SECTION VII 3.

NLRC rendered a Decision in ordering the Club to pay backwages, 13th and
001 Ching v. QC Sports Club (Santos) 14th month pay, and allowances to 6 illegally dismissed employees. As a
07 November 2016 | Leonardo-De Castro, J. | By-Laws result, a writ of execution was served on the for P4.4m.
PETITIONER: Catherine, Lorenzo, Laurence, and Christine Ching 4. Because the club was not in a financial position to pay the monetary awards,
RESPONDENTS: Quezon City Sports Club, Inc. (The Club); Members Of The the Board of Directors approved a BR, "Special Assessment for Club
Board Of Directors (BoD), Namely: Antonio Chua, Margaret Mary Rodas, Members in Relation to the Navarro, et al. v. QCSI, et al. Case," resolving to
Alejandro Yabut, Jr., Robert Gaw, Edgardo Ho, Romulo Sales, Bienvenido "seek the assistance of its members by assessing each member P2,500
Alano, Augusto Orosa, Finance Manager, Lourdes Ruth Lopez payable in 5 equal monthly payments.
SUMMARY: A judgment was rendered against the QC Sports Club, ordering it 5. Catherine was notified of the implementation of the special assessment
to pay P.4.4m because of illegally dismissing 6 employees. Because the club was through a Letter from the club Treasurer. P500 was debited/charged to
not in a financial position to pay the monetary awards, the BoD approved a Board Catherine's account each month from Sept ‘01 - Jan ‘02, as reflected in the
Resolution (BR) seeking the financial assistance of its members by assessing each club’s Statements of Account.
member P2,500 payable in 5 monthly payments. Catherine, a member, believed 6. The Statements of Account sent to Catherine included a general notice:
that the imposition of the special assessment was illegal but she took no action but a. This statement is deemed correct if no discrepancy is reported w/in
simply avoided paying the special assessment. Catherine’s membership was 10d from receipt.
suspended due to not paying the special assessment. She tried to avail of the b. Accounts past due for 60d and the amount is over P20k will be
services by signing-up as a guest of her husband or daughter but she was refused automatically suspended
access to the club so the Chings filed a complaint for damages before the RTC, c. Accounts that are 75d in arrears will automatically be suspended
based on Arts. 19-21, CC praying for the court to order the club to reinstate regardless of amount.
Catherine’s membership and pay damages. The issue in this case is WoN CA erred 7. Catherine believed that the imposition of the special assessment was unjust/
in ruling that suspension of Catherine in not paying the special assessment illegal, but she took no action and simply avoided paying the special
pursuant to a BR can be made under Art. 33 of the by-laws of the club. The answer assessment by settling the amounts due in her Statements of Account from
is that the club MAY suspend members by virtue of Art. 33, HOWEVER, in this Sept ‘01 – Jan ‘02 short of P500
case, the requisite of notification under Art. 35 of the by-laws was not satisfied so 8. BoD passed another BR suspending privileges of the members of QC Sports
Catherine’s right to due process was violated. The Court partly granted the petition Club who hadn’t paid the special assessment
but clarifies that only the Club shall be liable for the nominal damages because in 9. To fully enforce such and to be fair with other members who have already
the absence of malice and bad faith, officers of a corporation cannot be made paid, the BoD suspended the privileges of those members who would
personally liable for the liabilities of the corporation which, by legal fiction, has a continue not paying the special assessment despite receipt of demand.
personality separate and distinct from its officers, stockholders, and members. 10. Catherine continued availing herself of the services of the Club and regularly
DOCTRINE: The by-laws are the self-imposed rules resulting from the paid the amounts due from Feb ‘02 - May ‘03, but always leaving behind a
agreement between the country club and its members to conduct the corporate balance. Catherine wasn’t personally informed of the 2nd BR nor advised
business in a particular way. In that sense, the by-laws are the private “statutes” that she’s already deemed delinquent in the payment of any other Statements
by which the country club is regulated, and will function. Until repealed, the by- of Account.
laws are the continuing rules for the government of the country club and its 11. Catherine’s son, Laurence, went to QC Sports Club to avail of its services
officers, the proper function being to regulate the transaction of the incidental using the account of Catherine but QC Sports Club refused to accommodate
business of the country club. The by-laws constitute a binding contract as between Laurence because Catherine’s membership privileges was suspended.
the country club and its members, and as among the members themselves. The by- 12. Catherine noticed that her name was included and highlighted in Lopez's
laws are self-imposed private laws binding on all members, directors, and officers Memorandum addressed to "All Outlets" with the subject matter of
of the country club. The prevailing rule is that the provisions of the articles of "Suspended Members Due to Non-Payment of Special Assessment," copies
incorporation and the by-laws must be strictly complied with and applied to the of which were posted at the workstations of the employees and in other
letter. (Outline) conspicuous places within the premises of the Club; so she sent the Club and
its BoD a letter demanding her reinstatement and an apology for besmirching
FACTS:
her good reputation.
1. QC Sports Club is a registered domestic corporation providing recreational
13. The Club and its BoD replied in a letter pointing out that (1) the Club never
activities, sports facilities, and services to its members.
besmirched the reputation of any of its members; (2) Catherine herself
2. Catherine became a member of the Club in 1989. Per policy, Catherine's
admitted that she didn’t pay the special assessment fee; and (3) the list of
membership privileges were extended to her immediate family.
 suspended members failing to pay the special assessment fee was never 24. The statement of account contains a reminder that an account which is more
posted but was given to the members. than 75d deficient, regardless of the amount, will be suspended but the
14. So she can avail herself of the services of the Club, Catherine registered as a Statements of Account, offered in evidence by the Club were for other
guest of either her husband, Lorenzo, or her daughter, Noelle but Catherine expenses incurred by the Chings for chits such as Sports and Recreation
was refused access to the Club, even as a guest. (CHH), Charge Account Slip (CHC), Beauty Parlor (CBP), Reflexology
15. Catherine was paying more than double her customary fees to enjoy the (RC), Restaurant (CHR), Monthly Dues (MD) and Locker Rental (LR), but
services of the Club. none containing a demand for payment of special assessment.
16. The Chings filed a complaint for damages before the RTC, based on Arts. 19- 25. Statements of Account forming part of the the Club’s evidence do not prove
21, CC. The Chings prayed for the court to order the Club to (1) reinstate demand upon the Chings to pay for the Special Assessment before their
Catherine’s membership, (2) refund the losses Catherine incurred as a privileges can be suspended.
consequence of the illegal suspension of her membership; (3) pay moral 26. Catherine admitted during the Pre-trial Conference of her being aware of the
exemplary and damages, atty's fees and the costs of suit. billings for the special assessment but this admission is vague as to the time
17. To lift suspension of her membership privileges, Catherine paid "under when she came to know of these billings partaking of a demand.
protest" the special assessment of P2,500 but despite this, QC Sports Club 27. RTC Judgment: Club and its BoD acted in bad faith or with malice in
continued harassing her when she was at the Club continuing to deprive Catherine her membership privileges even after
a. A guard would unusually monitor her activities. she had already paid the special assessment.
b. Dacut, Catherine’s tennis trainer for 10y was enjoined by the 28. It was found that the evidence are strong enough to prove violation of the
management from playing with the Chings. Club's By-laws where the Chings were immediately suspended without
18. BOD issued a 3rd BR expelling Catherine as a member of QC Sports Club notice and hearing and for their continuous act of depriving them of their
due to her filing of the civil suit. Catherine received a notice of her expulsion privilege as members of theClub.
which became the subject matter of another case before the RTC. 29. The Club and its BoD were directed to pay jointly and severally the Chings,
19. The RTC basing on the "Business Judgment Rule" and PH Stock Exchange, moral and exemplary damages, attys fees and the costs of the suit
Inc. v. CA, held that questions of policy and management are left to the 30. The Club and BoD filed an MR which was denied.
honest decision of the officers and directors of a corporation; and the 31. They appealed to the CA which reversed the RTC decision, finding that the
courts are without authority to substitute their judgment for that of the respondents had no bad faith or intent to injure/humiliate, considering that:
BoD unless said judgment had been attended with bad faith. a. Catherine’s suspension was in accordance with the By-Laws and
20. The RTC found no evidence of bad faith on the part of the club and its BoD policy of the club;
in adopting the 1st BR re imposition of special assessment since it’s only b. Catherine's privileges were not actually suspended until Lopez
adopted because the club wasn’t in a financial capacity to pay. issued her a Memorandum
21. The special assessment was reasonable and fair in order to save the club from c. Billing clerks and attendants were furnished copies of respondent
the execution of the alias writ of execution. According to the RTC, since Lopez's Memorandum dated May 22, 2003 for their guidance or
Catherine is aware of the issuance of the 1st BR and was silent and failed to reference since it was their duty to check the status of a member's
immediately challenge the validity of said BR could only be construed as account, and if they wrongfully accommodated a suspended
her assent/waiver of her right to question its propriety. The RTC though member, then the charges incurred by said member would be
ruled that respondents failed to comply with the By-Laws of the Club when automatically deducted from their salaries;
they suspended Catherine's privileges. d. There was no proof that copies of said Memorandum were posted in
22. Sec. 35 of the By-laws: A member may be suspended or expelled if he or she conspicuous places within the premises of the club; and
violates the By-laws, rules, regulations, resolution and orders duly e. There was no evidence that the club instructed the billing clerks to
promulgated by the BoD or for an act, which in the opinion of the board, are post copies of respondent Lopez's Memorandum dated May 22,
serious or prejudicial to the Club. A suspension or expulsion comes after 2003 in their cubicles and to highlight Catherine's name.
proper notice and hearing. This is why a BR requiring "receipt of a f. Dacut's testimony that they were instructed by the management of
demand" upon a member before his privileges are suspended was created. the club to avoid petitioners was hearsay
23. The privileges of Chings were suspended without notice/demand having been g. The counterclaims for damages of respondents were denied since
issued to Catherine to pay the special assessment and if she fails her privileges they failed to establish that petitioners were moved by bad faith or
and that of her dependents will be suspended. malice in impleading the BOD in the case a quo.
ISSUE: WoN CA erred in ruling that suspension of Catherine in not paying the special 100. All stipulations of the contract are considered and the whole agreement is
assessment pursuant to a BR can be made under Art. 33 of the by-laws of the club – rendered valid and enforceable, instead of treating some provisions as
Only after due notice and hearing prior suspension, according to Sec.35(a) superfluous, void, or inoperable.
101. Suspension of Catherine's privileges was due to the P2,500 special
RULING: Instant Petition is partly GRANTED. CA Decision is REVERSED and assessment charged in her Statements of Account from Sept ’01 - Jan ‘02,
SET ASIDE. Quezon City Sports Club, Inc. is ORDERED to pay petitioners Lorenzo which remained unpaid for over 3 months by the time the BOD passed BR 3-
Ching, Catherine Ching, Laurence Ching, and Christine Ching nominal damages in ’02 on April 18, ‘02; and for 1y, 4m by the time Lopez issued her
the amount of P25,000. Memorandum dated May 22, 2003. However, tracing back, the P2,500
special assessment was not an ordinary account/bill incurred by the Chings
RATIO: in the Club, as contemplated in Sec 33(a).
96. The Court found the petition meritorious. 102. Sec. 33(a) of the By-Laws refers to the regular dues and ordinary accounts or
97. The Chings maintain that Catherine's nonpayment of the special assessment bills incurred by members as they avail of the services at the club, and for
of P2,500 was a violation of a resolution of the BoD, to which Sec 35(a) of which the members are charged in their monthly Statement of Account.
the By-Laws of the Club - requiring notice and hearing prior to the member's The immediate payment or collection of the amount charged in the member's
suspension - should have applied: monthly Statement of Account is essential so the club can carry-on its day-
Sec. 35. (a) For violating these By-Laws or rules and regulations of the Club, or resolution and orders duly to-day operations, which is why Sec. 33(a) allows for the automatic
promulgated at Board or stockholders' meeting, or for any other causes and acts of a member which in the
opinion of the Board are serious or prejudicial to the Club such as acts or conduct of a member or the
suspension of a nonpaying member after a specified period and
immediate members of his family, his guest or visitors, which the Board may deem disorderly or injurious notification.
to the interest or hostile to the objects of the Club, the offending member may be suspended, or expelled 103. The special assessment in the instant case arose from an extraordinary
by a two-thirds (2/33) vote of the Board of Directors upon proper notice and hearing. circumstance, i.e., the necessity of raising payment for the monetary
98. The club invoke Sec. 33(a) of the By-Laws allowing suspension of a member judgment against the club in an illegal dismissal case. The special assessment
with unpaid bills after notice: of P2,500 was imposed upon by the BOD through a BR; it only so happened
Sec. 33. (a) Billing of Members, Posting of Suspended Accounts As soon as possible after the end of
every month, a statement showing the account or bill of a member for said month will be prepared and
that said BR was implemented by directly charging the special assessment,
sent to them. If the bill of any regular member remains unpaid by the 20th of the month following that in in P500 installments, in the members' Statements of Account for 5 months.
which the bill was incurred, the Treasurer shall notify him that if his bill is not paid in full by the end of Thus, Catherine's nonpayment of the special assessment was, ultimately, a
the same month, his name will be posted as suspended the following day at the Clubhouse Bulletin Board. violation of a BR, covered by Sec. 35(a) of the By-Laws. This much was
While posted, a regular member together with the immediate members of his family mal not use the
facilities or avail of the privileges of the Club.
acknowledged by respondent BOD itself when it mentioned in BR 3-’02 that
99. Forest Hills Golf v. Gardpro.: articles of incorporation and by-laws of a "[t]o enforce BR 7-’01," it was suspending the members who did not pay the
country club are the special assessment.
a. fundamental documents governing the conduct of the corporate 104. Sec. 35(a) of the By-Laws requires notice and hearing prior to a member's
affairs of said club; suspension. Here, Catherine did not receive notice specifically advising
b. establish the norms of procedure for exercising rights, and reflected her that she could be suspended for nonpayment of the special
the purposes and intentions of the incorporators. assessment; affording her a hearing prior to her suspension through BR 3-
c. self-imposed rules resulting from the agreement between the ’02. The club merely relied on the general notice printed in Catherine's
country club and its members to conduct the corporate business in a Statements of Account warning of automatic suspension for accounts of over
particular way P20,000 which are past due for 60 days, and accounts regardless of amount
d. private "statutes" by which the club is regulated, and will function. which are 75 days in arrears. While said general notice in the Statements of
e. the continuing rules for the government of the country club and its Account might have been sufficient for purposes of Sec. 33(a) of the By-
officers, the proper function being to regulate the transaction of the Laws, it fell short of the stricter requirement under Sec. 35(a) of the same By-
incidental business of the country club. Laws. Catherine's right to due process was clearly violated.
f. binding contract as between the country club and its members, and 105. However, only the Club shall be liable for the nominal damages because in
as among the members themselves. the absence of malice and bad faith, officers of a corporation cannot be made
g. self-imposed private laws binding on all members, directors, and personally liable for the liabilities of the corporation which, by legal fiction,
officers of the country club. has a personality separate and distinct from its officers, stockholders, and
h. must be strictly complied with and applied to the letter. members.
002 BERNAS v. CINCO (Sabaupan)
July 1, 2015 | Perez, J. | By-laws cannot be contrary to law, public policy, or the FACTS:
charter 147. Makati Sports Club (MSC) is a domestic corporation duly organized and
existing under Philippine laws for the primary purpose of establishing,
PETITIONER: Jose A. Bernas, Cecile H. Cheng, Victor Africa, Jesus B. maintaining, and providing social, cultural, recreational, and athletic
Maramara, Jose T. Frondoso, Ignacio T. Macrochon, Jr., and Paulino T. Lim, activities among its members.
acting in their capacity as individual directors of Makati Sports Club, Inc., and on 148. Alarmed with the rumored anomalies in handling the corporate funds, the
behalf of the Board of Directors of Makati Sports Club MSC Oversight Committee (MSCOC), composed of the past presidents of
RESPONDENTS: Jovencio F. Cinco, Vicente R. Ayllon, Ricardo G. Librea, the club, demanded from the Bernas Group (Members of the Board of
Samuel L. Esguerra, Rolando P. dela Cuesta, Ruben L. Torres, Alex Y. Pardo, Ma. Directors and Officers of the corporation whose terms were to expire either
Cristina Sim, Roger T. Aguiling, Jose B. Quimson, Celestino L. Ang, Eliseo V. in 1998 or 1999), who were then incumbent officers of the corporation, to
Villamor, Felipe L. Gozon, Claudio B. Altura, Rogelio G. Villarosa, Manuel R. resign from their respective positions to pave the way for the election of new
Santiago, Benjamin A. Carandang, Regina de Leon-Herlihy, Carlos Y. Ramos, Jr., set of officers.
Alejandro Z. Barlin, Efrenilo M. Cayanga and John Does 149. The MSCOC called a Special Stockholders’ Meeting and set out notices to
all stockholders and members stating therein the time, place and purpose of
SUMMARY: The MSCOC of MSC called for a Special Stockholders’ Meeting the meeting. Bernas group failed to secure an injunction before the SEC, so
because they were alarmed with the rumored anomalies in handling the corporate the meeting proceeded wherein members of the Bernas group were removed
funds. They demanded that the Bernas group, who were then the incumbent from office and was replaced by members of the Cinco Group.
officers, to resign from their respective positions to pave the way for the election 150. Bernas group then initiated an action (SEC case 1) before the Securities
of new set of officers. The said meeting proceeded, and the Cinco group was Investigation and Clearing Department (SICD) of the SEC seeking for the
elected in place of the Bernas group. Bernas group then filed an action before the nullification of the Special Stockholders Meeting on the ground that it was
SCID of the SEC seeking the nullification of the Special Stockholders’ Meeting improperly called.
on the ground that it was improperly called. The Cinco group argued that the a. They cited Section 28 of the Corporation Code and argued that the
calling of the meeting was justified under the Corporation Code and the MSC by- authority to call a meeting lies with the Corporate Secretary and not
laws. Meanwhile, the newly elected directors found Bernas guilty of irregularities with the MSCOC which functions merely as an oversight body and
and the Board resolved to expel him from the club by selling his shares at a public is not vested with the power to call corporate meetings.
auction. Prior to the resolution of the case filed by the Bernas group, 3 Annual b. Since the meeting was called by persons not authorized to do so,
Stockholders’ Meeting was already conducted and in all these meetings, majority Bernas Group urged the SEC to declare the Special Stockholders’
of the stockholders resolved to ratify the calling of the Special Stockholders’ Meeting, including the removal of the sitting officers and the
Meeting. The SCID ruled that the Special Stockholders’ Meeting was invalid. SEC election of new ones, be nullified.
En Banc reversed this. CA ruled that the Special Stockholders’ Meeting was 151. The Cinco group insisted that the meeting is sanctioned by the Corporation
invalid for being properly called but ruled that the subsequent annual meetings Code and the MSC by-laws. They justified the calling of the meeting by
were valid. The issue is whether the Special Stockholders’ Meeting was valid. The MSCOC by invoking Section 25 of the MSC by-laws.
Court held that it was void because the MSCOC was not authorized to exercise a. Said by-law authorized the Corporate Secretary to issue notices of
corporate powers, such as the calling of a meeting. Based on its by-laws, only the meetings and nowhere does it state that such authority solely
President or the Board of Directors are authorized to call for a special meeting. belongs to him.
The defect goes into the very authority of the persons who made the call for the 152. Meanwhile, the newly elected directors initiated an investigation on the
meeting. Since the Special Stockholders’ Meeting is void, it is not subject to alleged anomalies in administering the corporate affairs and after finding
ratification. Bernas guilty of irregularities, the Board resolved to expel him from the club
by selling his shares at public auction.
DOCTRINE: Board of Directors should act in a manner and within the 153. Prior to the resolution of SEC Case 1, an Annual Stockholders’ Meeting was
formalities, if any, prescribed in its charter or by law. Thus, directors must act as held in April 1998. The meeting was attended by majority of the stockholders
a body in a meeting called pursuant to the law or the corporation’s by-laws; and they resolved to approve, confirm, and ratify, among others, the calling
otherwise, any action taken therein may be questioned by the objecting director or and holding of the Special Stockholders’ Meeting, the acts and resolutions
shareholder. Certainly, the rules set in the by-laws are mandatory for every adopted therein including the removal of the Bernas Group from the Board
member of the corporation and its officers and members must comply. and the election of their replacements. The Special Stockholders’ Meeting
was also ratified in the annual meeting in 1999 and 2000.
 154. The SCID rendered a Decision finding that the Special Stockholders’ RATIO:
Meeting and the Annual Stockholders’ Meeting conducted in 1998 and 1999 106. The Corporation Code laid down the rules on the removal of the Directors of
are invalid. The SICD likewise nullified the expulsion of Bernas from the the corporation, by providing, among others, the persons authorized to call
corporation and the sale of his share at the public auction. the meeting and the number of votes required for the purpose of removal.7
155. On appeal, the SEC En Banc reversed the findings of the SCID and validated 107. Textually, only the President and the Board of Directors are authorized by
the Special Stockholders’ Meeting and the 1999 and 2000 Annual the by-laws to call a special meeting. In cases where the person authorized
8

Stockholders’ Meeting. to call a meeting refuses, fails or neglects to call a meeting, then the
156. CA rendered a Decision declaring that the Special Stockholders’ Meeting stockholders representing at least 100 shares, upon written request, may file
invalid for being improperly called but affirmed the actions taken during the a petition to call a special stockholder's meeting.
Annual Stockholders’ Meeting in 1998, 1999, and 2000. 108. In the instant case, there is no dispute that the Special Stockholders' Meeting
157. Both parties elevated the case before the SC. was called neither by the President nor by the Board of Directors but by the
a. While the Bernas Group agrees with the disquisition of the appellate MSCOC. While the MSCOC, as its name suggests, is created for the purpose
court that the Special Stockholders' Meeting is invalid for being of overseeing the affairs of the corporation, nowhere in the by-laws does it
called by the persons not authorized to do so, they urge the Court to state that it is authorized to exercise corporate powers, such as the power to
likewise invalidate the holding of the subsequent Annual call a special meeting, solely vested by law and the MSC by-laws on the
Stockholders' Meetings invoking the application of the holdover President or the Board of Directors.
principle. 109. A corporation's board of directors is understood to be that body which:
b. The Cinco Group, for its part, insists that the holding of Special a. Exercises all powers provided for under the Corporation Code
Stockholders' Meeting is valid and binding underscoring the b. Conducts all business of the corporation
overwhelming ratification made by the stockholders during the c. Controls and holds all the property of the corporation.
subsequent annual stockholders' meetings and the previous refusal Its members have been characterized as trustees or directors clothed with
of the Corporate Secretary to call a special stockholders' meeting fiduciary character.
despite demand. 110. The ordinary trust relationship of directors of a corporation and stockholders
is not a matter of statutory or technical law. It springs from the fact that
ISSUE/s: directors have the control and guidance of corporate affairs and property and
18. Whether the Special Stockholders’ Meeting is valid. NO since the body that hence of the property interests of the stockholders.
called the meeting had no authority to do so. 111. Equity recognizes that stockholders are the proprietors of the corporate
19. Whether the sale of Bernas’ share in a public auction is valid. NO because a interests and are ultimately the only beneficiaries thereof. Should the board
void meeting cannot have any legal effect. fail to perform its fiduciary duty to safeguard the interest of the stockholders
or commit acts prejudicial to their interest, the law and the by-laws provide
RULING: Both the petition of the Bernas Group and the Cinco Group are DENIED. mechanisms to remove and replace the erring director.
The decision of the CA is AFFIRMED. 112. Relative to the powers of the Board of Directors, nowhere in the
Corporation Code or in the MSC by-laws can it be gathered that the

7 to propose such removal, must be given by publication or by written notice prescribed in this Code.
Sec. 28. Removal of directors or trustees. — Any director or trustee of a corporation may be removed
Removal may be with or without cause: Provided, That removal without cause may not be used to deprive
from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the
minority stockholders or members of the right of representation to which they may be entitled under
outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds
Section 24 of this Code.
(2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular
8
meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous SEC. 8. Annual Meetings. — The annual meeting of stockholders shall be held at the Clubhouse on the
notice to stockholders or members of the corporation of the intention to propose such removal at the third Monday of April of every year unless such day be a holiday in which case the annual meeting shall
meeting. A special meeting of the stockholders or members of a corporation for the purpose of be
removal of directors or trustees, or any of them, must be called by the secretary on order of the held on the next succeeding business day. At such meeting, the President shall render a report to the
president or on the written demand of the stockholders representing or holding at least a majority stockholders of the clubs.
of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a
majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting SEC. 10. Special Meetings. — Special meetings of stockholders shall be held at the Clubhouse when
upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting called by the President or by the Board of Directors or upon written request of the stockholders
may be addressed directly to the stockholders or members by any stockholder or member of the representing not less than one hundred (100) shares. Only matters specified in the notice and call will be
corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention taken up at special meetings.
 Oversight Committee is authorized to step in wherever there is breach are its own private laws which substantially have the same effect as the
of fiduciary duty and call a special meeting for the purpose of removing laws of the corporation.
the existing officers and electing their replacements even if such call was 119. In this sense they become part of the fundamental law of the corporation with
made upon the request of shareholders. The MSCOC is neither which the corporation and its directors and officers must comply. The general
empowered by law nor the MSC by-laws to call a meeting and the subsequent rule is that a corporation, through its board of directors, should act in the
ratification made by the stockholders did not cure the substantive infirmity, manner and within the formalities, if any, prescribed in its charter or by the
the defect having set in at the time the void act was done. general law. Thus, directors must act as a body in a meeting called pursuant
113. The defect goes into the very authority of the persons who made the call for to the law or the corporation’s by-laws, otherwise, any action take therein
the meeting. It is apt to recall that illegal acts of a corporation which may be questioned by the objecting director or shareholder.
contemplate the doing of an act which is contrary to law, morals or 120. Certainly, the rules set in the by-laws are mandatory for every member
public order, or contravenes some rules of public policy or public duty, of the corporation to respect. They are the fundamental law of the
are, like similar transactions between individuals, void. They cannot serve corporation with which the corporation and its officers and members
as basis for a court action, nor acquire validity by performance, ratification must comply. It on this score that the Court cannot sustain the Bernas
or estoppel. The same principle can apply in the present case. The void Group’s stance that the subsequent annual stockholders’ meetings were
election conducted during the Special Stockholders’ Meeting cannot be invalid. The said meetings were conducted in accordance with their by-laws
ratified by the subsequent Annual Stockholders’ Meeting. and the Corporation Code.
114. A distinction should be made between corporate acts or contracts which are 121. Considering that a new set of officers were already duly elected in 1998 and
illegal and those which are merely ultra vires: 1999 Annual Stockholders Meetings, the Bernas Group cannot be permitted
a. Illegal corporate acts contemplate the doing of an act which are to use the holdover principle as a shield to perpetuate in office. Members of
contrary to law, morals, or public policy, or public duty, and are the group had no right to continue as directors of the corporation unless
void. They cannot serve as basis of a court action nor acquire reelected by the stockholders in a meeting called for that purpose every year.
validity by performance, ratification or estoppel. They had no right to hold-over brought about by the failure to perform the
b. Mere ultra vires acts, on the other hand, or those which are not illegal duty incumbent upon them.
or void ab initio, but are not merely within the scope of the articles
of incorporation, are merely voidable and may become binding and SEPARATE OPINION:
enforceable when ratified by the stockholders. Perlas-Bernabe, concurring
115. The Special Stockholders’ Meeting belongs to the category of the latter, that 1. Following the doctrine that specific provisions must prevail over general
is, it is void ab initio and cannot be validated. ones, the procedure, as prescribed in Section 28 of the Corporation Code,
116. Consequently, such Special Stockholders' Meeting called by the Oversight should have therefore governed the conduct of the Special Stockholders’
Committee cannot have any legal effect. The removal of the Bernas Group, Meeting which was particularly intended for the removal of the Bernas Group
as well as the election of the Cinco Group, effected by the assembly in that from the MSC's Board of Directors, viz.:
improperly called meeting is void, and since the Cinco Group has no legal a. The special meeting must have been called by the secretary
right to sit in the board, their subsequent acts of expelling Bernas from the b. The same should have been made upon the order of the president or
club and the selling of his shares at the public auction, are likewise invalid. on written demand of the stockholders representing at least a
117. If it be true that the Corporate Secretary refused to call a meeting despite majority of the outstanding capital stock
fervent demand from the MSCOC, the remedy of the stockholders would c. In case the secretary failed or refused to give such notice, or if there
have been to file a petition to the SEC to direct him to call a meeting by giving was no secretary, the call may have been be made directly by any
proper notice required under the Code. To rule otherwise would open the stockholder signing the demand.
floodgates to abuse where any stockholder, who consider himself aggrieved 2. In these cases, the procedure outlined in Section 28 of the Corporation Code
by certain corporate actions, could call a special stockholders' meeting for the was not complied with.
purpose of removing the sitting officers in direct violation of the rules 3. I differ in that the removal of the Bernas Group and election of the Cinco
pertaining to the call of meeting laid down in the by-laws. Group — which are mere incidents resulting from the void Special
118. Every corporation has the inherent power to adopt by-laws for its Stockholders’ Meeting — could not have been ratified, notwithstanding the
internal government, and to regulate the conduct and prescribe the fact that the latter April 19, 1999 Meeting was held under the supervision of
rights and duties of its members towards itself and among themselves in the SEC. The SEC, being a mere regulatory body, cannot lend validity to
reference to the management of its affairs. The by-laws of a corporation otherwise invalid acts. Further, the presumption of regularity cannot apply
for the purpose of validating an internal action of a private corporation.
 power in the corporation.
003 PENA v. CA (Rosales) DOCTRINE: The by-laws of a corporation are its own private laws which
Feruary 7, 1991 | Gancayco, J. | By-laws substantially have the same effect as the laws of the corporation. They are in
effect, written, into the charter. In this sense they become part of the
PETITIONER: Rosita Pena (CLV lawyer niya lol) fundamental law of the corporation with which the corporation and its directors
RESPONDENTS: Court of Appeals, Spouses Rising T. Yap and Catalina Yap, and officers must comply.
Pampanga Bus Co., Inc., Jesus Domingo, Joaquin Briones, Salvador Bernardez,
Marcelino Enriquez, and Edgardo A. Zabat By-law provisions on the required quorum for special meetings of the Board have
the force of law and are binding even on third-parties who deal with the properties
SUMMARY: In 1962, the Pampanga Bus Company (PAMBUSCO) took out a of the corporation. (syllabus)
loan from the Development Bank of the Philippines (DBP). PAMBUSCO used
the parcels of land it owns to secure the loan. In October 1974, due to FACTS:
PAMBUSCO’s nonpayment, DBP foreclosed the parcels of land. Rosita Peña was 1. Pampanga Bus Co (PAMBUSCO), original owners of the lots in question
the highest bidder. Meanwhile, in November 1974, the Board of Directors of under TCT Nos. 4314, 4315 and 4316 (Lots A, B, C), mortgaged the same to
PAMBUSCO had a meeting. The meeting was attended by only 3 out of the 5 the Development Bank of the Philippines in consideration of the amount of
Directors. In the said meeting, the Board, through a resolution, authorized one of P935,000. This mortgage was foreclosed. In the foreclosure sale under Act
the directors, Atty. Joaquin Briones, to assign the properties of PAMBUSCO. No. 3135, the said properties were awarded to Rosita Peña as highest bidder.
Pursuant to the resolution, Briones assigned PAMBUSCO’s assets to Marcelino A certificate of sale was issued in her favor by the Senior Deputy Sheriff of
Enriquez. Enriquez, knowing that the properties were previously mortgaged and Pampanga, Edgardo A. Zabat, upon payment of the sum of P128,000 to the
foreclosed, exercised PAMBUSCO’s right to redeem. So in August 1975, he Office of the Provincial Sheriff. The certificate of sale was registered.
redeemed the said properties and thereafter he sold them to Rising Yap. Yap then 2. The board of directors of PAMBUSCO, through 3 out of its 5 directors,
registered the properties under his name. He then demanded Peña to vacate the resolved to assign its right of redemption over the aforesaid lots and
properties. Peña refused to do hence Yap filed a complaint. In her defense, Peña authorized one of its members, Atty. Joaquin Briones to execute and sign a
averred that Yap acquired no legal title over the property because the board Deed of Assignment for and in behalf of PAMBUSCO in favor of any
resolution issued by PAMBUSCO in November 1974 is void; that it is void interested party.
because the resolution was issued without a quorum; that there was no quorum 3. Briones executed a Deed of Assignment of PAMBUSCO's redemption right
because under the by-laws of PAMBUSCO, a quorum constitutes the presence of over the subject lots in favor of Marcelino Enriquez. Marcelino Enriquez then
4 out of 5 directors yet the meeting was only attended by three directors. As such, redeemed the said properties and a certificate of redemption was issued in his
the authority granted to Briones to assign the properties is void; that the favor by Sheriff Zabat upon payment of the sum of P140,474 to the Office of
subsequent assignment by Briones to Enriquez is void; that Enriquez acquired no the Provincial Sheriff of Pampanga.
title hence, likewise, Yap acquired no title. Yap insists that Peña has no legal 4. A day after the aforesaid certificate was issued, Enriquez executed a deed of
standing to question the board resolution because she is not a stockholder. ISSUE: absolute sale of the subject properties in favor of spouses Rising T. Yap and
Whether or not the board resolution is valid. SC held that no because it is void. Catalina Lugue, for the sum of P140,000.
The by-laws are the laws of the corporation. PAMBUSCO’s by-laws provides that 5. A levy on attachment in favor of Capitol Allied Trading was entered as an
a quorum consists of at least four directors. Hence, the meeting attended by only additional encumbrance on Lots A, B, C and a Notice of a pending consulta
three directors did not comply with the required quorum. As such, the three was also annotated on the same titles concerning the Allied Trading case
directors were not able to come up with a valid resolution which could bind the entitled Dante Gutierrez, et al. vs. PAMBUSCO in which the registrability of
corporation. Also, the sale of the properties of PAMBUSCO did not comply with the aforesaid lots in the name of the spouses Yap was sought to be resolved.
the procedure laid down by the Corporation Law. Under the law, the sale or 6. The certificate of sale issued by the Sheriff in favor of Peña, the resolution of
disposition of an and/or substantially all properties of the corporation requires, in the PAMBUSCO's board of directors assigning its redemption rights to any
addition to a proper board resolution, the affirmative votes of the stockholders interested party, the deed of assignment PAMBUSCO executed in favor of
holding at least two-thirds (2/3) of the voting power in the corporation in a meeting Marcelino B. Enriquez, the certificate of redemption issued by the Sheriff in
duly called for that purpose. No doubt, the questioned resolution was not favor of Enriquez as well as the deed of absolute sale of the subject lots
confirmed at a subsequent stockholders meeting duly called for the purpose by the executed by Enriquez in favor of the Spouses Yap were all annotated on the
affirmative votes of the stockholders holding at least two-thirds (2/3) of the voting same certificates of title, Also, the Office of the Provincial Sheriff of San
 Fernando, Pampanga informed Spouses Yap by registered mail that the executed in their favor by one Marcelino B. Enriquez who likewise
properties under Lots A, B, C were all redeemed by Mr. Marcelino B. could not have become owner of the properties in question by
Enriquez and that she may now get her money at the Sheriff’s Office. redeeming the same under an allegedly void deed of assignment
7. Peña wrote the Sheriff notifying him that the redemption was not valid as it executed in his favor by the original owners of the land in question,
was made under a void deed of assignment. She then requested the recall of the PAMBUSCO.
the said redemption and a restraint on any registration or transaction 16. The defense was that since the deed of assignment executed by PAMBUSCO
regarding the lots in question. in favor of Enriquez was void ab initio for being an ultra vires act of its board
8. The CFI Branch III, Pampanga in the Civil Case No. 4310, entitled Dante of directors and, for being without any valuable consideration, it could not
Gutierrez, et al. vs. PAMBUSCO, et al., ordered the Register of Deeds of have had any legal effect; hence, all the acts which flowed from it and all the
Pampanga to desist from registering or noting in his registry of property. rights and obligations which derived from the aforesaid void deed are
9. The Land Registration Commission opined under LRC Resolution No. 1029 likewise void and without any legal effect.
that "the levy on attachment in favor of Capitol Allied Trading (represented 17. It was also alleged the Spouses Yap are buyers in bad faith because they have
by Dante Gutierrez) should be carried over on the new title that would be caused the titles of the subject properties with the Register of Deeds to be
issued in the name of Rising Yap in the event that he is able to present the issued in their names despite an order from the then CFI, Br. III, Pampanga
owner's duplicates of the certificates of title herein involved. in Civil Case No. 4310, entitled Dante Gutierrez, et al. vs. Pampanga Bus
10. Meanwhile, Pena, through counsel, wrote the Sheriff asking for the execution Company, Inc., et al., to desist from registering or noting in his registry of
of a deed of final sale in her favor on the ground that the one year period of property any of the documents under contest. Washington Distillery stated
redemption has elapsed without any valid redemption having been exercised; that it has never occupied the subject lots hence they should not have been
hence, she will now refuse to receive the redemption money. impleaded in the complaint.
11. Yap wrote Pena asking payment of back rentals in the amount of P42,750 for 18. The RTC ruled in favor of Pena and Washington Distillery. The CA then
the use and occupancy of the land and house located at Sta. Lucia, San reversed its decision.
Fernando, Pampanga and informing her of an increase in monthly rental to
P2,000; otherwise, to vacate the premises or face an eviction. ISSUE/s:
12. In the meantime, the subject lots, formerly under Lots A, B, C, were 1. WoN CA erred in holding that trial court had no jurisdiction to rule on the
registered in the name of spouses Yap under TCT Nos. 148983-R, 148984-R validity of the questioned resolution and transfer – YES, because Pena’s
and 148985-R (Lots D, E, F), with an annotation of a levy on attachment in rights are adversely affected.
favor of Capitol Allied Trading. The LRC Resolution No. 1029 allowing the 2. WoN CA erred in holding that the resolution of PAMBUSCO, adopted on
conditioned registration of the subject lots in the name of the spouses Yap November 19, 1974, assigning its right of redemption is not void – YES,
was also annotated and the notice of a pending consulta noted was cancelled. because it did not comply with the requirements stated by law.
13. Despite the foregoing, Pena remained in possession of the lots in question
hence, the spouses Yap were prompted to file the instant case below. RULING: WHEREFORE, the petition is GRANTED. The questioned decision of the
14. Spouses Rising T. Yap and Catalina Lugue are the registered owners of the respondent Court of Appeals dated June 20, 1989 and its resolution dated December
lots in question Lots D, E, and F. In the complaint filed, Spouses Yap sought 27, 1989 are hereby REVERSED AND SET ASIDE and another judgment is hereby
to recover possession over the subject lands from Rosita Pena and rendered AFFIRMING in toto the decision of the trial court.
Washington Distillery on the ground that being registered owners, they have
to enforce their right to possession against Pena and Washington Distillery RATIO:
who have been allegedly in unlawful possession since October 1974 when 1. Issue 1: It is the fact of relationship between the parties that determines the
the previous owners assigned their right to collect rentals in favor of Spouses proper and exclusive jurisdiction of the SEC to hear and decide intra-
Yap. corporate disputes; that unless the controversy has arisen between and among
15. Rosita Peña and Washington Distillery denied the material allegations of the stockholders of the corporation, or between the stockholders and the officers
complaint and asserted that Peña is now the legitimate owner of the subject of the corporation, then the case is not within the jurisdiction of the SEC.
lands for having purchased the same in a foreclosure proceeding instituted by Where the issue involves a party who is neither a stockholder or officer of the
the DBP against PAMBUSCO and no valid redemption having been effected corporation, the same is not within the jurisdiction of the SEC.
within the period provided by law. 2. This court defined the relationships which are covered within “intra-
a. It was contended that Spouses Yap could not have acquired corporate disputes” under PD 902-A as follows:
ownership over the subject properties under a deed of absolute sale
 a. In order that the SEC can take cognizance of a case, the controversy for the valid transaction of business. Any number less than the number
must pertain to any of the following relationships (a) between the provided in the articles or by-laws therein cannot constitute a quorum and
corporation, partnership or association and the public; (b) between any act therein would not bind the corporation; all that the attending directors
the corporation, partnership or association and its stockholders, could do is to adjourn.
partners, members, or officers; (c) between the corporation, 10. The records also show that PAMBUSCO ceased to operate as of November
partnership or association and the state in so far as its franchise, 15, 1949 as evidenced by a letter of the SEC to said corporation dated April
permit or license to operate is concerned; and (d) among the 17, 1980. Being a dormant corporation for several years, it was highly
stockholders, partners or associates themselves. irregular, if not anomalous, for a group of three individuals representing
3. In this case, neither of the parties are stockholders or officers of themselves to be the directors of PAMBUSCO to pass a resolution disposing
PAMBUSCO. Consequently, the issue of validity of the series of transactions of the only remaining asset of the corporation in favor of a former corporate
resulting in the subject properties being registered in the names of Spouses officer.
Yap may be resolved only by the regular courts. 11. As a matter of fact, the three alleged directors who attended the special
4. This Court has held that a person who is not a party obliged principally or meeting on November 19, 1974 were not listed as directors of PAMBUSCO
subsidiarily in a contract may exercise an action for nullity of the contract if in the latest general information sheet of PAMBUSCO filed with the SEC
he is prejudiced in his rights with respect to one of the contracting parties and dated 18 March 1951. Similarly, the latest list of stockholders of respondent
can show the detriment which would positively result to him from the PAMBUSCO on file with the SEC does not show that the said alleged
contract in which he had no intervention. directors were among the stockholders of PAMBUSCO.
5. There can be no question in this case that the questioned resolution and series 12. Under Section 30 of the then applicable Corporation Law, only persons who
of transactions resulting in the registration of the properties in the name of own at least one share in their own right may qualify to be directors of a
Spouses Yap adversely affected the rights of petitioner to the said properties. corporation. Also, under Section 28 of the said law, the sale or disposition of
6. Issue 2: As to the question of validity of the board resolution of Spouses Yap, an and/or substantially all properties of the corporation requires, in addition
PAMBUSCO adopted on November 19, 1974, Section 4, Article III of the to a proper board resolution, the affirmative votes of the stockholders holding
amended by-laws of PAMBUSCO, provides as follows: at least two-thirds (2/3) of the voting power in the corporation in a meeting
a. Sec. 4. Notices of regular and special meetings of the Board of duly called for that purpose.
Directors shall be mailed to each Director not less than five days 13. The questioned resolution was not confirmed at a subsequent stockholders
before any such meeting, and notices of special meeting shall state meeting duly called for the purpose by the affirmative votes of the
the purpose or purposes thereof Notices of regular meetings shall be stockholders holding at least two-thirds (2/3) of the voting power in the
sent by the Secretary and notices of special meetings by the corporation. The same requirement is found in Section 40 of the present
President or Directors issuing the call. No failure or irregularity of Corporation Code.
notice of meeting shall invalidate any regular meeting or proceeding 14. At the time of the passage of the questioned resolution, PAMBUSCO was
thereat; Provided a quorum of the Board is present, nor of any insolvent and its only remaining asset was its right of redemption over the
special meeting; Provided at least four Directors are present. subject properties. Since the disposition of said redemption right of
7. The by-laws of a corporation are its own private laws which substantially PAMBUSCO by virtue of the questioned resolution was not approved by the
have the same effect as the laws of the corporation. They are in effect, required number of stockholders under the law, the said resolution, as well as
written, into the charter. In this sense they become part of the the subsequent assignment executed on March 8, 1975 assigning to Enriquez
fundamental law of the corporation with which the corporation and its the said right of redemption, should be struck down as null and void.
directors and officers must comply. 15. The CA, in upholding the questioned deed of assignment, which appears to
8. Apparently, only three out of five members of the board of directors of be without any consideration at all, held that the consideration thereof is the
PAMBUSCO convened on November 19, 1974 by virtue of a prior notice of liberality of the PAMBUSCO in favor of its former corporate officer,
a special meeting. There was no quorum to validly transact business since, Enriquez, for services rendered. Assuming this to be so, then as correctly
under Section 4 of the amended by-laws hereinabove reproduced, at least argued by Pena, it is not just an ordinary deed of assignment, but is in fact a
four members must be present to constitute a quorum in a special donation.
meeting of the board of directors of respondent PAMBUSCO. 16. Under Article 725 of the Civil Code, in order to be valid, such a donation
9. Under Section 25 of the Corporation Code of the Philippines, the articles of must be made in a public document and the acceptance must be made in the
incorporation or by-laws of the corporation may fix a greater number than the same or in a separate instrument. In the latter case, the donor shall be notified
majority of the number of board members to constitute the quorum necessary
 of the acceptance in an authentic form and such step must be noted in both
instruments.
17. Non-compliance with this requirement renders the donation null and void.
Since undeniably the deed of assignment dated March 8, 1975 in question,
shows that there was no acceptance of the donation in the same and in a
separate document, the said deed of assignment is thus void ab initio and of
no force and effect.
 004 China Banking Corporation v. CA (Cristelle) relatively permanent and continuing rules of action adopted by the
March 26, 1997 | Kapunan, J. |By-Laws not binding on 3rd parties corporation for its own government and that of the individuals
PETITIONER: CHINA BANKING CORPORATION composing it and having the direction, management and control of its
RESPONDENTS: COURT OF APPEALS, and VALLEY GOLF and affairs, in whole or in part, in the management and control of its affairs
COUNTRY CLUB, INC. and activities. The purpose of a by-law is to regulate the conduct and
SUMMARY: Calapatia, a stockholder of private respondent Valley define the duties of the members towards the corporation and among
Golf & Country Club, Inc. (VGCCI), pledged his Stock Certificate No. themselves. They are self-imposed and, although adopted pursuant to
1219 to petitioner China Banking Corporation (CBC). CBC wrote statutory authority, have no status as public law. Therefore, it is the
VGCCI requesting that the aforementioned pledge agreement be generally accepted rule that third persons are not bound by by-laws,
recorded in its books. VGCCI replied that the deed of pledge executed except when they have knowledge of the provisions either actually or
by Calapatia in petitioner's favor was duly noted in its corporate books. constructively. For the exception to the general accepted rule that third
Afterwards, Calapatia obtained a loan of P20,000.00 from China Bank, persons are not bound by by-laws to be applicable and binding upon the
payment of which was secured by the aforestated pledge agreement. pledgee, knowledge of the provisions of the VGCCI By-laws must be
Due to Calapatia's failure to pay his obligation, petitioner China bank, acquired at the time the pledge agreement was contracted. Knowledge
filed a petition for extrajudicial foreclosure and moved to conduct a of said provisions, either actual or constructive, at the time of
public auction sale of the pledged stock. China bank informed VGCCI foreclosure will not affect pledgee's right over the pledged share.
of the above-mentioned foreclosure proceedings and requested that the Article 2087 of the Civil Code provides that it is also of the essence of
pledged stock be transferred to CBC’s name and the same be recorded these contracts that when the principal obligation becomes due, the
in the corporate books. However, VGCCI wrote petitioner expressing things in which the pledge or mortgage consists maybe alienated for the
its inability to accede to petitioner's request in view of Calapatia's payment to the creditor. Further, VGCCI's contention that CBC is duty-
unsettled accounts with the club. Petitioner emerged as highest bidder bound to know its by-laws because of Article 2099 of the Civil Code
at the public auction and was issued the corresponding certificate of which stipulates that the creditor must take care of the thing pledged
sale. VGCCI demanded from Calapatia full payment of his overdue with the diligence of a good father of a family, fails to convince. CBC
account but the latter failed to pay. VGCCI then sold Calapatia’s share was never informed of Calapatia's unpaid accounts and the restrictive
as payment. Petitioner protested the sale by VGCCI of the subject share provisions in VGCCI's by-laws. Furthermore, Section 63 of the
of stock. Corporation Code which provides that "no shares of stock against
Issue: Whether or not the by-laws are controlling over the pledge? which the corporation holds any unpaid claim shall be transferable in
NO. In order to be bound, the third party must have acquired the books of the corporation" cannot be utilized by VGCCI. The term
knowledge of the pertinent by-laws at the time the transaction or "unpaid claim" refers to "any unpaid claim arising from unpaid
agreement between said third party and the shareholder was entered subscription, and not to any indebtedness which a subscriber or
into. Herein, at the time the pledge agreement was executed. VGCCI stockholder may owe the corporation arising from any other
could have easily informed CBC of its by-laws when it sent notice transaction." Herein, the subscription for the share in question has been
formally recognizing CBC as pledgee of one of its shares registered in fully paid as evidenced by the issuance of Membership Certificate
Calapatia's name. CBC's belated notice of said by-laws at the time of 1219. What Calapatia owed the corporation were merely the monthly
foreclosure will not suffice. By-laws signifies the rules and regulations dues. Hence, Section 63 does not apply.
or private laws enacted by the corporation to regulate, govern and DOCTRINE: The nature of by-laws being intramural instruments
control its own actions, affairs and concerns and its stockholders or would mean that they are not binding on third-parties, except those
members and directors and officers with relation thereto and among who have actual knowledge of their contents [at the time the transaction
themselves in their relation to it. In other words, by-laws are the between the third party & the shareholders was entered into].
FACTS: 13. VGCCI replied that "for reason of delinquency" Calapatia's stock was
1. 21 August 1974 - Calapatia, a stockholder of private respondent sold at the public auction held on 10 December 1986 for P25,000.00.
Valley Golf & Country Club, Inc. (VGCCI), pledged his Stock 14. Petitioner CBC protested the sale by VGCCI of the subject share of
Certificate No. 1219 to petitioner China Banking Corporation stock and thereafter filed a case with the Regional Trial Court of
(CBC). Makati for the nullification of the 10 December 1986 auction and for
2. Petitioner CBC wrote VGCCI requesting that the aforementioned the issuance of a new stock certificate in its name.
pledge agreement be recorded in its books. 15. RTC of Makati dismissed the complaint for lack of jurisdiction over
3. VGCCI replied that the deed of pledge executed by Calapatia in the subject matter on the theory that it involves an intra-corporate
CBC’s favor was duly noted in its corporate books. dispute and denied petitioner's motion for reconsideration.
4. Calapatia obtained a loan of P20,000.00 from CBC, payment of which 16. CBC filed a complaint with SEC for the nullification of the sale of
was secured by the aforestated pledge agreement still existing between Calapatia's stock by VGCCI; the cancellation of any new stock
Calapatia and CBC. certificate issued pursuant thereto; for the issuance of a new certificate
5. Due to Calapatia's failure to pay his obligation, CBC filed a petition in petitioner's name; and for damages, attorney's fees and costs of
for extrajudicial foreclosure before Notary Public Antonio T. de Vera litigation.
of Manila, requesting the latter to conduct a public auction sale of the 17. Case was dismissed by SEC Hearing Officer Manuel P. Perea and
pledged stock. rendered a decision in favor of VGCCI, stating in the main that
6. CBC informed VGCCI of the above-mentioned foreclosure "(c)onsidering that the said share is delinquent, (VGCCI) had valid
proceedings and requested that the pledged stock be transferred to reason not to transfer the share in the name of the petitioner in the
(CBC's) name and the same be recorded in the corporate books. books of (VGCCI) until liquidation of delinquency.
7. However, VGCCI wrote petitioner expressing its inability to accede 18. Hearing Officer Perea denied petitioner's motion for reconsideration.
to CBC's request in view of Calapatia's unsettled accounts with the 19. Petitioner CBC appealed to SEC en banc and the Commission issued
club. an order reversing the decision of its hearing officer.
8. Despite this, Notary Public de Vera held a public auction on 17 20. VGCCI sought reconsideration of the abovecited order. However, the
September 1985 and CBC emerged as the highest bidder at P20,000.00 SEC denied the same in its resolution dated 7 December 1993.
for the pledged stock and was issued the corresponding certificate of 21. VGCCI seek redress from the CA. CA rendered its decision nullifying
sale. and setting aside the orders of the SEC and its hearing officer on
9. 21 November 1985 - VGCCI sent Calapatia a notice demanding full ground of lack of jurisdiction over the subject matter and,
payment of his overdue account in the amount of P18,783.24. It was consequently, dismissed petitioner's original complaint.
followed by a demand letter dated 12 December 1985 for the same 22. CA declared that the controversy between CBC and VGCCI is not
amount and another notice dated 22 November 1986 for P23,483.24. intra-corporate. It ruled as follows: Indeed, the controversy between
10. VGCCI caused to be published in the newspaper Daily Express a petitioner and respondent bank which involves ownership of the stock
notice of auction sale of a number of its stock certificates, to be held that used to belong to Calapatia, Jr. is not within the competence of
on 10 December 1986 at 10:00 a.m. Included therein was Calapatia's respondent Commission to decide. It is not any of those mentioned in
own share of stock. the aforecited case.
11. Through a letter dated 15 December 1986, VGCCI informed Calapatia 23. Petitioner CBC moved for reconsideration but the same was denied by
of the termination of his membership due to the sale of his share of the CA in its resolution dated 5 October 1994. Hence, this petition.
stock in the 10 December 1986 auction. ISSUES:
12. Petitioner advised VGCCI that it is the new owner of Calapatia's Stock 1. W/N regular courts or SEC has jurisdiction over the controversy? Yes,
Certificate No. 1219 by virtue of being the highest bidder in the 17 the need for the SEC's technical expertise cannot be over-emphasized
September 1985 auction and requested that a new certificate of stock involving as it does the meticulous analysis and correct interpretation
be issued in its name. of a corporation's by-laws as well as the applicable provisions of the
 Corporation Code in order to determine the validity of VGCCI's 2. VGCCI did not assail the transfer directly and has in fact, in its letter
claims. The SEC, therefore, took proper cognizance of the instant case. of 27 September 1974, expressly recognized the pledge agreement
2. W/N petitioner is a stockholder of VGCCI? Yes, CBC is a stockholder executed by the original owner, Calapatia, in favor of petitioner and
of VGCCI through the purchase of the subject share or membership has even noted said agreement in its corporate books. In addition,
certificate at public auction by petitioner (and the issuance to it of the Calapatia, the original owner of the subject share, has not contested
corresponding Certificate of Sale) transferred ownership of the same the said transfer.
to the latter and thus entitled petitioner to have the said share registered 3. By virtue of the afore-mentioned sale, petitioner CBC became a
in its name as a member of VGCCI. bona fide stockholder of VGCCI and, therefore, the conflict that
3. W/N the BY-LAWS are controlling over the pledge? No, due to arose between petitioner and VGCCI aptly exemplies an intra-
the belated notice given by Valley golf to China bank. corporate controversy between a corporation and its stockholder
under Sec. 5(b) of P.D. 902-A.
RULING: WHEREFORE, premises considered, the assailed decision Issue 3: BY-LAWS are controlling over the pledge (IMPORTANT)
of the Court of Appeals is REVERSED and the order of the SEC en
banc dated 4 June 1993 is hereby AFFIRMED. 1. VGCCI's contention is unmeritorious: that the pledge was null and void for
lack of consideration because it was entered into on Aug. 21, 1974 but the loan or
promissory note which it secured was obtained by Calapatia much later or only on 3
RATIO: August 1983. The pledge agreement reveals that the contracting parties explicitly
Issue 1: SEC has jurisdiction over the case: stipulated therein that the said pledge will also stand as security for any future
1. SECTION 3. The Commission shall have absolute jurisdiction, advancements (or renewals thereof) that Calapatia (the pledgor) may procure from
supervision and control over all corporations, partnerships or petitioner.
associations, who are the grantees of primary franchises and/or a 2. The validity of the pledge agreement between petitioner and Calapatia cannot thus
license or permit issued by the government to operate in the be held suspect by VGCCI. As candidly explained by petitioner CBC, the
Philippines, and in the exercise of its authority, it shall have the power promissory note of 3 August 1983 in the amount of P20,000.00 was but a renewal
to enlist the aid and support of and to deputize any and all enforcement of the first promissory note covered by the same pledge agreement.
agencies of the government, civil or military as well as any private
3. VGCCI insist that Calapatia's failure to settle his delinquent accounts, gave VGCCI
institution, corporation, firm, association or person. the right to sell the share in question in accordance with the express provision found
2. In the same proceedings before the RTC of Makati, VGCCI in its by-laws. VGCCI insistence comes to naught, VGCCI began sending notices of
categorically stated (in its motion to dismiss) that the case between delinquency to Calapatia after it was informed by petitioner (through its letter dated
itself and petitioner is intra-corporate and insisted that it is the SEC 14 May 1985) of the foreclosure proceedings initiated against Calapatia's pledged
and not the regular courts which has jurisdiction. This is precisely the share, although Calapatia has been delinquent in paying his monthly dues to the club
reason why the said court dismissed petitioner's complaint and led to since 1975.
petitioner's recourse to the SEC. 4. CBC whom VGCCI had officially recognized as the pledgee of Calapatia's
3. Having resolved the issue on jurisdiction, instead of remanding the share, was neither informed nor furnished copies of these letters of overdue
whole case to the Court of Appeals, this Court likewise deems it accounts until VGCCI itself sold the pledged share at another public auction. By
procedurally sound to proceed and rule on its merits in the same doing so, VGCCI completely disregarded petitioner's rights as pledgee. It even
proceedings. failed to give petitioner notice of said auction sale. Such actuations of VGCCI
Issue 2: CBC is a stockholder of VGCCI thus belie its claim of good faith.
1. The purchase of the subject share or membership certificate at public 5. The general rule is that the by-laws are an intramural document which cannot affect
auction by petitioner (and the issuance to it of the corresponding third parties, as the by-laws only affect intra-corporate affairs. The exception, which
Certificate of Sale) transferred ownership of the same to the latter and allows the bylaws to have an effect on third persons, is when said third persons have
thus entitled petitioner to have the said share registered in its name as been given notice. Valley Golf claimed that China Bank actually fell in the exception,
a member of VGCCI. since China Bank had actually quoted a portion of the by-law provision in a letter it
sent to Valley Golf at the time the shares were to be foreclosed. The Court, however,
stated that Valley Golf MISUNDERSTOOD the application of that rule, which had
been derived from previous jurisprudence.
6. In order to be bound, the third party must have acquired knowledge of the pertinent
by-laws at the time the transaction or agreement between said third party and the
shareholder was entered into.
7. In this case, at the time the pledge agreement was executed. VGCCI could have
easily informed petitioner of its by-laws when it sent notice formally recognizing
petitioner as pledgee of one of its shares registered in Calapatia's name. Petitioner
CBC’s belated notice of said by-laws at the time of foreclosure will not suffice.
8. The ruling of the SEC en banc: By-laws are the relatively permanent and
continuing rules of action adopted by the corporation for its own government and
that of the individuals composing it and having the direction, management and
control of its affairs, in whole or in part, in the management and control of its
affairs and activities.
9. The purpose of a by-law is to regulate the conduct and define the duties of the
members towards the corporation and among themselves. They are self-imposed
and, although adopted pursuant to statutory authority, have no status as public
law. Therefore, it is the generally accepted rule that third persons are not bound
by by-laws, except when they have knowledge of the provisions either actually or
constructively.
10. Appellant-petitioner China bank as a third party cannot be bound by
appellee-respondent's (VGCCI) by-laws. It must be recalled that when appellee-
respondent communicated to appellant-petitioner bank that the pledge
agreement was duly noted in the club's books there was no mention of the
shareholder-pledgor's unpaid accounts. The transcript of stenographic notes of the
June 25, 1991 Hearing reveals that the pledgor (Calaptia) became delinquent only
in 1975. Thus, appellant-petitioner was in good faith when the pledge agreement
was contracted.
11. Similarly, VGCCI's contention that petitioner CBC is duty-bound to know its by-
laws because of Art. 2099 of the Civil Code which stipulates that the creditor must
take care of the thing pledged with the diligence of a good father of a family, fails to
convince.
12. Sec. 63 of the Corporation Code which provides that "no shares of stock
against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim"
refers to "any unpaid claim arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may owe the corporation arising from
any other transaction." In the case at bar, the subscription for the share in question has
been fully paid as evidenced by the issuance of Membership Certificate No. 1219.
What Calapatia owed the corporation were merely the monthly dues. Hence, the
aforequoted provision does not apply.
 SECTION VIII
001 De la Rama v. Ma-ao Sugar Central Co. (Punsalan) FACTS:
Feb. 28, 1969 | Capistrano, J. | Invest Corp Funds for Non-Primary Purpose 158. This was a representative or derivative suit commenced in the CFI Manila by
Endeavor 4 minority stockholders against the Ma-ao Sugar Central Co., Inc. (Ma-ao)
and J. Amado Araneta and 3 other directors of the corporation.
159. The complaint stated five causes of action
PETITIONER: RAMON DE LA RAMA, FRANCISCO RODRIGUEZ,
a. For alleged illegal and ultra-vires acts consisting of self-dealing
HORTENCIA SALAS, PAZ SALAS and PATRIA SALAS (heirs of Magdalena
irregular loans, and unauthorized investments
Salas) who represent the stockholders
b. for alleged gross mismanagement
RESPONDENTS: MA-AO SUGAR CENTRAL CO., INC., J. AMADO
c. for alleged forfeiture of corporate rights warranting dissolution
ARANETA, MRS. RAMON S. ARANETA, ROMUALDO M. ARANETA, and
d. for alleged damages and attorney's fees; and
RAMON A. YULO
e. for receivership
160. (Medyo magulo yung facts ng origs but here’s how I understood it)
SUMMARY: A suit was filed by the stockholders of the Ma-ao Sugar Central
a. Apparently stockholders’ meetings in Ma-ao Sugar weren’t
Co., Inc. against the corp. itself for allegedly investing in other companies not
conducted regularly in the corp.
related to the sugar central business. In addition, such investments were made
b. There were irregularities in the keeping of the books. Untrue entries
without the approval of the stockholders who are entitled to vote (initially wala
were made in the book which could not be considered as innocent
rin approval ng board of directors pero late sila nagsubmit ng resolution to approve
errors
it, when payments were already made but still without the approval of its
c. There were illegal investments made in different companies
stockholders). It is argued that such act is contrary to Sec. 17 ½ of the Corporation
(Mabuhay Printing and Acoje Mining) which were not pursuant to
Law in that investing funds of a corporation cannot be done unless with the
the corporate purpose of Ma-ao and without the requisite
approval of the board of directors and its stockholders who are entitled to vote.
authority of its stockholders.
Ma-ao argues Sec. 13 of the Corp. Law to justify that the investments they made,
d. There are also other corp funds distributed to other affiliated
although not directly connected to the main purpose, were still pursuant to the
companies (J. Amado Araneta & Co., Luzon Industrial Corp,
purpose of the corporation – sugar central business.
Associated Sugar, etc.) without the approval of the Ma-ao Board
of Directors, in violation of Sec III, Art. 6-A of the by-laws.
Issue: WoN the board of directors were correct in investing corporate funds in
e. It is argued that investing funds in the Philippine Fiber
various corporations that do not have a direct connection with its main purpose,
Processing Co., Inc. was not a violation of Sec 17 ½ of the
and done so without the authority of the stockholders of the corp – YES
Corporation Law since defendants admit having invested P655k in
shares of stock but that this was ratified by the Board of Directors in
The SC agreed with the trial court that the corporations which Ma-ao Sugar
2 resolutions; more than that, the company (Philippine Fiber) was
invested on were necessary to accomplish its purpose stated in the articles of
engaged in the manufacture of sugar bags so it was perfectly
incorporation (Ex. Philippine Fiber: they manufacture sugar bags which is still
legitimate for Ma-ao Sugar to invest in said corporation. (The trial
within the context of the sugar business). Such investments still fall within the
court agreed with this)
corporation’s primary purpose which means ratification by the stockholders are
161. The CFI rendered its decision (later supplemented by an Order resolving
not necessary in order for a corporation to exercise this action.
defendants’ MR) dismissing the petition for dissolution but condemns J.
Amado Araneta to pay Ma-ao Sugar Central Co., Inc. P46,270.00 with 8%
DOCTRINE: A private corporation has the power to invest its corporate funds in interest from the date of the filing of this complaint, plus the costs
any other corporation or business, or for any purpose other than the main purpose a. (IMPT; i.r. to Fact#3(e)) the lower court is convinced that that law
for which it was organized, provided that 'its board of directors has been so should be understood to mean that it is prohibited to the
authorized in a resolution by the affirmative vote of stockholders holding shares Corporation to invest in shares of another corporation unless such
in the corporation entitling them to exercise at least two-thirds of the voting power an investment is authorized by two-thirds of the voting power of
on such a proposal at a stockholders' meeting called for that purpose,' and provided the stockholders, if the purpose of the corporation in which
further, that no agricultural or mining corporation shall in anywise be interested investment is made is foreign to the purpose of the investing
in any other agricultural or mining corporation. When the investment is necessary corporation because surely there is more logic in the stand that if the
to accomplish its purpose or purposes as stated in it articles of incorporation, the investment is made in a corporation whose business is important to
approval of the stockholders is not necessary.
 the investing corporation and would aid it in its purpose, to require entitling them to exercise at least two-thirds of the voting power
authority of the stockholders would be to unduly curtail the Power on such proposal at the stockholders' meeting called for the purpose.
of the Board of Directors; the only trouble here is that the 123. It was contended by De la Rama, et al. that the investment of corporate funds
investment was made without any previous authority of the by the Ma-ao Sugar Co., Inc., in Philippine Fiber constitutes a violation of
Board of Directors but was only ratified afterwards; this of Sec. 17-½ of the Corporation Law and the Court mentions it deserves
course would have the effect of legalizing the unauthorized act consideration
but it is an indication of the manner in which corporate business is a. Ma-ao Sugar, through its President Araneta, subscribed for P300k
transacted by the Ma-ao Sugar administration, the fact that off and worth of capital stock of the Philippine Fiber, that such payments on
on, there would be passed by the Board of Directors, resolutions the subscription were made on from 1950-1952; that at the time the
ratifying all acts previously done by the management first two payments were made there was no board resolution
b. It also reiterates the preliminary injunction restraining the Ma-ao authorizing the investment; and that it was only on November 26,
Sugar Central Co., Inc. management to give any loans or advances 1951, that the President of Ma-ao Sugar Central Co., Inc., was
to its officers and orders that this injunction be as it is hereby made, so authorized by the Board of Directors.
permanent; b. In addition, 355k shares of stock of the same Philippine Fiber,
c. Contention that Ma-ao Sugar is on the verge of bankruptcy has not which are owned by Luzon Industrial, were transferred in 1952,
been clearly shown to Ma-ao Sugar which "investment" was made without prior
d. (ALSO RELATED TO THE TOPIC) orders it to refrain from board resolution, the authorizing resolution having been
making investments in Acoje Mining, Mabuhay Printing, and any subsequentIy approved only later on during 1952
other company whose purpose is not connected with the Sugar 124. On the other hand, Ma-ao Sugar, Araneta, etc. invoked Sec. 13, par. 10 of the
Central business; costs of plaintiffs to be borne by the Corporation Corp. Law which states that “Every corporation has the power
and J. Amado Araneta. a. To enter into any obligation or contract essential to the proper
162. Both parties appealed directly to the SC. administration of its corporate affairs or necessary for the proper
transaction of the business or accomplishment of the purpose for
ISSUE/s: which the corporation was organized
20. WoN the board of directors of Ma-ao Sugar Central Co, Inc. were correct in b. Except as in this section otherwise provided, and in order to
investing corporate funds in various corporations that do not have a direct accomplish its purpose as stated in the articles of incorporation, to
connection with its main purpose, and done so without the authority of the acquire, hold, mortgage, pledge or dispose of shares, bonds,
stockholders of the corp – YES, because the resolution of conflicting securities and other evidences of indebtedness of any domestic or
provisions (Sec 17 ½ and Sec 13) point out that investing in corporations not foreign corporation.”
directly related to the purpose yet still pursuant to it can be done without need 125. The Court cited the commentary of Prof. Sulpicio Guevara of the UP College
for the ratification by the stockholders. of Law, who is a well known authority in commercial law, and who also
reconciled these conflicting legal provisions (Sec 13 and Sec 17 ½)
RULING: Part of the judgment which orders the Ma-ao Sugar Central Co., Inc. “to a. Power to acquire or dispose of shares or securities. — A private
refrain from making investments in Acoje Mining, Mabuhay Printing, and any other: corporation, in order to accomplish its purpose as stated in its
company whose purpose is not connectd with the sugar central business,” is reversed. articles of incorporation, and subject to the limitations imposed by
Other parts of the judgment are affirmed. the Corporation Law, has the power to acquire, hold, mortgage,
pledge or dispose of shares, bonds, securities, and other evidences
RATIO: of indebtedness of any domestic or foreign corporation. Such an act,
if done in pursuance of the corporate purpose, does not need the
122. Sec. 17-1/2 of the Corporation Law provides that: approval of the stockholders; but when the purchase of shares of
a. No corporation organized under this act shall invest its funds in another corporation is done solely for investment and not to
any other corporation or business or for any purpose other than accomplish the purpose of its incorporation, the vote of approval
the main purpose for which it was organized unless its board of of the stockholders is necessary. In any case, the purchase of such
directors has been so authorized in a resolution by the shares or securities must be subject to the limitations established by
affirmative vote of stockholders holding shares in the corporation the Corporation Law; namely, (a) that no agricultural or mining
corporation shall in anywise be interested in any other agricultural
 or mining corporation; or (b) that a non-agricultural or non-mining
corporation shall be restricted to own not more than 15% of the
voting stock of any agricultural or mining corporation; and (c) that
such holdings shall be solely for investment and not for the purpose
of bringing about a monopoly in any line of commerce or
combination in restraint of trade.
b. Power to invest corporate funds. — A private corporation has the
power to invest its corporate funds in any other corporation or
business, or for any purpose other than the main purpose for which
it was organized, provided that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power on such a proposal at a stockholders'
meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in
any other agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in it
articles of incorporation, the approval of the stockholders is not
necessary.
126. Thus, the SC agrees with the trial court that the investment does not fall under
the purview of Sec. 17 ½ of the Corp. Law.
127. However, the judgment of the lower court ordering Ma-ao Sugar to refrain
from making investments in Acoje Mining, Mabuhay Printing, etc. whose
purpose is not connected with the sugar central business should be reversed
because Sec. 17 ½ allows a corporation to invest its fund in any other
corporation or business, or for any purpose other than the main purpose for
which it was organized, provided that its Board has been so authorized by the
affirmative vote of the stockholders holding shares entitling them to at least
two-thirds of the voting power.
 002 TUASON v. BOLAÑOS (Pleyto) 164. Plaintiff (J.M. Tuason & Co., Inc., represented by its Managing Partner,
May 28, 1954 | Reyes, J. | Specific Topic in Syllabus Gregorio Araneta, Inc.) here amended its complaint three times with respect
to the extent and description of the land sought to be recovered.
PLAINTIFF-APPELLEE: J.M. Tuason & Co., Inc., represented by its Managing a. Original complaint: the land was described as a portion of a lot
Partner, Gregorio Araneta, Inc. registered in plaintiff’s name under a TCT recorded in Rizal
DEFENDANT-APPELLANT: Quirino Bolaños Province. It also contained an area of 13 hectares, more or less.
b. Amended: area is reduced to 6 hectares, more or less (after
SUMMARY: Plaintiff (J.M. Tuason & Co., Inc., represented by its Managing defendant had indicated the plaintiff’s surveyors the portion of land
Partner, Gregorio Araneta, Inc.) filed a complaint in the CFI of Rizal to recover claimed and occupied by him)
possession of a registered land situated in Barrio Tatalon, QC. The complaint was c. Amendment #2: necessary and was allowed following the testimony
amended thrice. In his Answer, Bolaños sets up two things: (a) prescription and of plaintiff’s surveyors that a ortion of the area was embraced in
another certificate of title (different TCT)
(b) OCEPN possession adverse to the whole world since time immemorial. He
d. Amendment #3: during the course of trial, after defendant’s
also alleged that registration of the land was obtained by plaintiff or its surveyor and witness, Quirino Feria, had testified that the area
predecessors in interest thru “fraud or error and without knowledge (of) or occupied and claimed by defendant was about 13 hectares (so
notice either personal or thru publication to defendant and/or predecessors in plaintiff amended its complaint again to make its allegations
interest.” Lower Court ruled in favor of the plaintiff and ordered Bolaños to conform to the evidence)
restore the possession back to the plaintiff. The issue here is whether or not 165. In his Answer, Bolaños sets up (1) prescription and (1) title in himself thru
the case should be dismissed on the ground that the not brought by a real party “open, continuous, exclusive and public and notorious possession (of the land
in dispute) under claim of ownership, adverse to the entire world by
in interest. No. Corporations cannot enter into a partnership agreement but
defendant and his predecessors in interest” from time immemorial
corporations can enter a JV. a. It further alleged that registration of the land was obtained by
plaintiff or its predecessors in interest thru “fraud or error and
DOCTRINE: A corporation may validly enter into a joint venture agreement, without knowledge (of) or notice either personal or thru publication
where the nature of that venture is in line with the business authorized by its to defendant and/or predecessors in interest”
charter. b. Prayer: complaint be dismissed with costs and plaintiff required to
FROM JV LAST SEM (since mahilig siya magbring up ng past lesson): CLV’s reconvey the land to Bolaños or pay its value
interpretation: Tuason does not elaborate on why a corporation may become a co- 166. Lower Court: ruled in favor of the plaintiff. Bolaños was ordered to restore
venturer or partner in a joint venture arrangement but it would seem that the policy possession to plaintiff and to pay the latter a monthly rent of P132.62 from
behind the prohibition on why a corporation cannot be made a partner does not Jan. 1940 until he vacates the land
apply in a joint venture arrangement. Being only a particular project or 167. Bolaños directly went to the SC because of the value of the property involved.
undertaking, when the Board of Directors of a corporation evaluate the risks and
responsibilities involved, they can more or less exercise their own business ISSUE/s: (okay, si Kuya Bolaños madaming dinala sa SC pero yung first lang
judgment is determining the extent by which the corporation would be involved relevant)
in the project and the likely liabilities to be incurred. The situation therefore in a 21. WoN the trial court erred in not dismissing the case on the ground that
joint venture arrangement, unlike in an ordinarily partnership arrangement which the case was not brought by the real party in interest (RELEVANT:
may expose the corporation to any and various liabilities and risks which cannot Actually more of: WoN Gregorio Araneta, Inc. could not enter into a
be evaluated and anticipated by the board, allows the board to fully bind the partnership with JM Tuason and Co, Inc., it being another corporation)
corporation to matters essentially within the boards business appreciation and – No. Corporations cannot enter into a partnership agreement but
anticipation. (And last sem, this case was also in his book, Tuason is an old case corporations can enter a JV (not the rule na)
which says that corporations cannot enter into partnership agreements but it can 22. WoN the trial court erred in admitting the third amended complaint
enter JVs. So, JV was not yet seen as a kind of partnership pa this time, I think) 23. WoN the tiral court erred in denying defendant’s motion to strike
-Correct me if I’m wrong 24. WoN the trial court erred in including in its decision land not involved in the
litigation – (For 2, 3 and 4: without merit because amendment is not even
FACTS: necessary)
163. This is an action originally brought in the CFI of Rizal to recover possession 25. WoN the trial court erred in holding that the land in dispute is covered by the
of registered land situated in barrio Tatalon, QC
 TCTs the complaint is necessary, especially where defendant has himself
26. WoN the trial court erred in not finding that Bolaños is the true and lawful raised the point on which recovery is based, and that the appellate
owner of the land (For 5 and 6: Plaintiff has a torrens title, which is court treat the pleadings as amended to conform to the evidence,
indefeasible) although the pleadings were not actually amended
27. WoN the trial court erred in finding that Bolaños is liable to pay rent 9. For errors 5 and 6:
28. WoN the trial court erred in not ordering the Plantiff to reconvey the land in a. Bolaños admitted, through his attorney, at the early stage of the trial,
litigation to the defendant that the land in dispute "is that described or represented in Exhibit
A and in Exhibit B enclosed in red pencil with the name Quirino
RULING: Judgment appealed from is affirmed. Bolaños"
b. He later changed his lawyer and his theory and tried to prove that
RATIO: the land in dispute was not covered by plaintiff's certificate of title.
WoN the trial court erred in not dismissing the case on the ground that the case was c. The evidence, however, clearly establishes that plaintiff is the
not brought by the real party in interest registered owner of lot No. 4-B-3-C, situated in barrio Tatalon,
1. There is nothing to the contention that the present action is not brought by the Quezon City, covered by a TCT of the land records of Rizal
real party in interest, that is, by J.M. Tuason & Co., Inc. province, and of lot No. 4-B-4, situated in the same barrio, covered
2. Section 2, Rule 2 of the Rules of Court require is that an action be brought in by another TCT, both lots having been originally registered on July
the name of, but not necessarily by, the real party in interest. 8, 1914 under original certificate of title No. 735.
3. In fact, the practice is for an attorney-at-law to bring the action, that is to file d. The identity of the lots was established by the testimony of Antonio
the complaint, in the name of the plaintiff, which is the case here. Manahan and Magno Faustino, witnesses for plaintiff, and the
4. The complaint was signed by the law firm of Araneta & Araneta, “counsel identity of the portion thereof claimed by Bolaños was established
for plaintiff” and commences with the statement “comes now plaintiff, by the testimony of his own witness, Quirico Feria.
through its undersigned counsel” e. The combined testimony of these three witnesses clearly shows that
5. The complaint also states that the plaintiff is “represented herein by its the portion claimed by defendant is made up of a part of lot 4 B- 3-
Managing Partner Gregorio Araneta, Inc.”, another corporation C and major on portion of lot 4-B-4, and is well within the area
a. But there is nothing against one corporation being represented by covered by the two TCTs
another person, natural or juridical, in a suit in court f. As the land in dispute is covered by plaintiff's TCT and was
6. Bolaños contented that Gregorio Araneta, Inc. cannot act as managing registered in 1914, the decree of registration can no longer be
partner for plaintiff on the theory that it is illegal for two corporations impugned on the ground of fraud, error or lack of notice to
to enter into a partnership is without merit, defendant, as more than one year has already elapsed from the
a. for the true rule is that “though a corporation has no power to issuance and entry of the decree.
enter into a partnership, it may nevertheless enter into a JV with g. Neither could it be collaterally attacked by any person claiming title
another where the nature of that venture is in line with the to, or interest in, the land prior to the registration proceedings.
business authorized by its charter” h. Nor could title to that land in derogation of that of the registered
7. It was not contented that Gregorio Araneta Inc., as a managing partner is not owner, be acquired by prescription or adverse possession.
in line with the corporate business of either of them i. Adverse, notorious and continuous possession under claim of
8. Section 4 of Rule 17, Rules of Court, answers Errors 2, 3 and 4:
9 ownership for the period fixed by law is ineffective against a Torrens
a. Under this provision, amendment is not even necessary for the title.
purpose of rendering judgment on issues proved though not alleged j. And it is likewise settled that the right to secure possession under a
b. Comment of C.J. Moran in his Rules of Court: American courts decree of registration does not prescribe.
have, under the New Federal Rules of Civil Procedure, ruled that 10. Error 7:
where facts entitle plaintiff other than asked for, no amendment to a. The reasonable compensation for the use and occupation of the

9 trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings
SEC. 4. Amendment to conform to evidence. — When issues not raised by the pleadings are tried by
to be amended and shall be so freely when the presentation of the merits of the action will be subserved
express or implied consent of the parties, they shall be treated in all respects, as if they had been raised in
thereby and the objecting party fails to satisfy the court that the admission of such evidence would
the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the
prejudice him in maintaining his action or defense upon the merits. The court may grant a continuance to
evidence and to raise these issues may be made upon motion of any party at my time, even after judgment;
enable the objecting party to meet such evidence."
but failure so to amend does not affect the result of the trial of these issues. If evidence is objected to at the
 premises, as stipulated at the hearing was P10/month for each
hectare and that the are was 13.2619 hectares
b. Thus, total rent should be P132.62/month
c. Also, based on the testimony of J.A. Araneta and witness Emigdio
Tanjuatco that as early as 1939 an action of ejectment
d. It cannot be supposed that he has been paying rents because he
claimed ownership since time immemorial
11. Error 8: only a consequence of the other errors alleged and needs for further
consideration
12. Bolaños filed a motion to dismiss alleging that there is a pending case before
the CFI of Rice between the same parties and for the same cause of action
a. But the other case is one for recovery of ownership, while the
present one is for recovery of possession
13. This is also not a class suit: action seeks relief for individual plaintiff and not
relief for and on behalf of others
 003 Pirovano v. De la Rama Steamship (PERRAL)
Dec, 29, 1954 | Bautista Angelo, J. | Ratification of Ultra vires acts FACTS: (sorry guys, super long ng facts ng case)
1. Defendant De la Rama Steamship is a corporation duly organized in
PETITIONER: Maria Carla Pirovano, et al. accordance with the law with an authorized capital of P500K, divided into
RESPONDENTS: The De la Rama Steamship Co, et al. 5K shares, with par value of P100 each. The stockholders were: Esteban de
la Rama (1,800K shares), Leonor de la Rama (100 shares), Estifania De la
SUMMARY: Rama (100 shares, and Eliseo Hervas, Concepcion, Juanco, and Volaste ( 5
Under the presidency of Enrico Pirovano, the defendant corporation flourished and shares each).
became a multi-million corporation until the execution of Enrico by the Japanese. 2. Leonor and Estefania are daughters of Don Esteban De la Rama, while the
The plaintiffs here are the minor children of the late Enrico, represented by their rest is his employees. Estefania was married to the late Enrico Pirovano
mother Estefania. The case is hinged on certain resolutions by the Board of (Enrico) and to them 4 children were born who are the plaintiffs in this case.
Directors and stockholders of defendant company giving to said minor children the 3. Enrico became the president of the defendant company and under his
proceeds of the life insurance policies taken on the life of the late Enrico. The fist management the company grew and progressed until it became a multi-
resolution granted the plaintiffs the proceeds from insurance policies taken on million corporation by the time Enrico was executed by the Japanes during
Enrico’s life, it was agreed by a majority of the stockholders that the children were the occupation.
to be given 1000 shares each. However when the company discovered that it 4. The capital stock of the corporation consistently grew through the years.
donated more than it actually intended it adopted another resolution was adopted Under Enrico’s management, the assets of the company grew and increased
renouncing in favor of the heirs of its rights as beneficiary with the condition that from an original paid up capital of around P240K to P15,538,024 by Sept
the proceeds are to be retained by the company until it settles its debts with 30,1941.
National Development Corporation. A house in New York was even purchased by 5. Meantime, Don Esteban de la Rama, who practically owned and controlled
Estefania, paid out of the proceeds of the donation. Later on, however the SEC the stock of the defendant corporation, distributed his shareholding among
gave an opinion stating that the donation by the defendant was an ultra vires act as his 5 daughters (Leonor, Estefania, Lourdes, Lolita, Conchita) and his wife
it did not have the capacity to dispose of its assets by way of gift, hence they went (Natividad). With this the stockholding of the corporation stood as follows:
beyond the scope of their corporate powers. In line with such opinion, the Esteban-889 shares; Leonor and Conchita- 3,376 shares each; Estefania,
defendant company sought to revoke the donation. Issue in this case is: W/N Lourdes, Lolita- 3,368 shares; Natividad- 2,136 shares. Other stockholders
defendant corporation give by way of donation the proceeds of said insurance who were merely employees of Esteban got 40 shares each. While cartain
policies to the minor children of the late Enrico Pirovano under the law or its persons named Pedrosa and Lichauco only 1 share each because they merely
articles of corporation, or is that donation an ultra vires act? SC held Yes, represented the National Development Cmpany (NDC) which was give
defendant may make such donation. An examination of their articles of representation in the Board of the corporation because at that time the latter
incorporation would reveal that the company is empowered to deal with money not had an outstanding bonded indebtedness (amounted to P7,500) to the NDC.
immediately required and aid any person in which the company may have a lawful 6. This bond held by NDC was redeemable within a period of 20 years from
interest. These two powers are broad enough to include the act of donation to the March 1, 1940, bearing interes at the rate of 5% per annum. To secure this
heirs of a former president. On the issue of the donation being ultra vires, it was bonded indebtedness, all the assets of the De la Rama Steamship and
held by the court that it cannot be invalidated on that ground alone as the board of properties of Don Esteban, as well as those of the Hijos de I. de la Rama &
directors and even the stockholders, even the National Development Corporation Co., a sister corporation owned by Don Esteban and his family, mortgaged to
have expressed their approval of the donation, as evidenced by the ratified the NDC. During the management of Pirovan this indebtedness was reduced
resolutions. Furthermore inasmuch as the stockholders in reality constitute the to P3,260,855.
corporation, it should , it would seem, be estopped to allege ultra vires, and it is 7. Upon arrangement made with the NDC, the outstanding bonded indebtedness
generally so held where there are no creditors, or the creditors are not injured was converted in to non-voting preferred shares of stock of the De la Rama
thereby, and where the rights of the state or the public are not involved, unless the company under the express condition that they would bear a fixed cumulative
act is not only ultra vires but in addition illegal and void. of course, such consent dividend of 6% per annum and would be reddemable within 15 years. This
of all the stockholders cannot adversely affect creditors of the corporation nor conversion was carried out when the NDC executed a Deed of Termination
preclude a proper attack by the state because of such ultra vires act. of Trust and Release of Mortgage in favor of De la Rama company.
8. The result of this conversion was the released from the incumbrance of all
DOCTRINE: Acts done by the Board of Directors which are ultra vires cannot be the properties of Don Esteban and of Hijos company which was apparently
set-aside if the acts have been ratified by the stockholders. favorable to the interest of De la Rama Compant, but, on the other hand, it
 resulted in the inconvenience that, as holder of the preferred stock, the NDC life insurance policies taken on the life of Pivorano totalling $321,500, which
Company, was given the right of 40% of the me,mbership of the BoD of the loan would earn interest at the rate of 5 per cen per annum. Mrs. Pirovano, in
De la Rama company, which meant an increase in the representation of the executing the agreement, acted with the express authority granted to her by
NDC from 2 to 4 of the 9 members of the said Board. the court in an order dated March 26, 1947.
9. The First resolution of granting to the Pivorano children the proceeds of 15. The BoD approved a resolution providing therein that instead of the interest
theinsurance policies taken on his life by the defendant company was adopted on the loan being payable, together with the principal, only after the company
by the BoD at the meeting on July 10, 1946. This grant was called in the shall have the first settled in full its bonded indebtedness, said interest may
resolution as "Special Payment to Minor Heirs of the late Enrico Pirovano". be paid to the Pivorano children whenever the company is in a position to
(see end of digest for the full document). This resolution, which was adopted meet the obligation and on Feb 26,1948, Mrs Estefania executed a public
on July 10, 1946, was submitted to the stockholders of the De la Rama document in which she formally accepted the donation. The De la Rama
company at a meeting properly convened , and on that same day was duly company took "official notice" of this formal acceptance at a meeting held by
approved. its Board of Directors
10. It appeats that, although Don Esteban and the members of his family were 16. In connection with the negotitations, the BoD, took up at its meeting, the
agreeable to giving to the Pirovano children the amount of P400K out of the proposition of Mrs. Estefania to buy the house at New York owned by
proceeds of the insurance policies taken on the life of Enrico, the did not Demwood Realty, a subsidiary of the De la Rama company at its origina cost
realize that when they provided in the above referred 2 resolutions that said of $75K which would be paid from the finds held in trust belonging to her
amount should be paid in the form of shares of stock, they would actually be minor children. The proposition was approved in resolution adopted on the
giving more than what they intended to give. same day.
11. It was explained by Lourdes’ husband ( Sergio Osmeña jr.) that because the 17. The formal transfer was made in an agreement signed by Mrs. Estefania as
value of the shares of stock was actually 3.6 times theor par value, the guargian of her children, and by De la Rama Company, represented by its
donation, although purporting to be only 400K would actually amount to new Gen mangage Osmeña. The transfer of this porpert was approved by the
P1,440K. And that if the Pivorano children would be given shares of stock in court.
lieu of the amount to be donated, the voting strength of the 5 daughters of 18. 2 years and 3 months after the donation had been approved in the various
Don Estaban in the company would be adversely affected in the sense that resolutions, the stockholders of the De la Rama company formally ratified
Mrs. Pivorano ( Estafania) woulf have a voting power twice as much as that the dination with certain clarigying modificatios, including the resolution
of her sisters. approving the transfer of the Demwood property to the Pivorano children.
12. This caused Lourdes to write to the secretary of the corporation, Atty. 19. Sometime in March 1950, the new President of the corporation, Osmeña
Lichauco, asking him to cancel the waiver she supposedly gave of her addressed an inquiry to the Securities and Exchange Commission asking for
pre0emptive rights. Osmeña, for the meantime, took the matter with Don opinion regarding the validity of the donation of the proceedins of the
Esteban and, as consequences, the latter, addressed to Lichauco a letter staing insurance policies to the Pivorano children
that, “in view of the total lack of understanding by me and my daughters of 1. SEC rendered its opinion stating that the donation was void because the
the 2 resolutions abovementioned, namey, Directors’ and Stockholders’ corporation could not dispose of its assets by gift and therefore the
dated July 10,1946, as finally resolved by the majority of the Stockholders corporation acted beyond the scope of its corporate powers.
and Directors present yesterday, that you consider the resolutions nullified.” 2. This opinion was presented to the BoD, in which occasion the president
13. Pursuant of the change of attitude of Don Esteban, BoD adopted a resolution recommended that other legal ways be studied whereby the donation could
changing the form of donation to the Pivorano children of all the company's be carried out.
"right, title, and interest as beneficiary in and to the proceeds of the 20. Another meeting was held to discuss this matter. At this meeting the president
abovementioned life insurance policies", subject to the express condition that expressed the view that, since the corporation was not authorized by its
said proceeds should be retained by the company as a loan drawing interest charter to make the donation to the Pirovano children and the majority of the
at the rate of 5 per cent per annum and payable to the Pirovano children after stockholders was in favor of making provision for said children, the manner
the company "shall have first settled in full the balance of its present he believed this could be done would be to declare a cash dividend in favor
remaining bonded indebtedness in the sum of approximately P5,000,000" of the stockholders in the exact amount of the insurance proceeds and
This resolution was concurred in by the representatives of the NDC. thereafter have the stockholders make the donation to the children in their
14. This latter resolution was carried out by the company and Mrs. Estfania, the individual capacity. Notwithstanding this proposal of the president, the board
latter acting as guardian of her children, by executing a MOA stating that the took no action on the matter, and on March 8, 1951, at a stockholders' meeting
De la RamaSteamship shall enter in its books as a loan the proceeds of the
 convened on that date, the majority of the stockholders voted to revoke the incorporation, or is that donation an ultra vires act – Yes. Defendant may
resolution approving the donation to the Pirovano children. make such donation. An examination of their articles of incorporation
21. In view of the resolution decalring that the corporation failed to comply with would reveal that the company is empowered to deal with money not
the condition set for the effectivity of the donation and revoking at the same immediately required and aid any person in which the company may
time the approval given to it by the corporation, and considering that the have a lawful interest. These two powers are broad enough to include the
corporation can no longer set aside said donation because it had long been act of donation to the heirs of a former president.
perfected and consummated, the minor children of the late Enrico Pirovano,
represented by their mother and guardian, Estefania R. de Pirovano, 18. WoN De la Rama Steamship has, by the acts it performed subsequent to the
demanded the payment of the credit due them as of December 31, 1951, granting of the donation, deliberately prevented the fulfillment of the
amounting to P564,980.89, and this payment having been refused, they condition precedent to the payment of said donation such that it can be said
instituted the present action in the Court of First Instance of Rizal wherein it has forfeited its right to demand its fulfillment and has made the donation
they prayed that they be granted an alternative relief of the following tenor: entirely due and demandable - NO. It cannot be said that the fulfillment of
a. (1) sentencing defendant to pay to the plaintiff the sum of the condition for the payment of the donation is one that wholly depends on
P564,980.89 as of December 31, 1951, with the corresponding the exclusive will of the donor, simply because it failed to meet the
interest thereon; redemption of said shares in the manner desired by the donees.
b. (2) as an alternative relief, sentencing defendant to pay to the
plaintiffs the interests on said sum of P564,980.89 at the rate of 5
per cent per annum, and the sum of P564,980.89 after the RULING: SC affirmed the lower courts decision. Pwede rin wherefore.
redemption of the preferred shares of the corporation held by the
National Development Company; and RATIO:
c. (3) in any event, sentencing defendant to pay the plaintiffs damages 98. 1st issue.
in the amount of not less than 20 per cent of the sum that may be 1. SC in deciding this matter looked into the very reason on giving
adjudged to the plaintiffs, and the costs of action. donation to the Pirovano children by going through the pertinent
provisions of the resolution originally adopted on July 10, 1946.
ISSUE/s: 2. From this resolution, it clearly appears that the corporation thought of
15. WoN the grant of the proceeds of the insurance policies taken on the life of giving thedonation to the children of the late Enrico Pirovano because
the late Enrico Pirovano as embodied in the resolution of BoD adopted on he was to a large extent responsible for the rapid and very successful
Jan 6, 1947 and June 24l1947 a remunerative donation as found by the lower development and expansion of theactivitites of this company; and alos
court - YES. It is found that the donation is made taking into consideration because he left practically nothing to his heirs and it is but fit and proper
the service rendered by Enrico and being the spirit which moved the company that this company which owes so much to the deceased should make
to heights in making it a multi-milliton corp. some provision to his children", and so the donation was given "out of
16. WoN the donation been perfected before its rescission or nullification by the gratitude to the late Enrico Pirovano." We do not need to stretch our
stockholders of the corporation on March 8, 1951.-Yes. Donation has been imagination to see that a grant or donation given under these
perfected. Considering that the same has not only been granted in several circumstances is remunerative10 in nature in contemplation of law.
resolutions duly adopted by the BoD but it has been formally ratified by the 3. Citing Cinco Capistrano case: “ In donation made to a person for
stockholders of the defendant De la Rama Steamship and in all these services rendered to the donor, the donor’s will is moved by acts which
corporate acts the concurrence of the representatives of the National directly benefit him. The motivating cause is gratitude,
Development Company, the only creditor whose interest may be affected by acknowledgement of a favor, a desire to compensate. A donation made
the donation, has been expressly given. to one who saved the donor's life, or a lawyer who renounced his fees
17. (RELATED TO OUR TOPIC) WoN De la Rama Steamship can give by for services rendered to the donor, would fall under this class of
way of donation the proceeds of said insurance policies to the minor donations. These donations are called remunerative donations."
children of the late Enrico Pivorano under the law or its articles of 99. 2nd issue.

10
Civil Code Art 619 (old CC): That made to a person in consideration burden less than the value of the thing given is imposed upon the
onsideration of his merits or for services rendered to the donor, donee, is also a donation
provided they do not constitute recoverable debts, or that in which a
 1. SC held that Donation has been perfected. Considering that the same 2. To aid in any other manner any person, association, or
has not only been granted in several resolutions duly adopted by the corporation of which any obligation of in which iany interest
BoD but it has been formally ratified by the stockholders of the is held by this corporation or in the affairs or prosperity of
defendant De la Rama Steamship and in all these corporate acts the which this corporation has a lawful interest
concurrence of the representatives of the National Development 3. The word “deal” is broad enough to include any manner of disposition,
Company, the only creditor whose interest may be affected by the and refers to moneys not immediately required by the corporation, and
donation, has been expressly given. such disposition may be made in such manner as from time to time may
2. The defendant corporation De la Rama Steamship has even gone be determined by the corporations.
further. It actually transferred the ownership of the credit subject of 1. The donation in question undoubtedly comes within the scope of
donation to the Pivorano children with the express understanding that this broad power for it is a fact appearing in the evidence that the
the money would be retained by the corporation subject to the condition insurance proceeds were not immediately required when they
that the latter would pay interest thereon at the rate of 5% per annum were given away.
payable whenever said corporation may be in a financial position to do 2. In fact, the evidence shows that the corporation decalred a 100%
so. cash dividend, or P2M and later on another 30% case dividend. This
3. Based on the circumstances and acts of the said corporation as stated is clear proof of the solvency of the corporation.
in the facts, there can be no doubt that the donation was a corporate act 3. It may be that, as insinuated, Don Esteban wanted to make use of
carried out by the corporation not only with sanction of its BoD but the insurance money to rehabilitate the central owned by a sister
also of its stockholders. corporation, known as Hijos, but this, far from reflecting against the
4. It is evident that the donation has reached the stage of perfection which solvency of the Dela Rama company, only shows that the funds were
is valid and binding upon the corporation and as such cannot be not needed by the corporation.
rescinded unless there exist legal grounds for doing so. In this case, 4. Under the 2nd broad power stated above, that is, to aid in any other
there Is none. manner any person in the affairs and prosperity of whom the
5. The 2 reasons given for the rescission of said donation in the resolution corporation has a lawful interest, the record of this case is replete with
of the corporation adopted on March 8, 1951, to wit: Corporation failed instances which clearly show that the corporation knew well its scope
to comply with the conditions to which the above donation was made and meaning so much so that, with the exception of the instant case, no
subject, and that in the opinion of the SEC said donation is ultra vires, one has lifted a finger to dispute their validity.
are not, our opinion, valid and legal as to justify the rescission of a 4. Some instances: Thus, under this broad grant of power, this
perfect donation. corporation paid to the heirs of one Nonato, an engineer on 1 of its
1. These reasons cannot be invoked by the corporation to ships, to Ramons Pons, a captiain of 1 of its ships, and even
rescind or set at naught the dination has not been validly contributed to the fund raised by Associated Steamship for the
executed, or is illegal or ultra vires, and such is not the case. widow of a certain Gispert, secretary of said Association, of which
2. Court, therefore, declare that the resolution apprived by the the Dela Rama Steamship was a member along with 30 other
stockholders of the defendant corporation on March 8, 1951 steamship companies. In this instance, Gispert was not even an
did not and cannot have the effect of nullifying the donation employee of the corporation.
in question. 5. All these acts executed before and after the donation in question
100. 3rd Issue. (Most Related Topic) have never been questioned and were willingly and actually carried
1. The court looked into the articles of incorporation of Dela Rama out.
Steamship to decide whether the act or donation is outside of their 5. Court do not see much distinction between these acts of generosity
scope. or of benevolence extended to some employees of the corporation,
2. The court found that the corporation was given nroad and almost and even to some in whom the corporation was merely interested
unlimited powers to carry out the purposes for which it was organized because of certain moral or political considerations, and the
among them: donation which the corporation has seen fit to give to the children
1. To invest and deal with the moneys of the company not of the late Enrico Pirovano form the point of view of the power of
immediately required, in such manner as from time to time the corporation as expressed in its articles of incorporation.
may be determined
 6. If the former had been sanctioned and had been considered valid and 1. It cannot be said that the fulfillment of the condition for the payment
intra vires, we see no plausible reason why the latter should now be of the donation is one that wholly depends on the exclusive will of the
deemed ultra vires. donor, simply because it failed to meet the redemption of said shares
6. Moreover, the gratuity here given was not merely motivated by pure in the manner desired by the donees.
liberality or act of generosity, but by a deeps sense of recognition of 2. While it may be admitted that because of the disposition of the assets
the valuable services rendered by the late Pirovano which had of the corporation upon the suggestion of its general manager more
immensely contributed to the growth of the corporation- turned It into than enough funds had been raised to effect the immediate redemption
a multi-million corp. of the above shares it is not correct ot say that the management has
1. Was not only given because the company was so indebted to completely failed in its duty to pay its obligation for, according to the
him but it did so out of a sense of gratitude. evidence, a substantial portion of the indetedness has been paid, only a
2. Also, one factor to consider is the fact that late Enrico balance of about P1,805,169 was outstanding when the stockholders of
Pirovano was not only a high official of the company but was the corporation decided to revoke or cancel the donation.
at the same time member of the Dela Rama family, and the 3. There are also other good reasons why all the available funds have not
recipient of the donation are the grandchildren of Don been actually applied to the redemption of the preferred shares: (1)
Esteban. desire of the president of the corporation to preserve and continue the
7. Moreover, as stated earlier, this donation was somehow considered as government participation in the company; (2) the redemption of shares
remunerative donation contemplated in the Civil Code. In essence they does not depend on the will of the corporation alone but to a great
are the same. Such being the case, itm ay be said that this donation is extent on the will of a 3rd party, the NDC. ( Thus company had pledged
gratuity in a large sense for it was given for valuable services rendered, these shares to the PNB and the Rehabilitation Finance Corporation as
and in this sense the same cannot be considered an ultra vires a security to obtain certain loans to finance the purchase of certain ships
(jurisprudence provides that: Business corporation are not forbidden to contract entered into between the corporation and the NDC, and this
from recognizing moral obligations of which strict law takes no was what prevented the corporation form carrying out its offer to pay
cognizance…) the sum P1,956,513.
8. And even granting arguendo, that donation given to the Pivorano 4. With this, Sc is of the opinion that the finding of the lower court that
children is outside the scope of the powers of the defendant the failure of the defendant corporation to comply with the condition
corporation, or the scope of the powers that it may be said that the same of the donation is merely due to its desistance from obeying the
cannot be invalidated, or declared legally ineffective for that mandate of the majority of the stockholders and not to lack of funds, or
reason alone, it appearing that the donation represents not only the to lack of authority, has no foundation in law or in fact. This ruling
act of the Board of Directors but of the stockholders themselves as must be reversed.
shown by the fact that the same has been expressly ratified in a
resolution duly approved by the latter.
1. Mere ultra vires acts, on the other hand, or those which are
not illegal and void ab initio, but are not merely within the
scope of the areticles of incorporation, are merely voidable
and me become binding and enforceable when ratified by
the stockholders.
9. With these, the defendant corporation is estopped form contesting the
validity of the donation. This is specially so in this case when the very
directors who conceived the idea of granting said donation are
practically the stockholders themselves.
1. To allow the corporation to undo what it has done would
not only be most unfair but would contravene the well
settled doctrine that the defense of ultra vires cannot be set
up or availed of in completed transactions.
101. 4th issue.
 004 UNIVERSITY OF MINDANAO v. BSP (Peliño) and to the exercise of powers conferred by the corporation code and under a
January 11, 2016 | Leonen, J. | Ultra Vires of the 2nd Type: Doctrine of Centralized corporation’s articles of incorporation. University of Mindanao doesn’t have the
Management power to mortgage its properties in order to secure loans of other persons. As an
educational institution, it is limited to developing human capital through formal
PETITIONER: University of Mindanao instruction. It isn’t a corporation engaged in the business of securing loans of
RESPONDENT: Bangko Sentral ng Pilipinas, et. al. others. Securing loans is not an adjunct of the educational institution’s conduct
business.
SUMMARY: University of Mindanao is an educational institution wherein the
president is Guillermo Torres. Guillermo requested from BSP several loans and
emergency credits to finance the thrift banks that they likewise have. The VP of FACTS:
the university, Petalcorin, executed a deed of real estate mortgage over several 168. University of Mindanao is an educational institution and the board of trustees
properties of the university (1 in Cagayan, 2 in Iligan). The banks weren’t able to was chaired by Guillermo Torres and his wife Dolores was the Assistant
recover from the losses, so when BSP wanted to recover the money, they weren’t Treasurer.
able to pay, so they sent a letter to the university, saying that they would foreclose 169. Prior to 1982, Guillermo and Dolores incorporated and operated 2 thrift banks
the properties subject of the real estate mortgage. But the university was claiming FISLAI and DSLAI; Guillermo was the president in FISLAI while his wife
that they never mortgaged anything, that they never loaned from BSP, and as an was the treasurer, while in DSLAI, his wife was the president.
educational institution, it is not allowed to mortgage its properties to secure 170. Guillermo requested from the BSP a 1.9 million standby emergency credit to
another person’s debt. RTC ruled in favor of the university, finding that the VP FISLAI, evidenced by 3 PN: 500k, 600k, 800k; all the notes were signed by
which executed the real estate mortgage was not authorized to do so and that there either him or his wife.
was no board reso authorizing Petalcorin. On appeal, CA reversed the decision of 171. The VP of University of Mindanao, Saturnino Petalcorin, executed deed of
the RTCs. Hence, this petition. The issue in this case is whether or not the real estate mortgage; this was used as a security for the loan.
university is bound by the real estate mortgage contracts executed by Petalcorin. 172. Mortgage was annotated in the TCT.
The SC held in the negative. This is because the execution of mortgage contract 173. BSP granted FISLAI an additional loan of 620k and Guillermo and Ramos
was ultra vires because since university is an educational institution, it may not executed a PN.
secure the loans of third persons. Corporations are artificial entities granted legal 174. Petalcorin executed another deed of real estate mortgage, allegedly on behalf
personalities upon their creation by their incorporators in accordance with law. of University of Mindanao and this served as additional security.
They have no inherent powers; 3rd persons dealing with corporations cannot a. REM on a property in Cagayan and 2 lands in Iligan.
assume that corporations have powers. Ultra vires acts are corporate acts that are 175. BSP also granted emergency advances to DSLAI.
outside those express definitions under the law or articles of incorporation or those 176. FISLAI, DSLAI, and Land Bank entered into a MOA intended to rehabilitate
committed outside the object for which a corporation is created. The only the thrift banks, which had been suffering from their depositors’ heavy
exception to this rule is when the acts are necessary and incidental to carry out a withdrawals.
corporation’s pruposes, and to the exercise of powers conferred by the corporation a. One of the terms was the merger of FISLAI and DSLAI and DSLAI later
code and under a corporation’s articles of incorporation. University of Mindanao became Mindanao Savings and Loan Association (MSLAI).
doesn’t have the power to mortgage its properties in order to secure loans of other 177. Guillermo died.
persons. As an educational institution, it is limited to developing human capital 178. MSLAI failed to recover from its losses and was liquidated on May 24, 1991.
through formal instruction. It isn’t a corporation engaged in the business of BSP wanted to foreclose since MSLAI wasn’t able to pay.
securing loans of others. Securing loans is not an adjunct of the educational 179. University of Mindanao sent a letter to BSP, denying that their properties
institution’s conduct business. were mortgaged and they also denied receiving any loan proceeds.
180. University of Mindanao filed 2 complaints for nullification and cancellation
DOCTRINE: Corporations are artificial entities granted legal personalities upon of mortgage.
their creation by their incorporators in accordance with law. They have no inherent a. They were claiming that they didn’t obtain any loan from BSP and that
powers; 3rd persons dealing with corporations cannot assume that corporations they didn’t receive any loan proceeds.
have powers. Ultra vires acts are corporate acts that are outside those express b. They also claimed that Aurora De Leon’s certification was anomalous
definitions under the law or articles of incorporation or those committed outside and that they never authorized Petalcorin to execute real estate mortgage
the object for which a corporation is created. The only exception to this rule is contracts involving its properties to secure FISLAI’s debts and that they
when the acts are necessary and incidental to carry out a corporation’s pruposes, never ratified the execution of the mortgage contracts.
 c. As an educational institution, it cannot mortgage its properties to secure under the law or articles of incorporation or those committed outside
another person’s debt. the object for which a corporation is created.
181. RTC ruled in favor of University of Mindanao. i. The only exception to this rule is when the acts are necessary
a. De Leon’s testimony was that she signed the Secretary’s Certificate only and incidental to carry out a corporation’s pruposes, and to the
upon Guillermo’s orders. exercise of powers conferred by the corporation code and under
b. But Petalcorin testified that he had no authority to execute the mortgage a corporation’s articles of incorporation.
contract on University of Mindanao’s behalf but he merely executed the 2. SC held that University of Mindanao doesn’t have the power to mortgage
contract because of Guillermo’s request. its properties in order to secure loans of other persons.
c. BSP’s witness admitted that there was no board reso authorizing a. As an educational institution, it is limited to developing human
Petalcorin to execute mortgage contracts. capital through formal instruction. It isn’t a corporation engaged in
d. Since some of the properties were situated in Iligan and some in the business of securing loans of others.
Cagayan, there were 2 RTCs which were actually involved, but both b. Securing loans is not an adjunct of the educational institution’s
those RTCs ruled in favor of University of Mindanao, finding that conduct business.
Petalcorin had no authority to execute the mortgage contracts. c. SC upheld the validity of corporate acts when those acts were shown
182. BSP appealed the decisions. to be clearly within the corporation’s powers or were connected to
183. CA ruled that by virtue of De Leon’s Secretary Certificate, it clothed the corporation’s purposes.
Petalcorin with authority and BSP relied on that, so University of Mindanao d. Corporate acts are valid if on their face, the acts were within the
is estopped from denying Petalcorin’s authority. corporation’s powers or purposes.
a. In addition, the Secretary Certificate was also notarized, so it enjoyed a e. A contract executed by a corporation shall be presumed valid if on
presumption of regularity. its face its execution was not beyond the powers of the corporation
b. University of Mindanao’s officers (Guillermo and Dolores) signed the to do.
PNs, so they are presumed to have knowledge of the transaction. 3. University of Mindanao claims that they did not authorize Petalcorin to
c. The annotations on the TCTs also operate as constructive notice to it that mortgage its properties on its behalf. There was no board reso.
its properties were mortgaged. a. The mortgage contracts executed in favor of BSP do not bind University
184. Hence, this petition. of Mindanao.
b. Being a juridical person, Unviersity of Mindanao cannot conduct its
ISSUE/s: business, make deisions, or act in any manner without action from its
29. WON University of Mindanao is bound by the real estate mortgage contracts Board of Trustees – they must act as a body in order to exercise corporate
executed by Petalcorin – NO, University of Mindanao is not bound since the powers.
execution of the mortgage contract was ultra vires. c. Corporation may delegate through a board reso its corporate powers or
functions to a representative, subject to limitations.
RULING: WHEREFORE, the petition is GRANTED. The CA’s decision is d. Contracts entered into in the name of another without authority or valid
REVERSED and SET ASIDE. The RTC’s decisions are REINSTATED. legal representation are generally unenforceable.
e. In this case, BSP wasn’t able to prove that there was actually a board reso
RATIO: that was passed authorizing Petalcorin to mortgage the subject real
On whether the execution of the mortgage contract was ultra vires properties.

1. University of Mindanao: Execution of mortgage contract was ultra vires

because since it is an educational institution, it may not secure the loans
of thir persons.
a. SC: The claim of university is correct. Corporations are artificial
entities granted legal personalities upon their creation by their
incorporators in accordance with law.
b. They have no inherent powers; 3rd persons dealing with corporations
cannot assume that corporations have powers.
c. Ultra vires – corporate acts that are outside those express definitions
 005 HARDEN v. BENGUET CONSOLIDATED (MERILLES) of all work, effective July 31, 1926.
MARCH 18, 1933 | Street, J. | Ultra Vires of the Third Type 6. In November of the same year a general meeting of the company's
stockholders appointed a committee for the purpose of interesting outside
capital in the mine.
PETITIONER: Fred M. Harden, JD Highsmith, and John Hart, in their own 7. Under the authority of this resolution the committee approached A. W. Beam,
behalf and in that all other stockholders of the Baltic Mining company then president and general manager of the Benguet Company, to secure the
RESPONDENTS: Benguet Consolidated Mining Company, Balatoc Mining capital necessary to the development of the Balatoc property.
Company, HE Renzo, John W. Jaussermann and AW Beam 8. A contractwas executed on March 9, 1927, the principal features of which
were that the Benguet Company was to proceed with the development and
SUMMARY: Benguet Consolidates was registered as a sociedad anonima under construct a milling plant for the Balatoc mine.
the Spanish Law. Benguet Mining agreed to invest and build capital equipments a. The Benguet Company also agreed to erect an appropriate power
in favor of Balatoc Mining, a corporation registered under the Corproratio Law. plant, with the aerial tramlines and such other surface buildings as
Balatoc was to give Benguet Mining 600,000 shares of its capital stock. might be needed to operate the mine.
b. In return for this it was agreed that the Benguet Company should
Fred Harden, a stockholder of Balatoc who owns thousands of shares, sued receive from the treasurer of the Balatoc Company shares of a par
Benguet Mining on the ground that under the Corporation Law a corporation like value of P600,000, in payment for the first P600,000 be thus
Benguet Mining which is engaged in the mining industry is prohibited form being advanced to it by the Benguet Company.
interested int eh other corporations which are also engaged int he mining industry 9. The legal point upon which the action is planted is that it is unlawful for the
like Balatoc Mining. Benguet Company to hold any interest in a mining corporation and that
the contract by which the interest here in question was acquired must be
The Court before ruling on the authority of Benguet Mining to own shares in annulled.
Balatoc had to first decide whether Harden has a cause of action. The SC held 10. During the occupation of the United States, the Congress of the United States
that Harden in this case have no right of action against the Benguet Company. inserted certain provisions, under the head of Franchises, which were
It must be the Government through the OSG who initiates the case. intended to control the lawmaking power in the Philippine Islands in the
matter of granting of franchises, privileges and concessions.One of which
DOCTRINE: (under syllabus but not in case) Although arrangements between provides that:
the two mining companies was prohibited under the terms of the Corporation a. ... it shall be unlawful for any member of a corporation engaged in
Law, the Supreme Court did not declare the nullity of the agreements on the agriculture or mining and for any corporation organized for any
ground that only private rights and interests, not public interests, were involved purpose except irrigation to be in any wise interested in any other
in the case. corporation engaged in agriculture or in mining.
11. The Corporation law was enacted. The purpose of such was to introduce the
American corporation into the Philippine Islands as the standard commercial
entity and to hasten the day when the sociedad anonima of the Spanish law
FACTS:
would be obsolete.
1. The Benguet Consolidated Mining Co. was organized in June, 1903, as
12. The provision which prohibiting corporations engaged in mining and
a sociedad anonima in conformity with the provisions of Spanish law; while
members of such from being interested in any other corporation engaged in
the Balatoc Mining Co. was organized in December 1925, as a corporation,
mining, was amended.
in conformity with the provisions of the Corporation Law (Act No. 1459).
13. The change in the law effected by this amendment was in the direction of
2. Both entities were organized for the purpose of engaging in the mining of
liberalization.
gold in the Philippine Islands, and their respective properties are located only
14. Thus, the inhibition contained in the original provision against members of
a few miles apart in the subprovince of Benguet.
a corporation engaged in agriculture or mining from being interested in
3. The capital stock of the Balatoc Mining Co. consists of one million shares of
other corporations engaged in agriculture or in mining was so modified
the par value of one peso (P1) each.
as merely to prohibit any such member from holding more than fifteen
4. When the Balatoc Mining Co. was first organized the properties acquired by
per centum of the outstanding capital stock of another such corporation.
it were largely undeveloped; and the original stockholders were unable to
15. (di ko alam ano nangyari pero bigla nalang sila nag proceed sa issue) The
supply the means needed for profitable operation.
trial court denied the petition for annulment of Harden. Hence this petition)
5. For this reason, the board of directors of the corporation ordered a suspension
ISSUE/s:
1. Whether Harden, et al. can maintain an action based upon the violation of law
supposedly committed by the Benguet Company in this case - NO, the case
must be initiated by the OSG
2. Whether, assuming the first question to be answered in the affirmative, the
Benguet Company, which was organized as a sociedad anonima, is a
corporation within the meaning of the language used by the Congress of the
United States, and later by the Philippine Legislature, prohibiting a mining
corporation from becoming interested in another mining corporation -
COURT DID NOT RULE ON THE MATTER. (Ratio 6)

RULING: SC affirmed the lower courts decision. Pwede rin wherefore.

RATIO:
1. FIRST ISSUE: It is at once obvious that the provision referred to was adopted
by the lawmakers with a sole view to the public policy that should control in
the granting of mining rights.
2. Furthermore, the penalties imposed in what is now section 190 (A) of the
Corporation Law for the violation of the prohibition in question are of such
nature that they can be enforced only by a criminal prosecution or by an
action of quo warranto.
3. But these proceedings can be maintained only by the Attorney-General
in representation of the Government.
4. The defendant Benguet Company has committed no civil wrong against the
plaintiffs Harden, and if a public wrong has been committed, the directors
of the Balatoc Company, and the plaintiff Harden himself, were the active
inducers of the commission of that wrong.
5. The contract, supposing it to have been unlawful in fact, has been performed
on both sides, by the building of the Balatoc plant by the Benguet Company
and the delivery to the latter of the certificate of 600,000 shares of the Balatoc
Company. There is no possibility of really undoing what has been done.
6. Having shown that the plaintiffs Harden in this case have no right of action
against the Benguet Company for the infraction of law supposed to have
been committed, we forego any discussion of the further question whether
a sociedad anonima created under Spanish law, such as the Benguet
Company, is a corporation within the meaning of the prohibitory provision
already so many times mentioned.
7. That important question should, in our opinion, be left until it is raised in an
action brought by the Government.