De La Rama et al vs Ma-ao Sugar Central Co. Inc.

et al, 27 SCRA 247, Feb 28, 1969

Garcia, Francis Joseph Honrado
Seat No. 15
Case No. 49
FACTS:
This particular case is deemed a representative or derivative suit made by four minority
stockholders, Ramon de la Rama, Francisco Rodriguez, Hortencia Salas and Patria Salas, against
the Ma-ao Sugar Central Co., Inc., J. Amado Araneta, Ramon S. Araneta, Romualdo M. Araneta
and Ramon A. Yulo, who are the directors of the mentioned corporation. The complaints of the
former against the latter comprise five causes of action, including the act concerning the alleged
illegal investment of corporate funds made in other corporations, made by the board of directors
without the legal authority of the stockholders, that also do not have a direct connection with the
main purpose for which the said corporation was organized.
ISSUE:
Whether or not the mentioned board of directors of Ma-ao Sugar Central Co. Inc., were
correct in investing corporate funds in various corporations that do not have a direct connection
with the main purpose by which the corporation was organized, and done so without the
authority of the stockholders of the said corporation.
HELD:
Yes, the board of directors of Ma-ao Sugar Central Co. Inc., were correct.
RATIO:
The Court of First Instance of Manila first declared that the Ma-ao Sugar Central Co.
Inc., be renounced from making investments in corporations such as Acoje Mining, Mabuhay
Printing, and any other companies or corporations whose purpose is not connected with the
Sugar Central business. In addition, these investments were deemed illegal because these were
not made in pursuance of the corporate purpose and were done so without the requisite authority
of two-thirds of the stockholders of the corporation. However, with regards to the investments of
corporate funds made in the Philippine Fiber Processing Co. Inc., this was not deemed a
violation of Section 17 of the Corporation Law because the said company was actually affiliated
in the manufacturing of sugar bags, and was therefore a legitimate investment. In other words,
the court deems that if the investment is made in a corporation, whose business is essential to the
investing corporation and would consequently help it in its purpose, the requisite authority of the
stockholders would no longer be needed because this would only restrict the power invested to
the board of directors. As further justification, it is said in Section 13 of the Corporation Law that
every corporation has the power to enter into any obligation or contract essential to the proper
administration of its corporate affairs or necessary for the proper transaction of the business or
accomplishment of the purpose for which the corporation was organized. In addition, it is also
stated that the power to acquire, hold, mortgage, pledge or dispose shares, bonds, securities, etc.,
if done in pursuance of the corporate purpose, need not the approval of the stockholders
anymore. In conclusion, when the investment is necessary to accomplish its purpose or purposes
as stated in its articles of incorporation, the approval of the stockholders is no longer necessary.
With that in mind, the court deems that the investment in question does not fall under purview of
Section 17 of the Corporation Law, and consequently, the court shall reverse the decision made
with regards to the investments made with Acoje Mining and Mabuhay Printing.