed by Nicolas Concepcion and guaranteed by one Placido Esteban in favor
of petitioner, Concepcion executed a chattel mortgage covering the above mentioned
certificate in favor of petitioner.
Thereafter, he constituted a second mortgage on the same certificate to secure
payment of a subsequent loan obtained by Concepcion from the Rehabilitation
Finance Corporation (now Development Bank of the Philippines). This second
mortgage was approved by the respondent Commission, subject to the mortgage lien
in favor of petitioner. The certificate was later sold to Francisco Benitez, Jr., who
resold it to Rodi Taxicab Company. Both sales were made with assumption of the
mortgage in favor of the RFC, and were also approved provisionally by the
Commission, subject to petitioner's lien.
On October 10, 1953 petitioner filed an action to foreclose the chattel mortgage
executed in its favor by Concepcion. While the above case was pending, the RFC also
instituted foreclosure proceedings on its second chattel mortgage, and as a result of
the decision in its favor therein rendered, the certificate of public convenience was sold
at public auction in favor of Amador D. Santos for P24,010.00 on August 31, 1956.
Santos immediately applied with the Commission for the approval of the sale, and the
same was approved on January 26, 1957, subject to the mortgage lien in favor of
petitioner.

ISSUE:

Whether or not the purpose for which petitioner was organized and the
transaction of its lawful business reasonably and necessarily requires acquisition and
holds the certificate and operates as a common carrier by land.

RULING:

NO.

Under Section 13 (5) of the Corporation Law, a corporation created thereunder

may purchase, hold, etc., and otherwise deal in such real and personal property is the
purpose for which the corporation was formed may permit, and the transaction of its
lawful business may reasonably and necessarily require.
Petitioner’s corporate purposes are to carry on a general mercantile and
commercial business, etc., and that it is authorized in its articles of incorporation to
operate and otherwise deal in and concerning automobiles and automobile
accessories' business in all its multifarious ramification and to operate, etc., and
otherwise dispose of vessels and boats, etc., and to own and operate steamship and
sailing ships and other floating craft and deal in the same and engage in the Philippine
Islands and elsewhere in the transportation of persons, merchandise and chattels by
water; all this incidental to the transportation of automobiles.
The Court finds that Petitoner’s articles of incorporation are precisely the best
evidence that it has no authority at all to engage in the business of land
transportation and operate a taxicab service. That it may operate and otherwise deal
in automobiles and automobile accessories; that it may engage in the transportation of
persons by water does not mean that it may engage in the business of land
transportation — an entirely different line of business. If it could not thus engage in
the line of business, it follows that it may not acquire a certificate of public
convenience to operate a taxicab service, such as the one in question, because such
acquisition would be without purpose and would have no necessary connection with
petitioner's legitimate business.
TERESA ELECTRIC AND POWER CO., INC.
vs.
PUBLIC SERVICE COMMISSION and FILIPINAS CEMENT CORPORATION
G.R. No. L-21804. September 25, 1967

FACTS:

The petitioner Teresa Electric Light and Power Co., Inc. is a domestic
corporation operating an electric plant in Teresa, Rizal, under a subsisting certificate
of public convenience and necessity issued on June 2, 1960, while the respondent
Filipinas is likewise a domestic corporation engaged in the manufacture and sale of
cement.
On May 24, 1962, Filipinas filed an application with the Public Service
Commission for a certificate of public convenience to install, maintain and operate an
electric plant in sitio Kaysapon of barrio Pamanaan, municipality of Teresa, Rizal, for
the purpose of supplying electric power and light to its cement factory and its
employees living within its compound.
Petitioner opposed alleging that it is the duly authorized operator of an electric
light, heat and power service in Teresa, Rizal and that Filipinas is not authorized by its
articles of incorporation to operate an electric plant; that the Municipal Council of
Teresa had not authorized it either to operate the proposed service since Filipinas'
principal business does not come within the jurisdiction of the respondent
Commission.

ISSUES:

Whether or not under its articles of incorporation Filipinas is authorized to

operate and maintain an electric plant.

RULING:

YES.
 The Articles of Incorporation of Filipinas (paragraph 7) provide for authority to
secure from any governmental, state, municipality, or provincial, city or other
authority, and to utilize and dispose of in any lawful manner, rights, powers,
privileges, franchises and concessions — obviously necessary or at least related to the
operation of its cement factory. Moreover, said Articles of Incorporation also provide
that the corporation may generally perform any and all acts connected with the
business of manufacturing Portland cement or arising therefrom or incidental thereto.
It cannot be denied that the operation of an electric light, heat and power plant is
necessarily connected with the business of manufacturing cement. Moreover, it has
been established in this case that petitioner was in no condition to supply the power
needs of Filipinas, because its load capacity was only 200 kilowatts while Filipinas
was in need of 6,000 Kilowatts power to operate its cement factory.