MEAD V. E.C. MCCOLLOUGH ET. AL.

Mead, one of the directors of Philippine Engineering and Construction Company, sought to
recover his salary, share in profits and the value of the personal property he left with the
corporation which were sold by the defendants.
When Mead went to China to work as an engineer, the other four directors agreed to sell the
assets of the corporation to McCullough, another director of the corporation.
The sale, which was approved by a majority of the directors of the corporation, was held valid
and binding. At the time the sale was made, there was no hope that the enterprise would be
profitable. Although McCullough was present during the meeting when the sale was approved,
his presence was not necessary to constitute a quorum and likewise was not necessary to
approve the sale. The sale was approved by the three other directors who constituted a majority
and would therefore be binding on Mead.

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MEAD V. MCCULLOUGH (21 Phil. 95; 1911)

Issue: validity of sale of corp. property and assets to the directors who approved the same.
Gen Rule: When purely private corporations remain solvent, its directors are agents or trustees for the SH.
Exception: when the corp. becomes insolvent, its directors are trustees of all the creditors, whether they
are members of the corp. or not, and must manage its property and assets with strict regard to their
interest; and if they are themselves creditors while the insolvent corp is under their management, they
will not be permitted to secure to themselves by purchasing the corp property or otherwise any personal
advantage over the other creditors.
Exception to Exception: A director or officer may in good faith and or an adequate consideration
purchase from a majority of the directors or SH the property even of an insolvent corp, and a sale thus
made to him is valid and binding upon the minority.
In the case at bar, the sale was held to be valid and binding. Company was losing. 4 directors present
during meeting all voted for the sale. They likewise constitute majority of
SH. Contract was found to be fair and reasonable.
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Mead v. McCullough
FACTS
- Mead, McCullough and three others organized the Philippine Engineering and Construction Company.
The 5 of them were the only stockholders and also the directors of the company, with general ordinary
powers.
- Mead was elected as the general manager of the company. Under him, the company failed in their
undertaking to raise sunken Spanish fleet. It became a losing concern and a financial failure.
- After 9 mos. as general manager, Mead resigned to accept the position of engineer of the Canton and
Shanghai Railway Company and thus left for China.
- Thereafter, realizing that continuing the operations of the company would mean more losses, the
remaining directors unanimously assigned all the rights and interests of the company to McCullough
for value, who also assigned the same for value to other people who with McCullough subsequently
formed the Manila Salvage Association.
- Mead is now alleging that he is entitled to receive his salary as general manager, profits made before
the assignment and the value of his personal property which he have left and sold by the defendants.
(main issue but impertinent to the lesson).
ISSUE/S
- Whether or not the remaining directors have the power to sell or transfer to one of its members the
assets of the corporation.
HELD
- Yes. It has to be remembered that the 5 directors herein are also the only stockholders. When the four
remaining directors met to resolve for the assignment, there was a quorum not only of the directors but
also of the stockholders.
- McCullough, while he was the president of the corporation, did not sit in the said meeting as a
representative of the corporation. The corporation was represented by the 3 directors who by
themselves already constituted a quorum.
- Hence, McCulloughs vote was not necessary in this case, nor was his presence needed to have a
quorum.
- The contact was also fair and reasonable as the company was already in bad shape.
DOCTRINE
- A majority of the stockholders or directors have the power to sell or transfer to one of its members the
corporate property, where the stockholders or directors have general ordinary powers, and where there
is nothing in the articles of incorporation which prohibit such a sale.
- Whether a private corporation remains solvent or is insolvent, there is no reason why a director or
officer, by authority of the majority of its 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. But in all cases, such
officer or director must act in good faith and pay an adequate consideration.
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