Chapter VII – Control/Management
business of the corporation within the scope of the charter
Section 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 to be elected from among the holders of stocks, or
where there is no stock, from among the members of the corporation,
who shall hold office for one (1) year until their successors are elected
and qualified. (28a)
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name
on the books of the corporation. Any director who ceases to be the owner
of at least one (1) share of the capital stock of the corporation of which
he is a director shall thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. A majority of the directors or
trustees of all corporations organized under this Code must be residents
of the Philippines.
(FOR VILLANUEVA NOTES ON CORPORATE POWERS SEE: CHAP 4
CORPORATE POWERS)
Allocation of power and control: three levels of control:
(1) board of directors or trustees= formulate the corporate policies
(2) corporate officers= execute the policies
(3) stockholders or members= have residual powers over fundamental
corporate changes
Rationale of centralized management
— one of the advantageous features of the corporation—acting through
centralized management
— the congruence of authority and responsibility in the same person,
committee, or board always promote efficiency
Who exercises corporate powers?
1. board of directors (for stock corporations) or trustees (for non-
stock corporations)
— governing body
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— sole authority to determine the policy and conduct the ordinary
— so long as the board acts honestly, in GF, and not in defraud of
creditors or abusive of the rights of minority SHs
— GR: in the absence of an authority from the board of directors, no
person, not even the officers of the corporation, can validly bind the
corporation
— Exception: with respect to 3rd persons, actions of the corporation even
without formal board approval may still bind! (ex. Proof of usage,
acquiescence of the board despite knowledge of the act, receipt of
benefits, implied ratification, estoppel
Primary objective of the Board
— primary obligation of directors is to seek the maximum amount of
profits for the corporation, and characterized the position as a
position of trust
o in case director’s interest conflict with those of the corporation,
he cannot sacrifice the latter to his own advantage and benefit
o fiduciary or trust relationship is not a matter of statutory or
technical law, but springs from the control and guidance of
corporate affairs and property and hence the property interest of
the SHs
— 23: Powers of a corporation shall be exercise, all business conducted,
and all property of such corporation controlled and held by the board
of directors or trustees to be elected from among the holders of
stocks or among the members, unless otherwise provided in the
Code.
— 35: Board may delegate to an executive committee or officials or
contracted managers, which must be specific purposes, through the
by-laws
o Delegation makes the execom agents of the corporation, and the
rules on agency apply
o Not less than 3 members
o Can act on specific matters except:
 Action where SHs approval is required
 Filing of vacancies in the board
 Amendment of repeal of by-laws or adoption of new by-
laws
 Amendment or repeal of any board resolution which is
expressly unamendable
 Distribution of cash dividends
— Term of office of directors: 1 year
— stockholders or members elect the members, but once elected they
 have no right to interfere with the board’s exercise of powers
— 138: non-stock corps may designate governing boards
Section 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 to be elected from among the holders of stocks, or
where there is no stock, from among the members of the corporation,
who shall hold office for one (1) year until their successors are elected
and qualified. (28a)
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name
on the books of the corporation. Any director who ceases to be the owner
of at least one (1) share of the capital stock of the corporation of which
he is a director shall thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. A majority of the directors or
trustees of all corporations organized under this Code must be residents
of the Philippines.
Peculiar Agency Role of the board
— in a manner of speaking, the board acts as an agent of the corporation,
and is bound by the rules applying to agency relationship
o although the board is an agent of the corporation, since the principal
is a mere juridical concept, it realistically is not in a position to
countermand the decisions of its agent
o unlike in an ordinary principal-agent relationship, the corporate
principal does not really have its own mind to allow it to decide
matters for itself
o the board stands both as an agent of the corporation, and the very
personification of the corporation in the commercial and legal world
— board has sole power to decide whether a corporation could sue,
purchase or sell property, enter into a contract, or perform any other act
— SH resolutions on matters other than the exceptions= not legally
effective nor binding on the board; may be treated as merely advisory
(Ramirez case)
— GR: to the SH go the profits, to the board goes the management
— for educational institutions:
Section 108. Board of trustees. - Trustees of educational institutions
organized as non-stock corporations shall not be less than five (5) nor
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more than fifteen (15): Provided, however, That the number of trustees
shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-laws,
the board of trustees of incorporated schools, colleges, or other
institutions of learning shall, as soon as organized, so classify themselves
that the term of office of one-fifth (1/5) of their number shall expire every
year. Trustees thereafter elected to fill vacancies, occurring before the
expiration of a particular term, shall hold office only for the unexpired
period. Trustees elected thereafter to fill vacancies caused by expiration
of term shall hold office for five (5) years. A majority of the trustees shall
constitute a quorum for the transaction of business. The powers and
authority of trustees shall be defined in the by-laws.
For institutions organized as stock corporations, the number and term of
directors shall be governed by the provisions on stock corporations.
(169a)
— where the board of directors fails to observe reasonable degree of
care and diligence, the corporation may be held liable on a tort and
may be liable to pay damages
Directors; qualifications
— every director must own at least one (1) share of the capital stock of
the corporation of which he is a director
— no person shall be elected as trustee unless he is a member
o ceases to own one share= ceases to be a director
o the fact that a director is only holding the share as nominee of
another person does not qualify him as a director—law merely
requires that he has legal title to the shares
o 23: the share of a director shall stand in his name on the books of
the corporation
— majority must be residents of RP
— nominal SHs can be directors; law requires legal title
— Gokongwei v SEC: SH has no vested right to be elected to the board
o SH is considered to have parted with his personal right or
privilege to regulate the disposition of his property which he
invested in the capital stock of the corporation
— Rule on Corporate SHs:
o Such entities cannot be qualified to be elected to the board
o Corporate SHs cannot also designate an individual representative
to be vote into the board
o Their representation in the board can be achieved by making
their individual representatives trustees of the shares or
 membership, which would then make them SHs of record
(1) board must act as a body in a meeting
Section 25. Corporate officers, quorum. - Immediately after their
election, the directors of a corporation must formally organize by the
election of a president, who shall be a director, a treasurer who may or
may not be a director, a secretary who shall be a resident and citizen of
the Philippines, and such other officers as may be provided for in the by-
laws. Any two (2) or more positions may be held concurrently by the same
person, except that no one shall act as president and secretary or as
president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and the by-laws of the corporation. Unless
the articles of incorporation or the by-laws provide for a greater majority,
a majority of the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum shall be valid as
a corporate act, except for the election of officers which shall require the
vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
(33a)
— directors/trustees must act not individually but as a body in a lawful
meeting
— 25: majority of the board shall constitute a quorum
o as fixed in the AOI
o a decision of at least majority of directors present at a valid meeting
shall be valid as a corporate act
— grant of corporate power is to the board as a body, and not to the
individual members thereof, and the corporation can be bound only by
the collective act of the board
— as a general rule, a third person who acts in GF cannot be prejudiced by
the fact that the directors did not act in accordance with the
requirement of law, if such third person was led to believe or had the
right to presume, under the circumstances, that the act involved was
duly authorized by the board, without prejudice to the right of any
stockholder to question the validity of the act
— GR: the corporation can be bound only by the collective act or will of the
board
— Exception: can be bound even by the act of its officers, but always
because of the act or default of the board
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— An act by the board during the meeting, which was illegal for lack of
notice, may be ratified either expressly by the action of the directors
in a subsequent legal meeting, or impliedly, by the corporation’s
subsequent conduct
o Ramirez v Orientalist: the fact that the power to make corporate
contracts is vested in the board does not signify that a formal
vote of the board must always be taken before contractual
liability can be fixed upon a corporation; for the board can create
liability, like an individual, by other means than by a formal
expression of its will
o In reference to outsiders dealing with the corporation, not all
corporate actions need formal board approval.
o The fact that the directors know of a particular corporate act or
contract, and they stayed silent about it, or worse, allowed the
corporation to gain by the transaction or contract, would already
bind the corporation
o If a corporation knowingly permits one of its officers or any other
agent, to do acts within the scope of an apparent authority, and
thus holds him out to the public as possessing power to do those
acts, the corporation will, as against any one who has in GF dealt
with the corporation through such agents, be estopped from
denying his authority
— two types of meeting of the board:
o regular meeting held monthly unless the by-laws provide
otherwise
o special meeting or those held by the board at any time upon the
call of the president
 may be held at any time upon call
 may be held anywhere in and outside the RP unless the
by-laws provide otherwise
— president of the corporation presides at board meetings
Election of the board of directors
— 24: requisites for all elections of directors or trustees
o majority of OCS, either in person or by written proxy
o by ballot if requested
o mandatory cumulative voting—a SH may vote such number of
shares for as many persons as there are directors to be elected
or…
o … he may cumulate said shares and give one candidate as many
votes as the number of directors to be elected
Vacancies in the board (for reasons other than removal or expiration of
term)

— 29: any vacancy in the board other than by removal by the SHs or
expiration may be filled by the vote of at least a majority of the
remaining directors, provided there is a quorum
o vote of majority of remaining directors or trustees, provided there is
a quorum
o no quorum, SHs fill vacancy by vote in a regular or special meeting
o only for the unexpired term
o if vacancy is due to increase in membership: election by SH only!
(2) requirements of meeting
Section 53. Regular and special meetings of directors or trustees. -
Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any
time upon the call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere
in or outside of the Philippines, unless the by-laws provide otherwise.
Notice of regular or special meetings stating the date, time and place of
the meeting must be sent to every director or trustee at least one (1) day
prior to the scheduled meeting, unless otherwise provided by the by-
laws. A director or trustee may waive this requirement, either expressly
or impliedly. (n)
Section 54. Who shall preside at meetings. - The president shall preside
at all meetings of the directors or trustee as well as of the stockholders
or members, unless the by-laws provide otherwise. (n)
— meetings: regular or special
— requirements for board meetings must be complied with otherwise it will
be invalid and any action taken may be questioned by an objecting
director or stockholder
— requisites for a valid board meeting:
o meeting of director/trustees duly assembled as a board
o at a place time and manner provided in the by-laws
o presence of the required quorum
o decision of the majority of the quorum or in some cases majority of
the entire board
— directors or trustees cannot validly act by proxy
— directors/trustees cannot delegate their powers or assign duties
— in abstentions:
o GR: abstention is counted in favor of the issue that won the majority
vote, since by their abstaining, the directors are deemed to abide by
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the rule of the majority (Lopez v Ericta)
a notice
— by-laws can provide for different or additional requirements regarding
notice, date, place
— board must meet once a month
— by-laws cannot do away completely with notice requirement
— no notice= a director may question the validity of the meeting and of
any matter taken up therein
b place of meeting
— if by-laws are silent= board may meet anywhere it pleases
c quorum and vote
Section 25. Corporate officers, quorum. - Immediately after their
election, the directors of a corporation must formally organize by the
election of a president, who shall be a director, a treasurer who may or
may not be a director, a secretary who shall be a resident and citizen of
the Philippines, and such other officers as may be provided for in the by-
laws. Any two (2) or more positions may be held concurrently by the same
person, except that no one shall act as president and secretary or as
president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and the by-laws of the corporation. Unless
the articles of incorporation or the by-laws provide for a greater majority,
a majority of the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum shall be valid as
a corporate act, except for the election of officers which shall require the
vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
(33a)
— abstention? Ifo majority position
For a valid corporate act:
— Quorum: (Sec 25) majority of directors/trustees is required for a
quorum in directors meetings as fixed in the AOI
— Vote: at least a majority of directors present at a meeting where there is
a quorum
For the election of officers:
— Quorum: presence of ALL directors/trustees
— Vote: majority of ALL members of the board
— Director must be personally present and cannot be represented by proxy
d Agenda
— Notice of meeting must contain purpose
— Extraordinary matters not mentioned in the notice cannot be validly
acted upon against the objection of a director
— “Other matters”= only that which are routine and ordinary; significant
matters must be expressly stated in the agenda
o Exception: if all directors are present and agree to take extraordinary
matters up
e Presiding officer
— President (sec 54)= all directors/trustees meetings and SHs/members
meetings
— But the by-laws may provide for a Chairman of the Board who will
preside over the board meeting
(3) close corporations
— stock ownership = management
— composed of a smaller number of persons:
o closely related to each other by blood or other common interests,
o all or most of whom directly participate in the management
— Code allows close corps to do away with the board entirely; the SHs shall
be treated as or shall become the directors
Section 97. Articles of incorporation. - The articles of incorporation of a
close corporation may provide:
1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as
may be stated therein, subject to the provisions of the following
section;
2. For a classification of directors into one or more classes, each
of whom may be voted for and elected solely by a particular class
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of stock; and
3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the
business of the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. So long as this provision
continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders
of the corporation shall be deemed to be directors for the purpose
of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all
liabilities of directors.
The articles of incorporation may likewise provide that all officers or
employees or that specified officers or employees shall be elected or
appointed by the stockholders, instead of by the board of directors.
Section 101. When board meeting is unnecessary or improperly held. -
Unless the by-laws provide otherwise, any action by the directors of a
close corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is
signed by all the directors; or
2. All the stockholders have actual or implied knowledge of the
action and make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the
express or implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the
action in question and none of them makes prompt objection
thereto in writing.

If a director's meeting is held without proper call or notice, an action
taken therein within the corporate powers is deemed ratified by a director
who failed to attend, unless he promptly files his written objection with
the secretary of the corporation after having knowledge thereof.
— Where innocent third persons are concerned, the corporation—close or
otherwise—should be bound in instances where estoppel or ratification is
shown (Zamboanga case)
— If SHs as directors in a close corp with no board= provisions on meetings
of directors would apply to SHs
Ramirez v Orientalist Co & Fernandez. Orientalist Co, engaged in the
theater business, desired to be the exclusive agent of Ramirez, who
is based in Paris, for two film outfits—Éclair Films and Milano films.
Through the active involvement and negotiations of Ramon “El
Presidente” Fernandez, a director of Orientalist and also its treasurer,
with Ramirez, Orientalist was able to secure an offer, the terms of
which were acceptable to the Board as well as to the stockholders. It
appears that this acceptance of the terms of the offer was decided
during an informal meeting of the board, and conveyed to Ramirez in
two letters signed only by Fernandez, both in his individual and his
capacity as treasurer of Orientalist. It turns out that the company
was not financially capable to comply with the obligations set forth in
the agency contract, and about this time films had already been
delivered to the company. Two stockholders meetings were
organized, the first adopted a resolution approving the action of the
board on the offer, the second raising the contingency of the lack of
funds and the proviso that the four officers involved, including
Fernandez would continue importing the films using their own funds.
Ramirez sues Orientalist and Fernandez for what is due on the
contract. TC ruled Oriental as the principal debtor while Fernandez is
subsidiarily liable.
H: (1) it was incumbent upon the corporation if it desired to question
the authority of Fernandez to bind it, to deny the due execution of
the contract made by him. In pleading lack of authority of an officer
of a corporation to bind the latter through a contract executed by the
former is a special defense which should be specially pleaded and
the answer setting up this defense must be verified under oath. The
denial shall be specific, and a mere attack on the instrument in
general terms is insufficient, even though under oath. In dealing with
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corporations the public at large is bound to rely to a large extent
upon outward appearances. If a man is found acting for a
corporation with the external indicia of authority, any person not
having notice of want of authority, may usually rely upon those
appearances, and if it be found that the directors had permitted
the agent to exercise that authority and thereby held him out as a
competent person to bind the corporation, or had acquiesced in a
contract and retained the benefit supposed to have conferred by
it, the corporation will be bound, notwithstanding the actual
authority may never have been granted. The public is not
supposed nor required to know the transactions which happen
around the table where the corporate board of directors or the
stockholders are from time to time convoked. It is therefore
reasonable, in a case where an officer of a corporation has made
a contract in its name, that the corporation should be required, is
it denies his authority, to state such defense in his answer. This
failure of Orientalist to make any issue in its answer with regard to
the authority of Ramon Fernandez to bind it and its failure to deny
specifically under oath the genuineness of the due execution of
the contracts sued upon, have the effect of eliminating the
question of his authority from the case.
(2) Fernandez had no authority to bind the corporation. Corporate
powers is exercised by the board of directors, and is recognized in
the bylaws of Orientalist. The fact that the power to make
contracts is thus vested in the borad does not always signify that
a formal vote of the board must always be taken before
contractual liability can be fixed; the board can create liability, like
an individual, by other means than by formal expression of its will.
It may be established without reference to official records of the
proceedings of the board, by proof of the usage to which the
company had permitted to grow up in the business, and of the
acquiescence of the board charged with the duty of supervising
and controlling the company’s business. Fernandez was the most
active in the effort to secure the films. The negotiations were
conducted by him with the knowledge and consent of the other
members of the board. The board, before the financial inability of
the corporation was revealed, had already recognized the
contracts as being in existence and had proceeded to take the
steps necessary to utilize the films, particularly the publication of
announcements in the papers. In light of this, the contracts in
question were thus inferentially approved by the board and that the
company is bound unless the subsequent failure of the stockholders
to approve the same had the effect of abrogating the liability
created.
(3) the action of the stockholders, whatever its character, must be
ignored. Stockholders or members resolutions dealing with matters
other than the exceptions are not legally effective nor binding on the
board, and may be treated as merely advisory or may even be
completely disregarded. The functions of the stockholders of a
corporation are, of a limited nature. The theory is that the
stockholders may have all the profits but shall turn over the
complete management of the enterprise to their representatives or
agents, called the directors, making by-laws, and exercising special
powers defined by law. Thus contracts between a corporation and
third persons must be made by the directors and not by the
stockholders. The corporation is represented by the directors and not
the stockholders. Third persons can have little or no information as
to what occurs in corporate meetings, and must necessarily rely on
external manifestations of corporate consent. The integrity of
commercial transactions can only be maintained by holding the
corporation strictly to the liability fixed upon in by its agents in
accordance with law. If a corporation knowingly permits one of its
officers or any other person to do acts within the scope of an
apparent authority, and thus hold him out to the public as
possessing the power to do these acts, the corporation will be
estopped from denying such authority as against anyone who has
dealt with the corporation in GF.
Lopez v Ericta. Dr Consuelo Blanco was appointed Dean ad interim of the UP
College of Education. The Board of Regents met on 26 May and UP President Lopez
submitted the ad interim appointment for reconsideration. The minutes of the meeting
reveal that the Board voted to defer action on the matter in view of the objections cited
by Regent Kalaw, and to further study the same. The matter was referred to the
Committee on Personnel. It was extended and made effective 1 May 1970 until 30 April
1971 unless sooner terminated and subject to the approval of the Board of Regents. At
the next Board meeting, it appears in the minutes that the Personnel Committee
recommended that the UP president review his nomination and that he would discuss
with the nominee the possibility of withdrawing her nomination and appointment as
Dean. The Committee then withdrew its recommendation, but subjected the Blanco
appointment to a vote. The vote was 5-3-4, and not having the necessary number of
votes, the Board agreed to expunge the result of the voting from the records, on the
condition that the Board suspend action on the matter, which had the effect of the
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termination of the Blanco ad interim appointment. Blanco questions the action of
the Board and the designation of an officer-in-charge of the COE and sues in the TC.
Judge Ericta rules info Dr Blanco.
I: W/N the 4 abstentions had the effect of a negative vote against the ad interim
appointment.
H: Based on a reading of the minutes and the records of the meeting, it cannot be
said that the abstentions were affirmative ifo the ad interim appointment. It is clear
that (1) the Blanco appointment was referred for study by the Committee which
recommended its rejection; (2) that it should be done in a diplomatic way to avoid
embarrassment; (3) the final decision was to ask the UP President to talk to Blanco
for the appointment to be withdrawn; (4) a vote was taken which was 5-3-4, and it
was unclear what it meant because the rules do not provide for the treatment of
abstentions; (5) the Committee withdrew its recommendation; (6) the Board
identified the issue of w/n to confirm the ad interim appointment; (7) and that while
it will defer action, it considered the appointment to have terminated, and thus a
recommendation for non-confirmation. Thus the votes of abstention can in no way
be construed as votes for confirmation of the appointment. There can be no doubt as
to the decision of the Personnel Committee—it was for rejection of the appointment.
Also, the board resolved, without a vote of dissent to cancel the action taken,
including the results of the voting, and to return the case to its original status. In
effect, as announced by the Chairman, the Board has not acted on the confirmation
either adversely or favorably, but that the ad interim appointment has terminated.
Expertravel & Tours v CA and Korean Airlines. F: Korean Airlines,
through Atty. Aguinaldo, filed a Complaint against Expertravel with the
RTC for the collection of the principal amount of P260,150.00, plus
attorney’s fees and exemplary damages. The verification and certification
against forum shopping was signed by Atty. Aguinaldo, who indicated
therein that he was the resident agent and legal counsel of KAL and had
caused the preparation of the complaint. Expertravel filed a motion to
dismiss the complaint on the ground that Atty. Aguinaldo 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 Atty. Aguinaldo was its resident agent and was registered
as such with the Securities and Exchange Commission (SEC) as required
by the CorpoCode, and was further alleged that Atty. Aguinaldo was also
the corporate secretary of KAL. Atty. Aguinaldo 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 held on June 25,
1999, wherein the board of directors conducted a special teleconference
on June 25, 1999, which he and Atty. Aguinaldo attended. It was also
averred that in that same teleconference, the board of directors approved
a resolution authorizing Atty. Aguinaldo to execute the certificate of non-
forum shopping and to file the complaint. Suk Kyoo Kim also alleged,
however, that the corporation had no written copy of the aforesaid
resolution. TC denies MTD, CA affirms.

H: It is settled that the requirement to file a certificate of non-forum
shopping is mandatory and that the failure to comply with this requirement
cannot be excused. The certification is a peculiar and personal responsibility
of the party, an assurance given to the court or other tribunal that there are
no other pending cases involving basically the same parties, issues and
causes of action. Hence, the certification must be accomplished by the
party himself because he has actual knowledge of whether or not he has
initiated similar actions or proceedings in different courts or tribunals. Even
his counsel may be unaware of such facts. Hence, the requisite certification
executed by the plaintiff’s counsel will not suffice.
In a case where the plaintiff is a private corporation, the certification may be
signed, for and on behalf of the said corporation, by a specifically authorized
person, including its retained counsel, who has personal knowledge of the
facts required to be established by the documents. The corporation, such as
the petitioner, has no powers except those expressly conferred on it by the
Corporation Code and those that are implied by or are incidental to its
existence. In turn, a corporation exercises said powers through its board of
directors and/or its duly-authorized officers and agents. Physical acts, like
the signing of documents, can be performed only by natural persons duly-
authorized for the purpose by corporate by-laws or by specific act of the
board of directors.
The respondent’s allegation that its board of directors conducted a
teleconference on June 25, 1999 and approved the said resolution (with Atty.
Aguinaldo in attendance) is incredible, given the additional fact that no such
allegation was made in the complaint. If the resolution had indeed been
approved on June 25, 1999, long before the complaint was filed, the
respondent should have incorporated it in its complaint, or at least
appended a copy thereof. The respondent failed to do so. It was only on
January 28, 2000 that the respondent claimed, for the first time, that there
was such a meeting of the Board of Directors held on June 25, 1999; it even
represented to the Court that a copy of its resolution was with its main office
in Korea, only to allege later that no written copy existed. It was only on
March 6, 2000 that the respondent alleged, for the first time, that the
meeting of the Board of Directors where the resolution was approved was
held via teleconference.
Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had
signed a Secretary’s/Resident Agent’s Certificate alleging that the board of
directors held a teleconference on June 25, 1999. No such certificate was
appended to the complaint, which was filed on September 6, 1999. More
importantly, the respondent did not explain why the said certificate was
signed by Atty. Aguinaldo as early as January 9, 1999, and yet was notarized
one year later (on January 10, 2000); it also did not explain its failure to
8
append the said certificate to the complaint, as well as to its Compliance
dated March 6, 2000. It was only on January 26, 2001 when the
respondent filed its comment in the CA that it submitted the
Secretary’s/Resident Agent’s Certificate[30] dated January 10, 2000.
The Court is, thus, more inclined to believe that the alleged
teleconference on June 25, 1999 never took place, and that the resolution
allegedly approved by the respondent’s Board of Directors during the said
teleconference was a mere concoction purposefully foisted on the RTC,
the CA and this Court, to avert the dismissal of its complaint against the
petitioner.
Citibank NA v Chua. Velez deposited his unfunded personal checks with his
current account with the petitioner. But prior to depositing said checks, he would
present his personal checks to a bank officer asking the latter to have his personal
checks immediately credited as if it were a cash deposit and at the same time
assuring the bank officer that his personal checks were fully funded. Having already
gained the trust and confidence of the officers of the bank because of his past
transactions, the bank's officer would always accommodate his request. After his
requests are granted which is done by way of the bank officer affixing his signature
on the personal checks, private respondent Cresencio Velez would then deposit his
priorly approved personal checks to his current account and at the same time
withdraw sums of money from said current account by way of petitioner bank's
manager's check. Private respondent would then deposit petitioner bank's
manager's check to his various current accounts in other commercial banks to cover
his previously deposited unfunded personal checks with petitioner bank. Naturally,
petitioner bank and its officers never discovered that his personal check deposits
were unfunded. On the contrary, it gave the petitioner bank the false impression that
private respondent's construction business was doing very well and that he was one
big client who could be trusted. This deceptive and criminal scheme he did every
banking day without fail from September 4, 1985 up to March 11, 1986. The
amounts that he was depositing and withdrawing during this period (September 4,
1985 to March 11, 1986) progressively became bigger. It started at P46,000.00 on
September 4, 1985 and on March 11, 1986 the amount of deposit and withdrawal
already reached over P3,000,000.00. At this point in time (March 11, 1986), the
private respondent Cresencio Velez presumably already feeling that sooner or later
he would be caught and that he already wanted to cash in on his evil scheme,
decided to run away with petitioner's money. On March 11, 1986, he deposited
various unfunded personal checks totaling P3,095,000.00 and requested a bank
officer that the same be credited as cash and after securing the approval of said
bank officer, deposited his various personal checks in the amount of P3,095,000.00
with his current account and at the same time withdrew the sum of P3,244,000.00 in
the form of petitioner's manager's check. Instead of using the proceeds of his
withdrawals to cover his unfunded personal checks, he ran away with petitioner
bank's money. Thus, private respondent Cresencio Velez's personal checks
deposited with petitioner bank on March 11, 1986 in the total aggregate amount of
P3,095,000.00 bounced. The checks bounced after said personal checks were
made the substantial basis of his withdrawing the sum of P3,244,000.00 from his
current account with petitioner bank. Citibank sues on the grounds of violation of BP 22.
Before pre-trial conference, and in pursuance of the authority granted to him by
petitioner bank's by-laws, its Executing Officer appointed William W. Ferguson, a
resident alien, as its Attorney-in-Fact empowering the latter, among other things, to
represent Citibank in court cases such as the present case. In turn, William W.
Ferguson executed a power of attorney in favor of J.P. Garcia & Associates (petitioner
bank's counsel) to represent petitioner bank in the pre-trial conference before the lower
court.
I: There are thus two issues in this case. First, whether a resolution of the board of
directors of a corporation is always necessary for granting authority to an agent to
represent the corporation in court cases.
H: In the corporate hierarchy, there are three levels of control: (1) the board of directors,
which is responsible for corporate policies and the general management of the
business affairs of the corporation; (2) the officers, who in theory execute the policies
laid down by the board, but in practice often have wide latitude in determining the
course of business operations; and (3) the stockholders who have the residual power
over fundamental corporate changes, like amendments of the articles of incorporation.
However, just as a natural person may authorize another to do certain acts in his
behalf, so may the board of directors of a corporation validly delegate some of its
functions to individual officers or agents appointed by it.
It is clear that corporate powers may be directly conferred upon corporate officers or
agents by statute, the articles of incorporation, the by-laws or by resolution or other act
of the board of directors. In addition, an officer who is not a director may also appoint
other agents when so authorized by the by-laws or by the board of directors. Such are
referred to as express powers. There are also powers incidental to express powers
conferred. It is a fundamental principle in the law of agency that every delegation of
authority, whether general or special, carries with it, unless the contrary be express,
implied authority to do all of those acts, naturally and ordinarily done in such cases,
which are reasonably necessary and proper to be done in order to carry into effect the
main authority conferred.
Since the by-laws are a source of authority for corporate officers and agents of the
corporation, a resolution of the Board of Directors of Citibank appointing an attorney in
fact to represent and bind it during the pre-trial conference of the case at bar is not
necessary because its by-laws allow its officers, the Executing Officer and the
Secretary Pro-Tem, * to execute a power of attorney to a designated bank officer,
William W. Ferguson in this case, clothing him with authority to direct and manage
corporate affairs.
Since paragraph XXI (of the by-laws) specifically allows Ferguson to delegate his
powers in whole or in part, there can be no doubt that the special power of attorney in
favor, first, of J.P. Garcia & Associates and later, of the bank's employees, constitutes a
valid delegation of Ferguson's express power (under paragraph XVII above) to
represent petitioner bank in the pre-trial conference in the lower court.
9
I: The second issue is whether the by-laws of the petitioner foreign corporation
which has previously been granted a license to do business in the Philippines, are
effective in this jurisdiction. If the by-laws are valid and a board resolution is not
necessary as petitioner bank claims, then the declaration of default would have no
basis.
H: A careful reading of the Sec 46 of Corpo Code would show that a corporation can
submit its by-laws, prior to incorporation, or within one month after receipt of official
notice of the issuance of its certificate of incorporation by the SEC. When the third
paragraph of the above provision mentions "in all cases", it can only refer to these
two options; i.e., whether adopted prior to incorporation or within one month after
incorporation, the by-laws shall be effective only upon the approval of the SEC. But
even more important, said provision starts with the phrase "Every corporation
formed under this Code", which can only refer to corporations incorporated in the
Philippines. Hence, Section 46, in so far as it refers to the effectivity of corporate by-
laws, applies only to domestic corporations and not to foreign corporations. On the
other hand, Section 125 of the same Code requires that a foreign corporation
applying for a license to transact business in the Philippines must submit, among
other documents, to the SEC, a copy of its articles of incorporation and by-laws,
certified in accordance with law. Unless these documents are submitted, the
application cannot be acted upon by the SEC. Since under Sec 126 of Corpo Code
the SEC will grant a license only when the foreign corporation has complied with all
the requirements of law, it follows that when it decides to issue such license, it is
satisfied that the applicant's by-laws, among the other documents, meet the legal
requirements. This, in effect, is an approval of the foreign corporation's by-laws. It
may not have been made in express terms, still it is clearly an approval. Therefore,
petitioner bank's by-laws, though originating from a foreign jurisdiction, are valid and
effective in the Philippines.
Prime White Cement v IAC. Prime White Cement entered into a
dealership agreement with one of its directors, Alejandro Te, for the latter
to be the exclusive distributor of 20,000 bags of Prime White cement per
month @ P9.70 per bag for the entire Mindanao area for 5 years, and that
a letter of credit be opened to secure payment. Te advertised his
dealership and was able to obtain possible clients, and entered into
agreements with several hardware stores for the purchase of the cement.
Te then informed Prime White of the orders, but the latter imposed
additional conditions, which effectively delayed the delivery of the
cement, lowered the number of bags to be delivered, and increased the
price per bag. It also made the prices subject to change unilaterally and
additional conditions on the manner of payment. Te refused to comply
and Prime White cancelled the dealership agreement. Te sued for specific
performance and damages. TC ruled ifo Te.
I: W/N the dealership agreement is a valid and enforceable contract
binding on the Corporation.
H: No. it is not valid and enforceable. All corporate powers are exercised by Heirs Inc claims that Boyer­Roxas and Guillermo Roxas 
the Board. It may also delegate specific powers to its President or other had been in possession of the various properties and 
officers. In the absence of express delegation, a contract entered into by the
improvements in the resort and only upon the tolerance 
President in behalf of the corporation, may still bind the latter if the board
should ratify expressly or impliedly. In the absence of express or implied of the corporation. It was alleged that they committed 
ratification, the President may as a general rule bind the corporation through acts that impeded the corporation’s expansion and normal 
a contract in the ordinary course of business, provided the same is operation of the resort. They also did not comply with 
reasonable under the circumstances. These rules are applicable where the court and regulatory orders, and thus the corporation 
President or other officer acting for the corporation is dealing with a third adopted a resolution authorizing the ejectment of the 
person.
defendants. TC grants. CA affirms. Boyer and Roxas 
The situation is different where a director or officer is dealing with his own contend that, being SHs, their possession of the 
corporation. Te was not an ordinary stockholder; he was a member of the properties of the corporation must be respected in view 
Board and Auditor of the corporation. He is what is often called a “self- of their ownership of an aliquot portion of all 
dealing” director. As a director, he holds a position of trust and owes a duty properties of the corporation.
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.
The trust relationship springs from the control and guidance of the corporate H: Regarding properties owned by the corporation, the 
affairs and property interests of the stockholders. A director’s contract with SH of Guanzon case says that “properties registered in 
his corporation is not in all instances void or voidable. If the contract is fair the name of the corporation are owned by it as an 
and reasonable under the circumstances, it may be ratified by the entity separate and distinct from its members. While 
stockholders provided a full disclosure of his adverse interest is made. The shares of stock constitute personal property, they do 
contract in this case is neither fair nor reasonable. At the time of the
not represent property of the corporation. A share of 
contract, the corporation had not yet even started producing the cement.
Prices of cement, just like any other commodity, are not stable and expected stock only typifies an aliquot part of the corporation’s 
to rise. Within a period of six years from the date of dealership agreement property, or the right to share in its proceeds to that 
the prices were certain to rise, and yet the contract pegged the rate to P9.70 extent when distributed according to law and equity, but 
per bag. This according to the Court was not fair and reasonable at all, and its holder is not the owner of any part of the capital 
unduly prejudiced the corporation. The contracts he entered into after the of the corporation, nor is he entitled to the 
dealership agreement were such as to completely shield him from any
possession of any definite portion of its property or 
increase in the price of cement. The contracts were only for two years at a
time, even if the dealership was good for 5. He was attempting to enrich assets. The SH is not a co­owner or tenant in common of 
himself at the expense of the corporation. There is no showing that the the corporate property. 
stockholders ratified the dealership agreement. Thus the same was not valid
and he cannot be allowed to reap the fruits of his disloyalty. The corporation has a personality distinct and separate 
from its members and transacts business only through its 
Boyer-Roxas v CA. (Hidden Valley Apocalypse Now case). The 
officers or agents. Whatever authority these officers or 
corporation, Heirs of Eugenia Roxas Inc, was established  agents may have derived from the board or other 
to engage in agriculture to develop the properties  governing body, unless conferred by the charter of the 
inherited from Eugenia Roxas and Eufroncio Roxas, which  corporation itself. In this case the elder Roxas who 
includes the land upon which the Hidden Valley Springs  then controlled the management of the corporation, 
Resort was put up, including various improvements thereon,  being the majority SH, consented to the petitioner’s use 
using corporate funds (used as site for filming Apocalypse  and stay within the properties. The Board did not object 
Now). The AOI of Heirs Inc was amended for this purpose.  and were allowed to stay until it adopted a resolution 

10
to the effect of authorizing moves to eject them. Since  Cooperative, was informed by COA that cash advances received by officers and
their stay was merely by tolerance, in deference to the  employees of Benguet Electric had been virtually written off the books, that
wishes of the majority SH who controlled the corporation,  per diems and allowances showed substantial inconsistencies with the
when Roxas died his actions cannot bind the company  directives of the National Electricifcation Administration, and that several
forever. There is no provision in the by­laws or any other  irregularities in the utilization of funds released by NEA to Benguet. Cosalan
resolution authorizing their continued stay.   then implemented the remedial measures recommended by COA. Board
  members of Benguet responded by abolishing the housing allowance of Cosalan,
reduced his salary, representation and other allowances, and directed him to
EPG Construction v CA. EPG undertook the construction of the UP hold in abeyance all disciplinary actions, and struck his name out as principal
Law Library for around P7.5M. Upon completion, the building was signatory of Benguet Electric. The Board adopted another series of resolutions
turned over to UP Law. Sometime thereafter, the aircon in the 3rd
which resulted in te ouster of Cosalan as GM. Cosalan nonetheless continued to
floor was not functioning properly, and this was reported to EPG.
work as GM, contending that only the NEA can suspend and remove him. The
After inspection EPG agreed to repair the same and shoulder the
expenses thereof, but for whatever reason the repair was never Board then refused to act on Cosalan request to release compensation due him.
undertaken despite repeated demands. EPG demanded a hefty sum, Cosalan files a complaint with the NLRC against the Board of Benguet Electric,
which UP claims should be covered by the guarantee provision in and impleaded Benguet Electric itself as well as the individual members of the
their contract. UP then contracts with another repair company, and board in their official and private capacities. Labor Arbitrer rules ifo Cosalan,
demands reimbursement from EPG. UP sues EPG and its President, holding both the company and the board solidarily liable to Cosalan. NLRC
Emmanuel de Guzman. TC ruled ifo UP, and order both the company modifies award to Cosalan by declaring Bengeut alone, and not the Board
and its president to pay UP solidarily. The president Guzman claims members, was liable to Cosalan. Benguet appeals.
that as to him, UP was suing him in his official capacity and not in his
personal capacity, thus his inclusion as president of the company is H: the Board members and officers of a corporation who purport to act for and
superfluous, because his acts were corporate acts imputable to EPG in behalf of the corporation, keep within the lawful scope of their authority in
itself as his principal. so acting, and act in GF, do no become liable, civilly or otherwise, for the
consequences of their acts. Those acts are properly attributed to the
H: A corporation is invested by law with a personality separate and
corporation alone and no personal liability is incurred. In this case, the board
distinct from those of the persons composing it as well as from that
of any other entity to which it may be related. Mere ownership by a members obviously wanted to get rid of Cosalan and acted with indecent haste
since SH or by another corporation of all or nearly all of the capital in removing him from his GM position. This shows strong indications that the
stock of a corporation is not of itself sufficient ground for members of the board had illegally suspended and dismissed him precisely
disregarding the separate personality. because he was trying the rectify the financial irregularities.

The GM of a corporation cannot be made personally liable for his
official acts in behalf of the corporation, with the exception that if he
official had acted maliciously or in BF, which would make him liable
personally. Since it was not proven that Guzman acted maliciously or
in BF, whatever damage was caused to UP as a result of his acts is
the sole responsibility of EPG even though Guzman is the principal
officer and controlling SH.
Benguet Electric Cooperative v NLRC. Cosalan, GM of the Benguet Electric
The Board members are also liable for damages under Sec 31 of the Corpo
Code, which by virtue of Sec 4 thereof, makes it applicable in a supplementary
manner to all corporations, including those with special or individual charters so
long as these are not inconsistent therewith.
The Board members are also guilty of gross negligence and BF in directing the
affairs of the corporation in enacting the said resolutions, and in doing so,
acted beyond the scope of their authority.

11

Woodchild Holdings Inc v Roxas Electric and Construction Co. The
respondent posits that Roxas was not so authorized under the May 17, 1991
Resolution of its Board of Directors to impose a burden or to grant a right of
way in favor of the petitioner on Lot No. 491-A-3-B-1, much less convey a
portion thereof to the petitioner. Hence, the respondent was not bound by
such provisions contained in the deed of absolute sale.
H: Generally, the acts of the corporate officers within the scope of their
authority are binding on the corporation. However, under Article 1910 of the
New Civil Code, acts done by such officers beyond the scope of their
authority cannot bind the corporation unless it has ratified such acts
expressly or tacitly, or is estopped from denying them. Thus, contracts
entered into by corporate officers beyond the scope of authority are
unenforceable against the corporation unless ratified by the corporation.
Evidently, Roxas was not specifically authorized under the said resolution to
grant a right of way in favor of the petitioner on a portion of Lot No. 491-A-3-
B-1 or to agree to sell to the petitioner a portion thereof. The authority of
Roxas, under the resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No.
78086 did not include the authority to sell a portion of the adjacent lot, Lot
No. 491-A-3-B-1, or to create or convey real rights thereon. Neither may
such authority be implied from the authority granted to Roxas to sell Lot No.
491-A-3-B-2 to the petitioner “on such terms and conditions which he deems
most reasonable and advantageous.” The general rule is that the power of
attorney must be pursued within legal strictures, and the agent can neither
go beyond it; nor beside it. The act done must be legally identical with that
authorized to be done. In sum, then, the consent of the respondent to the
assailed provisions in the deed of absolute sale was not obtained; hence, the
assailed provisions are not binding on it.
It bears stressing that apparent authority is based on estoppel and can arise
from two instances: first, the principal may knowingly permit the agent to so
hold himself out as having such authority, and in this way, the principal
becomes estopped to claim that the agent does not have such authority;
second, the principal may so clothe the agent with the indicia of authority as
to lead a reasonably prudent person to believe that he actually has such
authority. There can be no apparent authority of an agent without acts or
conduct on the part of the principal and such acts or conduct of the principal
must have been known and relied upon in good faith and as a result of the
exercise of reasonable prudence by a third person as claimant and such
must have produced a change of position to its detriment. The apparent
power of an agent is to be determined by the acts of the principal and not by
the acts of the agent.
It bears stressing that the respondent sold Lot No. 491-A-3-B-2 to the
12
petitioner, and the latter had taken possession of the property. As such,
the respondent had the right to retain the P5,000,000, the purchase price
of the property it had sold to the petitioner. For an act of the principal to
be considered as an implied ratification of an unauthorized act of an
agent, such act must be inconsistent with any other hypothesis than that
he approved and intended to adopt what had been done in his name.
Ratification is based on waiver – the intentional relinquishment of a
known right. Ratification cannot be inferred from acts that a principal has
a right to do independently of the unauthorized act of the agent.
Moreover, if a writing is required to grant an authority to do a particular
act, ratification of that act must also be in writing. Since the respondent
had not ratified the unauthorized acts of Roxas, the same are
unenforceable. Hence, by the respondent’s retention of the amount, it
cannot thereby be implied that it had ratified the unauthorized acts of its
agent, Roberto Roxas.
2. corporate officers and agents
— 23: the Board may validly delegate some of its functions and
powers to individual officers, committees, or agents it appoints
— Corporate officers are within the business judgment of the board
to terminate or delegate or appoint
— general principles of agency govern the relation between the
corporation and its officers or agents
— a corporate officer or agent may represent and bind the
corporation in transactions with third person to the extent that
the authority to do so has been conferred upon him, and this
includes:
o powers which have been intentionally conferred
o such powers as in the usual course of business are incidental
or implied from the powers conferred
o powers added by custom or usage, and
o such apparent powers as the corporation has caused persons
dealing with the officer or agent
Section 25. Corporate officers, quorum. - Immediately after their
election, the directors of a corporation must formally organize by the
election of a president, who shall be a director, a treasurer who may or
may not be a director, a secretary who shall be a resident and citizen of
the Philippines, and such other officers as may be provided for in the by-
laws. Any two (2) or more positions may be held concurrently by the same
person, except that no one shall act as president and secretary or as
president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the

duties enjoined on them by law and the by-laws of the corporation. Unless
the articles of incorporation or the by-laws provide for a greater majority,
a majority of the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum shall be valid as
a corporate act, except for the election of officers which shall require the
vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
(33a)
— Three (3) officers which a corporation must have:
o President
Elected by majority of
o Treasurer ALL board members
o Secretary
— By-laws may provide for other officers
— GM: may be appointed from any of the officer positions
o By express provision of the by-laws
— Officer need not be a director; thus, a non-SH can be an officer
o Exception: President. He must be a director (co-terminous with
his position as director)
— No citizenship requirement
o Exception:
 Corporate secretary
 Industries partially or totally reserved for Filipinos
• No alien may be an officer…
• …but may be a director; proportional to alien
equity
— In close corporations:
o May be managed by SHs directly, so long as it is in the AOI
 No directors
 SHs appoint or elect the officers
o AOI may provide that all or some officers are elected or
appointed by the SHs instead of the board
— In non-stock corporations:
o Members are allowed to directly elect the officers
 Exception: contrary provision in AOI or BLs
— Officers’ authority to bind NOT inherent in their office, but derived
from:
o law
13
o the by-laws
o delegation by the Board (express through BoardRes, or
impliedly through custom or acquiescence)
— Corporate Officers are AGENTS of the corporation
o GRs on AGENCY as to the binding effect apply
o Acts which are within the authority BIND
o Acts beyond authority CANNOT BIND
 Except:
• Subsequent ratification
• Estoppel
 Lack of authority to bind is a defense which must be
specially pleaded (Ramirez case)
o GR: person dealing with a corporate officer is put on inquiry
as to the scope of his authority
 Exception: Innocent 3rd person cannot be prejudiced if
he had the right to presume under the circumstances
the authority of the officer
(1) President
— Presides over all meetings of the board and SHs
o By-laws may delegated that function to Chairman
— Act of president done in the ordinary course of business is
presumably within the scope of his authority
— Impliedly vested with broad powers
o Burden of proof that an act of the president cannot bind=
corporation
— Power to sign and execute corporate contracts
o He is authorized to sign in the name of the corporation…
o …but does not include the power to enter into contracts
with 3rd persons (that’s the Board’s function)
— Capacity to negotiate…
o …but cannot perfect the contract without board
authorization
— cannot also be concurrent Treasurer and Secretary
— must be a director and SH
(2) vice-president
— no inherent power to bind
— takes over when president is absent or position becomes
vacant
(3) secretary

— keeps corporate records and is the custodian
— duties are ministerial and cannot bind the corporation without
board authorization or appointment as GM
— must be a resident and a Phil citizen (Sec 25)
(4) treasurer
— appointed at the time of drafting the AOI
o Code requires Treasurer’s affidavit to attest to the fact of
compliance with the required incorporation subscription
— Receive and keep the corporate funds
— Disburse in accordance with the authority given by the board
— Cannot bind the corporation unless authorized
(5) general manager
— takes care of day-to-day affairs of the corporation
— powers are limited to implementing policies laid down by the
board
— GR: can only perform such acts and enter into such contracts as
are usual in the ordinary course of business of the corporation
(Yu Chuck case)
o exception: (deemed within his implied authority—Kalaw
case)
 where the board gives him broader authority
 where the board had acquiesced in the past or had
never prevented or prohibited the GM from
performing extraordinary acts
 where the board ratifies (express or implied) after
— can contract for purchase of ordinary supplies necessary for
corporate functions…
o …but no implied power to borrow money even for legitimate
purposes without prior approval by the board
— 3rd person has right to presume that a GM has authority to
perform acts or enter into ordinary contracts in the usual course
of business
o innocent 3rd persons cannot be prejudiced
— any officer cannot be held personally liable for the consequences of their
acts
o except: BF, negligence
o in personal capacity= personal liability
14
(6) other agents
— may appoint agents for specific purposes
o last say will have to be with the board
Yu Chuck v Kong Li Po. Kong Li Po is a corporation engaged in the
publication of a Chinese newspaper. Its AOI provide for a president
who shall sign all contracts and other instruments of writing, but
does not provide for a business or general manager. CC Chen or
TC Chen was appointed general business manager of the paper.
He then entered into an agreement with Yu Chuck for the printing
of the newspaper for P580 per month. Yu Chuck worked for a year
until they were discharged by the new manager Tan Tian Hong
because CC Chen had left for China. Yu Chuck sues the paper,
claiming the the contract was for a period of 3 years, and that
discharge without just cause before the expiration of this term
entitles them to receive full pay for the remainder of the term.
Kong Li Po counters that CC Chen was not authorized to enter into
the contract with Yu Chuck. TC ruled ifo of Yu Chuck, concluding
that the contract had been impliedly ratified by Kong Li Po and
that although he had no express authority to enter into the
contract, since he was general business manager in charge of the
printing of the paper and thus had implied authority to employ the
petitioners
I: W/N CC Chen had the power to bind the corporation through the
contract mentioned.
H: GR: The power to bind a corporation by contract lies with its
board of directors or trustees, but this power may either be
expressly or impliedly delegated to other officers or agents of the
corporation. EXCEPTION: An officer or agent who has general
control and management of the corporation’s business or a
specific part thereof, may bind the corporation by the
employment of such agents and employees as are usual and
necessary in the conduct of such business. Exception to
exception: Where the authority is vested expressly in the BOD.
As to the term of employment, a manager has authority to hire an
employee for such a period as is customary or proper under the
circumstances, but unless he is expressly authorized or held out
to have such authority, he cannot make a contract of employment
for a long future period, such as for 3 years. There can be no doubt
that CC Chen as general manager of the Kong Li Po, had implied
authority to bind the defendant corporation by a reasonable and
usual contract of employment with the plaintiffs. But the term of
employment is unusually long, and the conditions are otherwise so
onerous to the defendant corporation that the possibility of the
corporation being thrown into insolvency thereby is expressly
contemplated in the same contract.
The corporation also did not impliedly ratify the contract, just
because the president of Kong Li Po saw the plaintiffs work as
printers in the office one day. Before a contract can be ratified,
knowledge of its existence must, of course, be brought home to the
parties who have authority to ratify it or circumstances must be
shown from which such knowledge may be presumed. No such
knowledge or circumstances indicating knowledge is shown or
proven in the case. Moreover, a ratification by him would have been
to no avail; in order to validate a contract, a ratification by the BOD
was necessary. The fact that the president was authorized by the by-
laws to sign documents evidencing contracts doesn’t mean that he
had power to make the contracts.
Lapulapu Foundation Inc v CA. Elias Q. Tan, then President of the co-
petitioner Lapulapu Foundation, Inc., obtained four loans from the
respondent Allied Banking Corporation covered by four promissory
notes in the amounts of P100,000 each. As of January 23, 1979, the
entire obligation amounted to P493,566.61 and despite demands
made on them by the respondent Bank, the petitioners failed to pay
the same. The respondent Bank was constrained to file with the
Regional Trial Court of Cebu City, Branch 15, a complaint seeking
payment by the petitioners, jointly and solidarily, of the sum of
P493,566.61 representing their loan obligation. Foundation denied
incurring indebtedness from the respondent Bank alleging that the
loans were obtained by petitioner Tan in his personal capacity, for his
own use and benefit and on the strength of the personal information
he furnished the respondent Bank. The petitioner Foundation
maintained that it never authorized petitioner Tan to co-sign in his
capacity as its President any promissory note and that the
respondent Bank fully knew that the loans contracted were made in
petitioner Tan’s personal capacity and for his own use and that the
petitioner Foundation never benefited, directly or indirectly,
15
therefrom. Tan admitted that he contracted the loans from the
respondent Bank in his personal capacity. The parties, however,
agreed that the loans were to be paid from the proceeds of
petitioner Tan’s shares of common stocks in the Lapulapu
Industries Corporation, a real estate firm. The loans were covered
by promissory notes which were automatically renewable (“rolled-
over”) every year at an amount including unpaid interests, until
such time as petitioner Tan was able to pay the same from the
proceeds of his aforesaid shares. According to petitioner Tan, the
respondent Bank’s employee required him to affix two signatures
on every promissory note, assuring him that the loan documents
would be filled out in accordance with their agreement. However,
after he signed and delivered the loan documents to the
respondent Bank, these were filled out in a manner not in accord
with their agreement, such that the petitioner Foundation was
included as party thereto.
H: The Court particularly finds as incredulous petitioner Tan’s
allegation that he was made to sign blank loan documents and
that the phrase “IN MY OFFICIAL/PERSONAL CAPACITY” was
superimposed by the respondent Bank’s employee despite
petitioner Tan’s protestation. The Court is hard pressed to believe
that a businessman of petitioner Tan’s stature could have been so
careless as to sign blank loan documents. In contrast, as found by
the CA, the promissory notes clearly showed upon their faces that
they are the obligation of the petitioner Foundation, as contracted
by petitioner Tan “in his official and personal capacity.” Moreover,
the application for credit accommodation, the signature cards of
the two accounts in the name of petitioner Foundation, as well as
New Current Account Record, all accompanying the promissory
notes, were signed by petitioner Tan for and in the name of the
petitioner Foundation. These documentary evidence unequivocally
and categorically establish that the loans were solidarily
contracted by the petitioner Foundation and petitioner Tan. The
evidence shows that Tan has been representing himself as the
President of Lapulapu Foundation, Inc. He opened a savings
account and a current account in the names of the corporation,
and signed the application form as well as the necessary
specimen signature cards twice, for himself and for the
foundation. He submitted a notarized Secretary’s Certificate from
the corporation, attesting that he has been authorized, inter alia,
to sign for and in behalf of the Lapulapu Foundation any and all
checks, drafts or other orders with respect to the bank; to transact
business with the Bank, negotiate loans, agreements, obligations,
promissory notes and other commercial documents; and to initially
obtain a loan for P100,000.00 from any bank. Under these
circumstances, the defendant corporation is liable for the
transactions entered into by Tan on its behalf.
Per its Secretary’s Certificate, the petitioner Foundation had given its
President, petitioner Tan, ostensible and apparent authority to inter
alia deal with the respondent Bank. Accordingly, the petitioner
Foundation is estopped from questioning petitioner Tan’s authority to
obtain the subject loans from the respondent Bank. It is a 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.
Board of Liquidators v Kalaw. Maximo Kalaw is chairman of the board and
general manager of the National Coconut Corporation (NACOCO), a non-profit GOCC
empowered by its charter to buy sell barter export and… deal in coconut, copra, and
dessicated coconut. Bocar, Garcia and Moll were directors. It entered into contracts for
the trading and delivery of copra. Nature intervened—4 typhoons devastated
agriculture and copra production. NACOCO was on the verge of sustaining losses and
could not be able to make good on the contracts. Sensing this, Kalaw submitted the
contracts to the board for approval and made a full disclosure of the situation. No
action was taken, and no vote was taken on the matter. On 20 Jan 1947 the board met
again with Kalaw, Bocar, Garcia, and Moll in attendance, and approved the contracts.
NACOCO however only partially performed the contracts. One of the contracts concerns
the Louis Drayfus & Co., which sued NACOCO. NACOCO settled out-of-court and paid
Drayfus P567,024.52 representing 70% of total claims. The total settlements sum up to
P1.3M. NACOCO sues Kalaw, and his directors Bocar, Moll and Garcia to recover this
sum, alleging negligence and BF and breach of trust in approving the contracts, by not
having them approved by the board. TC dismisses complaint. NACOCO claims that the
by-laws provide that prior Board approval is required before the GM can perform or
execute in behalf of NACOCO all contracts necessary to accomplish its purpose.
I: W/N the Kalaw contracts are valid despite its lack of prior board approval as required
by the NACOCO by-laws
H: The contracts in question are “forward sales” contracts—a sales agreement entered
into, even though the goods are not yet in the hands of the seller. Given the peculiar
nature of copra trading, ie copra must be disposed of asap else it would lose weight and
would decrease its value, it necessitates a quick turnover and execution of the contract
16
on short notice (w/in 24 hours). It would be difficult if not impractical to call a
formal meeting of the board each time a contract is to be executed.
NACOCO board met the difficulties attendant to forward sales by leaving the
adoption of the means to the sound discretion of Kalaw. Long before the contracts
came into being, Kalaw already contract by himself alone some 60 such contracts,
and NACOCO reaped a gross profit. These contracts were contracted without prior
authority from the Board and were known to all the members, but nothing was said
by them. Also contracts entered into by Kalaw had been submitted to the board
after execution, not before as required by the by-laws. The Board has knowledge of
this and did not object to the same. Thus the practice of the corporation has been to
allow its GM to negotiate and execute contracts in behalf of NACOCO without prior
Board approval, and by its acts and through acquiescence practically laid aside the
requirement in the by-law. The contracts are therefore valid.
Ratification by a corporation of an unauthorized act or contract by its officers relates
back to the time of the act or contract ratified and is equivalent to original authority.
The theory of corporate ratfication is predicated upon the right of a corporation to
contract, and any ratification or adoption is equivalent to a grant of prior authority.
Ratification “cleanses the contract from all its defects from the moment it was
constituted. By corporate confirmation of the contracts in dispute on 20 Jan, the
Kalaw contracts are thus purged of whatever vice or defects they may have. Thus
even in the face of an express by-law requirement of prior approval, the law on
corporations is not to be held so rigid and inflexible as to fail to recognize equitable
considerations.
There was no BF or breach of trust on the part of Kalaw. The board knew, and Kalaw
had so informed it, that the contracts would cause heavy losses. The Court found no
trace of any dishonest purpose or moral obliquity or ill will that partakes of the
nature of fraud which would consitute BF on the part of Kalaw. The Board did not
eventhink of raising their voice in protest against past contracts which brought
enormous profits to NACOCO. The ratification was an act of simple justice and
fairness to the GM and to the best interest of the corporation whose prestige would
have been seriously impaired by a rejection of the board of those contracts which
proved disadvantageous.
Zamboanga Transportation v Bachrach Motor. The Zamboanga
Transpo Corp, a corporation managed by a BOD composed of 5
stockholders, purchased trucks, automobiles and parts from
Bachrach Motors Inc. It incurred a balance of P44K due on several
White trucks, secured by 2 CMs. As it was in dire financial straits,
Zamboanga through its GM, President and Auditor Jose Erquiaga,
entered into loan and additional agreements with Jose Clos,
Bishop of Zamboanga, who was also the majority stockholder. As
security for the financial accommodation, a new CM agreement
was executed, wherein goods pledged to Bachrach was also
pledged to the Bishop. Erquiaga submitted the mortgage deed to the
board for approval. Two directors of Zamboanga expressed their
satisfaction with the arrangement. Zamboanga partially complied
with the mortgage deed. Bachrach sought the cancellation of the 2
CMs and to have it recorded in the registry of deeds. Erquiaga
replied that the cancellations cannot be recorded pending the
approval by the board of the mortgage deed. The BoD of Zamboanga
then convened and rejected the mortgage deed, because of the
discovery that the mortgage had been registered by Bachrach
without the knowledge or consent of Zamboanga and without having
first recorded the cancellations of the two previous mortgages. This
also prompted the Board to adopt another resolution authorizing
legal action to annul the mortgages. Bachrach also sued
Zamboanga, and was able to obtain possession of all the chattels
and sold the same at public auction. Zamboanga claims that an oral
agreement existed such that the mortgage would not be valid
without approval by resolution of the board and that it would not be
recorded until approval thru resolution was obtained, among other
conditions.
I: W/N the CMs executed by Erquiaga is valid and binding upon the
Zamboanga Transportation Corp after payments have been made to
Bachrach and notwithstanding the fact that the CMs were
disapproved by the Board of Directors of Zamboanga.
H: In his manifold capacity as President, GM, legal counsel, auditor,
and majority stockholder, Erquiaga entered into the CM contract with
Bachrach by virtue of which Zamboanga obtained greater
advantages. While it is true that the last CM contract was not
approved by the board, whose approval was needed in order to
validate it according to the by-laws, the broad powers vested in
Erquiaga, the approval of his acts with the other CMs, the approval of
the other directors, and the payments made to Bachrach are
equivalent to a tacit approval by the BoD of the CM contract and
binds Zamboanga Transport. In truth and in fact Erquiaga was and is
the factotum of the corporation and may be said to be the
corporation itself. While the chief officers of the corporation are in
reality its owners and are permitted to manage the business by the
directors, the acts of such officers are binding on the corporation,
which cannot escape liability as to third persons dealing with it in GF.
Thus when the president of a corporation, who is one of the principal
stockholders and at the same time its general manager, auditor,
legal counsel, is empowered by the by-laws to enter into CM
17
contracts, subject to the approval of the board, one of whom is
also a principal shareholder, and both of whom, together with the
president, form a majority and said corporation takes advantage
of the benefits afforded by said contract, such acts are equivalent
to an implied ratification of said contract by the board and binds
the corporation even if not formally approved by the board.
3. board committees
— BOD can create committees for the performance of certain functions,
so long as the board clearly specifies and limits the functions
delegated, and the delegation does not in effect constitute an
abdication of its powers vested by law
— S35 of Corpo Code allows delegation to an Executive Committee of
any act within the contemplation of the board with exceptions:
o Provided that the delegation is on specific matters and is not a
blanket or general one
o Implies that the board or by-laws may specifically authorize the
executive committee to study and review a board resolution not
expressly unamendable or unrepealable
o The delegation cannot go so far as to render the board powerless
and free from all responsibility
Section 35. Executive committee. - The by-laws of a corporation may
create an executive committee, composed of not less than three
members of the board, to be appointed by the board. Said committee
may act, by majority vote of all its members, on such specific matters
within the competence of the board, as may be delegated to it in the by-
laws or on a majority vote of the board, except with respect to: (1)
approval of any action for which shareholders' approval is also required;
(2) the filing of vacancies in the board; (3) the amendment or repeal of
by-laws or the adoption of new by-laws; (4) the amendment or repeal of
any resolution of the board which by its express terms is not so
amendable or repealable; and (5) a distribution of cash dividends to the
shareholders.
4. stockholders or members (Sec 23)
Section 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 to be elected from among the holders of stocks, or
where there is no stock, from among the members of the corporation,
who shall hold office for one (1) year until their successors are elected
and qualified. (28a)
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name
on the books of the corporation. Any director who ceases to be the owner
of at least one (1) share of the capital stock of the corporation of which
he is a director shall thereby cease to be a director. Trustees of non-stock
corporations must be members thereof. A majority of the directors or
trustees of all corporations organized under this Code must be residents
of the Philippines.
— GR: all corporate powers vested in the board of directors
— Exceptions: otherwise provided in the Code
o Where the Code expressly requires the stockholders or members
consent to certain matters before any action may be taken
o Usually involves the major changes in the corporation
o Stockholders or members approval usually expressed during a
meeting, which may be regular or special
Section 49. Kinds of meetings. - Meetings of directors, trustees,
stockholders, or members may be regular or special. (n)
o Sec. 50: Regular meeting: annually on a date fixed by the by-laws,
or…
 Anytime in April as determined by the board
o Meeting not required in case of amendment to the AOI, when written
assent of ALL the stockholders is sufficient
o Exceptions:
 amendment to shorten or extend corporate term or
 amendment to increase capital stock
Section 16. Amendment of Articles of Incorporation. - Unless otherwise
prescribed by this Code or by special law, and for legitimate purposes,
any provision or matter stated in the articles of incorporation may be
amended by a majority vote of the board of directors or trustees and the
vote or written assent of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock, without prejudice to the
appraisal right of dissenting stockholders in accordance with the
provisions of this Code, or the vote or written assent of at least two-
thirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation. Such
18
articles, as amended shall be indicated by underscoring the change or
changes made, and a copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or trustees stating the
fact that said amendment or amendments have been duly approved by
the required vote of the stockholders or members, shall be submitted to
the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities
and Exchange Commission or from the date of filing with the said
Commission if not acted upon within six (6) months from the date of
filing for a cause not attributable to the corporation.
Section 37. Power to extend or shorten corporate term. - A private
corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of directors
or trustees and ratified at a meeting by the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or by at least two-
thirds (2/3) of the members in case of non-stock corporations. Written
notice of the proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That in case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right under the conditions
provided in this code. (n)
Section 38. Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness. - No corporation shall increase or
decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder's meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock shall favor the increase
or diminution of the capital stock, or the incurring, creating or increasing
of any bonded indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring, creating, or increasing
of any bonded indebtedness and of the time and place of the
stockholder's meeting at which the proposed increase or diminution of
the capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to each stockholder
Must be through vote of 2/3 of OCS/members in a SH
atmtg
his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or
served personally.
A certificate in duplicate must be signed by a majority of the directors of
the corporation and countersigned by the chairman and the secretary of
the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied
with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock
or number of shares of no-par stock thereof actually subscribed,
the names, nationalities and residences of the persons
subscribing, the amount of capital stock or number of no-par
stock subscribed by each, and the amount paid by each on his
subscription in cash or property, or the amount of capital stock or
number of shares of no-par stock allotted to each stock-holder if
such increase is for the purpose of making effective stock
dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or
increased;
(5) The actual indebtedness of the corporation on the day of the
meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital
stock, or the incurring, creating or increasing of any bonded
indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From
and after approval by the Securities and Exchange Commission and the
issuance by the Commission of its certificate of filing, the capital stock
19
shall stand increased or decreased and the incurring, creating or
increasing of any bonded indebtedness authorized, as the certificate of
filing may declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of
capital stock unless accompanied by the sworn statement of the
treasurer of the corporation lawfully holding office at the time of the
filing of the certificate, showing that at least twenty-five (25%) percent of
such increased capital stock has been subscribed and that at least
twenty-five (25%) percent of the amount subscribed has been paid either
in actual cash to the corporation or that there has been transferred to
the corporation property the valuation of which is equal to twenty-five
(25%) percent of the subscription: Provided, further, That no decrease of
the capital stock shall be approved by the Commission if its effect shall
prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or
increase the same, with the approval by a majority vote of the board of
trustees and of at least two-thirds (2/3) of the members in a meeting
duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof. (17a)
(1) requirements of stockholders or members
meetings and of voting
Jack: Publish notice when it is not
sure that there will be a quorum
a notice
Section 50. Regular and special meetings of stockholders or members. -
Regular meetings of stockholders or members shall be held annually on a
date fixed in the by-laws, or if not so fixed, on any date in April of every
year as determined by the board of directors or trustees: Provided, That
written notice of regular meetings shall be sent to all stockholders or
members of record at least two (2) weeks prior to the meeting, unless a
different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time
deemed necessary or as provided in the by-laws: Provided, however,
That at least one (1) week written notice shall be sent to all stockholders
or members, unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member.
— By-laws may shorten or extend the time required by the Code for
giving notice
— Board of SMB Workers: Failure to give notice would, as a rule,
render any resolution made therein voidable at the instance of
an absent stockholder who was not notified of the meeting
— Attendance by a stockholder despite want of notice operates as
a waiver of the requirement
— If all stockholders are present or duly represented, it will be valid
even if no notice at all was sent
Section 51. Place and time of meetings of stockholders of members. -
Stockholder's or member's meetings, whether regular or special, shall be
held in the city or municipality where the principal office of the
corporation is located, and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall, for purposes of this
section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof
stated therein.
All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting be improperly held or
called, provided all the stockholders or members of the corporation are
present or duly represented at the meeting. (24 and 25)
— Requisites of notice: Jack: in publicly held
o Specify time and place of meeting corps, notice published
o Purpose in newpaper
o Only matters reasonably related to the purpose must be
taken up
o Sent to last known address
— Attendance of stockholder is an exercise of his personal right as
owner of the stocks of the corporation
Board of SMB Workers v Tan. Stockholder John del Castillo files an action
in court to declare null and void the election of the members of the board of
directors and Election Committee of SMB Workers Savings and Loan Assoc
Inc. and to compel the board to call for an hold another election in
accordance with its by-laws and the Corporation Law, and to restrain the
illegally elected directors from exercising the functions of their office. TC
grants the petition and declared the election null and void and ordered
20
another election to be held. However, the same members of the Election
Committee set the meeting of the members of the association to elect
the new members. Del Castillo et al contends that it would be inequitable
for them to conduct and supervise again the election. Furthermore, since
the notice was posted and sent out only on 26 March, and the election
would be held on 28 March, or two days after notice, it is not in
accordance with the by-laws which provide that 5 days notice is required.
The TC entered an order that the election set for 28 March be cancelled
and a committee of three be constituted and appointed to call conduct
and supervise the election.
H: it appears that the notice was posted on 26 March and 28 March was
the date for the election. Therefore the five days previous notice required
by the by-laws was not complied with.
As regards the creation of a committee of three vested with the authority
to call conduct and supervise the election, and the appointment of
Viernes as chairman of the Committee, the court in the exercise of its
equity jurisdiction may appoint such committee, it having been shown
that the Election Committee provided for in the by-laws has been
annulled by the TC and would jeopardize the rights of respondents if
allowed to act.
b place of meeting
Section 51. Place and time of meetings of stockholders of members. -
Stockholder's or member's meetings, whether regular or special, shall be
held in the city or municipality where the principal office of the
corporation is located, and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall, for purposes of this
section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof
stated therein.
All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting be improperly held or
called, provided all the stockholders or members of the corporation are
present or duly represented at the meeting. (24 and 25)
— by-laws cannot fix a place of meeting other than that fixed in Sec 51
— for non-stock corporations: Sec 93
Section 93. Place of meetings. - The by-laws may provide that the
members of a non-stock corporation may hold their regular or special
meetings at any place even outside the place where the principal office
of the corporation is located: Provided, That proper notice is sent to all
members indicating the date, time and place of the meeting: and
Provided, further, That the place of meeting shall be within the
Philippines. (n)
c quorum
Section 52. Quorum in meetings. - Unless otherwise provided for in this
Code or in the by-laws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or a majority of
the members in the case of non-stock corporations. (n)
— GR: quorum is a majority of outstanding capital stock or majority
of members of non-stock corporations
— Exception:
o special rules in the Code
o by-laws may provide for greater or lesser number
— to constitute a quorum, stockholders need not be present
personally but may be represented by proxies whose vote will be
as effective as if they were personally present:
Section 58. Proxies. - Stockholders and members may vote in person or
by proxy in all meetings of stockholders or members. Proxies shall in
writing, signed by the stockholder or member and filed before the
scheduled meeting with the corporate secretary. Unless otherwise
provided in the proxy, it shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a period longer than
five (5) years at any one time. (n)
Section 59. Voting trusts. - One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring upon
a trustee or trustees the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any time: Provided,
That in the case of a voting trust specifically required as a condition in a
loan agreement, said voting trust may be for a period exceeding five (5)
years but shall automatically expire upon full payment of the loan. A
voting trust agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities and
Exchange Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the
voting trust agreement shall be cancelled and new ones shall be issued
21
in the name of the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the corporation, it shall be
noted that the transfer in the name of the trustee or trustees is made
pursuant to said voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors voting
trust certificates, which shall be transferable in the same manner and
with the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject to
examination by any stockholder of the corporation in the same manner
as any other corporate book or record: Provided, That both the transferor
and the trustee or trustees may exercise the right of inspection of all
corporate books and records in accordance with the provisions of this
Code.
Any other stockholder may transfer his shares to the same trustee or
trustees upon the terms and conditions stated in the voting trust
agreement, and thereupon shall be bound by all the provisions of said
agreement.
No voting trust agreement shall be entered into for the purpose of
circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.
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.
The voting trustee or trustees may vote by proxy unless the agreement
provides otherwise. (36a)
— stockholders cannot unjustifiably walk-out, thereby breaking
the quorum and defeating the validity of any act proposed
and approved by the majority
— if justified, the meeting cannot be validly continued if the
remaining stockholders present do not constitute a quorum
d vote
— vote required to carry a resolution of the stockholders or
members depends on:
 o the nature of the resolution, and
o corresponding rule as required by the code
— GR: majority vote of the shares or members present or
represented, provided that there is a quorum
— Stock corps: vote is based on number of outstanding shares
represented and not on number of stockholders present
— Non-stock: vote based number of members
Section 137. Outstanding capital stock defined. - The term "outstanding
capital stock", as used in this Code, means the total shares of stock
issued under binding subscription agreements to subscribers or
stockholders, whether or not fully or partially paid, except treasury
shares. (n)
— Close corps: AOI can provide for a quorum and voting
requirements in stockholders meetings than that provided in Sec
52
o Each member has only one vote unless the by-laws or AOI
limit the right or broaden it
o By-laws may provide for voting by mail
Section 97. Articles of incorporation. - The articles of incorporation of a
close corporation may provide:
1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as
may be stated therein, subject to the provisions of the following
section;
2. For a classification of directors into one or more classes, each
of whom may be voted for and elected solely by a particular
class of stock; and
3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
-xXx-
e non-voting stocks or members
— can still vote/are required to vote in the ff:
(1) amendment to the AOI
(2) adoption/amendment to the BLs
(3) sale, lease, mortgage, etc of all or substantially all corporate assets
22
(4) bonded indebtedness
(5) increase/decrease in capital stock
(6) merger/consolidation
(7) investment in another corporation
(8) dissolution
where all stockholders present
— GR: Meeting VOID If no notice or defective notice, or venue in
another place other than in BLs or AOi,
— Any matter taken up will be voidable at the instance of an
objecting SH
— But presence of ALL SHs, personally or thru representatives,
constitutes a waiver of any irregularity or defect
Section 51. Place and time of meetings of stockholders of members. -
Stockholder's or member's meetings, whether regular or special, shall be
held in the city or municipality where the principal office of the
corporation is located, and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall, for purposes of this
section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof
stated therein.
All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting be improperly held or
called, provided all the stockholders or members of the corporation are
present or duly represented at the meeting. (24 and 25)
Johnston v Johnston. Logan, Irene, and Felisa Johnston, and Louis and
Rosario Johnston, and Elizabeth Araneta are the majority shareholders of
a family stock corporation known as Johnston Lumber Co Inc. A
stockholders meeting was scheduled to elect a new set of directors who
would in turn choose the new officers of the corporation. Logan presented
a proxy by his mother, Felisa, and another proxy by his wife, Irene, which
all-in-all represented 1,242 of the 2,462 shares of the corporation. He also
requested that the duly endorsed shares of JB Solis be listed in the books
for voting purposes. Minority SH Louis Johnston, as Chairman of the
board, denied the request. Logan quickly sent for the original owners so
that they could vote in his favor. Louis also disallowed Logan from voting
the 307 shares of the elder Johnston which he had been voting in his
capacity as administrator of the estate because the estate proceedings
were already terminated. Thereafter, and before the existence of a quorum
could be declared, Logan et al walked out of the SH meeting and refused to
recognize the validity of the meeting. Louis’ group, the minority carried on
and elected themselves directors and officers. Another SH meeting was
called by Louis at the instance of Logan, which will cover matters not taken
up or not finished during the regular SH meeting. During the meeting Logan
moved for the election of a new board, claiming that there was no quorum in
the last meeting and thus was not validly held. Louis denied the motion.
Logan, who represented majority of the stocks, then nominated his own set
of directors, and his group cast their votes in favor of the nominees, which
were elected the new members of the board. This action was overruled
again by Louis as Chair. Logan Irene and Felisa filed a quo warranto suit
alleging that they were the duly elected members of the BOD of Johnston
Lumber Co, and were also elected as the corporate officers thereof and
praying for the ouster of Louis, Araneta and Rosario Johnston.
I: (1) Which of the two factions, the Logan group or the Louis group, was
validly elected as directors and officers of the corporation
H: The SHs who remained after the group representing the majority walked
out without a quorum being declared represented the minority and did no
constitute a quorum, and it is clear that they could not have validly
transacted further business much less have elected a new set of directors. It
follows that if the election of the directors after the withdrawal of Logan was
null and void, then the subsequent meeting of the board at which the Louis
group was elected was likewise null and void.
If the purpose in bolting the meeting was to deliberately defeat the
existence of a quorum, the absence of a quorum, then it would produce the
effect of nullifying the proceedings that follows. It is to be noted that a SH
can, for justifiable reasons, break the quorum by w/drawing from the
meeting. Logan walked out because Louis persistently and with reason
overruled Logan on his requests to vote the shares of the Silos family, which
he validly purchased. That Logan did everything possible to register the
stocks in order to vote them was substantial compliance with the charter
and the by-laws. The denial by Louis to vote the shares of the minor children
of Albert Johnston was likewise unreasonable. The withdrawal of Logan,
although it actually defeated the existence of a quorum, was neither
unreasonable nor unjustifiable.
The second meeting of SH was properly convened. All parties were present.
The roll was called and a quorum was declared. The contention of Louis that
the 2nd meeting did not amount to an election cannot be sustained. It must
be remembered that the Logan group held the majority of stocks when they
cast their votes ifo the nominees. The inaction of the Louis faction, did not
have the effect of defeating or invalidating the election. It is the essence of
23
all elections that the will of the majority, properly expressed, shall
govern. A majority of votes cast will decide, although some SHs who are
present may refuse to vote, and thus the majority of the votes cast may
be less than a majority of the persons or stocks present or represented.
Neither may the second election be assailed on the ground that notice
did not specifically include the election of the new board on the agenda.
The notice provided that matters not taken up or finished during the first
meeting will be part of the agenda, therefore the SHs knew that Logan
would press for the new board and they were prepared for it, having
attended the first meeting. Furthermore, all SHs were present either in
person or by proxy during the 1st meeting and whatever defect in the
notice was cured b their presence and acquiescence.
(2) where no meeting called
— Sec 50 and 6 of PD 902-A are intended to protect the SHs from a
situation where no meeting is called due to the absence of any
person authorized to call it or fraudulent or unjustified refusal to call
it
— 50: limited to a situation where there is no person authorized to call a
meeting
Section 50. Regular and special meetings of stockholders or members. -
Regular meetings of stockholders or members shall be held annually on a
date fixed in the by-laws, or if not so fixed, on any date in April of every
year as determined by the board of directors or trustees: Provided, That
written notice of regular meetings shall be sent to all stockholders or
members of record at least two (2) weeks prior to the meeting, unless a
different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time
deemed necessary or as provided in the by-laws: Provided, however,
That at least one (1) week written notice shall be sent to all stockholders
or members, unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member.
Whenever, for any cause, there is no person authorized to call a
meeting, the Securities and Exchange Commission, upon petition
of a stockholder or member on a showing of good cause therefor,
may issue an order to the petitioning stockholder or member
directing him to call a meeting of the corporation by giving
proper notice required by this Code or by the by-laws. The
petitioning stockholder or member shall preside thereat until at
least a majority of the stockholders or members present have
chosen one of their number as presiding officer. (24, 26)
— transfers power to authorize the calling of a meeting from the
courts to the SEC, and only when NO person is authorized to call
a meeting
— intended to protect stockholders/members from a situation
where no meeting is called due to the absence of any person
authorized to call the same or due to the neglect of fraudulent
refusal o directors to call a meeting for the election of new
directors or whenever it is necessary to act on certain matters
Ponce et al v Encarnacion. At a stockholders meeting of the Daguhoy
Enterprises Inc, the voluntary dissolution of the corporation and the
appointment of Potenciano Gapol, the majority stockholder, as receiver was
agreed upon, with a petition for voluntary dissolution drafted and signed by
Ponce. Instead of filing the petition, Gapol changed his mind and filed a
complaint in court to compel Ponce et al to render an accounting of the
funds of the corp, reimburse it for expenses and purchases, and other
amounts which were allegedly misspent and misappropriate for Ponce’s own
use. Gapol also sought the removal of Ponce et al as members of the board,
and prayed for an order directing him to call a meeting of the stockholders
and to preside thereat. 2 days later, without notice to the Ponce group and
to the other board members, the TC issued the order prayed for. Ponce only
got to know about the order when the bank refused to honor the checks
because of its refusal to recognize the new board members.
H: The by-laws of the corporation provide in part that its board shall be
elected by the stockholders every even year during the month of January.
The requirement in the Corp Code that “on the showing of good cause
therefor” does not mean that the petition must be set for hearing with notice
served upon the board. The TC was satisfied that there was good cause
considering that the chairman had failed, neglected, or refused to perform
his duty to call a meeting of the stockholders to elect new sets of directors,
in accordance with the by-laws. They had no right to continue as directors
unless reelected by the stockholders in a meeting called for that purpose
every even year. They had no right to hold-over brought about by the failure
to perform the duty incumbent upon any of them. The alleged illegality of
the election of one members of the board at the meeting called by Gapol
was authorized by the court being subsequent to the order complained of
and cannot affect the validity and legality of that order. If it be true that the
director elected at the meeting authorized by the court was not qualified in
accordance with the by-laws the remedy for the aggrieved party would be a
quo warranto.
24
5. instances when stockholder or members action is
necessary—where board action is insufficient, which includes
election of directors/trustees but also major changes in the
corporation
— most significant rights of a stockholder:
o right to vote
o right to share in the profits
o right to participate proportionately, upon dissolution and
after payment to creditors, in the distribution of the
corporate assets
(1) election of directors or trustees
— 24: at all elections of directors or trustees, there must
present, either in person or by proxy, the owners of the
majority of OCS
— right to vote is a right emanating from ownership
— this is the only way a stockholder can have a voice in the
management of corporate affairs
— it is the only way members can have a say as to how the
purposes of the corporation should be achieved
— once elected, stockholders relinquish all corporate powers to
the board
— right to vote can be waived in exchange for preferences and
privileges, such as the issuance of preferred and redeemable
shares as non-voting shares
— right to vote in certain areas cannot be denied (Sec 6)
Section 6. Classification of shares. - The shares of stock of stock
corporations may be divided into classes or series of shares, or both, any
of which classes or series of shares may have such rights, privileges or
restrictions as may be stated in the articles of incorporation: Provided,
That no share may be deprived of voting rights except those classified
and issued as "preferred" or "redeemable" shares, unless otherwise
provided in this Code: Provided, further, That there shall always be a
class or series of shares which have complete voting rights. Any or all of
the shares or series of shares may have a par value or have no par value
as may be provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or such other preferences
as may be stated in the articles of incorporation which are not violative
of the provisions of this Code: Provided, That preferred shares of stock
may be issued only with a stated par value. The board of directors, where
authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof: Provided,
That such terms and conditions shall be effective upon the filing of a
certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully
paid and non-assessable and the holder of such shares shall not be liable
to the corporation or to its creditors in respect thereto: Provided; That
shares without par value may not be issued for a consideration less than
the value of five (P5.00) pesos per share: Provided, further, That the
entire consideration received by the corporation for its no-par value
shares shall be treated as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated
in the certificate of stock, each share shall be equal in all respects to
every other share.
Where the articles of incorporation provide for non-voting shares in the
cases allowed by this Code, the holders of such shares shall nevertheless
be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
25
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this Code
shall be deemed to refer only to stocks with voting rights. (5a)
— rules to be followed in the election of directors/trustees:
Section 24. Election of directors or trustees. - At all elections of
directors or trustees, there must be present, either in person or by
representative authorized to act by written proxy, the owners of a
majority of the outstanding capital stock, or if there be no capital stock, a
majority of the members entitled to vote. The election must be by ballot
if requested by any voting stockholder or member. In stock corporations,
every stockholder entitled to vote shall have the right to vote in person
or by proxy the number of shares of stock standing, at the time fixed in
the by-laws, in his own name on the stock books of the corporation, or
where the by-laws are silent, at the time of the election; and said
stockholder may vote such number of shares for as many persons as
there are directors to be elected or he may cumulate said shares and
give one candidate as many votes as the number of directors to be
elected multiplied by the number of his shares shall equal, or he may
distribute them on the same principle among as many candidates as he
shall see fit: Provided, That the total number of votes cast by him shall
not exceed the number of shares owned by him as shown in the books of
the corporation multiplied by the whole number of directors to be
elected: Provided, however, That no delinquent stock shall be voted.
Unless otherwise provided in the articles of incorporation or in the by-
laws, members of corporations which have no capital stock may cast as
many votes as there are trustees to be elected but may not cast more
than one vote for one candidate. Candidates receiving the highest
number of votes shall be declared elected. Any meeting of the
stockholders or members called for an election may adjourn from day to
day or from time to time but not sine die or indefinitely if, for any reason,
no election is held, or if there are not present or represented by proxy, at
the meeting, the owners of a majority of the outstanding capital stock, or
if there be no capital stock, a majority of the member entitled to vote.
(31a)
— the above provision requires presence either in person or proxy,
implying that a stockholders meeting is required
Section 92. Election and term of trustees. - Unless otherwise provided in
the articles of incorporation or the by-laws, the board of trustees of non-
stock corporations, which may be more than fifteen (15) in number as
may be fixed in their articles of incorporation or by-laws, shall, as soon as
organized, so classify themselves that the term of office of one-third (1/3)
of their number shall expire every year; and subsequent elections of
trustees comprising one-third (1/3) of the board of trustees shall be held
annually and trustees so elected shall have a term of three (3) years.
Trustees thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the unexpired
period.
No person shall be elected as trustee unless he is a member of the
corporation.
Unless otherwise provided in the articles of incorporation or the by-laws,
officers of a non-stock corporation may be directly elected by the
members. (n)
Section 93. Place of meetings. - The by-laws may provide that the
members of a non-stock corporation may hold their regular or special
meetings at any place even outside the place where the principal office
of the corporation is located: Provided, That proper notice is sent to all
members indicating the date, time and place of the meeting: and
Provided, further, That the place of meeting shall be within the
Philippines. (n)
a quorum required
— for a valid election of directors/trustees= majority of outstanding
capital stock or members entitled to vote
— Campos: quorum also based on the number of outstanding
voting stocks or members entitled to vote
b manner of voting; cumulative voting
26
— viva voce is sufficient, unless ballot voting is requested
— in stock corporations, cumulative voting in the election of
directors is mandatory
— right to cumulative voting cannot be curtailed by the by-laws
— number of voting stockholder votes = product of number of
shares owned and the number of directors to be elected
o stockholder may distribute them any way he pleases
c in close corporations
— special privilege in sec 97
d qualifications and disqualifications of
directors
— no one can be elected director unless he owns at least one
share in the corporation, registered in his name on the books
S23
— if a director disposes all his shares, he ipso facto ceases to be
a director and a vacancy is created
— majority of directors/trustees must be residents of RP
— citizenship requirements: subject to Constitutional limitations
— by-laws may not do away with the qualifications required by
law, buy may add qualifications or provide for
disqualifications
Detective & Protective Bureau v Cloribel. Fausto Alberto was
managing director of the Detective and Protective Bureau Inc.
who illegally seized and took control of the assets and books of
the corporation, concealed them illegally and refused to allow any
member of the corporation to examine. The stockholders in a
meeting removed Alberto as managing director and elected Jose
de la Rosa, who did not own a share of stock of the corporation.
Alberto refused to vacate and surrender his office and continued
to perform unauthorized acts and to use corporate funds. The
corporation claimed that Alberto arrogated unto himself the
powers of the board because of his refusal to surrender his office
despite removal by the stockholders.
H: Since de la Rosa did not own a share of stock of the
corporation, he cannot become a director in accordance with the
Corpo Code. If he could not be director, then it follows that he cannot I: were the amended by­laws valid and reasonable
be managing director. Since he is not qualified, then Alberto cannot
be compelled to vacate his office because the by-laws itself provide H: In the case at bar, there are facts which cannot be denied, viz.: that the amended 
that directors shall serve until the election and qualification of duly
by­laws were adopted by the Board of Directors of the San Miguel Corporation in the 
qualified successor.
exercise of the power delegated by the stockholders ostensibly pursuant to section 
Gokongwei v SEC. This involves two actions in the SEC filed by John Gokongwei, a  22 of the Corporation Law; that in a special meeting on February 10, 1977 held 
San Miguel Corporation stockholder by himself and through the URC and CFC, who  specially for that purpose, the amended by­laws were ratified by more than 80% of 
sued the majority of the SMC BoD (Soriano, Zobel, Roxas, Ortigas, Prieto et al) and  the stockholders of record; that the foreign investment in the Hongkong Brewery and 
SMC itself to declare null and void the amended by­laws and a cancellation of the  Distellery, a beer manufacturing company in Hongkong, was made by the San 
certificate of filing the amended by­laws. He alleges the following: Miguel Corporation in 1948; and that in the stockholders' annual meeting held in 
— SMCBOD acted without authority in amending the by­laws without the  1972 and 1977, all foreign investments and operations of San Miguel Corporation 
prescribed 2/3 vote of stockholders holding subscribed and paid­up  were ratified by the stockholders.
capital stock
— Some members of the SMCBOD amended the by­laws which state that in  I: Whether or not the amended by­laws of SMC of disqualifying a competitor from  
determining whether or not a person is engaged in competitive business,  nomination or election to the Board of Directors of SMC are valid and reasonable
the Board may look into factors such as competitive business and family 
relationship, thus purposely providing for Gokongwei’s disqualification as  H: Gokongwei claims that the amended by­laws are invalid and unreasonable 
director, and effectively disqualified him from being elected as director because they were tailored to suppress the minority and prevent them from having 
representation in the Board, at the same time depriving petitioner of his "vested 
Gokongwei also files an action in the SEC to compel SMC to allow him to inspect the  right" to be voted for and to vote for a person of his choice as director. Upon the 
records of the corporation, including the minutes of the last stockholders meeting, copy  other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel 
of the management contract with ANSCOR, latest financial statements among others,  Corporation content that the exclusion of a competitor from the Board is legitimate 
including the authority of the stockholders to invest corporate funds in San Miguel  corporate purpose, considering that being a competitor, petitioner cannot devote an 
International Inc.  unselfish and undivided Loyalty to the corporation; that it is essentially a preventive 
measure to assure stockholders of San Miguel Corporation of reasonable protective 
The Sorianos counter by alleging that Gokongwei as president and majority stockholder  from the unrestrained self­interest of those charged with the promotion of the 
of URC and CFC, conducted bad publicity against the SMC to generate support from  corporate enterprise. 
the stockholders in his effort to secure a seat in the board. They add the fact 
Under US corporate law, corporations have the power to make by­laws declaring a 
Gokongwei was rejected by the stockholders because he was engaged in competitive 
person employed in the service of a rival company to be ineligible for the 
business and securing a seat would have subjected SMC to grave disadvantages. SEC 
corporation's Board of Directors. ... [A]n amendment which renders ineligible, or if 
grants Gokongwei motion but denies the motion to inspect the financial statements and 
elected, subjects to removal, a director if he be also a director in a corporation 
records of San Miguel International as he is not a stockholder thereof. SEC also 
whose business is in competition with or is antagonistic to the other corporation is 
allowed him to run as director but cannot sit as long as the validity of the by­laws has 
valid." This is based upon the principle that where the director is so employed in the 
been settled. Meanwhile the SMCBOD submitted the amended by­laws to the 
service of a rival company, he cannot serve both, but must betray one or the other. 
stockholders, who ratified the same. 
Such an amendment "advances the benefit of the corporation and is good." In the 

27
Philippines, section 21 of the Corporation Law expressly provides that a corporation  entrusted with the management of the corporation for the collective benefit of the 
may make by­laws for the qualifications of directors. Thus, it has been held that an  stockholders, "they occupy a fiduciary relation, and in this sense the relation is one 
officer of a corporation cannot engage in a business in direct competition with that of  of trust." “The ordinary trust relationship of directors of a corporation and 
the corporation where he is a director by utilizing information he has received as such  stockholders", according to Ashaman v. Miller," is not a matter of statutory or 
officer, under "the established law that a director or officer of a corporation may not  technical law. It springs from the fact that directors have the control and guidance of 
enter into a competing enterprise which cripples or injures the business of the  corporate affairs and property and hence of the property interests of the 
corporation of which he is an officer or director.”  stockholders. Equity recognizes that stockholders are the proprietors of the 
corporate interests and are ultimately the only beneficiaries thereof. 
It is also well established that corporate officers "are not permitted to use their position 
of trust and confidence to further their private interests." In a case where directors of a  I: Whether or not respondent San Miguel Corporation could, as a measure of self­  
corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's  protection, disqualify a competitor from nomination and election to its Board of  
products, and after establishing a rival business, the directors entered into a new  Directors.
contract themselves with the foreign firm for exclusive sale of its products, the court 
held that equity would regard the new contract as an offshoot of the old contract and,  H: It is alleged that petitioner, as of May 6, 1978, has exercised, personally or thru 
therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the  two corporations owned or controlled by him, control over the following 
fruits of his misconduct to the exclusion of his principal.”  shareholdings in San Miguel Corporation. According to respondent SMC, in 1976, 
the areas of competition affecting SMC involved product sales of over P400 million 
I: W/N Gokongwei, as SH of SMC, has a vested right to be voted as director in the   or more than 20% of the P2 billion total product sales of SMC. The CFC­Robina 
corporation.  group was in direct competition on product lines which, for SMC, represented sales 
amounting to more than P478 million.
H: It is further argued by SMC that there is no vested right of any stockholder under  
Philippine Law to be voted as director of a corporation. Pursuant to section 18 of the  In this jurisdiction, under section 21 of the Corporation Law, a corporation may 
Corporation Law, any corporation may amend its articles of incorporation by a vote or   prescribe in its by­laws "the qualifications, duties and compensation of directors, 
written assent of the stockholders representing at least two­thirds of the subscribed   officers and employees ... " This must necessarily refer to a qualification in addition 
capital stock of the corporation If the amendment changes, diminishes or restricts the   to that specified by section 30 of the Corporation Law, which provides that "every 
rights of the existing shareholders then the dissenting minority has only one right, viz.:  director must own in his right at least one share of the capital stock of the stock 
"to object thereto in writing and demand payment for his share." Under section 22 of the  corporation of which he is a director ... " Any person "who buys stock in a 
same law, the owners of the majority of the subscribed capital stock may amend or  corporation does so with the knowledge that its affairs are dominated by a majority 
repeal any by­law or adopt new by­laws. It cannot be said, therefore, that petitioner has  of the stockholders and that he impliedly contracts that the will of the majority shall 
a vested right to be elected director, in the face of the fact that the law at the time such  govern in all matters within the limits of the act of incorporation and lawfully enacted 
right as stockholder was acquired contained the prescription that the corporate charter  by­laws and not forbidden by law." To this extent, therefore, the stockholder may be 
and the by­law shall be subject to amendment, alteration and modification. 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 
Although in the strict and technical sense, directors of a private corporation are not  corporation, and surrendered it to the will of the majority of his fellow incorporators. 
regarded as trustees, there cannot be any doubt that their character is that of a fiduciary  ... It cannot therefore be justly said that the contract, express or implied, between 
insofar as the corporation and the stockholders as a body are concerned. As agents  the corporation and the stockholders is infringed ... by any act of the former which is 

28
authorized by a majority..."  — … but directors may hold-over as directors until the annual
election is held
— 92 and 108: in non-stock corps, unless AOI provide otherwise,
It is not denied that a member of the Board of Directors of the San Miguel Corporation  the term of trustee is 3 years except education corporations
has access to sensitive and highly confidential information, such as: (a) marketing  (5 years)
strategies and pricing structure; (b) budget for expansion and diversification; (c) 
f vacancies in the board
research and development; and (d) sources of funding, availability of personnel, 
proposals of mergers or tie­ups with other firms. — 29: vacancies in the board are to be filled by the SHs in a
meeting:
It is obviously to prevent the creation of an opportunity for an officer or director of San  — no quorum
Miguel Corporation, who is also the officer or owner of a competing corporation, from  — removal
— expiration of term
taking advantage of the information which he acquires as director to promote his  — increase in number of directors
individual or corporate interests to the prejudice of San Miguel Corporation and its  — may occur by reason of death, resignation, removal,
stockholders, that the questioned amendment of the by­laws was made. Certainly,  expiration of term, or abandonment
— mere withdrawal insufficient—there must be clear intention to
where two corporations are competitive in a substantial sense, it would seem 
resign
improbable, if not impossible, for the director, if he were to discharge effectively his  — Mead: abandonment of office may be implied when the
duty, to satisfy his loyalty to both corporations and place the performance of his  director has accepted a position outside of the RP where his
corporation duties above his personal concerns. work would require his continuous presence, making it
incompatible with his position as director of corporation
— if thru removal or expiration of term: majority of remaining
Sound principles of corporate management counsel against sharing sensitive  directors
information with a director whose fiduciary duty of loyalty may well require that he 
disclose this information to a competitive arrival. These dangers are enhanced  (2) removal of directors
considerably where the common director such as the petitioner is a controlling 
— only SHs have the power to remove directors under the
stockholder of two of the competing corporations. It would seem manifest that in such  procedures in 28
situations, the director has an economic incentive to appropriate for the benefit of his  — removal of director before expiry of his term, even without
own corporation the corporate plans and policies of the corporation where he sits as  cause, is a right granted to the SHs for their protection
against fraud, incompetence or abuse
director.
— NOTE: no cumulative voting in the removal of directors—as
fast as the minority elects a director by exercising their right
Indeed, access by a competitor to confidential information regarding marketing  to cumulate their votes, the latter can be removed by 2/3
strategies and pricing policies of San Miguel Corporation would subject the latter to a  vote OCS
— Vacancy can be filled in the same meeting where the removal
competitive disadvantage and unjustly enrich the competitor, for advance knowledge by 
is effected; NO need for notice
the competitor of the strategies for the development of existing or new markets of  — Vote required: 2/3 OCS in stock corps; 2/3 members entitled
existing or new products could enable said competitor to utilize such knowledge to his  to vote in non-stock corps
advantage.
Roxas v Dela Rosa. The majority SHs of Binalbagan Estate Inc formed a
voting trust, wherein the trustees (Fisher, Laguda, and Monteblanco) were
e term of director or trustee
authorized to represent and vote the shares pertaining to the majority
SHs. During the SH meeting the trustees were able to elect a board to
— 23: in stock corporations= 1 year…
their liking without opposition from the minotiry. Various substitutions

29
have been made in the personnel of the voting trust, such that the present
composition wanted to oust the officers of Binalbagan elected by the voting
trust previously, without waiting the termination of their official term or after
one year from date of their election. The trust then called a special general
meeting of the SHs for the election of the board, amendment of by-laws, and
other business. A board member and a single SH sued the trustees to enjoin
them from holding said meeting. TC granted the petition.
H: Under the law the directors of a corporation can only be removed from
office by a vote of the SH representing 2/3 of the subscribed capital stock
entitled to vote, while vacanies in the board can only be filled by mere
majority vote. While the trust controls a majority of the stock, it does not
have a clear 2/3 majority. It was therefore impolitic for the trust, in forcing
the call for the meeting, to come out frankly and say in the notice that one
of the purposes of the meeting was to remove the directors of the
corporation. Instead the call was limited to the election of the board, it being
the evident intention to elect a new board as if the directorate had been
then vacant. Since the present directors were regularly elected, the proposal
to elect another directorate, if carried into effect, would result in the election
of a rival set of directors, who would need a court order of quo warranto to
install them in office. Thus the TC was correct in forestalling that eventuality
and to enjoin the second election.
Angeles v Santos. Angeles et al were minority SHs, while Santos et al were the
majority SHs of Paranaque Rice Mills Inc. At an extraordinary SH meeting the SH
appointed an investigation committee to investigate and determine the properties,
assets, and losses of the corporation. Santos denied access to the properties and the
records and books of the corporation. Santos took the records and books and
appropriated for his own benefit the properties and funds of the corporation. He also
refused to issue a certificate of stock for Angeles, and refused to call a SH meeting and
a board meeting, as well as disposed of the properties of the corporation without
authority. Santos also called no meeting of the board or of the SH thus enabling him to
continue holding without any election, the position of president and GM. Angeles et al
sought a court order to appoint a receiver, to order Santos to render an accounting, to
issue to certificate of stock ifo Angeles, and to remove the present board and hold a
special SH meeting to elect a new board.
H: There is ample evidence to show that Santos et al have been guilty of breach of trust
as directors of the corporation. The Board is a creation of the SH by delegation of the
SH. But the board, or the majority thereof, occupies a position of trusteeship in relation
to the minority of stock in the sense that the board should exercise GF, care, and
diligence in the administration of the affairs of the corporation. And should protect not
only the interests of the majority but also those of the minority of the stock. Where the
majority of the board performs ultra vires acts or commits fraud or wrongful harm to the
corporation, the court, in its exercise of equity jurisdiction, and upon showing that an
intracorporate remedy is unavailing, will entertain a suit for and in behalf of the
30
corporation to redress the injuries of the minority SHs against wrong by the majority.
Where corporate directors are guilty of a breach of trust—not of mere error of
judgment or abuse of discretion—and intracorporate remedy is futile or useless, a
SH may institute a suit in behalf of himself and other SH and for the benefit of the
corporation.
GR: SH cannot ordinarily sue in equity to redress wrongs done to the corporation,
but the action must be brought by the board
Exception: If the corporation is under the complete control of the wrongful members
of the board, or where a demand or suit would be useless and futile
The appointment of a receiver upon application of the minority SH is a power to be
exercised with great caution. This does not mean that the rights of the minority SH
may be entirely disregarded, and that where necessity has arisen, the appointment
of a receiver for a corporation is a matter resting largely in the sound discretion of
the court.
As to the contention that it was wrong for the TC to order the removal of the
directors and members of the board upon application by the minority SHs, the law
does no confer expressly upon the courts the power to remove a director. But if the
court has acquired jurisdiction to appoint a receiver because of the mismanagement
and resulting injury caused by the members of the board, these may thereafter be
removed and others appointed in their place by the same court in the exercise of its
equity jurisdiction. In the present case, the properties and assets of the corporation
are amply protected by the appointment of a receiver and thus the removal of the
directors is unnecessary and unwarranted.
Campbell v Leow Inc. Two factions have been fighting for control
of Leows Inc—the Tomlinson (majority SH) Faction, and the Vogel
(president) Faction. At the SH meeting each nominated 6 directors
and a neutral director, or 13 directors in all. 2 of the 6 Vogel
directors, a Tomlinson director, and the neutral director resigned,
making it 5-4 ifo Tomlinson. A quorum is 7. Only the 5 Tomlinson
directors attended a directors’ meeting to fill the vacancies in the
board. Before the meeting, Vogel as president called a SH meeting
to fill director vacancies, amend the by-laws to increase the
number of board members from 13 to 19, to increase the quorum
from 7 to 10, and to elect 6 additional directors, as well as to
remove 2 Tomlinson directors. A proxy statement was sent out by
Vogel soliciting SH support for the agenda in the notice of the
Vogel meeting and to fill the board with Vogel nominees.
Tomlinson sued. He claims the president had no authority to call a
special meeting of SH to act upon policy matters which have not
been defined by the board. He also alleges that the president had no
authority, without board imprimatur, to propose an amendment of
the by-laws to enlarge the board.
H: Vogel as president had authority to call the special meeting of SH,
although the purposes of the meeting were not in furtherance of the
routine business of the corporation, because it is expressly granted
by the by-laws. Nonetheless, the SH, by permitting the by-laws to
stand, have given the president power to state these broad purposes
in his call for a meeting. The call of the Sh meeting is not of the
character that would impinge on the power given directors by the
statute. A by-law giving the president power to submit matters for
SH action presumably only embraced matters which are appropriate
for SH action. So construed the by-laws do not impinge on the
statutory right and duty of the board to manage the business of the
corporation.
As to the enlargement of the board, although a radical change in
corporate management and could be determinative of control, the
wording of the by-law authorizes such action.
As to the call of meeting for filing newly created directorships, which
plaintiff claims is invalid, the SHs have the inherent right between
annual meetings to fill newly created directorships. It would take
strong by-law language to warrant the conclusion that those
adopting the by-laws intended to prohibit the SHs from filing new
directorships.
As to the removal of directors by the SH even for cause, which is not
authorized by state law, the court ruled that the SH have such
power. This power must be implied when we consider that otherwise
a director who is guilty of the worst sort of violation of his duty would
nevertheless remain on the board. Considering the damage a
director might be able to inflict upon his corporation, the doubt must
be resolved by construing the statute and by-laws as leaving
untouched the question of director removal for cause. This power
exists even where there is a provision for cumulative voting. If a
director’s presence or action is clearly damaging the corporation and
its SH in a substantial way, it is difficult to see why that director
should be free to continue such damage merely because he was
elected under a cumulative voting system. However, a SH has
standing and the right to challenge the legal propriety of action
31
proposed to remove a member of the board, and can attack
procedures adopted to remove directors for cause where the
procedure is invalid in its face.
(3) fundamental changes
— in the following basic changes in the corporation, although usually
initiated by the board, its decision is not final, and therefore approval
of the SH would be necessary.
o Non-voting stocks or non-voting members will be entitled to vote
(Sec 6)
o Vote required: 2/3 of outstanding capital stock or 2/3 of members
entitled to vote
 For amendment of by-laws: simple majority
 Unanimous vote never required
a amendment of AOI
Section 16. Amendment of Articles of Incorporation. - Unless otherwise
prescribed by this Code or by special law, and for legitimate purposes,
any provision or matter stated in the articles of incorporation may be
amended by a majority vote of the board of directors or trustees and the
vote or written assent of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, without prejudice to the appraisal
right of dissenting stockholders in accordance with the provisions of this
Code, or the vote or written assent of at least two-thirds (2/3) of the
members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation. Such articles,
as amended shall be indicated by underscoring the change or changes
made, and a copy thereof duly certified under oath by the corporate
secretary and a majority of the directors or trustees stating the fact that
said amendment or amendments have been duly approved by the
required vote of the stockholders or members, shall be submitted to the
Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities
and Exchange Commission or from the date of filing with the said
Commission if not acted upon within six (6) months from the date of filing
for a cause not attributable to the corporation.
— AOI embodies the basic agreement of the SHs; thus any change
requires their consent
— Note: no requirement of SH or members meeting; “written assent” is
sufficient
o Secs 37 38 39 40 42 43 and 44 however require a meeting first
— Extension (or shortening) of term and increase (or decrease) of capital
stock also involve an amendment of the AOI but are covered by Sec 37
and 38
— Amendment of “certain matters”:
Section 103. Amendment of articles of incorporation. - Any amendment
to the articles of incorporation which seeks to delete or remove any
provision required by this Title to be contained in the articles of
incorporation or to reduce a quorum or voting requirement stated in said
articles of incorporation shall not be valid or effective unless approved by
the affirmative vote of at least two-thirds (2/3) of the outstanding capital
stock, whether with or without voting rights, or of such greater proportion
of shares as may be specifically provided in the articles of incorporation
for amending, deleting or removing any of the aforesaid provisions, at a
meeting duly called for the purpose.
-- x X x --
Section 96. Definition and applicability of Title. - A close corporation,
within the meaning of this Code, is one whose articles of incorporation
provide that: (1) All the corporation's issued stock of all classes, exclusive
of treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20); (2) all the issued stock of
all classes shall be subject to one or more specified restrictions on
transfer permitted by this Title; and (3) The corporation shall not list in
any stock exchange or make any public offering of any of its stock of any
class. Notwithstanding the foregoing, a corporation shall not be deemed a
close corporation when at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another corporation which is not a
close corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except
mining or oil companies, stock exchanges, banks, insurance companies,
public utilities, educational institutions and corporations declared to be
vested with public interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations:
Provided, That the provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise provides.
— Note that such an amendment in sec 103 would make a corporation a
close one. Any amendment to these would in effect change the status of
32
the corporation as a close one, and will deprive it of special privileges
accorded by the Code to ordinary corporations
— This must prevail over the general provision of Sec 16 which does not
require a SH meeting
b sale or other disposition of substantially all
assets
— sale of all or substantially all assets is not just an act of mgt—
it is an act of ownership, and therefore SH approval is
necessary
— requires a meeting duly called and notice to SHs
Section 40. Sale or other disposition of assets. - Subject to the provisions
of existing laws on illegal combinations and monopolies, a corporation
may, by a majority vote of its board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise dispose of all or substantially all
of its property and assets, including its goodwill, upon such terms and
conditions and for such consideration, which may be money, stocks,
bonds or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient,
when authorized by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds (2/3) of the members, in
a stockholder's or member's meeting duly called for the purpose. Written
notice of the proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the
board of directors or trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the rights of third parties
under any contract relating thereto, without further action or approval by
the stockholders or members.
Nothing in this section is intended to restrict the power of any

corporation, without the authorization by the stockholders or members, to
sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its
property and assets if the same is necessary in the usual and regular
course of business of said corporation or if the proceeds of the sale or
other disposition of such property and assets be appropriated for the
conduct of its remaining business.
In non-stock corporations where there are no members with voting rights,
the vote of at least a majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction authorized
by this section.
c investment in another business or corporation
(compare with 36)
— 42 adopts the ruling in Dela Rama that where the investment by
the corporation is reasonably necessary to accomplish its
primary purpose in the AOI, the approval of SHs is NOT
necessary. However…
— … In 36: expressly limits such investment to one which may be
reasonable and necessarily required by the lawful business of
the corporation, which would make any other kind of investment
ultra vires!
— Campos: The power to invest in another business other than its
primary purpose must therefore be expressly allowed by the
AOI! If not, and the corporation wants to make such an
investment, it should amend its AOI.
— In either case: SHs approval is mandatory
— 42 and 36 are based on the principle that the SHs have a right to
decide how their funds will be invested
Section 42. Power to invest corporate funds in another corporation or
business or for any other purpose. - Subject to the provisions of this Code,
a private corporation may invest its funds in any other corporation or
business or for any purpose other than the primary purpose for which it
was organized when approved by a majority of the board of directors or
trustees and ratified by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the
members in the case of non-stock corporations, at a stockholder's or
member's meeting duly called for the purpose. Written notice of the
proposed investment and the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as
33
shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally: Provided, That
any dissenting stockholder shall have appraisal right as provided in this
Code: Provided, however, That where the investment by the corporation is
reasonably necessary to accomplish its primary purpose as stated in the
articles of incorporation, the approval of the stockholders or members
shall not be necessary. (17 1/2a)
Section 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
-- x X x --
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
Dela Rama et al v Ma-ao Sugar. Derivative suit by 4 minority SHs
against the Ma-ao Sugar Central, its president and 3 other directors. The
minority SHs contend that the president subscribed for P3M worth of
capital stock of the Phil Fiber Co Inc, a company making sugar bags,
making 2 payments without any board resolution authorizing the
investment at the time, but only after the investment was already made.
They claim that the transaction is still wanting in legality, since no
resolution was approved by affirmative vote of 2/3 of SHs.
H: a private corporation, in order to accomplish its purpose as state in its
AOI, and subject to the limitations of the Code, has to power to acquire,
hold, mortgage… shares, bonds, and other debt instruments of any
domestic corporation. Such an act, if done in pursuance of the corporate
purpose, does not need the approval of the Shs, but when the purchase
of shares of another corporation is done solely for investment and not to
accomplish its purpose, the vote of approval of the SH is necessary. When
the investment is necessary to accomplish its purpose in the AOI, the
approval of SHs is not necessary.
Gokongwei v SEC. I: W/N the SH of a corporation may ratify the
investment of corporate funds in a foreign corporation.
H: If the investment is made in pursuance of the corporate
purpose, it does not need approval of the SH. It is only when the
purchase of shares in another corporation is done sholey for
investment and not to accomplish the purpose of the corporation
that the vote of approval of 2/3 of SH is necessary.
In this case, the purchase of beer manufacturing facilities by SMC
was an investment in the same business as stated in its AOI, which is
to manufacture or market beer. Even assuming that the board of
SMC had no authority to make the investment, there is no question
that a corporation, like an individual, may ratify and render binding
upon it the originally unauthorized acts of its officers or other agents.
It is a corporate transaction or contract which is within the corporate
powers, but which is defective from a purported failure to observe
the requirement of law the a vote of 2/3 of SH holding voting stock.
This requirement is for the benefit of the SHs. Thus only they may
ratify the investment, and such ratification obliterates any defect
which it may have had at the time of investment.
d merger and consolidation (cf Mergers and
Combinations)
— merger: the union of two or more corporations by virtue of which
one of them absorbs all the others
o juridical personalities are extinguished, except only that of
the absorbing corporation
— consolidation: union of two or more corporations with the
formation of a new corporation, extinguishing all the constituent
corporations in the process
Section 77. Stockholder's or member's approval. - Upon approval by
majority vote of each of the board of directors or trustees of the
constituent corporations of the plan of merger or consolidation, the same
shall be submitted for approval by the stockholders or members of each
of such corporations at separate corporate meetings duly called for the
purpose. Notice of such meetings shall be given to all stockholders or
members of the respective corporations, at least two (2) weeks prior to
the date of the meeting, either personally or by registered mail. Said
notice shall state the purpose of the meeting and shall include a copy or a
summary of the plan of merger or consolidation. The affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock of each corporation in the case of stock corporations or at
least two-thirds (2/3) of the members in the case of non-stock
corporations shall be necessary for the approval of such plan. Any
dissenting stockholder in stock corporations may exercise his appraisal
34
right in accordance with the Code: Provided, That if after the approval by
the stockholders of such plan, the board of directors decides to abandon
the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made,
provided such amendment is approved by majority vote of the respective
boards of directors or trustees of all the constituent corporations and
ratified by the affirmative vote of stockholders representing at least two-
thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the
members of each of the constituent corporations. Such plan, together
with any amendment, shall be considered as the agreement of merger or
consolidation. (n)
e APPRAISAL RIGHT (cf Appraisal Right
sidebar in Amendments to Charter)
— appraisal right: a SH who dissented and voted against the
proposed corporate action may choose to get out of the
corporation by demanding payment of the fair value of his
shares
— the SH is granted by law the appraisal right in any of the four
fundamental changes (amendment of AOI; sale or other
disposition of substantially all assets; investment in another
business/corporation; merger/consolidation)
— GR: a SH cannot just pull out his investment, other than
selling his shares to a willing buyer, which he subjects to all
the risks of the business of the corporation, and will have to
wait until dissolution of the corporation.
o Exception: in specified and specific major changes in his
contract of investment
o The law presumes that the SH did not foresee the
changes when he bought the shares or made the
investment
Section 81. Instances of appraisal right. - Any stockholder of a
corporation shall have the right to dissent and demand payment of the
fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or
class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of

extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate
property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
— all instances of amendment of the AOI gives rise to a SH’s
appraisal right
o changes that affect or restrict the rights of any SH gives rise
to his appraisal right
o ex. Mere change in name or principal office not sufficient to
invoke the appraisal right
Section 82. How right is exercised. - The appraisal right may be
exercised by any stockholder who shall have voted against the proposed
corporate action, by making a written demand on the corporation within
thirty (30) days after the date on which the vote was taken for payment of
the fair value of his shares: Provided, That failure to make the demand
within such period shall be deemed a waiver of the appraisal right. If the
proposed corporate action is implemented or affected, the corporation
shall pay to such stockholder, upon surrender of the certificate or
certificates of stock representing his shares, the fair value thereof as of
the day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was
approved by the stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the shares, it shall be
determined and appraised by three (3) disinterested persons, one of
whom shall be named by the stockholder, another by the corporation, and
the third by the two thus chosen. The findings of the majority of the
appraisers shall be final, and their award shall be paid by the corporation
within thirty (30) days after such award is made: Provided, That no
payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover such
payment: and Provided, further, That upon payment by the corporation of
the agreed or awarded price, the stockholder shall forthwith transfer his
shares to the corporation. (n)
— if SH was absent during the meeting or if present, abstained in
the voting on the approval of a corporate action, then he does
35
not have the appraisal right
— one very important condition: the corporation must have
unrestricted retained earnings. This is intended to protect
both corporate creditors and the remaining SHs
— costs and expenses of appraisal are borne by the corporation,
unless the fair value ascertained by the corporation is
approximately the same as the price which the corporation
may have offered to pay the SH
Section 83. Effect of demand and termination of right. - From the time of
demand for payment of the fair value of a stockholder's shares until either
the abandonment of the corporate action involved or the purchase of the
said shares by the corporation, all rights accruing to such shares,
including voting and dividend rights, shall be suspended in accordance
with the provisions of this Code, except the right of such stockholder to
receive payment of the fair value thereof: Provided, That if the dissenting
stockholder is not paid the value of his shares within 30 days after the
award, his voting and dividend rights shall immediately be restored. (n)
Section 84. When right to payment ceases. - No demand for payment
under this Title may be withdrawn unless the corporation consents
thereto. If, however, such demand for payment is withdrawn with the
consent of the corporation, or if the proposed corporate action is
abandoned or rescinded by the corporation or disapproved by the
Securities and Exchange Commission where such approval is necessary,
or if the Securities and Exchange Commission determines that such
stockholder is not entitled to the appraisal right, then the right of said
stockholder to be paid the fair value of his shares shall cease, his status
as a stockholder shall thereupon be restored, and all dividend
distributions which would have accrued on his shares shall be paid to him.
(n)
Effect of the demand for the fair value:
— if the corporation refuses or fails to pay the fair value w/in 30
days of the award, SH is restored to all his rights ipso facto
o even if the inability to pay is due to insufficient
unrestricted retained earnings
— same effect:
o corporate action is abandoned or rescinded
o necessary approval of SEC cannot be obtained
o SEC decides that SH is not entitled to appraisal right
o SH withdraws demand for fair value of shares with
consent of corporation

Section 85. Who bears costs of appraisal. - The costs and expenses of
appraisal shall be borne by the corporation, unless the fair value
ascertained by the appraisers is approximately the same as the price
which the corporation may have offered to pay the stockholder, in which
case they shall be borne by the latter. In the case of an action to recover
such fair value, all costs and expenses shall be assessed against the
corporation, unless the refusal of the stockholder to receive payment was
unjustified. (n)
Section 86. Notation on certificates; rights of transferee. - Within ten
(10) days after demanding payment for his shares, a dissenting
stockholder shall submit the certificates of stock representing his shares
to the corporation for notation thereon that such shares are dissenting
shares. His failure to do so shall, at the option of the corporation,
terminate his rights under this Title. If shares represented by the
certificates bearing such notation are transferred, and the certificates
consequently cancelled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have all
the rights of a regular stockholder; and all dividend distributions which
would have accrued on such shares shall be paid to the transferee. (n)
— If dissenting SH sells his shares before getting paid, his right to payment
ceases, and transferee acquires all rights of a regular SH
Section 105. Withdrawal of stockholder or dissolution of corporation. - In
addition and without prejudice to other rights and remedies available to a
stockholder under this Title, any stockholder of a close corporation may,
for any reason, compel the said corporation to purchase his shares at
their fair value, which shall not be less than their par or issued value,
when the corporation has sufficient assets in its books to cover its debts
and liabilities exclusive of capital stock: Provided, That any stockholder of
a close corporation may, by written petition to the Securities and
Exchange Commission, compel the dissolution of such corporation
whenever any of acts of the directors, officers or those in control of the
corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly
prejudicial to the corporation or any stockholder, or whenever corporate
assets are being misapplied or wasted.
— A situation where the SH can still get back his investment from the
corporation before dissolution
— Refers only to SHs of close corporations
— Sec 105 makes the close corporation very much like a partnership where
a partner, even without just cause, can leave the business at any time
and effect a dissolution
36
— Withdrawal of SH does not cause the dissolution of the corporation
— Corporate creditors are protected—the code requires that the assets
of the corporation be sufficient to cover its debts and liabilities
exclusive of capital stock
o Note difference between the above condition and the
requirement in Sec 82 (i.e. existence of unrestricted retained
earnings)
f increase and decrease of capital stock;
creation or increase of bonded
indebtedness (cf Financing…)
(Sec 38 supra)
g adoption, amendment, and repeal of by-
laws (cf Amendments of Charter)
— Code does not consider amendment of BLs as a major change
in the corporation, therefore SHs have NO appraisal right
— Vote required: majority OCS
— Power to amend BLs can be delegated to the board by 2/3
vote OCS
— Q: Will delegation continue to be effective even if the capital
stock has been greatly increased thereafter? (Gokongwei)
— Campos: YES. Under 48, if the present SHs wish to revoke the
board delegated authority, they can do so in a meeting called
for the purpose, thru a majority vote
— Non-voting stocks cannot vote here
— Amendments effective only after SEC issuance of certification
Section 48. Amendments to by-laws. - The board of directors or trustees,
by a majority vote thereof, and the owners of at least a majority of the
outstanding capital stock, or at least a majority of the members of a non-
stock corporation, at a regular or special meeting duly called for the
purpose, may amend or repeal any by-laws or adopt new by-laws. The
owners of two-thirds (2/3) of the outstanding capital stock or two-thirds
(2/3) of the members in a non-stock corporation may delegate to the
board of directors or trustees the power to amend or repeal any by-laws
or adopt new by-laws: Provided, That any power delegated to the board of
directors or trustees to amend or repeal any by-laws or adopt new by-laws
shall be considered as revoked whenever stockholders owning or
representing a majority of the outstanding capital stock or a majority of
the members in non-stock corporations, shall so vote at a regular or
special meeting.
Whenever any amendment or new by-laws are adopted, such amendment
or new by-laws shall be attached to the original by-laws in the office of the
corporation, and a copy thereof, duly certified under oath by the
corporate secretary and a majority of the directors or trustees, shall be
filed with the Securities and Exchange Commission the same to be
attached to the original articles of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by
the Securities and Exchange Commission of a certification that the same
are not inconsistent with this Code. (22a and 23a)
(4) other instances requiring stockholders action
a declaration of stock dividends (cf Dividends)
— 43: no stock dividend may be issued without the approval of at
least 2/3 OCS
— stock dividends deprive the SHs of the right to participate in the
current profits of the corporation
— stock dividends are ploughed back into the capital and made
part of the capital stock, exposing it to risk
b management contracts (cf Corporate Powers)
— defn of mgt contract: one entered into between 2 corporations
by virtue of which one agrees that its corporate affairs will be
managed by the other
— 44: SHs of BOTH corporations must give their consent—majority
vote at a meeting duly called
— NOTE: non-voting stocks have no say in the approval of mgt
contracts
Section 44. Power to enter into management contract. - No corporation
shall conclude a management contract with another corporation unless
such contract shall have been approved by the board of directors and by
stockholders owning at least the majority of the outstanding capital stock,
or by at least a majority of the members in the case of a non-stock
corporation, of both the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That (1) where a
stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than one-
37
third (1/3) of the total outstanding capital stock entitled to vote of the
managing corporation; or (2) where a majority of the members of the
board of directors of the managing corporation also constitute a majority
of the members of the board of directors of the managed corporation,
then the management contract must be approved by the stockholders of
the managed corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of
the members in the case of a non-stock corporation. No management
contract shall be entered into for a period longer than five years for any
one term.
The provisions of the next preceding paragraph shall apply to any
contract whereby a corporation undertakes to manage or operate all or
substantially all of the business of another corporation, whether such
contracts are called service contracts, operating agreements or otherwise:
Provided, however, That such service contracts or operating agreements
which relate to the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as may be
provided by the pertinent laws or regulations. (n)
c fixing consideration for no-par shares (cf
Consideration for Shares)
— vote: majority OCS
— right to vote the fixing of consideration arises only when the
AOI does not fix it and the board is not authorized by the AOI
or BLs
— non-voting stocks have no right to participate in the voting
under Sec 6
Section 62. Consideration for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for
the issuance of stock may be any or a combination of any two or more of
the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of the
stock issued;
3. Labor performed for or services actually rendered to the
 corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to
stated capital; and
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.
Where the consideration is other than actual cash, or consists of
intangible property such as patents of copyrights, the valuation thereof
shall initially be determined by the incorporators or the board of directors,
subject to approval by the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or
future service.
The same considerations provided for in this section, insofar as they may
be applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred
upon it by the articles of incorporation or the by-laws, or in the absence
thereof, by the stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose. (5 and
16)
d fixing compensation of directors
Section 30. Compensation of directors. - In the absence of any provision
in the by-laws fixing their compensation, the directors shall not receive
any compensation, as such directors, except for reasonable per diems:
Provided, however, That any such compensation other than per diems
may be granted to directors by the vote of the stockholders representing
at least a majority of the outstanding capital stock at a regular or special
stockholders' meeting. In no case shall the total yearly compensation of
directors, as such directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the preceding year. (n)
38
e deadlocks in close corporations
— AOI of a close corporation may provide for a greater quorum
and voting requirement in board and SH meetings
— AOI of a close corporation may provide that the mgt of the
corporation shall be done by the SHs, which shall be deemed
directors
— This makes chances of deadlock greater and balance of
control more precarious
— SEC may intervene, even on the action of only one SH
regardless of the number of his shares, with the power to
prohibit the directors or SHs from performing any corporate
act and even to dissolve the corporation
— SEC can also appoint a provisional director
Section 104. Deadlocks. - Notwithstanding any contrary provision in the
articles of incorporation or by-laws or agreement of stockholders of a
close corporation, if the directors or stockholders are so divided
respecting the management of the corporation's business and affairs that
the votes required for any corporate action cannot be obtained, with the
consequence that the business and affairs of the corporation can no
longer be conducted to the advantage of the stockholders generally, the
Securities and Exchange Commission, upon written petition by any
stockholder, shall have the power to arbitrate the dispute. In the exercise
of such power, the Commission shall have authority to make such order
as it deems appropriate, including an order: (1) cancelling or altering any
provision contained in the articles of incorporation, by-laws, or any
stockholder's agreement; (2) cancelling, altering or enjoining any
resolution or act of the corporation or its board of directors, stockholders,
or officers; (3) directing or prohibiting any act of the corporation or its
board of directors, stockholders, officers, or other persons party to the
action; (4) requiring the purchase at their fair value of shares of any
stockholder, either by the corporation regardless of the availability of
unrestricted retained earnings in its books, or by the other stockholders;
(5) appointing a provisional director; (6) dissolving the corporation; or (7)
granting such other relief as the circumstances may warrant.
A provisional director shall be an impartial person who is neither a
stockholder nor a creditor of the corporation or of any subsidiary or
affiliate of the corporation, and whose further qualifications, if any, may
be determined by the Commission. A provisional director is not a receiver
of the corporation and does not have the title and powers of a custodian
or receiver. A provisional director shall have all the rights and powers of a
duly elected director of the corporation, including the right to notice of
and to vote at meetings of directors, until such time as he shall be
removed by order of the Commission or by all the stockholders. His
compensation shall be determined by agreement between him and the
corporation subject to approval of the Commission, which may fix his
compensation in the absence of agreement or in the event of
disagreement between the provisional director and the corporation.
Right to vote
— Sec 6: no share may be deprived of voting rights except those classified
and issued as “preferred” or “redeemable” shares, and there shall
ALWAYS be a class of shares which have complete voting rights
— Non-voting shares are entitled to vote in certain matters enumerated in
Sec 6
Devices affecting control
— GR: extent of control would be proportional to the number of shares a
stockholder owns i.e. the more shares, the greater the possibility of
control
— Except, that it is possible for a person or group owning only a minority of
shares can obtain control by successfully electing the majority of
directors, through devises
— Common problem in devises: effect of transfer of some or all stocks by
one of the parties to the voting agreement
1. the proxy device
— Corpo Code expressly allows voting by proxy in all stockholders
and members meetings
Section 58. Proxies. - Stockholders and members may vote in person or
by proxy in all meetings of stockholders or members. Proxies shall in
writing, signed by the stockholder or member and filed before the
scheduled meeting with the corporate secretary. Unless otherwise
provided in the proxy, it shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a period longer than
five (5) years at any one time. (n)
— two meanings of proxy:
o person duly authorized by the stockholder to vote in his
behalf at a stockholder’s meeting
 is actually an agent for a special purpose
 rules on agency apply to the relationship
39
o the actual document evidencing this authority
— types of proxy:
o general proxy—gives the power to vote for directors and
on all ordinary matters which may be properly be taken in
an SH meeting
 does not include the power to vote for an
amendment to the AOI or other unusual
transactions
o limited proxy—restricts the authority to vote to specified
matters only and may direct the vote to be case in a
certain way
— Nature of proxy: a special form of agency governed by the
laws on agency
o Strictly fiduciary relation, and therefore as a GR,
revocable in nature despite contrary stipulations
o Exception: coupled with an interest
 Includes where the proxy has parted with the
value or incurred liability at the SHs request…
 … which would mean to it is NOT the giving of
onerous consideration that makes a proxy one
that is coupled with an interest, but that the
proxy is an integral part of the security by which
a loan is to be paid
— requisites for valid proxy (58)
o in writing
o signed by SH or member
o filed before the scheduled meeting
— term of proxy:
o proxy may fix the period it may be used, but cannot
exceed 5 years, renewable for not more than 5 years per
renewal
o no period specified: expires after the meeting for which it
was given and cannot be used for another meeting unless
it is renewed
— who may be appointed proxy?
o Stock: no limitation, and BL restrictions on SH right to
appoint a proxy will be VOID
o Non-stock: 89: AOI or BL may restrict right to appoint
proxy
— revocability:
o GR revocable even before the period has expired and
even if it expressly provides for irrevocability
o Exception: coupled with an interest
 Irrevocable for the period fixed
 Upon expiry, proxy automatically ceases to be
 effective unless renewed
 What constitutes sufficient interest? Depends from
case to case
— Procedure/practice:
o management usually sends a proxy form with notice of the
annual stockholders meeting
o persons suggested as proxies have been selected by the
incumbent directors and are sometimes referred to as the
proxy committee
o the existing management who may own only a small portion
of the corporation’s shares can retain its control over
corporate affairs for as long as they can obtain the
necessary number of proxies from absentee stockholders
o proxies may not be appointed orally and the written proxy
should be filed with the corporate secretary before the
meeting
 failure to comply will render the proxy void and
ineffective
 vote or presence counted on the basis of a void
proxy may result in the invalidation of any action,
unless the number of shares required for quorum or
voting is present
o when a group of SH feel dissatisfied with management, they
may seek control to correct such mismanagement by
soliciting proxies for the next election of directors
o each block of SH will seek proxies of absentee SHs
o since management has the right to defend its present
policies, it can as a rule, use corporate funds and facilities in
solicitation, as long as:
 it acts in GF,
 the expenses are reasonable under the
circumstances and
 the proxy war is not a personal one
— GR: when the right to vote by proxy is given by statute, a
stockholder cannot be deprived of it by any by-law
— Exception: non-stock corps—Code allows for a waiver of the right
provided this is made in the AOI or by-laws
— By-laws may also impose reasonable conditions as to the form
and manner of voting by proxy
In re Giant Portland Cement. H: Stock transferred on the books of
the corporation within 20 days prior to a stockholders meeting, for
the election of directors, is temporarily disenfranchised, and cannot
be voted either by the transferor or by the transferee. The persons
40
on whose proxies the SH meeting were the SH of record within the
provision of the statute, although they were not real beneficial or
equitable owners of the stock. The right to vote shares of
corporate stock, having voting powers, has always been incident
to its legal ownership. Whatever the rights of the mere
unrecorded assignee of the stock certificate might be in the
absence of a by-law or other contract provision requiring all
transfers of shares to be recorded on the books of the corporation,
it is not contended that such a provision is not authorized or is not
binding as between SHs and the corporation. As between the
transferor and the unrecorded transferee to the stock certificate,
the legal title passes to the latter. A very different rule applies
between the corporation and the mere unrecorded assignee of the
certificate of stock. That is because limited contract restrictions
relating to stock transfers, are for the benefit of the corporation,
and to enable it to ascertain from its records who its members of
SHs are. So far as the corporation is concerned, until such a by-
law is complied with, the record owner must therefore be
regarded as the real owner of the stock, with the consequent
general right to vote it by proxy or otherwise. When considered
from a legal standpoint, there is no privity of contract between the
mere holder of the certificate and the corporation, and he is not a
real member of that organization until the transfer is recorded.
Until that time, the possible legal rights of the holder of the
certificate are of an inchoate nature. In other words, a real
novation, whereby a new contract between the mere holder of the
certificate and the corporation is substituted for the prior contract
of the record owner, can only be brought about by complying with
the corporate regulation relating to transfers of stock. The record
owner may, therefore, be the mere nominal owner, or technically
a trustee for the holder of the certificate, but legally he is still a
stockholder in the corporation, and so far as the corporation is
concerned, like the usual trustee, ordinarily has the right to vote
the stock standing in his name. In cases of this nature, when
nothing more than a mere dry trust is involved the owners of the
certificates can usually protect their rights by recording the
transfers and having the new certificates issued; but even though
that could not be done in this case because the corporate transfer
books were closed at the time of the assignments, they could
have compelled the record owners to give them proxies to vote
the stock standing in their names. A mere nominal owner
naturally owes some duties to the real beneficial owner or equitable
owner of the stock, and even if the right to demand a proxy is not
exercised, if the vendor exercises his legal right to vote in such a
manner as to materially and injuriously affect the rights of the
vendee, he is perhaps answerable in damages in some cases. It can
hardly be contended that the actual consent of the holder of the
certificate is ordinarily essential to the right of the record owners to
vote stock standing in their names.
When the right and power of a mere record owner to vote is
questioned, some ultra vires, negligent, or improper willful act or
omission on the part of the corporation or its agents is relied upon
and must appear. In some cases the court may also reject votes cast
by the record owners, which are regarded as improper, solely
because of some peculiar inequitable circumstances affecting the
relation between such apparent owners and the transferee of the
certificates. Conceding that as between a transferor who has parted
will all the beneficial interest in stock and his transferee, the board
equities are all in favor of the latter in the matter of its voting.
State ex rel Everett Trust v Pacific Wax. I: W/N the proxy to vote the
stock owned by Paine-Mitchell and Jordan was revocable
H: The rules against perpetuities is usually stated as prohibiting the creation
of future interest or estates, which by possibility may not become vested
within a life or lives in being and 21 years… the rule however applies only to
the vesting of future estates and does not apply to vested estates. The
option agreement did not create a future estate or interest to become
vested at some future time. It was a promise by an owner of stock in a
corporation that if at any time during the next 20 years he desired to sell his
stock he would give the promissee the first opportunity for a period of 15
days to purchase it a such price and upon such terms and conditions as the
promisor offered. It was in effect a promise to give an option in the even the
promisor desired to sell his stock.
GR: a proxy given by a SH to vote his corporate stock at a meeting of the
SHs of a corporation is revocable by him even though the proxy by its terms
is expressly made irrevocable.
Exceptions:
(1) where authority or power is coupled with an interest—a power coupled
with an interest is a power or authority to do an act, accompanied by or
connected with an interest in the subject or thing itself upon which the
power is to be exercised, the power and interest being united in the same
person. The interest is not limited to the thing itself upon which the power is
41
to be exercised, but is also included the subject upon which the power is
to be exercised. It is however sufficient that the proxy holder have an
interest in the subject matter upon which the power is to be exercised.
The “thing itself” may refer to tangible shares or certificates of stock, but
the subject matter may refer to the intangible voting right and the
incidental control of the corporation.
(2) where authority is given as part of a security or is necessary to
effectuate a security—in such a case the interest of an agent is
something more than an interest in being permitted to exercise the
power, yet something less than an estate in the subject matter or thing
upon which the power is to be exercised.
It is clear from the proxy agreement that the parties agreed that Paine
Mitchell stock should be used in conjunction with the stock owned by
Engle so that the policies of the respondent should be thus controlled. In
this situation Engle was more than a mere agent. In voting stock he
served purposes of his own in maintaining control of the corporation by
his choice of directors and the determination of policies and business
affairs of the corporation. This voting of the stock for these purposes was
the subject matter of the agency. Engle acquired an interest in the
subject matter of the power given to him and this interest was coupled
with such power. The power to vote the stock was necessary in order to
make Engle’s control of the corporation secure. The mutual agreement as
a whole created something like a community of interest in the
stockholdings of the parties having for its purpose the use of their stock
as a unit and the effect of which was to give both parties an interest in
the voting of the stock, although the power to vote was to be exercised
by Engle after the death of Jordan or by Paine-Mitchell after the death of
Engle. This power was couple with an interest and by the entire
agreement between the parties the power was intended to be and
became a security to effectuate the main purpose of the agency. The
parties did no more than promise to give each other an option to
purchase in the even either had a proposal to buy his or its stock; but the
option agreement must be considered with the proxy agreement in
determining the intention of the parties and whether Engle had an
irrevocable proxy. The conclusion is that Engle had a power coupled with
an interest and that the authority was given to him as part of a security
and was necessary to effectuate such security and therefore the proxy
was not revocable by the appellant.
A proxy in favor of the pledgee of the shares subject of the proxy is
sufficient interest to render the proxy irrevocable
Alejandrino v de Leon. Pambul Inc was organized by the controlling
stockholders of Pampanga Sugar as a scheme to perpetuate their
monopoly of the directorship and executive positions of Pampanga sugar
by loaning money to its SHs at as low a rate of interest as 7% per annum
on the security of their shares of stock, the amount of the loans being as
high as 90% of the par value of the shares, thereby inducing the SHs to avail
themselves of the loan and thereby enabling the management of Pampanga
Sugar through Pambul to secure sufficient proxies for their purpose, and as a
result the pledgors-stockholders could do nothing even if they should make
use of their right to vote when and if the management should commit
corporate abuses, excesses, and mistakes.
H: We do not think such alleged circumstances are sufficient in law or equity
to vitiate or invalidate or render revocable the irrevocable proxies in
question. The desire and design of a majority of SHs of a corporation to
control its management and operation is legitimate per se, and is in fact the
universal practice in the business world. The SH who own a majority of the
stock of a corporation may elect themselves directors or appoint themselves
its agents, or form and carry into effect policies of management as freely as
if the business were their own, so long as they act honestly and do not
devote the corporate assets or business to their own private gain or to the
prejudice of other stockholders, and no one can question their acts, which
are surely intra vires.
The allegations of monopoly positions in a corporation, without any
allegation of fraud or irregularity resulting therefrom to the prejudice of any
stockholder, is not actionable per se. The SH owning 30% of the outstanding
stock of a corporation cannot secure its control without the willingness,
adherence, cooperation, or support of other SHs. Assuming that the two
families owning 30% of the capital stock have been able to procure such
support by organizing Pambul for the purposes above indicated, it would be
admitted that the organization of Pambul was accomplished by vote of the
majority and not of only 30% of capital stock of Pampanga Sugar. It cannot
be assumed that the meeting in which the organization of Pambul was
agreed upon the SHs other than the two families referred to were deprived
of their vote by means of the proxies now assailed, because said proxies
could not have existed before Pambul was organized. Even now the SHs of
Pambul are also the SHs of Pampanga Sugar, the former cannot be said to
be under the control of the said two families because the latter are not
alleged from the facts. In other words, Pambul SHs are free to vote their
stock and elect the directors they want; and the board of directors of Pambul
is at liberty to change any or all of the onditions of the contract of pledge in
question. Even assuming that respondent de Leon controls Pampanga Sugar,
it would not necessarily follow that he or the company also hold voting
proxies on the shares of stock of Pambul. Therefore the SHs of Pambul are
free to vote their shares at the election of its directors. It is thus clear that if
the alleged minority SHs of Pampanga Sugar cannot or do not elect even
one candidate to represent them in its BOD, nothing appears to prevent
them from doing so except their own volition. Nobody forces them to pledge
their stock to Pambul. They must either be satisfied with the management or
42
indifferent with regard to voting. Only Alejandrino, as one of the minority
SHs, owning 112 shares, has come before the court to assail the
contracts of pledged entered into by 18 other SHs and in which he is not
even a party.
To vote at a meeting of the SHs of a corporation is, unlike a political
franchise, but an exercise of the right of ownership involving no public
interest. To call the transfer of such right bribery is to distort the meaning
of the word; it can no more be called bribery than the payment by the
purchaser of the price of goods bought by him may be considered a bribe
to the seller
Would it not, rather, be morally wrong to permit a SH to obtain a liberal
loan of pledging and transferring his stock and the right to vote it and
then repudiate the proxy to vote without paying the loan? Would it be fair
to convert the pledgee or its representative into a mere voting puppet of
the pledgor when the former accepted the pledge from the latter in GF
and in the belief that the security for its investment could be protected
by it by exercising the right to manage the property through the voting
proxy.
Campbell v Leows Inc. Action to restrain Loew’s Inc from using
corporate funds, employees, and facilities for solicitation of
proxies for the Vogel group and from voting proxies so solicited.
Campbell contends that the Vogel Group, by calling the meeting
and by using corporate funds and facilities, are usurping the
authority of the BOD, and that the president is in effect in using
his corporate authority and the corporate resources to deny the
will of the BOD and to maintain himself in office. The by-laws
provide for 13 directors. 7 is a quorum. Due to 4 resignations
there are now 9 directors in office. 5 of 9 are of the Tomlinson
Faction while the remaining 4 are of the Vogel Faction. Since the
Vogel Group will not attend directors meetings, it follows that the
Tomlinson Group is unable to muster a quorum of the BOD and is
thus unable to take action on behalf of the Board.
H: The BOD acting as a board must be recognized as the only
group authorized to speak for management in the sense that
under the statute they are responsible for the management of the
corporation. Since the Vogel Group, being in physical possession
of the records and facilities of the corporation, treated the request
of the directors for a stockholders list as though it were to be
judged by standards applicable to a mere SH’s request, they
violated the duty owed such directors as directors. The fact the
Vogel, as president, had the power to call a SH meeting to elect
directors and is so to speak, in physical control of the corporation,
cannot obscure the fact that the possible proxy fight is between two
sets of directors. Vogel has no legal standing to make his faction the
exclusive voice of Loew’s in the forthcoming election.
On the issue of how the two groups should be classified for purposes
of determining the rights of the Vogel Group in connection with the
use of corporate money and facilities for proxy solicitation at the SH
meeting—w/n the SH approve of a record made by one group and
opposed by another group. While the Tomlinson Group has 5 of 9
directors, it would be most misleading to have them represent to the
SH that they are management in the sense that they have been
responsible for corporate policy and administration. It is apparent
that the Vogel Group is entitled to solicit proxies, not as representing
a majority of the board, but as representing those who have been
and are now responsible for corporate policy and administration.
Whereas the Tomlinson Group, while not management in the sense
that it is able to take effective director action, is representative of
the majority of the incumbent directors and is entitled to so
represent to the SHs if it decides to solicit proxies. Since Vogel is
entitled to expend reasonable sums of corporate funds in the
solicitation of proxies, it follows that the request for an injunction
against such us will be denied.
On the issue of the entitlement of the Vogel group to use corporate
facilities and employees, because such action would carry the
intracorporate strife even deeper within the corporation and there is
no practical way to ensure equal treatment for both factions where
only one group (Vogel) is in control of the physical facilities, Vogel
should thus by enjoined from using corporate facilities and personnel
in soliciting proxies.
On the issue of w/n Vogel, in soliciting proxies, misrepresented
himself as management and thus the proxies should not be voted,
the evidence presented by Tomlinson Group are not so misleading as
to void the proxies. Since the meeting was validly called by the
president, there was nothing misleading in the creation of the
impression that the meeting and the material were initiated by the
company. The whole impact of the proxy material conveyed to the
43
average reader the impression that there is a bitter fight between
the president and his faction and another faction on the board.
The overall result is no so misleading as to justify the nullification
of the proxies for any purpose.
2. voting trust agreement
— Def’n: a trust agreement whereby a stockholder transfers his
shares to a trustee who will exercise his voting rights. Under this
arrangement, the stockholder remains the beneficial or equitable
owner of the shares, but legal ownership is transferred to the
trustee.
— Essence of voting trust: real ownership is separated from the
voting rights
— Involves the complete surrender by the SH of his voting rights to
a trustee or trustees
— Voting trustee is only a share owner vested with colorable and
fictitious title for the sole purpose of voting upon stocks that he
does not own
— Transferring SH ceases to become SH of record but retains the
right of inspection of corporate books
— During the period of the agreement, it is irrevocable for as long
as the trustee has not violated the trust by his misconduct or
fraud.
— Conditions for the use of voting trusts—Sec 59:
Section 59. Voting trusts. - One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring upon
a trustee or trustees the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any time: Provided,
That in the case of a voting trust specifically required as a condition in a
loan agreement, said voting trust may be for a period exceeding five (5)
years but shall automatically expire upon full payment of the loan. A
voting trust agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities and
Exchange Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the
voting trust agreement shall be cancelled and new ones shall be issued
in the name of the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the corporation, it shall be
noted that the transfer in the name of the trustee or trustees is made
pursuant to said voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors voting

trust certificates, which shall be transferable in the same manner and
with the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject to
examination by any stockholder of the corporation in the same manner
as any other corporate book or record: Provided, That both the transferor
and the trustee or trustees may exercise the right of inspection of all
corporate books and records in accordance with the provisions of this
Code.
Any other stockholder may transfer his shares to the same trustee or
trustees upon the terms and conditions stated in the voting trust
agreement, and thereupon shall be bound by all the provisions of said
agreement.
No voting trust agreement shall be entered into for the purpose of
circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.
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.
The voting trustee or trustees may vote by proxy unless the agreement
provides otherwise. (36a)
— Requisites of a valid voting trust: (59)
o In writing and notarized
o Certified copy filed with the corporation and the SEC
o Period not longer than 5 years, but renewable each time for not
more than 5 years
 Exception: where the voting trust is a condition of a loan
agreement, in which case it may be for a longer period but
not beyond the time when the loan is fully paid
o Certificates of stock is to be cancelled, and new ones issued to the
trustee stating that it is issued in pursuance of a voting trust
agreement
o Transfer must be entered in the corporate books
o Trustee should issue voting trust certificates in favor of transferring
SHs
44
o Not for an illegal purpose, or for the benefit only of the trustee
without any obligation to perform any useful service for the
protection of the stockholders or creditors of the corporation
 it must have a legitimate business purpose to promote
the best interest of the corporation or even to protect the
legitimate interests of others in the corporation
— creation of voting trust:
o transferring SHs receive transferable voting trust certificates as
evidence of their rights
 rights other than voting rights may also be transferred to
the trustee
o but the SH ceases to be a SH and his rights are now against the
trustee in accordance with the agreement
o SH has the express right to inspect corporate books and records
o Trustee is also qualified to become a director, since he is the
registered owner of the shares and fulfills the qualifications of the
Code that at least one share is owned to become qualified as
director
o No voting trust agreement may be kept secret among the parties
thereto; it must be open to examination
o No voting trust agreement may be exclusive, since the law gives
a SH the right to transfer his shares to the trustee upon the same
terms and conditions in the agreement
Abercrombie v Davis. 6 stockholders, led by Davies (president) of the 
American Independent Oil Company took steps to form a coalition, in 
order to ensure the smooth functioning of its board considering that not 
one SH holds a majority of the stock of the corp, and no one SH is 
represented by more than four directors.  The Davies 6 hold 54.5% of the 
corporate shares and is represented on the board by 8 of 15 directors. An 
agreement was executed between the 8 directors representing the Davies 
group and are called “agents,” and the Davies 6 to achieve effective control 
of the board and control of corporate policy. Motive was to prevent 
acquisition of control by Philipps, the largest single SH holding 1/3 of the 
stock. The agreement provides that it transfers voting conrol of the stock of 
the Davies 6 to the 8 agents for a period of 10 years. An agreement of 7 of 
the 8 agents is required to vote the stock and in case of disagreement an 
arbitrator will be designated. Abercrombie (one of the organizers of the 
company), Philips et al sued Davies and the agents, claiming that the 
agreement is invalid. In substance it is a voting trust but since it did not  Transfer on the books is not essential to effect an irrevocable transfer of 
comply with the voting trust statute it should be void. Davies contends that it  voting rights to fiduciaries. It is such a transfer which is characteristic of a 
was never intended to be a voting trust but a mere pooling agreement.  voting trust. 

H: The agreement is a voting trust.  If any SH agreement provided for joint or  The fact that the agents are subject to control by their respective principals 
concerted voting is so drawn as in effect to occupy  the field reserved for the  does not prevent the agreement from constituting a voting trust. The stock 
voting trust, it is illegal, whatever the mechanics may be devised to attain the  is voted by the agents as a group. No one SH retains complete control over 
result.  the voting. It cannot vote its own stock directly; all it can do is direct its 
agent how to vote on a decision to be made by the agents as a group/ in 
Definition of voting trust: a device whereby two or more persons owning stock  effect, each SH participating in the agreement reserves the right to name 
with voting powers, divorce the voting rights thereof from the ownership,  and remove the fiduciary representing him. Such a provision is not 
retaining to all intents and purposes the latter in themselves and transferring  inconsistent with a voting trust. 
the former to trustees in whom the voting rights of all depositors in the trust 
are pooled. The principal object of such trust is voting control.  Davies cites the ruling in Ringling Bros v Ringling in arguing that their 
agreement is only a pooling agreement. As a pooling agreement in 
The agent’s agreement effectively divorces the voting rights of the pooled stock  substance and purpose approaches more and more nearly the substance 
from its beneficial ownership, transfers the rights to the agents through  and purpose of the voting trust statute, there comes a point which if the 
irrevocable proxies for 10 years, pools the stocks in the agents as a group  statute is not complied with, it is illegal. A pooling agreement may not 
through the proxy devise with no SH retaining the right to vote, and its  escape the statutory controls by calling the trustees agents and giving to the 
principal object is the voting control of the company. These elements are  SH receipts instead of voting trust certificates. 
elements of a voting trust. The provision in the agreement which gives the 
Everett v Asia Banking. Teal & Company is indebted to HW Peabody &
agents the power to withdraw the stock from escrow and transform the  Co. for P300K for tractors, plows, and parts delivered, of which it has paid
agreement into a voting trust merely added only the special mechanics of a  P150K. Asia Banking Corp held drafts accepted by Teal under the HW
Peabody’s guarantee. Tractors were returned to HW Peabody due to its
voting trust that the statute requires, the substance of the voting trust having  being unsellable due to financial and agricultural depression in the RP.
already existed in the agreement. Since the voting trust statute was not  Teal ordered another lot of tractors from Smith Kirkpatrick, but shipment
complied with i.e. shares were not transferred in the books and a copy not  was delayed until the rescission of the credit of Teal with Asia Bank. Yet
Smith still delivered the order, and Teal at the request and advice of the
furnished to corporation, it effectively created a secret voting trust. The  Bank accepted the drafts and stored the same. Asia bank persuaded Teal,
statutory requirement is for the benefit of all SHs and all beneficiaries of the  Peabody, and Smith Kirkpatrick to enter into a “creditors agreement”
wherein it was mutually agreed that neither of the parties should take
trust, who are entitled to know where voting control of the corporation resides. 
action to collect its debts from Teal for 2 years. Teal soon became
indebted to Asia Bank for P750,000, secured by mortgage. The Bank then
This failure to transfer stock on the books is not a sufficient reason for holding  suggested that, for the mutual protection of Teal and itself, it was
advisable that the Bank should temporarily obtain control of the
the agent’s agreement not a voting trust. The stock here was endorsed in blank  management and affairs of the company. To this end, it was necessary for
and delivered to the agents for deposit in escrow with irrevocable proxies.  the SHs to place their shares in a voting trust to be held by the Bank,

45
then the Bank would finance Teal under its own supervision. The Teal SHs
were thus induced to enter into the Voting Trust Agreement, with the
purpose that the agreement will be intended for the protection of all parties
from outside creditors. Shortly after the execution and delivery of the voting
trust and the MOA, Mullen as GM of the Bank, caused the displacement and
removal SH representatives in the Board and the substitution in their place
of the Bank’s employees or representatives. The new Board, who have not
purchased any share of stock of Teal, proceeded to remove the Corp
Secretary, discharge all the old managers and displace them with creatures
of their own choosing whose interest consisted wholly in pleasing
themselves and the Bank, and who were wholly foreign to the stockholders.
— Right of transferring SHs to set aside the trust agreement when their
rights are trampled upon by the trustee. Corpo Code now provides that
no VTA will be used for purposes of fraud.
Mackin v Nicollete Hotel. Dixon was the owner of a leasehold interest in a
tract of land in Minneapolis upon which stood what was known as the
Nicollet Hotel. Nicollet Hotel Inc was organized for the purpose of adding to
the hotel accommodation of that city. Arrangements were made to have
Dixon take 2500 shares for his lease and to erect an new Nicollet Hotel upon
this property. Cost was $3M, to be raised by the sale of $1M mortgage bonds
and $1.25M of preferred stock. The Minnesota Loan and Trust Co approved
the loan application of Nicollet for $1.8M secured by the said mortgaged
bond. The loan agreement stipulates that a voting trust agreement is
entered covering the common stock of Nicollet. The State Securities
Commission approved Nicollet’s application for the license to sell its
preferred stock, provided that the common stock is to be trusted with three
trustees for 10 years for the protection of preferred SHs. Thereafter a voting
trust agreement was entered with Dixon et al as voting trustees. Mackin is
the owner of a trust certificate representing 80 shares of common stock,
alleging that the voting trust is void and that the trustees and directors
appointed have mismanaged the company and have caused large losses.
The agreement also allegedly denied them the right to inspect the books,
and they ask the court to declare the same null and void and appoint a
receiver until the beneficial owners can elect a new set of directors.
I: W/N the voting trust is valid
H: Voting trusts are not illegal per se. In the instances where the voting trust
has been held void, there existed invalidating circumstances such as want of
consideration, voting power not coupled with an interest, fraud, illegal
purpose, and so on. In this case there was no charge of illegality or fraud,
nor of any invalidating circumstance. The voting power of the three trustees
is coupled with an interest because of one of the trustees is a substantial
owner of the common stock, and all are charged with the duty of protecting
and conserving property for the benefit of those who became purchasers of
46
preferred stock and bonds. The whole purpose of the agreement is
legitimate and wholesome. It was a matter of civic pride and to make this
possible, it involved the invitation of combinations of capital in
substantial amounts, which could only be secured by having those who
invested their money assured of the fact that there would be a continuity
of management during a period of years until such time that the new
enterprise would have an opportunity to justify a successful financial
future. It would be a manifest injustice to the large number of holders of
bonds and preferred stocks, not to the parties to the suit, to adjudge and
hold illegal a trust agreement upon the strength of which they had
invested their money in the enterprise. It also appears that Mackin
purchase the certificates of trust after the creation of the trust agreement
and are presumed to have full knowledge of the limitation of their rights.
NIDC v Aquino. Batjak, a manufacturer of coco oil and copra cake
for export, is on the brink of bankruptcy. It entered in to a
Financial Agreement with PNB for additional operating capital for
its 3 processing mills and to pay its other debts to other banks.
Under the agreement with PNB, NIDC, a wholly-owned subsidiary
of PNB, would invest P6.7M worth of preferred shares convertible
within 5 years into common stock to pay off the other debts and
the balance to pay off its own due with PNB. PNB also granted
various credit accommodations. Batjak as part of the deal,
mortgaged all its properties in the province. A 5-year voting trust
agreement was executed ifo NIDC by the SHs representing 60%
outstanding stock of Batjak. Years later, PNB instituted foreclosure
proceedings against the mortgaged properties due to Batjak’s
insolvency, and soon became owner of the properties. Batjak
failed to exercise its right to redeem within the period allowed and
PNB transferred ownership of the 2 oil mills to NIDC. 3 years later,
Batjak represented by majority SHs, inquired with NIDC if it was
still interested in negotiating the renewal of the voting trust
agreement. NIDC replied that its was no longer interested and
requested turn-over of all Batjak assets and properties. Batjak
demanded an accounting of all assets and properties and
operations but NIDC refused to comply. Batjak then filed an action
for mandamus. CFI Judge Aquino issued a TRO prohibiting NIDC
from removing any record, report, or document or disposing all of
the properties of Batjak, and allowed Batjak to inspect the same.
Batjak then moved for the appointment of a receiver. NIDC and
PNB opposes, but overruled by CFI. MRs denied.
H: Batjak premises its right to possession through the receivership
of the 3 oil mills in the voting trust agreement, claiming that under
said agreement, NIDC was constituted as trustee of the assets,
management, and operations of Batjak, and that due to expiration of
the agreement, NIDC should turn over the assets to Batjak. What
was assigned to NIDC was the power to vote the shares of stock
representing 60% of SHs, who are signatories to the agreement.
Nowhere in the agreement is mention made of any transfer or
assignment to NIDC of Batjak’s assets operations and management.
NIDC was constituted as trustee only of the voting rights of 60% of
outstanding shares. What was to be returned by NIDC as trustee to
Batjak’s SHs upon termination of the agreement, was the certificates
of stock, not the properties or assets which were never delivered to
NIDC in the first place. The acquisition of PNB and NIDC of the
properties was not in its capacity as trustee but as a creditor in
accordance with the financing agreement.
— SC failed to appreciate the fact that the voting trust was obtained from
the SHs of the borrowing corporation precisely to allow PNB-NIDC to
have management and undertake control in the operations of the
borrowing corporation
— In this case, the VTA was part and parcel of the loan arrangement, and
should have been considered by the Court as a means by which the
lending institution obtains control over the management or operation of
the borrowing corporation, and not merely as a transfer only of voting or
other rights pertaining to the shares
VTA as part of Loan Agreement
— VTA as part of loan agreement can exceed 5 years as an exception to
the rule that VTAs cannot be for more than 5 years
— VTA as part of loan agreement ensures that the lending institution would
have a controlling interest in corporate votes
— Constitutes further security to the lending institution
— In reality, the lending institution would have very little interest in the
operations of the corporation as to require a voting trust
3. pooling and voting agreements
— Definition: an agreement between two or more SHs to vote their
shares the same way.
— Through this kind of agreement, SHs who individually own only a
minority of the shares but together represent the majority, can
47
obtain control of the management of the corporation.
— Usually relates to the election of directors, which may either
specify the name of the nominees to be voted for, or the number
shares to be voted as a unit
— In case of disagreement: arbitration
— Since pooling agreements personal obligations to do, then
although valid it cannot be enforced by action for specific
performance
— These agreements have been upheld as valid provided they do
not limit the discretion of the board or work fraud against the
other SHs
o Ex. An agreement that directors once elected must vote for
certain persons as officers would be void, since the choice of
officers is vested in law in the board
— Voting agreement vs. voting trust: VA does not involve a transfer
of stocks but is merely a private agreement between and among
SHs to vote the same way. Breach would therefore give rise to
liability for damages.
— In close corporations: Sec 100:
Section 100. Agreements by stockholders. -
1. Agreements by and among stockholders executed before the
formation and organization of a close corporation, signed by all
stockholders, shall survive the incorporation of such corporation
and shall continue to be valid and binding between and among
such stockholders, if such be their intent, to the extent that such
agreements are not inconsistent with the articles of
incorporation, irrespective of where the provisions of such
agreements are contained, except those required by this Title to
be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing
and signed by the parties thereto, may provide that in exercising
any voting rights, the shares held by them shall be voted as
therein provided, or as they may agree, or as determined in
accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the
stockholders, relating to any phase of the corporate affairs, shall
be invalidated as between the parties on the ground that its
effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders in

a close corporation shall not be invalidated on the ground that it
so relates to the conduct of the business and affairs of the
corporation as to restrict or interfere with the discretion or
powers of the board of directors: Provided, That such agreement
shall impose on the stockholders who are parties thereto the
liabilities for managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary
duties to each other and among themselves. Said stockholders
shall be personally liable for corporate torts unless the
corporation has obtained reasonably adequate liability insurance.
— Para 1: SH agreements in general. Pre-incorporation agreements among
SHs remains effective even after incorporation if so intended and even if
not reflected in AOI, except matters required by the Code to appear in
AOI
— Para 2: refers to pooling and voting agreements in particular. There is no
reason for denying SHs other than those in close corporations the right
to enter into voting or pooling agreements to protect their interest, as
long as no wrong or fraud is committed or intended to be committed on
other SHs not parties
— Para 3: gives close corps freedom to operate as a partnership between
and among the SHs, but remaining a corp with respect to 3rd persons.
Note: SHs who are parties assume liabilities of directors
Ringling v Ringling Bros. Involves an action contesting the validity of the
election of directors and officers of Ringling Bros-Barnum & Bailey Combined
Shows Inc. Edith Ringling and Aubrey Haley, two of three majority SHs, entered
into an agreement (valid for 10 years) that neither party will sell any shares or
VTCs without first making a written offer to the other for the same price and
under the same conditions, allowing a period of within 180 days to accept the
offer. Each party will consult with the other and act jointly in exercising voting
rights, and in case of disagreement, an arbitrator (Loos) will intervene, and his
decision shall be binding on the parties. It also provides that each will enter into
VTAs or other agreements as deemed advisable. From 1943-45 both parties voted
together in accordance with the agreement and elected 5 of 7 directors in each
occasion. James Haley, as proxy for Mrs Haley, refused to follow the instructions
of the arbitrator Loos on a particular manner of voting the shares (i.e. vote for
adjournment and vote for 5 named nominees for director) by voting all his wife’s
shares for the election of Aubrey Haley and James Haley.
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I: W/N the contested agreement is an “agreement to agree” thus not having
any binding obligations
H: The mutual promises in the agreement certainly constitute sufficient
consideration to support it. But did the parties agree to agree? Certainly the
parties agree as to how they would vote their stock, but they also provided
that they shall be bound by the decision of the arbitrator. The agreement to
agree therefore has provisions which are capable of being enforced with
respect to particular facts. The very nature and object of the agreement
render it impossible to do more than agree to agree, and is sufficiently
definite in terms of the duties and obligations imposed on the parties to be
legally enforceable.
I: W/N the agreement is a voting trust agreement. If not, does it violate any
public policy?
H: The SHs under the present agreement vote their own stock at all times,
which is the antithesis of a voting trust because the latter has for its chief
attribute the severance of the voting rights from the other attributes of
ownership. In cases where the parties cannot reach an accord as to how they
will vote, and are directed by the arbitrator to vote in a certain way, the
substance of the matter may be said not to differ in effect from a voting trust
agreement, however, there is this substantial distinction—the right of the
arbitrator to direct the vote is limited to those particular cases where a SHs
vote is called for and the parties cannot agree. In a voting trust, the trustees
in the first instance determine policy and implement it by their votes, and
have continuous voting control for the period stipulated in the voting trust.
The agreement in question is actually a variation of the stock pooling
agreement and the voting trust.
Generally agreements and combinations to vote stock or control corporate
action and policy are valid, if they seek without fraud to accomplish only
what the parties might do as SHs and do not attempt it by illegal proxies,
trust, or other means. The objects and purposes in the agreement are lawful
and constitute no constitutional or public policy infirmity, and thus the stock
held thereunder should have been voted pursuant to the direction of the
arbitrator. When a party refuse to comply with the arbitrator, then the
agreement constitutes the willing party to the agreement an implied agent
possessing the irrevocable proxy of the recalcitrant party for the purpose of
casting the particular vote. Here an implied agency based on an irrevocable
proxy is fully justified to implement the agreement without doing violence to
its terms. The provisions make it clear that the proxy may be treated as one
coupled with an interest so as to render it irrevocable under the
circumstances.

The nature of the Agreement also does not preclude the granting of specific
performance, because to deny it would be tantamount to declaring the
agreement invalid.
E K Buck Retail Store v Harkert. Suit for declaratory judgment to test
the validity of a corporation control agreement entered by the
parties in their capacities as SHs of Harkert House. Harkert, the sole
owner of a chain of restaurants and burger chains, sought financial
aid from EK Buck, and entered into 4 purchase and resale
agreements prior to the incorporation of Harkert’s restaurants. These
involve the selling of equipment and fixtures of a designated outlet
or stand to an investor for cahs and entering into an agreement to
buy back the same at the end of 5 years for a higher price. Harkert
then incorporated his business, with its net worth estimated at
$47,504.38, which Buck knew. Harkert was then obligated on the
repurchase agreements to persons other than Buck. Harkert, also
indebted to Buck, entered into another agreement where buck would
cancel the gross amount of indebtedness and pay in cash into the
business for which he was to receive as consideration 40% of the
stock and equal board representation. Buck invested around $90K
into the Harkert Houses. In the agreement, the parties agree that the
number of board members of Harkert be reduced from 5 to 4, which
would include Buck and Devor (of the EK Buck Retail Stores), and at
all times 2 nominees shall come from each party (Buck group and
Harkert group). It was also agreed between the parties that at all SH
meetings all of the shares of the parties be voted in such a manner
by the directors elected. EK Buck Retail thus became owner of 1198
shares to Harkert’s 1437. The contract was between the parties as
SHs. They involved no action on the part of the corporation. The
board, offices, or other SH had no knowledge of the transactions.
Harkert claims that an agreement between SHs as to how stock shall
be voted at the election of directors ipso facto changes the manner
of election prescribed by the Constitution. He adds that although a
SH may vote as he pleases, public policy forbids the enforcement of
a contract by which a SH undertakes to bargain away his right to
vote for directors according to his best judgment. Buck counters
that no public policy is violated in the making of an agreement
between the majority and minority SHs to cause voting rights in the
corporation to be equal when it is beneficial to the corporation for
the purpose of brining fresh money into the business.
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H: GR: an agreement purporting to control the actions of directors
after they are elected, in handling the ordinary business of the
corporation, is void. This is because the law imposes the business
management of the corporation on its directors, who represent all
the SHs and creditors, and they cannot enter into agreements
among themselves to abdicate their independent judgment. But
the correct rule is that SH control agreements are valid where it is
for the benefit of the corporation, where it works no fraud upon
creditors or other SHs, and where it violates no statute or
recognized public policy. The court upheld the validity of a SH
agreement for voting trust, applying as a test the conclusion that
there was no wrong to the corporation or no special benefit to the
parties to the contract and no turning over of management to
strangers. Applied in the present case, the agreement would be
valid.
Furthermore, the agreement does not place Buck Retail, as the
owner of 40% of stock, in control of the corporation. It does give
him veto power. But Buck would not have cancelled the gross
indebtedness of $55K and paid in fresh money without the stock
agreement being made. It must be assumed that the purpose of
the agreement was to prevent the corporation from getting into
financial distress. The difficulties of Harkert and Buck only arose
after 11 years of successful operations on the very policy which
Buck sought to have maintained when he brought in the fresh
capital into the business by purchasing 40% of the stock.
SH control agreements are not invalid per se. If they are based on
a sufficient consideration between contracting SH they are valid
and binding if they do not contravene any express constitutional
or statutory provision or contemplate any fraud, oppression, or
wrong against creditors or other SHs. It is not illegal or against
public policy for 2 or more SH owning majority shares to unity
upon a course of corporate policy, or upon the officers or directors
whom they will elect.
Clark v Dodge. Action for specific performance between Clark and Dodge, SHs
of two New Jersey corporations, Bell & Co and Hollings-Smith Co, engaged in the
business of manufacturing medicinal preparations by secret formulae. Clark owned
25% and Dodge 75% of each corporation. Dodge, a director, took no active part in
the business but controlled the other directors of both corporations. Clark was a
director, treasurer and GM of Bell but was in charge of a major part of the business
of Hollings-Smith. The secret formulae were known to Clark alone. Both entered into an
agreement that Clark should continue in the management and control of Bell so long as
he remained faithful and competent, and that he should not be the sole custodian of the
formulae but share his knowledge with Dodge’s son. The agreement also provides that
Dodge during his lifetime and after death, a trustee to be appointed by him in his will
would vote his stock and so vote as director that Clark would continue to be a director
and GM and receive ¼ of the net income of the corporations, among others. Clark
agreed to share the formula to Dodge’s son and instruct him on the methods of
manufacturing. Clark accuses Dodge of breach and his failure to use his control of the
stock to continue Clark as director and GM, and even prevented Clark from receiving a
proportion of the income as stipulated in the agreement.
I: W/N the contract in question is illegal as against public policy
H: GR: the business of the corporation shall be managed by its board. If the
enforcement of a particular contract damages nobody—not even the public—one sees no
reason for holding it illegal, even though it impinges on the general rule stated above.
Damage suffered or threatened is a logical and practical test. Where the directors are
the sole SHs, there seems to be no objection to enforcing an agreement among them to
vote for certain people as officers. The rule that all SHs by their universal consent may
do as they choose with corporate concerns and assets, provided the interests of
creditors are not affected, because they are the complete owners of the corporation,
cannot apply in a case where the SHs are not parties to the agreement in question. So
when the public is not affected, the parties in interest might, by their original agreement
of incorporation, limit their respective rights and powers. As the parties are the
complete owners of the corporation, there is no reason why the exercise of power and
discretion of the directors cannot be controlled by valid agreement between themselves,
provided that the interests of creditors are not affected.
The agreement here in question was legal and that the complaint states a cause of
action. The only restrictions on Dodge were that he should vote for Clark as director,
and that as director he should continue Clark as GM, so long he “proved faithful,
efficient and competent, and entitlement to ¼ of the income. These are all perfectly
legal contractual stipulations. If there was an invasion of powers of the board, it is so
slight as to be negligible; and certainly there is no damage suffered or threatened to
anybody.
NOTE: Although the GR is that pooling or voting agreement cannot limit the discretion
of directors, this principle has not been applied strictly to close corporations, as
illustrated by the Clark case. This variation is incorporated in sec 100. The Clark case
also illustrates that the remedy of specific performance is available in case of violation
of a voting agreement.
4. cumulative voting
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— the system of cumulative voting gives the minority an
opportunity to elect a representative to the board
— it is vital to both the majority and the minority to cumulate their
votes so that they can get as many seats as possible
5. classification of shares (Sec 6 supra; cf Financing Corporate
Capital Structure)
— device of classification of shares can be used to achieve the
allocation of control desired by the parties
— if shares are classified into common voting and preferred non-
voting shares, the management of corporate affairs will be
controlled by whoever owns the majority of the common voting,
even though it may only be a minority of the total number of
shares (voting and non-voting)
— control would depend not on the amount of investment, but on
the number of voting shares acquired
— if non-voting shares are non-redeemable, the prospect that the
investor may get back his investment at some future time before
dissolution would be a compensating factor
— SEC: to prevent abuses, it requires where no dividends are
declared for 3 consecutive years despite available profits, that
preferred stocks be given the right to vote for directors until
dividends are declared
— In a close corporation, it is allowed to classify its directors into one or
more classes, each of whom may be voted for and elected solely by a
particular class of stock
Gottschalk v Avalon Realty. I: W/N the provisions authorizing the
holders of the 1st and 2nd preferred stock to vote whenever default should
exist in the payment of dividends… constitute a denial of the right to vote
H: Yes. The AOI deny the right to vote of the first and second preferred
SHs. The provision that such stock may vote upon the happening of such
contingencies clearly implies that it may not until such contingencies
occur. The right to vote may be denied by implication, such as a provision
that “sole voting power shall reside in the holders of common stock.”
Such a denial may exist expressly or by necessary implication. A denial
may exist under an express provision even though the denial may not be
expressed. Unless a denial is clearly manifested, it should not be given
effect, but in this case, it should be given effect even though it is not
express.
 6.
restriction on transfer of shares (cf Transfer of Shares)
— common example: a restriction which gives a first option to other SHs
and/or the corporation to acquire the shares of a SH who wishes to sell
o peculiar to close corps
7. prescribing qualifications for directors; founders’ shares
— definition of the qualifications of directors or trustees may be provided in
the by-laws
Section 24. Election of directors or trustees. - At all elections of directors
or trustees, there must be present, either in person or by representative
authorized to act by written proxy, the owners of a majority of the
outstanding capital stock, or if there be no capital stock, a majority of the
members entitled to vote. The election must be by ballot if requested by
any voting stockholder or member. In stock corporations, every
stockholder entitled to vote shall have the right to vote in person or by
proxy the number of shares of stock standing, at the time fixed in the by-
laws, in his own name on the stock books of the corporation, or where the
by-laws are silent, at the time of the election; and said stockholder may
vote such number of shares for as many persons as there are directors to
be elected or he may cumulate said shares and give one candidate as
many votes as the number of directors to be elected multiplied by the
number of his shares shall equal, or he may distribute them on the same
principle among as many candidates as he shall see fit: Provided, That the
total number of votes cast by him shall not exceed the number of shares
owned by him as shown in the books of the corporation multiplied by the
whole number of directors to be elected: Provided, however, That no
delinquent stock shall be voted. Unless otherwise provided in the articles
of incorporation or in the by-laws, members of corporations which have no
capital stock may cast as many votes as there are trustees to be elected
but may not cast more than one vote for one candidate. Candidates
receiving the highest number of votes shall be declared elected. Any
meeting of the stockholders or members called for an election may
adjourn from day to day or from time to time but not sine die or
indefinitely if, for any reason, no election is held, or if there are not
present or represented by proxy, at the meeting, the owners of a majority
of the outstanding capital stock, or if there be no capital stock, a majority
of the member entitled to vote. (31a)
— examples:
o a by-law provision that only SHs with a stated minimum number of
shares fully paid up may be elected as directors is valid (Govt v El
51
Hogar)
o a by-law that disqualify a SH who is competing with the
corporation, as the corporation has the right to protect itself from
persons who may use inside information to its prejudice
(Gokongwei v SEC)
o a by-law that only holders of “founders shares” may qualify for
directorship (Sec 7)
 exception to Sec 6 that non-voting shares shall be limited
to preferred and redeemable shares
 5 year period non-extendible
 SEC approval
Section 7. Founders' shares. - Founders' shares classified as such in the
articles of incorporation may be given certain rights and privileges not
enjoyed by the owners of other stocks, provided that where the exclusive
right to vote and be voted for in the election of directors is granted, it
must be for a limited period not to exceed five (5) years subject to the
approval of the Securities and Exchange Commission. The five-year period
shall commence from the date of the aforesaid approval by the Securities
and Exchange Commission. (n)
8. management contracts
— BOD may decide to enter into mgt contracts with another corporation
— The managing corporation will then perform all the managerial
functions usually pertaining to a GM
— BOD must still retain control of the basic corporate policies and power
to recall the contract where the corporation’s interest would greatly
suffer from its continuance
Section 44. Power to enter into management contract. - No corporation
shall conclude a management contract with another corporation unless
such contract shall have been approved by the board of directors and by
stockholders owning at least the majority of the outstanding capital stock,
or by at least a majority of the members in the case of a non-stock
corporation, of both the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That (1) where a
stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than one-
third (1/3) of the total outstanding capital stock entitled to vote of the
managing corporation; or (2) where a majority of the members of the
board of directors of the managing corporation also constitute a majority
of the members of the board of directors of the managed corporation,
then the management contract must be approved by the stockholders of
the managed corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of
the members in the case of a non-stock corporation. No management
contract shall be entered into for a period longer than five years for any
one term.
The provisions of the next preceding paragraph shall apply to any
contract whereby a corporation undertakes to manage or operate all or
substantially all of the business of another corporation, whether such
contracts are called service contracts, operating agreements or otherwise:
Provided, however, That such service contracts or operating agreements
which relate to the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as may be
provided by the pertinent laws or regulations. (n)
— Not an exception to Sec 23 which lays down the fundamental
principle that all corporate powers shall be exercised by the BOD
— BOD cannot abdicate its responsibility to act as a governing
body by giving absolute powers to offices or others by way of
management contracts
— The management contract is therefore a mere contract to
manage the day-to-day affairs of the corporation just like a GM
— It is one for lease of services and is not of agency
Sherman & Ellis v Indiana Mutual Casualty Co. F: Indiana Mutual
Casualty Co was organized to take over the business of an
unincorporated association engaged in writing policies covering risks
created by the Indiana Workmen’s Compensation Law. It ratified an
agreement with Sherman & Ellis by which the management of the
casualty company was conferred upon Sherman Ellis for 20 years.
Indiana Mutual terminated its contract after some difficulties arose
between Sherman Ellis and the Indiana state department in which
the latter tried to appoint a receiver for Indiana Mutual. Sherman
sues for specific performance to enforce the contract.
H: the contract provides that the underwriting and executive
management for Indiana Mutual will be performed by Ellis, president
of Sherman Ellis, and may appoint another officer to be the chief
executive head and underwriting manager of the company. It also
provides that the managing company (Sherman Ellis) shall have
general supervision and charge of underwriting affairs and shall be
entitled to 10% of the net earned premiums collected from all
policyholders. The grant of corporate power by a state is upon the
52
hypothesis that these powers shall be exercised by the
corporation’s officers, annually elected by the SHs and not by the
officers of another corporation. Although generally corporations
may for a limited period delegate to a stranger certain duties
performed by the officers, there are duties the performance of
which may not be delegated to outsiders. In this case the period
of control of the managing corporation is 20 years. Nothing of
importance was left for the BOD but the mere ministerial duties.
The agreement contemplated the substitution of Sherman Ells for
the officers of Indiana Mutual. The principal business of Indiana
was write casualty insurance, which is now solely exercised by
Sherman Ellis. No other conclusion can be drawn other than that
Indiana Mutual was to be an instrumentality through which
Sherman Ellis was to conduct a casualty business in the state of
Indiana.
9. unusual voting and quorum requirements
— a device which in effect increases the veto power of the minority
— usually involves the formation of a corporation which has clearly
efined majority and minority blocks.
o In exchange for the numerical majority in the board, the minority
might bargain for a provision in the AOI giving them strong veto
power in mjor corporate decisions
— In close corps, a requirement in the AOI that unanimous vote of all
SHs is necessary would only have the effect of maintaining the status
quo.
Section 97. Articles of incorporation. - The articles of incorporation of a
close corporation may provide:
1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as
may be stated therein, subject to the provisions of the following
section;
2. For a classification of directors into one or more classes, each
of whom may be voted for and elected solely by a particular class
of stock; and
3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
— A provision requiring a higher quorum or voting requirement cannot be
amended except by the vote of SHs representing such higher voting
requirement, whether voting or non-voting
Section 103. Amendment of articles of incorporation. - Any amendment
to the articles of incorporation which seeks to delete or remove any
provision required by this Title to be contained in the articles of
incorporation or to reduce a quorum or voting requirement stated in said
articles of incorporation shall not be valid or effective unless approved by
the affirmative vote of at least two-thirds (2/3) of the outstanding capital
stock, whether with or without voting rights, or of such greater proportion
of shares as may be specifically provided in the articles of incorporation
for amending, deleting or removing any of the aforesaid provisions, at a
meeting duly called for the purpose.
Benintendi v Kenton Hotel. 2 men owned in equal amounts all the
stock of a domestic business corporation, made an agreement to
vote for and adopt the by-laws of the corporation, providing that no
action should be taken by the SHs except by unanimous vote of the
SH present in person or by proxy should be sufficient, that the
directors of the corporation should be the 3 person receiving the
unanimous vote of all SHs, that no action shall be taken by the
directors except by unanimous vote of all directors. The minority SHs
sued to have the by-laws adjudged valid and to enjoin the majority
from doing anything inconsistent therewith.
H: the device is intrinsically unlawful because it contravenes an
essential part of State policy. But a requirement, that there shall be
no election of directors unless every single vote be cast for the same
nominees is in direct opposition to the rule that the receipt of
plurality of votes entitles a nominee to election.
The by-law which requires unanimous action of SHs to pass any
resolution or take action of any kind, is equally obnoxious to the
statutory scheme of stock corporation management. The whole
concept of a representative government in a corporation, with voting
conducted conformably to statute, and with the power of decision
lodged in certain fractions of the stock, is destroyed when the SHs by
agreement or by-law or AOI provision as to unanimous action, give
the minority interest an absolute, permanent and all-inclusive power
of veto.
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The last by-law makes it impossible for the directors to act on any
matter except by unanimous vote of all of them. Such a by-law is
almost unworkable and unenforceable because, prima facie in all
acts done by a corporation, the major number must bind the
lesser, or else differences could never be determined. Every
corporation is given the privilege of enacting a by-law fixing its
own quorum requirement at a fraction not less than that
mandated by law. But the very idea of a quorum is that when that
required number of persons goes into session as a body, the votes
of a majority thereof are sufficient of binding action.
Dissent: While the 2 by-laws are indeed invalid because it is
violative of the statutes, the courts should nonetheless enforce
against either SH the agreement made by both of them which
finds expression in those by-laws.
BOD:
Majority to convene mtg
Majority of majority to vote for binding corporate act
SHs ratification
GR: 2/3 vote; Exceptions: 50%+1
Removal of directors: difficult to remove, SHs limited right to vote,
difficult to personally sue, therefore law grants protection for SHs
Holdover of directors occurs when you cannot convene a meeting for
want of quorum
In Roxas: election as mode of removal
Angeles: appointment of receiver as mode of removal
Campbell: outright removal, then elect new directors
Personal action may also be instituted, but difficult
Devices affecting control—common denominator is the contractual
obligation
— SHs NOT of record: CANNOT vote, CANNOT be vote for
— Once voting rights are exercised by another, voting rights of the
owner of shares are already impaired
— Proxies: proxy holder is an agent
o Does it affect ownership rights? No. Registration of shares? No
 o Why do I need them? rights
 No distinct and clear majority to collate enough votes to o So long as consideration is in place, obligation satisfactorily
form majority performed, voting agreement is justified, enforceability should be
 Biggest SHs; Shares are so widely held/dispersed there!
o 5-year term of proxies only applies to revocable proxies — Management contracts: Is the manager/managing corp a trustee?
o voting trusts and proxies coupled with an interest (security for NO… covered by contract
obligations) — Effect of higher quorum or voting requirements
o in Alejandrino: “deemed” to have sufficient interest o Controlling interest of the corporation can be vetoed by the
minority
 pledgor-pledgee: interest of pledgee in ensuring that the o Would affect disposition of corporate assets
value of stock used as security may not be impaired, and o Controlling interest has the authority to formulate the policies
may be sold at a premium to 3rd parties at public auction in
o Anarchy/tyranny of the majority
case obligors/debtors default…
— Voting trust: beneficial owner is SH; legal ownership is trustee
o Registration with SEC and corporation of stock certificate (effect is
constructive notice to 3rd parties)
o All stock certificates issued in name of participating SHs are
presented for cancellation and issuance of new ones; voting trust
certificates are issued by the trustee
o Orig SHs are delisted; replaced by trustees with notation that it holds
stocks of orig SHs
o “walang pakialam and korporasyon sa relasyon ng SH at ng trustee”
o SH still has naked title; he can still sell the shares by selling the VTC.
But trustee is now SH of record!
o Total divorce of voting rights
 Voting rights: trustee; Economic rights: SH
o VTA is binding on participants even if there is disposition of the VTC
 Can trustee sell shares? NO! it holds it in trust
 Can transferee of VTC vote the shares? NO! only the trustee
o Only binding arrangement would be the fiduciary arrangement
 In proxies without an interest and pooing agreements, NO
fiduciary nature!
o Key to determining w/n VTAs exist:
 trustee exercises DISCRETION as to the vote, but it may also
be consensual, i.e. trustees can agree among themselves
who to vote
 There is also delegation of authority; It is not the corporation
constituting the VTA, it is the SHs!
— Pooling agreements: reciprocal arrangement of those who reach a
consensus to exercise right to vote separately, but shares remain with
SHs
— Consideration for voting devices
o sufficient consideration: In Clark, IPR, services, “secret formula”; In
Harkert, loan/investment; In Ringling, RFR; in Avalon, PS with econ

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