1

B. ROLE OF SHAREHOLDERS

Right to Vote and Attend Meetings (Section 89 of the Cor oration Code! Sec. 89. Right to "ote. - The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. (n) oting by mail or other similar means by members of non-stoc! corporations may be a"thori#ed by the by-laws of non-stoc! corporations with the approval of, and "nder s"ch conditions which may be prescribed by, the $ec"rities and %xchange Commission. &ep"blic of the 'hilippines S#$REME CO#R% (anila %) *+)C &.R. 'o. L()*+8, 'o"e-.er ,/0 ,9))

1. S. $R2CE and %HE S#L# DEVELO$ME'% COM$A'30 plaintiffs-appellants, vs. H. MAR%2'0 defendant-appellant. %HE A&#SA' COCO'#% COM$A'30 defendant-appellee. J.W. Ferrier for plaintiff-appellants. G.E. Campbell and W.A. Caldwell for defendant-appellant. DeWitt, Perkins and Brady for appellee.

H#LL0 J.: 'laintiffs bro"ght s"it in the Co"rt of ,irst -nstance of (anila praying that a mortgage exec"ted by the $"l" .evelopment Company on its properties in favor of the +g"san Cocon"t Company be dissolved and declared n"ll and void, the principal contentions being that at the stoc!holders/ meeting in which the officers of the $"l" .evelopment Company were elected and at which the proposed mortgage was approved of, 01 shares of stoc! of the $"l" .evelopment Company were voted by the proxy of (rs. 2orcester, in whose name the stoc! at that time stood "pon the boo!s of the company, whereas defendant (artin claimed that he was the tr"e owner and that he sho"ld have voted the stoc!. ,rom the records of the $"l" .evelopment Company it appears that at the meeting of )ovember 13, 1034, (artin presented evidence to the effect that he, and not (rs. 2orcester, was the owner of the 01 shares of stoc!. Copies of the doc"ments relied "pon by (artin were made a part of the record, b"t apparently no action was ta!en by the stoc!holders or by the directors, and at the meetings of )ovember 13, 11, and 10, (rs. 2orcester/s proxy apparently voted the stoc! witho"t protest on the part of (artin or any other stoc!holder. +s far as the record shows, every formal action ta!en at those three meetings was "nanimo"s, and (artin at the last two meetings was accompanied by two members of the *ar of the 'hilippine -slands as his co"nsel. The $"l" .evelopment Company from its inception "p to the time of exec"ting the contract was virt"ally owned and controlled by (artin. 'rince p"rchased one share of stoc! abo"t a month before the called meeting b"t was not present at the meetings in 5"estion.

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+nother gro"nd relied "pon by plaintiffs is a claim that the mortgage was witho"t consideration. The evidence shows that for years the +g"san Cocon"t Company, thro"gh its general manager, had been advancing s"ms thro"gh (artin in order that the $"l" .evelopment Company might sec"re good and s"fficient title to a large tract of land sit"ated near $iasi and thereon develop a cocon"t plantation. The amo"nt of money so advanced was in disp"te, b"t between the meeting on )ovember 13 and the final action on )ovember 10, the attorney of the $"l" .evelopment Company, one of whom was also an acco"ntant, and the attorneys of the +g"san Cocon"t Company went over the m"t"al acco"nts with care and arrived at the s"m set forth in the mortgaged. 6ad there been no agreement, s"it wo"ld have been instit"ted by the +g"san Company against the $"l" .evelopment Company. There is also a claim that there was a parol agreement between (artin and 2orcester, representing the two companies, that after the death of (r. 2orcester on (ay 3, 1037, the +g"san Cocon"t Company failed to comply with the terms and conditions of the so-called c"ltivation agreement, and (artin prayed in his special cross-complaint and co"nter-claim that the .efendant +g"san Cocon"t Company be re5"ired to ma!e s"ch f"rther cash advances to 8carry o"t the f"ll scale development of the tract of land in the c"ltivation agreement and as contemplated therein.8 The trial co"rt, on timely ob9ection, ref"sed to receive the parol evidence as to the c"ltivation agreement, and after trial and a lengthy opinion, held that the mortgage in 5"estion was valid and ref"sed to order its cancellation. ,rom that decision plaintiff appeal and ma!e the following assignments of error: The trial co"rt erred: 1. -n ref"sing appellants the right to introd"ce evidence as to the 8c"ltivation agreement8 extensively referred to by the parties herein. 3. -n ref"sing to reopen the case on motion filed in d"e form and manner by the plaintiffs and appellants herein, on the gro"nd of newly discovered evidence, s"ch motion having been filed the rendition of the 9"dgment herein. ;. -n finding that the plaintiff, 2.$. 'rice, did not appear here as a plaintiff to depend his own right b"t for the p"rpose of giving aid to the defendant, 6arry (artin. 7. -n r"ling that altho"gh the 01 shares voted by (rs. )anon <. 2orcester at the meetings in 5"estion thr" her proxy belonged to 6arry (artin and were only held in tr"st by her late h"sband, .ean C. 2orcester, yet s"ch tr"steeship was for the benefit of the +g"san Cocon"t Company, and that s"ch company is the act"al cest"i 5"e tr"st there"nder, in violation of the express terms of the tr"st agreement. 4. -n holding that (rs. )anon <. 2orcester co"ld legally vote the said 01 shares she act"ally voted at the meeting in 5"estion, notwithstanding the facts as fo"nd by said co"rt, that said shares belonged to 6. (artin and were merely held in tr"st by her deceased h"sband. =. -n finding that the 01 shares of stoc! in 5"estion had been ad9"dicated to (rs. )anon <. 2orcester by the commissioners on claims against the estate of her deceased h"sband> that s"ch ad9"dication had been approved by the Co"rt of ,irst -nstance of the City of (anila, and that the said )anon <. 2orcester had inherited said shares by virt"e of the will of her deceased h"sband. 1. -n holding the effect that there was a !or!m in the pretended meetings of the stoc!holders of the $"l" .evelopment Company alleged to have ta!en place on )ovember 13, 11 and 10, 1034, partic"larly that one asserted to have been held on )ovember 10, 1034, when in law and in fact there was no s"ch !or!m. ?. -n finding in effect that the meetings pretended to be held by $"l" .evelopment on the dates aforementioned were validly and legally held and that the action ta!en and proceedings had thereat were valid and effective. 0. -n finding that if the defendant 6. (artin had had the 01 shares in 5"estion in his own name at the alleged meetings of the $"l" .evelopment Company, he wo"ld have voted them in the same way and to the same effect as the said )anon <. 2orcester voted them.

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1@. -n not finding that there was attendant fra"d, misrepresentation and deceit in the exec"tion and iss"ance of the mortgage contract, %xhibit U. 11. -n not holding that said mortgage is n"ll and void for want of legal consideration. 13. -n finding that the plaintiffs and appellants herein are legally bo"nd by the said mortgage contract %xhibit U. 1;. -n holding that the plaintiffs and appellants herein are legally estopped to contest the efficacy and validity of the mortgage contract, %xhibit, U. 17. -n dismissing plaintiffs/ complaint herein. 14. -n denying plaintiffs/ motion for a new trial. 2hile defendant (artin appeals and assigns the following errors: 1. The trial co"rt erred in ref"sing to find that the one h"ndred shares of the capital stoc! of the appellant, the $"l" .evelopment Company, delivered on )ovember 3;, 1033, by the appellant, 6. (artin, to the late .ean C. 2orcester, were so delivered in tr"st to be held and "sed for the benefit of the said 6. (artin. 3. The trial co"rt erred in finding that the voting by (rs. )anon <. 2orcester, in the meeting held by the stoc!holders of the appellant, the $"l" .evelopment Company, on )ovember 13, 11, and 10, 1034, was legal. ;. The trial co"rt erred in ref"sing to find that the mortgage involved in this litigation, p"rported to have been exec"ted by the appellant, the $"l" .evelopment Company, in favor of the appellee, the +g"san Cocon"t Company, is n"ll and void. 7. The trial co"rt erred in excl"ding, as being within the stat"te of fra"ds, testimony regarding a certain verbal agreement entered into by and between the appellee, the +g"san Cocon"t Company, and the appellant, 6. (artin, which agreement had been f"lly performed by the latter. 4. The trial co"rt erred in excl"ding as 86earsay %vidence8, testimony regarding statements made by certain officials of the appellee, the +g"san Company. =. The trial co"rt erred in excl"ding the testimony of the appellant, 6. (artin, regarding matters of fact which occ"rred between him and certain officials of the appellee, the +g"san Cocon"t Company, who had died prior to the trial of this action. +n examination of the assignments of error will show that altho"gh this case in its main aspects is a simple one and confined to the 5"estions, first, as to whether the mortgage was d"ly exec"ted by the $"l" .evelopment Company and, second, whether it was given for a val"able consideration, many side iss"es of no moment were "rged "pon the trial co"rt, which probably acco"nts for the vol"mino"s record with which we are confronted and n"mero"s assignments of error which we do not deem it necessary to disc"ss in detail. 'laintiffs contend that the transference on the boo!s of the company of 01 shares of stoc! in the name of (rs. 2orcester was fra"d"lent and illegal. The evidence of record, however, "nder all the circ"mstances of the case, fails to demonstrate the allegation of fra"d, and this co"rt believes that she acted in good faith and in the honest belief that she had not only a legal right b"t a d"ty to participate in the stoc!holders meeting. +s to whether the stoc! was rightf"lly the property of (artin, that is a 5"estion for the co"rts and for a stoc!holder/s meeting. Until challenged in a proper proceeding, a stoc!holder according to the boo!s of the company has a right to participate in that meeting, and in the absence of fra"d the action of the stoc!holders/ meeting cannot be collaterally attac!ed on acco"nt of s"ch participation. 8+ person who has p"rchased stoc!, and who desires to be recogni#ed as a stoc!holder, for the p"rpose of voting, m"st sec"re s"ch a standing by having the transfer recorder "pon the boo!s. -f the transfer is not d"ly made "pon re5"est, he has, as his remedy, to compel it to be made.8 ((orrill "s. <ittle ,alls (fg. Co., 4; (inn., ;11> 31 <.&.+., 114-11?, citing Coo!, $toc! A $toc!holders, par. =11> 'eople "s. &obinson, =7 Cal., ;1;>

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.owning "s. 'otts, 3; ).B.<., ==> $tate "s. ,erris, 73 Conn., 4=@> )ew Cor! A ).6.&. Co. "s. $ch"yler, ;7 ).C., ?@> *an! of Commerce/s +pp., 1; 'a., 40> 6oppin "s. *"ff"m, 0 &.-., 41;> 11 +m. &ep., 310> #e $t. <awrence $.&. Co., 77 ). B. <., 430.) +s to the 5"estion of lac! of consideration for the mortgage, thro"gho"t the brief for appellants it appears by the constant reiteration of the phrase that all the advances were made 8by the +g"san Cocon"t Company andDor its then Eeneral (anager, the late .ean C. 2orcester, to 6. (artin andDor the $"l" .evelopment Company.8 -t m"st be remembered that there is no disp"te between the 2orcester interests and the +g"san Cocon"t Company as to who advanced the money, namely, the +g"san Cocon"t Company, nor is there any diffic"lty in determining to whom the money was advanced. +ltho"gh (artin was virt"ally the owner of all the capital stoc! of the $"l" .evelopment Company, b"siness was carried on in the name of the company, and the land and properties were sec"red in the name of the company, and "p to the time of the exec"tion of the mortgage and some time thereafter there was no claim from anybody the money had been advanced to (artin instead of the company. %ven a repeated "se of the 5"estionable phrase 8andDor8 as to the grantor 8andDor8 as to the grantee, will not fabricate a life-raft on which a recalcitrant debtor can reach a safe harbor of rep"diation.lawp$il.net 2e are therefore convinced that the contention that the mortgage was made witho"t consideration was a aftertho"ght witho"t fo"ndation in fact and in a vain attempt to avoid a legal and binding obligation. 2e find no merit in the contention that the trial co"rt sho"ld have concerned itself with an alleged parol contract between (artin and .ean C. 2orcester, deceased. The alleged contract not being in writing or to be exec"ted within a year, it is within the stat"te of fra"ds. The val"e of the r"le is shown in this case as it was some time after (r. 2orcester/s death before anything was heard of s"ch an alleged agreement. %ven if s"ch an agreement had been made and it had been proper to receive proof thereof, it wo"ld not benefit plaintiffs as the mortgage was exec"ted p"rs"ant to a compromise agreement to settle the affairs between the two companies, and all the transactions between the two companies were merged and settle by that compromise. The contention that a new trial sho"ld have been granted in order that plaintiffs co"ld present in evidence a letter from (r. 2orcester to the late Eovernor-Eeneral 2ood, is li!ewise witho"t merit. The letter, even if admitted, wo"ld not have changed the res"lt of these proceedings, as a fair reading of the letter is not rep"gnant to a single contention of defendant-appellee. The 9"dgment appealed from is therefore affirmed. Costs against appellants. $o ordered. %al&olm, 'illa-#eal, Abad (antos, and )mperial, JJ., &on&!r. a. 2nstances4 ( E5ection of Directors and %r6stees (Section +7 of the Cor oration Code! Sec. +7. E5ection of directors or tr6stees. - +t all elections of directors or tr"stees, there m"st be present, either in person or by representative a"thori#ed to act by written proxy, the owners of a ma9ority of the o"tstanding capital stoc!, or if there be no capital stoc!, a ma9ority of the members entitled to vote. The election m"st be by ballot if re5"ested by any voting stoc!holder or member. -n stoc! corporations, every stoc!holder entitled to vote shall have the right to vote in person or by proxy the n"mber of shares of stoc! standing, at the time fixed in the by-laws, in his own name on the stoc! boo!s of the corporation, or where the by-laws are silent, at the time of the election> and said stoc!holder may vote s"ch n"mber of shares for as many persons as there are directors to be elected or he may c"m"late said shares and give one candidate as many votes as the n"mber of directors to be elected m"ltiplied by the n"mber of his shares shall e5"al, or he may distrib"te them on the same principle among as many candidates as he shall see fit:

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'rovided, That the total n"mber of votes cast by him shall not exceed the n"mber of shares owned by him as shown in the boo!s of the corporation m"ltiplied by the whole n"mber of directors to be elected: 'rovided, however, That no delin5"ent stoc! shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stoc! may cast as many votes as there are tr"stees to be elected b"t may not cast more than one vote for one candidate. Candidates receiving the highest n"mber of votes shall be declared elected. +ny meeting of the stoc!holders or members called for an election may ad9o"rn from day to day or from time to time b"t not sine die or indefinitely if, for any reason, no election is held, or if there not present or represented by proxy, at the meeting, the owners of a ma9ority of the o"tstanding capital stoc!, or if there be no capital stoc!, a ma9ority of the member entitled to vote. - +mendment of +rticles of -ncorporation ($ection 1= of the Corporation Code Sec. ,8. A-end-ent of Artic5es of 2ncor oration. - Unless otherwise prescribed by this Code or by special law, and for legitimate p"rposes, any provision or matter stated in the articles of incorporation may be amended by a ma9ority vote of the board of directors or tr"stees and the vote or written assent of the stoc!holders representing at least two-thirds (3D;) of the o"tstanding capital stoc!, witho"t pre9"dice to the appraisal right of dissenting stoc!holders in accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (3D;) of the members if it be a non-stoc! corporation. The original and amended articles together shall contain all provisions re5"ired by law to be set o"t in the articles of incorporation. $"ch articles, as amended shall be indicated by "nderscoring the change or changes made, and a copy thereof d"ly certified "nder oath by the corporate secretary and a ma9ority of the directors or tr"stees stating the fact that said amendment or amendments have been d"ly approved by the re5"ired vote of the stoc!holders or members, shall be s"bmitted to the $ec"rities and %xchange Commission. The amendments shall ta!e effect "pon their approval by the $ec"rities and %xchange Commission or from the date of filing with the said Commission if not acted "pon within six (=) months from the date of filing for a ca"se not attrib"table to the corporation. ( 2n"est-ent in another B6siness (Section 7+ of the Cor oration Code! Sec. 7+. $o9er to in"est cor orate f6nds in another cor oration or .6siness or for an: other 6r ose. - $"b9ect to the provisions of this Code, a private corporation may invest its f"nds in any other corporation or b"siness or for any p"rpose other than the primary p"rpose for which it was organi#ed when approved by a ma9ority of the board of directors or tr"stees and ratified by the stoc!holders representing at least two-thirds (3D;) of the o"tstanding capital stoc!, or by at least two thirds (3D;) of the members in the case of non-stoc! corporations, at a stoc!holder/s or member/s meeting d"ly called for the p"rpose. 2ritten notice of the proposed investment and the time and place of the meeting

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shall be addressed to each stoc!holder or member at his place of residence as shown on the boo!s of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: 'rovided, That any dissenting stoc!holder shall have appraisal right as provided in this Code: 'rovided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary p"rpose as stated in the articles of incorporation, the approval of the stoc!holders or members shall not be necessary. (11 1D3a!

&ep"blic of the 'hilippines S#$REME CO#R% (anila %) *+)C &.R. 'o. L(,*;/7 < L(,*;/8 Fe.r6ar: +80 ,989

RAMO' DE LA RAMA0 FRA'C2SCO RODR2&#E=0 HOR%E'C2A SALAS0 $A= SALAS and $A%R2A SALAS0 heirs of Magda5ena Sa5as0 as stoc>ho5ders on their o9n .eha5f and for the .enefit of the Ma(ao S6gar Centra5 Co.0 2nc.0 and other stoc>ho5ders thereof 9ho -a: 9ish to ?oin in this action0 plaintiffs-appellants, vs. MA(AO S#&AR CE'%RAL CO.0 2'C.0 @. AMADO ARA'E%A0 MRS. RAMO' S. ARA'E%A0 ROM#ALDO M. ARA'E%A0 and RAMO' A. 3#LO0 defendants(a e55ants. (an J!an, Afri&a and Benedi&to for plaintiffs-appellants. 'i&ente *ilado and Gian+on, (ison, ,!lo and Asso&iates for defendants-appellants. CA$2S%RA'O0 J.: This was a representative or derivative s"it commenced on Fctober 3@, 104;, in the Co"rt of ,irst -nstance of (anila by fo"r minority stoc!holders against the (a-ao $"gar Central Co., -nc. and B. +mado +raneta and three other directors of the corporation. The complaint comprising the period )ovember, 107= to Fctober, 1043, stated five ca"ses of action, to wit: (1) for alleged illegal and "ltra-vires acts consisting of self-dealing irreg"lar loans, and "na"thori#ed investments> (3) for alleged gross mismanagement> (;) for alleged forfeit"re of corporate rights warranting dissol"tion> (7) for alleged damages and attorney/s fees> and (4) for receivership. 'laintiffs prayed, in s"bstance, as follows: Under the ,-&$T C+U$% F, +CT-F), that the defendant B. +mado +raneta and his individ"al co-defendants be ordered to render an acco"nting of all transactions made and carried o"t by them for defendant corporation, and 8to collect, prod"ce andDor pay to the defendant corporation the o"tstanding balance of the amo"nts so diverted and still "npaid to defendant corporation8> Under the $%CF). C+U$% F, +CT-F), that the individ"al defendants be held liable and be ordered to pay to the defendant corporation 8whatever amo"nts may be recovered by the plaintiffs in Civil Case )o. 3@133, entitled /,rancisco &odrig"e# vs. (a-ao $"gar Central Co./8> to ret"rn to the defendant corporation all amo"nts withdrawn by way of discretionary f"nds or bac!pay, and to acco"nt for the difference between the corporation/s crop loan acco"nts payable and its crop loan acco"nts receivable> Under the T6-&. C+U$% F, +CT-F), that the corporation be dissolved and its net assets be distrib"ted to the stoc!holders> and

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Under the ,FU&T6 C+U$% F, +CT-F), that the defendants be ordered 8to pay the s"m of ';@@,@@@.@@ by way of compensatory, moral and exemplary damages and for expenses of litigation, incl"ding attorney/s fees and costs of the s"it.8 T6% ,-,T6 C+U$% F, +CT-F) was an application for the provisional remedy of receivership. -n their answer originally filed on .ecember 1, 104;, and amended on ,ebr"ary 1, 1044, defendants denied 8the allegations regarding the s"pposed gross mismanagement, fra"d"lent "se and diversion of corporate f"nds, disregard of corporate re5"irements, ab"se of tr"st and violation of fid"ciary relationship, etc., s"pposed to have been discovered by plaintiffs, all of which are nothing b"t grat"ito"s, "nwarranted, exaggerated and distorted concl"sions not s"pported by plain and specific facts and transactions alleged in the complaint.8 *C 2+C F, $'%C-+< .%,%)$%$, the defendants alleged, among other things: (1) that the complaint 8is premat"re, improper and "n9"stified8> (3) that plaintiffs did not ma!e an 8 earnest, not sim!lated effort8 to exha"st first their remedies within the corporation before filing their complaint> (;) that no act"al loss had been s"ffered by the defendant corporation on acco"nt of the transactions 5"estioned by plaintiffs> (7) that the payments by the debtors of all amo"nts d"e to the defendant corporation constit"ted a f"ll, s"fficient and ade5"ate remedy for the grievances alleged in the complaint and (4) that the dissol"tion andDor receivership of the defendant corporation wo"ld violate and impair the obligation of existing contracts of said corporation. *C 2+C F, CFU)T%&C<+-(, the defendants in s"bstance f"rther alleged, among others, that the complaint was premat"re, improper and malicio"s, and that the lang"age "sed was 8"nnecessarily vit"perative ab"sive and ins"lting, partic"larly against defendant B. +mado +raneta who appears to be the main target of their hatred.8 2herefore, the defendant so"ght to recover 8compensation for damages, act"al, moral, exemplary and corrective, incl"ding reasonable attorney/s fees.8 +fter trial, the <ower Co"rt rendered its .ecision (later s"pplemented by an Frder resolving defendants/ (otion for &econsideration), the dispositive portion of which reads: -) -%2 26%&%F,, the Co"rt dismisses the petition for dissol"tion b"t condemns B. +mado +raneta to pay "nto (a-ao $"gar Central Co., -nc. the amo"nt of '7=,31@.@@ with ?G interest from the date of the filing of this complaint, pl"s the costs> the Co"rt reiterates the preliminary in9"nction restraining the (a-ao $"gar Central Co., -nc. management to give any loans or advances to its officers and orders that this in9"nction be as it is hereby made, permanent> and orders it to refrain from ma!ing investments in +co9e (ining, (ab"hay 'rinting, and any other company whose p"rpose is not connected with the $"gar Central b"siness> costs of plaintiffs to be borne by the Corporation and B. +mado +raneta. ,rom this 9"dgment both parties appealed directly to the $"preme Co"rt. *efore ta!ing "p the errors respectively, assigned by the parties, we sho"ld state that the following findings of the <ower Co"rt on the commission of corporate irreg"larities by the defendants have not been 5"estioned by the defendants: 1. ,ail"re to hold stoc!holders/ meetings reg"larly. )o stoc!holders/ meetings were held in 1071, 104@ and 1041> 3. -rreg"larities in the !eeping of the boo!s. Untr"e entries were made in the boo!s which co"ld not simply be considered as innocent errors> ;. -llegal investments in the (ab"hay 'rinting, '3,3?@,@@, and the +co9e (ining, '1,@@@.@@. The investments were made not in p"rs"ance of the corporate p"rpose and witho"t the re5"isite a"thority of two-thirds of the stoc!holders> 7. Una"thori#ed loans to B. +mado +raneta totalling '1;3,@?3.@@ (which, according to the defendants, had been f"lly paid), in violation of the by-laws of the corporation which prohibits any director from borrowing money from the corporation> 4. .iversion of corporate f"nds of the (a-ao $"gar Central Co., -nc. to:

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B. +mado +raneta A Co. <"#on -nd"strial Corp. +ssociated $"gar Eeneral $ec"rities *acolod ("rcia Central +#"carera del .anao Talisay-$ilay '37;,714.=3 4?4,01?.11 7=;,?=@.;= ?=,17;.=4 4@1,@;@.=1 01,??7.73 7,;=4.0@

The Co"rt fo"nd that s"ms were ta!en o"t of the f"nds of the (a-ao $"gar Central Co., -nc. and delivered to these affiliated companies, and vice versa, witho"t the approval of the (a-ao *oard of .irectors, in violation of $ec. ---, +rt. =-+ of the by-laws. The errors assigned in the appeal of the plaintiffs, as appellants, are as follows: -. T6% <F2%& CFU&T %&&%. -) 6F<.-)E T6+T T6% -) %$T(%)T F, CF&'F&+T% ,U).$ F, T6% (++F $UE+& C%)T&+< CF., -)C., -) T6% '6-<-''-)% ,-*%& '&FC%$$-)E CF., -)C. 2+$ )FT + -F<+T-F) F, $%C. 11-H F, T6% CF&'F&+T-F) <+2. --. T6% <F2%& CFU&T %&&%. -) )FT ,-).-)E T6+T T6% (+-+F $UE+& C%)T&+< CF., -)C. 2+$ -)$F< %)T. ---. T6% <F2%& CFU&T %&&%. -) 6F<.-)E T6+T T6% .-$C&-(-)+TF&C +CT$ CF((-TT%. +E+-)$T '<+)T%&$ .-. )FT CF)$T-TUT% (-$(+)+E%(%)T. - . T6% <F2%& CFU&T %&&%. -) 6F<.-)E T6+T -T$ CU<'+*<% +CT$ 2%&% -)$U,,-C-%)T ,F& T6% .-$$F<UT-F) F, T6% CF&'F&+T-F). The portions of the .ecision of the <ower Co"rt assailed by the plaintiffs as appellants are as follows: (1) 8.... ,inally, as to the 'hilippine ,iber, the Co"rt ta!es it that defendants admit having invested '=44,@@@.@@ in shares of stoc! of this company b"t that this was ratified by the *oard of .irectors in &esol"tions =@ and ?@, %xhibits 8&8 and 8&-38> more than that, defendants contend that since said company was engaged in the man"fact"re of s"gar bags it was perfectly legitimate for (a-ao $"gar either to man"fact"re s"gar bags or invest in another corporation engaged in said man"fact"re, and they 5"ote a"thorities for the p"rpose, pp. 3?-;1, memorand"m> the Co"rt is pers"aded to believe that the defendants on this point are correct, beca"se while $ec. 11-1D3 of the Corporation <aw provides that: )o corporation organi#ed "nder this act shall invest its f"nds in any other corporation or b"siness or for any p"rpose other than the main p"rpose for which it was organi#ed "nless its board of directors has been so a"thori#ed in a resol"tion by the affirmative vote of stoc!holders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on s"ch proposal at the stoc!holders/ meeting called for the p"rpose.

0
the Co"rt is convinced that that law sho"ld be "nderstood to mean as the a"thorities state, that it is prohibited to the Corporation to invest in shares of another corporation "nless s"ch an investment is a"thori#ed by two-thirds of the voting power of the stoc!holders, if the p"rpose of the corporation in which investment is made is foreign to the p"rpose of the investing corporation beca"se s"rely there is more logic in the stand that if the investment is made in a corporation whose b"siness is important to the investing corporation and wo"ld aid it in its p"rpose, to re5"ire a"thority of the stoc!holders wo"ld be to "nd"ly c"rtail the 'ower of the *oard of .irectors> the only tro"ble here is that the investment was made witho"t any previo"s a"thority of the *oard of .irectors b"t was only ratified afterwards> this of co"rse wo"ld have the effect of legali#ing the "na"thori#ed act b"t it is an indication of the manner in which corporate b"siness is transacted by the (a-ao $"gar administration, the fact that off and on, there wo"ld be passed by the *oard of .irectors, resol"tions ratifying all acts previo"sly done by the management, e.g. resol"tions passed on ,ebr"ary 34, 1071, and ,ebr"ary 34, 1043, by the *oard of .irectors as set forth in the affidavit of -sidro T. ."nca p. 131, etc. ol. 1. (.ecision, pp. 3;0-371 of &ecord on +ppeal.) xxx xxx xxx

(3) 8Fn the other hand, the Co"rt has noted against plaintiffs that their contention that (a-ao $"gar is on the verge of ban!r"ptcy has not been clearly shown> against this are %xh. C to %xh. C-; perhaps the best proof that insolvency is still far is that this action was filed in 104; and almost seven years have passed since then witho"t the company apparently getting worse than it was before> ...8 (.ecision, pp. 37;-377, s!pra.) xxx xxx xxx

(;) 8+s to the crop loan anomalies in that instead of giving "nto the planters the entire amo"nt alloted for that, the Central withheld a certain portion for their own "se, as can be seen in +ppendix + of %xh. C-1, while the theory of plaintiffs is that since between the amo"nt of ';,101,441.1? the crop loan acco"nt payable, and the amo"nt of '1,1@?,7??.33, the crop loan receivable, there is a difference of '3,@?;,@=;.4=, this wo"ld indicate that this latter s"m had been "sed by the Central itself for its own p"rposes> on the other hand, defendants contend that the first amo"nt did not represent the totality of the crop loans obtained from the *an! for the p"rpose of relending to the planters, b"t that it incl"ded the Central/s own credit line on its 7@G share in the standing crop> and that this irreg"larity amo"nts to a grievance by plaintiffs as planters and not as stoc!holders, the Co"rt m"st find that as to this co"nt, there is really reason to find that said anomaly is not a clear basis for the derivative s"it, first, beca"se plaintiffs/ evidence is not very s"fficient to prove clearly the alleged diversion in the face of defendants/ defense> there sho"ld have been a showing that the Central had no a"thority to ma!e the diversion> and secondly, if the anomaly existed, there is gro"nd to hold with defendants that it was an anomaly pernicio"s not to the Central b"t to the planters> it was not even pernicio"s to the stoc!holders. Eoing to the discriminatory acts of B. +mado +raneta, namely, manip"lation of cane allotments, withholding of molasses and alcohol shares, withholding of tr"c!ing allowance, formation of rival planters associations, ref"sal to deal with legitimate planters gro"p, %xh. $> the Co"rt notices that as to the fail"re to provide ha"ling transportation, this in a way is corroborated by %xh. 1, that part containing the decision of the Co"rt of ,irst -nstance of (anila, civil 3@133, Fran&is&o #odri-!e+ ". %a-ao (!-ar> for the reason, however, that even if these were tr"e, those grievances were grievances of plaintiffs as planters and not as stoc!holders I 9"st as the grievance as to the crop loans already adverted to, I this Co"rt will find ins"fficient merit on this co"nt. (.ecision, pp. 3;@-3;1, s!pra.) xxx xxx xxx

(7) 8...> for the Co"rt m"st admit its limitations and confess that it cannot pretend to !now better than the *oard in matters where the *oard has not transgressed any positive stat"te or by-law especially where as here, there is the circ"mstance that pres"mably, an impartial representative in the *oard of .irectors, I the one from the 'hilippine )ational *an!, I against whom apparently plaintiffs have no 5"arrel, does not appear to have made any protest against the same> the net res"lt will be to hold that the c"lpable acts proved are not eno"gh to sec"re a dissol"tion> the Co"rt will only order the correction of ab"ses, proved as already mentioned> nor will the Co"rt grant any more damages one way or the other. (.ecision, p. 377, s!pra.) Fn the other hand, the errors assigned in the appeal of the defendants as appellants are as follows:

1@
-. T6% <F2%& CFU&T %&&%. -) +.BU.E-)E B. +(+.F +&+)%T+ TF '+C TF (+-+F $UE+& C%)T&+< CF., -)C., T6% +(FU)T F, '7=,31@.@@, 2-T6 ?G -)T%&%$T ,&F( T6% .+T% F, ,-<-)E F, T6% CF('<+-)T. --. T6% <F2%& CFU&T %&&%. -) )FT F&.%&-)E T6% '<+-)T-,,$ TF '+C T6% .%,%).+)T$, '+&T-CU<+&<C B. +(+.F +&+)%T+, T6% .+(+E%$ '&+C%. ,F& -) T6% CFU)T%&C<+-( F, $+-. .%,%).+)T$. The portions of the .ecision of the <ower Co"rt assailed by the defendants as appellants are as follows: (1) 8+s to the alleged 9"ggling of boo!s in that the personal acco"nt of B. +mado +raneta of '7=,31@.@@ was closed on Fctober ;1, 1071 by charges transferred to loans receivable nor was interest paid on this amo"nt, the Co"rt finds that this is related to charge )o. 1, namely, the granting of personal loans to B. +mado +raneta> it is really tr"e that according to the boo!s, and as admitted by defendants, B. +mado +raneta sec"red personal loans> in 1071, the cash advance to him was '1;3,@?3.@@ (%xh. +)> the Co"rt has no do"bt that this was against the *y<aws which provided that: The .irectors shall not in any case borrow money from the Company. ($ec. ---, +rt. 1)> the Co"rt therefore finds this co"nt to be d"ly proved> worse, the Co"rt also finds that as plaintiffs contend, while the boo!s of the Corporation wo"ld show that the last balance of '7=,31@.@@ was written off as paid, as testified to by +"ditor (r. $anche#, the payment appeared to be nothing more than a transfer of his loan receivable acco"nt, stated otherwise, the item was only transferred from the personal acco"nt to the loan receivable acco"nt, so that again the Co"rt considers established the 9"ggling of the boo!s> and then again, it is also tr"e that the loans were sec"red witho"t any interest and while it is tr"e that in the .irectors/ meeting of 31 Fctober, 104;, it was resolved to collect ?G, the Co"rt does not see how s"ch a "nilateral action of the *oard co"ld bind the borrowers. *e it stated that defendants have presented in evidence %xh. 4 photostatic copy of the page in loan receivable and it is so"ght to be proved that B. +mado +raneta/s debt was totally paid on ;1 Fctober, 104;> to the Co"rt, in the absence of definite primary proof of act"al payment having fo"nd o"t that there had already been a 9"ggling of boo!s, it cannot 9"st believe that the amo"nt had been paid as noted in the boo!s. (.ecision, pp. 3;;3;4 of &ecord on +ppeal.) (3) 82ith respect to the second point in the motion for reconsideration to the effect that the Co"rt did not ma!e any findings of fact on the co"nterclaim of defendants, altho"gh the Co"rt did not say that in so many words, the Co"rt ta!es it that its findings of fact on pages 11 to 31 of its decision were eno"gh to 9"stify a dismissal of the co"nterclaim, beca"se the co"nterclaims were based on the fact that the complaint was premat"re, improper, malicio"s and that the lang"age is "nnecessarily vit"perative ab"sive and ins"lting> b"t the Co"rt has not fo"nd that the complaint is premat"re> nor has the Co"rt fo"nd that the complaint was malicio"s> these findings can be gleaned from the decision with respect to the allegation that the complaint was ab"sive and ins"lting, the Co"rt does not conc"r> for it has not seen anything in the evidence that wo"ld 9"stify a finding that plaintiffs and been act"ated by bad faith, nor is there anything in the complaint essentially libelo"s> especially as the r"le is that allegations in pleading where relevant, are privileged even tho"gh they may not clearly proved afterwards> so that the Co"rt has not seen any merit in the co"nterclaims> and the Co"rt had believed that the decision already carried with it the implication of the dismissal of the co"nterclaims, b"t if that is not eno"gh, the Co"rt ma!es its position clear on this matter in this order, and clarifies that it has dismissed the co"nterclaims of defendant> ...8 (Frder of $eptember ;, 10=@, pp. 37?-370, s!pra.) &egarding +ssignment of %rrors )os. 3, ; and 7 contained in the brief of the plaintiffs as appellants, it appears to "s that the <ower Co"rt was correct in its appreciation (1) that the evidence presented did not show that the defendant (a-ao $"gar Company was insolvent (3) that the alleged discriminatory acts committed by the defendant Central against the planters were not a proper s"b9ect of derivative s"it, b"t, at most, constit"ted a ca"se of action of the individ"al planters> and (;) that the acts of mismanagement complained of and proved do not 9"stify a dissol"tion of the corporation.

11
2hether insolvency exists is "s"ally a 5"estion of fact, to be determined from an inventory of the assets and their val"e, as well as a consideration of the liabilities.... B!t t$e mere impairment of &apital sto&k alone does not establis$ insol"en&y t$ere bein- ot$er e"iden&e as to t$e &orporation bein- a -oin- &on&ern wit$ s!ffi&ient assets. Also, t$e e.&ess of liabilities o"er assets does not establis$ insol"en&y, w$en ot$er assets are a"ailable . (,letcher Cyc. of the <aw of 'rivate Corporations, ol. 14+, 10;? %d pp. ;7-;1> %mphasis s"pplied). *"t relief by dissol"tion will be awarded in s"ch cases only where no other ade5"ate remedy is available, and is not available where the rights of the stoc!holders can be, or are, protected in some other way. (1= ,letcher Cyc. Corporations, 1073 %d., pp. ?13-?1;, citing 8Thwing v. (c.onald8, 1;7 (inn. 17?, 14= ).2. 1?@, 14? ).2. ?3@, 140 ).2. 4=7, +nn. Cas. 101? % 73@> (itchell v. *an! of $t. 'a"l, 1 (inn. 343). The ,irst +ssignment of %rror in the brief of the plaintiffs as appellants, contending that the investment of corporate f"nds by the (a-ao $"gar Co., -nc., in another corporation (the 'hilippine ,iber 'rocessing Co., -nc.) constit"tes a violation of $ec. 11-H of the Corporation <aw, deserves consideration. 'laintiffs-appellants contend that in 104@ the (a-ao $"gar Central Co., -nc., thro"gh its 'resident, B. +mado +raneta,, s"bscribed for ';@@,@@@.@@ worth of capital stoc! of the 'hilippine ,iber 'rocessing Co. -nc., that payments on the s"bscription were made on $eptember 3@, 104@, for '14@,@@@.@@, on +pril ;@, 1041, for '4@,@@@.@@, and on (arch =, 1043, for '1@@,@@@.@@> that at the time the first two payments were made there was no board resol"tion a"thori#ing the investment> and that it was only on )ovember 3=, 1041, that the 'resident of (a-ao $"gar Central Co., -nc., was so a"thori#ed by the *oard of .irectors. -n addition, ;44,@@@ shares of stoc! of the same 'hilippine ,iber 'rocessing Co., -nc., owned by <"#on -nd"strial, corporation were transferred on (ay ;1, 1043, to the defendant (a-ao $"gar Central Co., -nc., with a val"ation of ';44,@@@.@@ on the basis of '1.@@ par val"e per share. +gain the 8investment8 was made witho"t prior board resol"tion, the a"thori#ing resol"tion having been s"bse5"ent-y approved only on B"ne 7, 1043. 'laintiffs-appellants also contend that even ass"ming, ar-!endo, that the said *oard &esol"tions are valid, the transaction, is still wanting in legality, no resol"tion having been approved by the affirmative vote of stoc!holders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power, as re5"ired in $ec. 11-H of the Corporation <aw. The legal provision invo!ed by the plaintiffs, as appellants, $ec. 11-H of the Corporation <aw, provides: )o corporation organi#ed "nder this act shall invest its f"nds in any other corporation or b"siness, or for any p"rpose other than the main p"rpose for which it was organi#ed, "nless its board of directors has been so a"thori#ed in a resol"tion by the affirmative vote of stoc!holders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on s"ch proposal at a stoc!holders/ meeting called for the p"rpose .... Fn the other hand, the defendants, as appellees, invo!ed $ec. 1;, par. 1@ of the Corporation <aw, which provides: $%C. 1;. I %very corporation has the power: xxx xxx xxx

(0) To enter into any obligation or contract essential to the proper administration of its corporate affairs or necessary for the proper transaction of the b"siness or accomplishment of the p"rpose for which the corporation was organi#ed> (1@) %xcept as in this section otherwise provided, and in order to accomplish its p"rpose as stated in the articles of incorporation, to ac5"ire, hold, mortgage, pledge or dispose of shares, bonds, sec"rities and other evidences of indebtedness of any domestic or foreign corporation. + reading of the two afore-5"oted provisions shows that there is need for interpretation of the apparent conflict.

13
-n his wor! entitled 8The 'hilippine Corporation <aw,8 now in its 4th edition, 'rofessor $"lpicio $. E"evara of the University of the 'hilippines, College of <aw, a well-!nown a"thority in commercial law, reconciled these two apparently conflicting legal provisions, as follows: 9. Power to a& !ire or dispose of s$ares or se&!rities. I + private corporation, in order to accomplish its p"rpose as stated in its articles of incorporation, and s"b9ect to the limitations imposed by the Corporation <aw, has the power to ac5"ire, hold, mortgage, pledge or dispose of shares, bonds, sec"rities, and other evidences of indebtedness of any domestic or foreign corporation. (!&$ an a&t, if done in p!rs!an&e of t$e &orporate p!rpose, does not need t$e appro"al of t$e sto&k$olders/ b!t w$en t$e p!r&$ase of s$ares of anot$er &orporation is done solely for in"estment and not to a&&omplis$ t$e p!rpose of its in&orporation, t$e "ote of appro"al of t$e sto&k$olders is ne&essary. -n any case, the p"rchase of s"ch shares or sec"rities m"st be s"b9ect to the limitations established by the Corporation <aw> namely, (a) that no agric"lt"ral or mining corporation shall in anywise be interested in any other agric"lt"ral or mining corporation> or (b) that a non-agric"lt"ral or non-mining corporation shall be restricted to own not more than 14G of the voting stoc! of any agric"lt"ral or mining corporation> and (c) that s"ch holdings shall be solely for investment and not for the p"rpose of bringing abo"t a monopoly in any line of commerce or combination in restraint of trade. (The 'hilippine Corporation <aw by $"lpicio $. E"evara, 10=1 %d., p. ?0.) (%mphasis o"rs.) lawp$i0.n1t 7@. Power to in"est &orporate f!nds. I + private corporation has the power to invest its corporate f"nds in any other corporation or b"siness, or for any p"rpose other than the main p"rpose for which it was organi#ed, provided that /its board of directors has been so a"thori#ed in a resol"tion by the affirmative vote of stoc!holders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on s"ch a proposal at a stoc!holders/ meeting called for that p"rpose,/ and provided f"rther, that no agric"lt"ral or mining corporation shall in anywise be interested in any other agric"lt"ral or mining corporation. W$en t$e in"estment is ne&essary to a&&omplis$ its p!rpose or p!rposes as stated in it arti&les of in&orporation, t$e appro"al of t$e sto&k$olders is not ne&essary. ()d., p. 1@?.) (%mphasis o"rs.) 2e agree with 'rofessor E"evara. 2e therefore agree with the finding of the <ower Co"rt that the investment in 5"estion does not fall "nder the p"rview of $ec. 11- H of the Corporation <aw. 2ith respect to the defendants/ assignment of errors, the second (referring to the co"nterclaim) is clearly witho"t merit. +s the <ower Co"rt aptly r"led in its Frder of $eptember ;, 10=@ (resolving the defendants/ (otion for &econsideration) the findings of fact were eno"gh to 9"stify a dismissal of the co"nterclaim, 8beca"se the co"nterclaims were based on the fact that the complaint was premat"re, improper, malicio"s and that the lang"age is "nnecessarily vit"perative ab"sive and ins"lting> b"t the Co"rt has not fo"nd that the complaint is premat"re> nor has the Co"rt fo"nd that the complaint was malicio"s> these findings can be gleaned from the decision> with respect to the allegation that the complaint was ab"sive and ins"lting, the Co"rt does not conc"r> for it has not seen anything in the evidence that wo"ld 9"stify a finding that plaintiffs had been act"ated by bad faith, nor is there anything in the complaint essentially libelo"s especially as the r"le is that allegations in pleadings where relevant, are privileged even tho"gh they may not be clearly proved afterwards> ...8 +s regards defendants/ first assignment of error, referring to the stat"s of the acco"nt of B. +mado +raneta in the amo"nt of '7=,31@.@@, this Co"rt li!ewise agrees with the finding of the <ower Co"rt that %xhibit 4, photostatic copy of the page on loans receivable does not constit"te definite primary proof of act"al payment, partic"larly in this case where there is evidence that the acco"nt in 5"estion was transferred from one acco"nt to another. There is no better s"bstit"te for an official receipt and a cancelled chec! as evidence of payment. -n the 9"dgment, the lower co"rt ordered the management of the (a-ao $"gar Central Co., -nc. 8to refrain from ma!ing investments in +co9e (ining, (ab"hay 'rinting and any other company whose p"rpose is not connected with the s"gar central b"siness.8 This portion of the decision sho"ld be reversed beca"se, $ec. 11-H of the Corporation <aw allows a corporation to 8invest its f"nd in any other corporation or b"siness, or for any p"rpose other than the main p"rpose for which it was organi#ed,8 provided that its board of directors has been so a"thori#ed by the affirmative vote of stoc!holders holding shares entitling them to exercise at least two-thirds of the voting power. -) -%2 F, +<< T6% ,F&%EF-)E, that part of the 9"dgment which orders the (a-ao $"gar Central Co., -nc. 8to refrain from ma!ing investments in +co9e (ining, (ab"hay 'rinting, and any other: company whose p"rpose is not connected

1;
with the s"gar central b"siness,8 is reversed. The other parts of the 9"dgment are, affirmed. )o special prono"ncement as to costs. Con&ep&ion, C.J., #eyes, J.B.2., Di+on, 3aldi"ar, Castro, Fernando and Barredo, JJ., &on&!r. %akalintal, (an&$e+ and 4ee$ankee, JJ., took no part.

&o>ong9ei "s. SEC0 89 SCRA ))8 (,9*9! 'ost "nder case digests, Commercial <aw at (onday, Ban"ary ;@, 3@13 'osted by $chi#ophrenic (ind Facts4 'etitioner, stoc!holder of $an (ig"el Corp. filed a petitionwith the $%C for the declaration of n"llity of the by-laws etc. against the ma9ority members of the *F. and $an (ig"el. -t is stated in the by-laws that the amendment or modification of the by-laws may only be delegated to the *F.s "pon an affirmative vote of stoc!holders representing not less than 3D; of the s"bscribed and paid "o capital stoc! of the corporation, which 3D; co"ld have been comp"ted on the basis of the capitali#ation at the time of the amendment. 'etitioner contends that the amendment was based on the 10=1 a"thori#ation, the *oard acted witho"t a"thority and in "s"rpation of the power of the stoc!holders n amending the bylaws in 101=. 6e also contends that the 10=1 a"thori#ation was already "sed in 10=3 and 10=;. 6e also contends that the amendment deprived him of hisright to vote and be voted "pon as a stoc!holder (beca"se it

dis5"alified competitors from nomination and election in the *F. of $(C), th"s the amended by-laws were n"ll and void. 2hile this was pending, the corporation called for a stoc!holderJs meeting for the ratification of the amendment to the bylaws. This prompted petitioner to see! for s"mmary 9"dgment. This was denied by the $%C. -n another case filed by petitioner, he alleged that the corporation had been "sing corporate f"nds in other corps and b"sinesses o"tside the primary p"rpose cla"se of the corporation in violation of the Corporation Code.

2ss6e4 +re

amendments

validK

He5d4 The validity and reasonableness of a by-law is p"rely a 5"estion of law. 2hether the by-law is in conflict with the law of the land, or with the charter of the corporation or is in legal sense "nreasonable and therefore "nlawf"l is a 5"estion of law. 6owever, this is limited where the reasonableness of a by-law is a mere matter of 9"dgment, and one "pon which reasonable minds m"st necessarily differ, a co"rt wo"ld not be warranted in s"bstit"ting its 9"dgment instead of the 9"dgment of those who are a"thori#ed to ma!e by-laws and who have exercised a"thority. The Co"rt held that a corporation has a"thority prescribed by law to prescribe the 5"alifications of directors. -t has the inherent power to adopt by-laws for its internal government, and to reg"late the cond"ct and prescribe the rights and d"ties of its members towards itself and among themselves in reference to the management of its affairs. + corporation, "nder the Corporation law, may prescribe in its by-laws the 5"alifications, d"ties and compensation of directors, officers, and employees. +ny person who b"ys stoc! in a corporation does so with the !nowledge that its affairs are dominated by a ma9ority of the stoc!holders and he impliedly contracts that the will of the ma9ority shall govern in all matters within the limits of the acts of incorporation and lawf"lly enacted by-laws and not forbidden by law. +ny corporation may amend its by-laws by the owners of the ma9ority of the s"bscribed stoc!. -t cannot th"s be said that petitioners has the vested right, as a stoc!

17
holder, to be elected director, in the face of the fact that the law at the time s"ch stoc!holder/s right was ac5"ired contained the prescription that the corporate charter and the by-laws shall be s"b9ect to amendment, alteration and modification. + .irector stands in a fid"ciary relation to the corporation and its shareholders, which is characteri#ed as a tr"st relationship. +namendment to the corporate by-laws which renders a stoc!holder ineligible to be director, if he be also director in a corporation whose b"siness is in competition with that of the other corporation, has been s"stained as valid. This is based "pon the principle that where the director is employed in the service of a rival company, he cannot serve both, b"t m"st betray one or the other. The amendment in this case serves to advance the benefit of the corporation and is good. Corporate officers are also not permitted to "se their position of tr"st and confidence to f"rther their private needs, and the act done in f"rtherance of private needs is deemed to be for the benefit of the corporation. This is called the doctrine of corporate opport"nity. ( Merger and Conso5idation (Section ** of the Cor oration Code! Sec. **. Stoc>ho5derAs or -e-.erAs a ro"a5. - Upon approval by ma9ority vote of each of the board of directors or tr"stees of the constit"ent corporations of the plan of merger or consolidation, the same shall be s"bmitted for approval by the stoc!holders or members of each of s"ch corporations at separate corporate meetings d"ly called for the p"rpose. )otice of s"ch meetings shall be given to all stoc!holders or members of the respective corporations, at least two (3) wee!s prior to the date of the meeting, either personally or by registered mail. $aid notice shall state the p"rpose of the meeting and shall incl"de a copy or a s"mmary of the plan of merger or consolidation. The affirmative vote of stoc!holders representing at least two-thirds (3D;) of the o"tstanding capital stoc! of each corporation in the case of stoc! corporations or at least two-thirds (3D;) of the members in the case of non-stoc! corporations shall be necessary for the approval of s"ch plan. +ny dissenting stoc!holder in stoc! corporations may exercise his appraisal right in accordance with the Code: 'rovided, That if after the approval by the stoc!holders of s"ch plan, the board of directors decides to abandon the plan, the appraisal right shall be exting"ished. +ny amendment to the plan of merger or consolidation may be made, provided s"ch amendment is approved by ma9ority vote of the respective boards of directors or tr"stees of all the constit"ent corporations and ratified by the affirmative vote of stoc!holders representing at least two-thirds (3D;) of the o"tstanding capital stoc! or of two-thirds (3D;) of the members of each of the constit"ent corporations. $"ch plan, together with any amendment, shall be considered as the agreement of merger or consolidation. (n) - 2ncrease and Decrease of Ca ita5 Stoc> (Section )8 of the Cor oration Code) Sec. )8. $o9er to increase or decrease ca ita5 stoc>B inc6r0 create or increase .onded inde.tedness. - )o corporation shall increase or decrease its capital stoc! or inc"r, create or increase any bonded indebtedness "nless approved by a ma9ority vote of the board of directors and, at a stoc!holder/s meeting d"ly called for the p"rpose, two-thirds (3D;) of

14
the o"tstanding capital stoc! shall favor the increase or dimin"tion of the capital stoc!, or the inc"rring, creating or increasing of any bonded indebtedness. 2ritten notice of the proposed increase or dimin"tion of the capital stoc! or of the inc"rring, creating, or increasing of any bonded indebtedness and of the time and place of the stoc!holder/s meeting at which the proposed increase or dimin"tion of the capital stoc! or the inc"rring or increasing of any bonded indebtedness is to be considered, m"st be addressed to each stoc!holder at his place of residence as shown on the boo!s of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. + certificate in d"plicate m"st be signed by a ma9ority of the directors of the corporation and co"ntersigned by the chairman and the secretary of the stoc!holders/ meeting, setting forth: +ny increase or decrease in the capital stoc! or the inc"rring, creating or increasing of any bonded indebtedness shall re5"ire prior approval of the $ec"rities and %xchange Commission. Fne of the d"plicate certificates shall be !ept on file in the office of the corporation and the other shall be filed with the $ec"rities and %xchange Commission and attached to the original articles of incorporation. ,rom and after approval by the $ec"rities and %xchange Commission and the iss"ance by the Commission of its certificate of filing, the capital stoc! shall stand increased or decreased and the inc"rring, creating or increasing of any bonded indebtedness a"thori#ed, as the certificate of filing may declare: 'rovided, That the $ec"rities and %xchange Commission shall not accept for filing any certificate of increase of capital stoc! "nless accompanied by the sworn statement of the treas"rer of the corporation lawf"lly holding office at the time of the filing of the certificate, showing that at least twenty-five (34G) percent of s"ch increased capital stoc! has been s"bscribed and that at least twenty-five (34G) percent of the amo"nt s"bscribed has been paid either in act"al cash to the corporation or that there has been transferred to the corporation property the val"ation of which is e5"al to twenty-five (34G) percent of the s"bscription: 'rovided, f"rther, That no decrease of the capital stoc! shall be approved by the Commission if its effect shall pre9"dice the rights of corporate creditors. )on-stoc! corporations may inc"r or create bonded indebtedness, or increase the same, with the approval by a ma9ority vote of the board of tr"stees and of at least two-thirds (3D;) of the members in a meeting d"ly called for the p"rpose. *onds iss"ed by a corporation shall be registered with the $ec"rities and %xchange Commission, which shall have the a"thority to determine the s"fficiency of the terms thereof. ( Ado tion0 A-end-ent0 and Re ea5 of B:(La9s (Section 78 of the Cor oration Code! Sec. 78. A-end-ents to .:(5a9s. - The board of directors or tr"stees, by a ma9ority vote thereof, and the owners of at least a ma9ority of the o"tstanding capital stoc!, or at least a ma9ority of the members of a non-stoc! corporation, at a reg"lar or special meeting d"ly

1=
called for the p"rpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (3D;) of the o"tstanding capital stoc! or two-thirds (3D;) of the members in a non-stoc! corporation may delegate to the board of directors or tr"stees the power to amend or repeal any by-laws or adopt new by-laws: 'rovided, That any power delegated to the board of directors or tr"stees to amend or repeal any by-laws or adopt new by-laws shall be considered as revo!ed whenever stoc!holders owning or representing a ma9ority of the o"tstanding capital stoc! or a ma9ority of the members in non-stoc! corporations, shall so vote at a reg"lar or special meeting. 2henever any amendment or new by-laws are adopted, s"ch amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, d"ly certified "nder oath by the corporate secretary and a ma9ority of the directors or tr"stees, shall be filed with the $ec"rities and %xchange Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective "pon the iss"ance by the $ec"rities and %xchange Commission of a certification that the same are not inconsistent with this Code. (33a and 3;a) ( Dec5aration of Stoc> Di"idends (Section 7) of the Cor oration Code! Sec. 7). $o9er to dec5are di"idends. - The board of directors of a stoc! corporation may declare dividends o"t of the "nrestricted retained earnings which shall be payable in cash, in property, or in stoc! to all stoc!holders on the basis of o"tstanding stoc! held by them: 'rovided, That any cash dividends d"e on delin5"ent stoc! shall first be applied to the "npaid balance on the s"bscription pl"s costs and expenses, while stoc! dividends shall be withheld from the delin5"ent stoc!holder "ntil his "npaid s"bscription is f"lly paid: 'rovided, f"rther, That no stoc! dividend shall be iss"ed witho"t the approval of stoc!holders representing not less than two-thirds (3D;) of the o"tstanding capital stoc! at a reg"lar or special meeting d"ly called for the p"rpose. (1=a) $toc! corporations are prohibited from retaining s"rpl"s profits in excess of one h"ndred (1@@G) percent of their paid-in capital stoc!, except: (1) when 9"stified by definite corporate expansion pro9ects or programs approved by the board of directors> or (3) when the corporation is prohibited "nder any loan agreement with any financial instit"tion or creditor, whether local or foreign, from declaring dividends witho"t itsDhis consent, and s"ch consent has not yet been sec"red> or (;) when it can be clearly shown that s"ch retention is necessary "nder special circ"mstances obtaining in the corporation, s"ch as when there is need for special reserve for probable contingencies. (n) ( Manage-ent Contracts (Section 77 of the Cor oration Code!

11
Sec. 77. $o9er to enter into -anage-ent contract. - )o corporation shall concl"de a management contract with another corporation "nless s"ch contract shall have been approved by the board of directors and by stoc!holders owning at least the ma9ority of the o"tstanding capital stoc!, or by at least a ma9ority of the members in the case of a non-stoc! corporation, of both the managing and the managed corporation, at a meeting d"ly called for the p"rpose: 'rovided, That (1) where a stoc!holder or stoc!holders representing the same interest of both the managing and the managed corporations own or control more than one-third (1D;) of the total o"tstanding capital stoc! entitled to vote of the managing corporation> or (3) where a ma9ority of the members of the board of directors of the managing corporation also constit"te a ma9ority of the members of the board of directors of the managed corporation, then the management contract m"st be approved by the stoc!holders of the managed corporation owning at least two-thirds (3D;) of the total o"tstanding capital stoc! entitled to vote, or by at least two-thirds (3D;) of the members in the case of a non-stoc! corporation. )o management contract shall be entered into for a period longer than five years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation "nderta!es to manage or operate all or s"bstantially all of the b"siness of another corporation, whether s"ch contracts are called service contracts, operating agreements or otherwise: 'rovided, however, That s"ch service contracts or operating agreements which relate to the exploration, development, exploitation or "tili#ation of nat"ral reso"rces may be entered into for s"ch periods as may be provided by the pertinent laws or reg"lations.

( FiCing of Consideration for $ar Va56e Shares (Section 8+ of the Cor oration Code! Sec. 8+. Considering for stoc>s. - $toc!s shall not be iss"ed for a consideration less than the par or iss"ed price thereof. Consideration for the iss"ance of stoc! may be any or a combination of any two or more of the following: 1. +ct"al cash paid to the corporation> 3. 'roperty, tangible or intangible, act"ally received by the corporation and necessary or convenient for its "se and lawf"l p"rposes at a fair val"ation e5"al to the par or iss"ed val"e of the stoc! iss"ed> ;. <abor performed for or services act"ally rendered to the corporation> 7. 'revio"sly inc"rred indebtedness of the corporation> 4. +mo"nts transferred from "nrestricted retained earnings to stated capital> and =. F"tstanding shares exchanged for stoc!s in the event of reclassification or conversion.

1?
2here the consideration is other than act"al cash, or consists of intangible property s"ch as patents of copyrights, the val"ation thereof shall initially be determined by the incorporators or the board of directors, s"b9ect to approval by the $ec"rities and %xchange Commission. $hares of stoc! shall not be iss"ed in exchange for promissory notes or f"t"re service. The same considerations provided for in this section, insofar as they may be applicable, may be "sed for the iss"ance of bonds by the corporation. The iss"ed price of no-par val"e shares may be fixed in the articles of incorporation or by the board of directors p"rs"ant to a"thority conferred "pon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stoc!holders representing at least a ma9ority of the o"tstanding capital stoc! at a meeting d"ly called for the p"rpose. (4 and 1=) .. %reas6r: Shares (Section ;* of the Cor oration Code! Sec. ;*. Voting right for treas6r: shares. - Treas"ry shares shall have no voting right as long as s"ch shares remain in the Treas"ry. (n) c. Cond6ct of Stoc>ho5dersD or Me-.ersD Meetings ( Einds and ReF6ire-ents of Meetings (Sections 79 and ;/ of the Cor oration Code! Sec. 79. Einds of -eetings. - (eetings of directors, tr"stees, stoc!holders, or members may be reg"lar or special. (n) Sec. ;/. Reg65ar and s ecia5 -eetings of stoc>ho5ders or -e-.ers. - &eg"lar meetings of stoc!holders or members shall be held ann"ally on a date fixed in the by-laws, or if not so fixed, on any date in +pril of every year as determined by the board of directors or tr"stees: 'rovided, That written notice of reg"lar meetings shall be sent to all stoc!holders or members of record at least two (3) wee!s prior to the meeting, "nless a different period is re5"ired by the by-laws. 2henever, for any ca"se, there is no person a"thori#ed to call a meeting, the $ecretaries and %xchange Commission, "pon petition of a stoc!holder or member on a showing of good ca"se therefor, may iss"e an order to the petitioning stoc!holder or member directing him to call a meeting of the corporation by giving proper notice re5"ired by this Code or by the by-laws. The petitioning stoc!holder or member shall preside thereat "ntil at least a ma9ority of the stoc!holders or members present have been chosen one of their n"mber as presiding officer. (37, 3=) ( $5ace and %i-e of Meeting (Section ;, and 9) of the Cor oration Code! Sec. ;,. $5ace and ti-e of -eetings of stoc>ho5ders or -e-.ers . - $toc!holders/ or members/ meetings, whether reg"lar or special, shall be held in the city or m"nicipality where the principal office of the corporation is located, and if practicable in the principal

10
office of the corporation: 'rovided, That (etro (anila shall, for p"rposes of this section, be considered a city or m"nicipality. )otice of meetings shall be in writing, and the time and place thereof stated therein. +ll proceedings had and any b"siness transacted at any meeting of the stoc!holders or members, if within the powers or a"thority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stoc!holders or members of the corporation are present or d"ly represented at the meeting. (37 and 34) Sec. 9). $5ace of -eetings. - The by-laws may provide that the members of a non-stoc! corporation may hold their reg"lar or special meetings at any place even o"tside the place where the principal office of the corporation is located: 'rovided, That proper notice is sent to all members indicating the date, time and place of the meeting: and 'rovided, f"rther, That the place of meeting shall be within the 'hilippines. (n)

( G6or6- (Section ;+ of the Cor oration Code! $%CF). .- -$-F)

H&.R. 'o. ,),)97. March +80 +//;I

@ES#S V. LA'#=A0 MA&AD3A RE3ES0 BA3A'2 RE3ES and AR2EL RE3ES0 petitioners, vs. CO#R% OF A$$EALS0 SEC#R2%2ES A'D EJCHA'&E COMM2SS2O'0 DOLORES O'R#B2A0 ELE'2%A 'OLASCO0 @#A' O. 'OLASCO 2220 ES%A%E OF FA#S%2'A M. O'R#B2A0 $H2L2$$2'E MERCHA'% MAR2'E SCHOOL0 2'C.0 respondents. DEC2S2O' %2'&A0 J.4 'resented in the case at bar is the apparently straight-forward b"t complicated 5"estion: 2hat sho"ld be the basis of 5"or"m for a stoc!holdersJ meetingIthe o"tstanding capital stoc! as indicated in the articles of incorporation or that contained in the companyJs stoc! and transfer boo!K 'etitioners see! to n"llify the Co"rt of +ppealsJ De&ision in C+LE.&. $' )o. 7171;M1N prom"lgated on 1? +"g"st 1001, affirming the $%C 5rder dated 3@ B"ne 100=, and the #esol!tionM3N of the Co"rt of +ppeals dated ;1 Fctober 1001 which denied petitionersJ motion for reconsideration. The antecedents are not disp"ted. -n 1043, the 'hilippine (erchant (arine $chool, -nc. ('(($-) was incorporated, with seven h"ndred (1@@) fo"ndersJ shares and seventy-six (1=) common shares as its initial capital stoc! s"bscription reflected in the articles of incorporation. 6owever, private respondents and their predecessors who were in control of '(($- registered the companyJs stoc! and transfer boo! for the first time in 101?, recording thirty-three (;;) common shares as the only iss"ed

3@
and o"tstanding shares of '(($-. $ometime in 1010, a special stoc!holdersJ meeting was called and held on the basis of what was considered as a 5"or"m of twenty-seven (31) common shares, representing more than two-thirds (3D;) of the common shares iss"ed and o"tstanding. -n 10?3, the heirs of one of the original incorporators, B"an +cayan, filed a petition with the $ec"rities and %xchange Commission ($%C) for the registration of their property rights over one h"ndred (13@) fo"ndersJ shares and twelve (13) common shares owned by their father. The $%C hearing officer held that the heirs of +cayan were entitled to the claimed shares and called for a special stoc!holdersJ meeting to elect a new set of officers. M;N The $%C En Ban& affirmed the decision. +s a res"lt, the shares of +cayan were recorded in the stoc! and transfer boo!. Fn @= (ay 1003, a special stoc!holdersJ meeting was held to elect a new set of directors. 'rivate respondents thereafter filed a petition with the $%C 5"estioning the validity of the @= (ay 1003 stoc!holdersJ meeting, alleging that the 5"or"m for the said meeting sho"ld not be based on the 1=4 iss"ed and o"tstanding shares as per the stoc! and transfer boo!, b"t on the initial s"bscribed capital stoc! of seven h"ndred seventy-six (11=) shares, as reflected in the 1043 +rticles of -ncorporation. The petition was dismissed.M7N +ppeal was made to the $%C En Ban&, which granted said appeal, holding that the shares of the deceased incorporators sho"ld be d"ly represented by their respective administrators or heirs concerned. The $%C directed the parties to call for a stoc!holders meeting on the basis of the stoc!holdings reflected in the articles of incorporation for the p"rpose of electing a new set of officers for the corporation. M4N 'etitioners, who are '(($- stoc!holders, filed a petition for review with the Co"rt of +ppeals. M=N &ebecca +cayan, Bayne F. +b"id, 2illie F. +b"id and &enato Cervantes, stoc!holders and directors of '(($-, earlier filed another petition for review of the same $%C En Ban&6s orders. The petitions were thereafter consolidated. M1N The consolidated petitions essentially raised the following iss"es, "i+: (a) whether the basis the o"tstanding capital stoc! and accordingly also for determining the 5"or"m at stoc!holdersJ meetings it sho"ld be the 101? stoc! and transfer boo! or if it sho"ld be the 1043 articles of incorporation> and (b) whether the Co"rt of +ppeals Ogravely erred in applying the %spe9o .ecision to the benefit of respondents.PM?N The O%spe9o .ecisionP is the decision of the $%C en ban& in $%C Case )o. 33?0 which ordered the recording of the shares of Bose +cayan in the stoc! and transfer boo!. The Co"rt of +ppeals held that for p"rposes of transacting b"siness, the 5"or"m sho"ld be based on the o"tstanding capital stoc! as fo"nd in the articles of incorporation. M0N +s to the second iss"e, the Co"rt of +ppeals held that the r"ling in the A&ayan case wo"ld ipso fa&to benefit the private respondents, since to re5"ire a separate 9"dicial declaration to recogni#e the shares of the original incorporators wo"ld entail "nnecessary delay and expense. *esides, the Co"rt of +ppeals added, the incorporators have already proved their stoc!holdings thro"gh the provisions of the articles of incorporation.M1@N -n the instant petition, petitioners claim that the 1003 stoc!holdersJ meeting was valid and legal. They s"bmit that reliance on the 1043 articles of incorporation for determining the 5"or"m negates the existence and validity of the stoc! and transfer boo! which private respondents themselves prepared. -n addition, they posit that private respondents cannot avail of the benefits sec"red by the heirs of +cayan, as private respondents m"st show and prove entitlement to the fo"nders and common shares in a separate and independent actionDproceeding. -n private respondentsJ %emorand!mM11N dated @? (arch 3@@@, they point o"t that the instant petition raises the same facts and iss"es as those raised in E.&. )o. 1;1;14M13N, which was denied by the ,irst .ivision of this Co"rt on 1? Ban"ary 1000 for fail"re to show that the Co"rt of +ppeals committed any reversible error. They add that as a logical conse5"ence, the instant petition sho"ld be dismissed on the gro"nd of res 7!di&ata. ,"rthermore, private respondents claim that in view of the applicability of the r"le on res 7!di&ata, petitionersJ co"nsel sho"ld be cited for contempt for violating the r"le against for"m-shopping. M1;N ,or their part, petitioners claim that the principle of res 7!di&ata does not apply to the instant case. They arg"e that the instant petition is separate and distinct from E.&. )o. 1;1;14, there being no identity of parties, and more importantly, the parties in the two petitions have their own distinct rights and interests in relation to the s"b9ect matter in litigation. ,or the same reasons, they claim that co"nsel for petitioners cannot be fo"nd g"ilty of for"m-shopping. M17N -n their %anifestation and (otionM14N dated 33 $eptember 3@@7, private respondents moved for the dismissal of the instant petition in view of the dismissal of E.&. )o. 1;1;14. +ttached to the said manifestation is a copy of the Entry of J!d-mentM1=N iss"ed by the ,irst .ivision dated @1 .ecember 1000. The petition m"st be denied, not on res 7!di&ata, b"t on the gro"nd that li!e the petition in E.&. )o. 1;1;14 it fails to imp"te reversible error to the challenged Co"rt of +ppealsJ De&ision. #es 7!di&ata does not apply in t$e &ase at bar.

31
#es 7!di&ata means a matter ad9"dged, a thing 9"dicially acted "pon or decided> a thing or matter settled by 9"dgment.M11N The doctrine of res 7!di&ata provides that a final 9"dgment, on the merits rendered by a co"rt of competent 9"risdiction is concl"sive as to the rights of the parties and their privies and constit"tes an absol"te bar to s"bse5"ent actions involving the same claim, demand, or ca"se of action. M1?N The elements of res 7!di&ata are (a) identity of parties or at least s"ch as representing the same interest in both actions> (b) identity of rights asserted and relief prayed for, the relief being fo"nded on the same facts> and (c) the identity in the two (3) partic"lars is s"ch that any 9"dgment which may be rendered in the other action will, regardless of which party is s"ccessf"l, amo"nt to res7!di&ata in the action "nder consideration.M10N There is no disp"te as to the identity of s"b9ect matter since the cr"cial point in both cases is the propriety of incl"ding the still "nproven shares of respondents for p"rposes of determining the 5"or"m. 'etitioners, however, deny that there is identity of parties and ca"ses of actions between the two petitions. The test often "sed in determining whether ca"ses of action are identical is to ascertain whether the same facts or evidence wo"ld s"pport and establish the former and present ca"ses of action. M3@N(ore significantly, there is identity of ca"ses of action when the 9"dgment so"ght will be inconsistent with the prior 9"dgment. M31N -n both petitions, petitioners assert that the Co"rt of +ppealsJ De&isioneffectively negates the existence and validity of the stoc! and transfer boo!, as well as a"tomatically grants private respondentsJ shares of stoc!s which they do not own, or the ownership of which remains to be "nproved. 'etitioners in the two petitions rely on the entries in the stoc! and transfer boo! as the proper basis for comp"ting the 5"or"m, and conse5"ently determine the degree of control one has over the company. %ssentially, the affirmance of the $%C 5rder had the effect of diminishing their control and interests in the company, as it allowed the participation of the individ"al private respondents in the election of officers of the corporation. +bsol"te identity of parties is not a condition sine !a non for res 7!di&ata to applyIa shared identity of interest is s"fficient to invo!e the coverage of the principle. M33N 6owever, there is no identity of parties between the two cases. The parties in the two petitions have their own rights and interests in relation to the s"b9ect matter in litigation. +s stated by petitioners in their #eply to #espondents6 %emorand!m ,M3;N there are no two separate actions filed, b"t rather, two separate petitions for review on &ertiorari filed by two distinct parties with the Co"rt and represented by their own co"nsels, arising from an adverse consolidated decision prom"lgated by the Co"rt of +ppeals in one action or proceeding. M37N +s s"ch, res 7!di&ata is not present in the instant case. <i!ewise, there is no basis for declaring petitioners or their co"nsel g"ilty of violating the r"les against for"mshopping. -n the 'erifi&ation8Certifi&ationM34N portion of the petition, petitioners clearly stated that there was then a pending motion for reconsideration of the 1? +"g"st 1001 De&ision of the Co"rt of +ppeals in the consolidated cases (C+-E.&. $' )o. 7171; and C+-E.&. $' )o. 717@;) filed by the +b"ids, as well as a motion for clarification. (oreover, the records indicate that petitioners filed their %anifestationM3=N dated 3@ Ban"ary 100?, informing the Co"rt of their receipt of the petition in E.&. )o. 1;1;14 in compliance with their d"ty to inform the Co"rt of the pendency of another similar petition. The Co"rt finds that petitioners s"bstantially complied with the r"les against for"m-shopping. 4$e De&ision of t$e Co!rt of Appeals m!st be !p$eld. The petition in this case involves the same facts and s"bstantially the same iss"es and arg"ments as those in E.&. )o. 1;1;14 which the ,irst .ivision has long denied with finality. The ,irst .ivision fo"nd the petition before it inade5"ate in failing to raise any reversible error on the part of the Co"rt of +ppeals. 2e reach a similar concl"sion as regards the present petition. The cr"cial iss"e in this case is whether it is the companyJs stoc! and transfer boo!, or its 1043 +rticles of -ncorporation, which determines stoc!holdersJ shareholdings, and provides the basis for comp"ting the 5"or"m. 2e agree with the Co"rt of +ppeals. The articles of incorporation has been described as one that defines the charter of the corporation and the contract"al relationships between the $tate and the corporation, the stoc!holders and the $tate, and between the corporation and its stoc!holders.M31N 2hen '(($- was incorporated, the prevailing law was +ct )o. 1740, otherwise !nown as OThe Corporation <aw.P $ection = thereof states: $ec. =. ,ive or more persons, not exceeding fifteen, a ma9ority of whom are residents of the 'hilippines, may form a private corporation for any lawf"l p"rpose or p"rposes by filing with the $ec"rities and %xchange Commission articles of incorporation d"ly exec"ted and ac!nowledged before a notary p"blic, setting forth: ....

33
(1) -f it be a stoc! corporation, the amo"nt of its capital stoc!, in lawf"l money of the 'hilippines, and the n"mber of shares into which it is divided, and if s"ch stoc! be in whole or in part witho"t par val"e then s"ch fact shall be stated>Pro"ided, $owe"er, That as to stoc! witho"t par val"e the articles of incorporation need only state the n"mber of shares into which said capital stoc! is divided. (?) -f it be a stoc! corporation, the amo"nt of capital stoc! or n"mber of shares of no-par stoc! act"ally s"bscribed, the amo"nt or n"mber of shares of no-par stoc! s"bscribed by each and the s"m paid by each on his s"bscription. . . . M3?N + review of '(($-Js articles of incorporation M30N shows that the corporation complied with the re5"irements laid down by +ct )o. 1740. -t provides in part: 1. That the capital stoc! of the said corporation is )-)%TC T6FU$+). '%$F$ ('0@,@@@.@@) divided into two classes, namely: ,FU).%&$J $TFCQ - 1,@@@ shares at '3@ par val"e' 3@,@@@.@@ CF((F) $TFCQ1@@ shares at ' 1@@ par val"e L ' 1@,@@@.@@ TFT+< ---------------------1,1@@ shares----------------------------' 0@,@@@.@@ .... ?. That the amo"nt of the entire capital stoc! which has been act"ally s"bscribed is T2%)TC F)% T6FU$+). $-R 6U).&%. '%$F$ ('31,=@@.@@) and the following persons have s"bscribed for the n"mber of shares and amo"nt of capital stoc! set o"t after their respective names: $U*$C&-*%& $U*$C&-*%. )o. of $hares Crisp"lo B. Fnr"bia B"an 6. +cayan (artin '. $agarbarria (a"ricio E. Eallaga <"is &enteria ,a"stina (. de Fnr"bia (rs. &amon +raneta Carlos (. Fnr"bia 13@ ,o"nders 13@ 8 1@@ 4@ 4@ 17@ +(FU)T $U*$C&-*%. 'ar al"e ' 3,7@@.@@ 3, 7@@.@@ 3, @@@.@@ 1, @@@.@@ 1, @@@.@@ 3, ?@@.@@ ?@@.@@ 1,=@@.@@ ' 17,@@@.@@ +(FU)T $U*$C&-*%. 'ar al"e

8 8 8 8

7@ 8 ?@ 8 1@@ $U*$C&-*%. )o. of $hares

$U*$C&-*%&

Crisp"lo B. Fnr"bia B"an 6. +cayan (artin '. $agarbarria (a"ricio E. Eallaga <"is &enteria ,a"stina (. de Fnr"bia

13 Common 13 ? ? ? 13 8 8 8 8 8

' 1,3@@.@@ 1,3@@.@@ ?@@.@@ ?@@.@@ ?@@.@@ 1,3@@.@@

3;
(rs. &amon +raneta Carlos (. Fnr"bia ? 8 ? 8 1= ?@@.@@ ?@@.@@ ' 1,=@@.@@M;@N

There is no gainsaying that the contents of the articles of incorporation are binding, not only on the corporation, b"t also on its shareholders. -n the instant case, the articles of incorporation indicate that at the time of incorporation, the incorporators were bona fide stoc!holders of seven h"ndred (1@@) fo"ndersJ shares and seventy-six (1=) common shares. 6ence, at that time, the corporation had 11= iss"ed and o"tstanding shares. Fn the other hand, a stoc! and transfer boo! is the boo! which records the names and addresses of all stoc!holders arranged alphabetically, the installments paid and "npaid on all stoc! for which s"bscription has been made, and the date of payment thereof> a statement of every alienation, sale or transfer of stoc! made, the date thereof and by and to whom made> and s"ch other entries as may be prescribed by law. M;1N + stoc! and transfer boo! is necessary as a meas"re of preca"tion, expediency and convenience since it provides the only certain and acc"rate method of establishing the vario"s corporate acts and transactions and of showing the ownership of stoc! and li!e matters. M;3N 6owever, a stoc! and transfer boo!, li!e other corporate boo!s and records, is not in any sense a p"blic record, and th"s is not excl"sive evidence of the matters and things which ordinarily are or sho"ld be written therein. M;;N -n fact, it is generally held that the records and min"tes of a corporation are not concl"sive even against the corporation b"t are prima fa&ie evidence only, M;7N and may be impeached or even contradicted by other competent evidence. M;4N Th"s, parol evidence may be admitted to s"pply omissions in the records or explain ambig"ities, or to contradict s"ch records. M;=N -n 10?@, Batas Pambansa Bl-. 9:, otherwise !nown as OThe Corporation Code of the 'hilippinesP s"pplanted +ct )o. 1740. *' *lg. =? provides: $ec. 37. %lection of directors or tr"stees.I+t all elections of directors or tr"stees, there m"st be present, either in person or by representative a"thori#ed to act by written proxy, the owners of a ma9ority of the o"tstanding capital stoc!, or if there be no capital stoc!, a ma9ority of the members entitled to vote. . . . $ec. 43. S"or"m in meetings.- Unless otherwise provided for in this Code or in the by-laws, a 5"or"m shall consist of the stoc!holders representing a ma9ority of the o"tstanding capital stoc! or ma9ority of the members in the case of non-stoc! corporation. F"tstanding capital stoc!, on the other hand, is defined by the Code as: $ec. 1;1. F"tstanding capital stoc! defined.I The term Oo"tstanding capital stoc!P as "sed in this code, means the total shares of stoc! iss"ed to s"bscribers or stoc!holders whether or not f"lly or partially paid (as long as there is binding s"bscription agreement) except treas"ry shares. Th"s, 5"or"m is based on the totality of the shares which have been s"bscribed and iss"ed, whether it be fo"ndersJ shares or common shares.M;1N -n the instant case, two fig"res are being pitted against each otherI those contained in the articles of incorporation, and those listed in the stoc! and transfer boo!. To base the comp"tation of 5"or"m solely on the obvio"sly deficient, if not inacc"rate stoc! and transfer boo!, and completely disregarding the iss"ed and o"tstanding shares as indicated in the articles of incorporation wo"ld wor! in9"stice to the owners andDor s"ccessors in interest of the said shares. This case is one instance where resort to doc"ments other than the stoc! and transfer boo!s is necessary. The stoc! and transfer boo! of '(($- cannot be "sed as the sole basis for determining the 5"or"m as it does not reflect the totality of shares which have been s"bscribed, more so when the articles of incorporation show a significantly larger amo"nt of shares iss"ed and o"tstanding as compared to that listed in the stoc! and transfer boo!. +s aptly stated by the $%C in its 5rder dated 14 B"ly 100=:M;?N -t is to be explained, that if at the onset of incorporation a corporation has 111 shares s"bscribed, the $toc! and Transfer *oo! sho"ld li!ewise reflect 111 shares. +ny sale, disposition or even reac5"isition of the company of its own shares, in which it becomes treas"ry shares, wo"ld not affect the total n"mber of shares in the $toc! and Transfer *oo!. +ll that will change are the entries as to the owners of the shares b"t not as to the amo"nt of shares already s"bscribed. This is precisely the reason why the $toc! and Transfer *oo! was not given probative val"e. .id the shares, which were not recorded in the $toc! and Transfer *oo!, b"t were recorded in the +rticles of -incorporation 9"st vanish into thin airK . . . .M;0N

37
+s shown above, at the time the corporation was set-"p, there were already seven h"ndred seventy-six (11=) iss"ed and o"tstanding shares as reflected in the articles of incorporation. )o proof was add"ced as to any transaction effected on these shares from the time '(($- was incorporated "p to the time the instant petition was filed, except for the thirtythree (;;) shares which were recorded in the stoc! and transfer boo! in 101?, and the additional one h"ndred thirty-two (1;3) in 10?3. *"t obvio"sly, the shares so ordered recorded in the stoc! and transfer boo! are among the shares reflected in the articles of incorporation as the shares s"bscribed to by the incorporators named therein. Fne who is act"ally a stoc!holder cannot be denied his right to vote by the corporation merely beca"se the corporate officers failed to !eep its records acc"rately. M7@N + corporationJs records are not the only evidence of the ownership of stoc! in a corporation.M71N -n an +merican case,M73N persons claiming shareholders stat"s in a professional corporation were listed as stoc!holders in the amendment to the articles of incorporation. Fn that basis, they were in all respects treated as shareholders. -n fact, the acts and cond"ct of the parties may even constit"te s"fficient evidence of oneJs stat"s as a shareholder or member.M7;N -n the instant case, no less than the articles of incorporation declare the incorporators to have in their name the fo"nders and several common shares. Th"s, to disregard the contents of the articles of incorporation wo"ld be to pretend that the basic doc"ment which legally triggered the creation of the corporation does not exist and accordingly to allow great in9"stice to be ca"sed to the incorporators and their heirs. 'etitioners arg"e that the Co"rt of +ppeals Ogravely erred in applying the %spe9o decision to the benefit of respondents.P The Co"rt believes that the more precise statement of the iss"e is whether in its assailed De&ision, the Co"rt of +ppeals can declare private respondents as the heirs of the incorporators, and conse5"ently register the fo"nders shares in their name. 6owever, this iss"e as recast is not act"ally determinative of the present controversy as explained below. 'etitioners claim that the De&ision of the Co"rt of +ppeals "nilaterally divested them of their shares in '(($- as recorded in the stoc! and transfer boo! and instantly created inexistent shares in favor of private respondents. 2e do not agree. The assailed De&ision merely declared that a separate 9"dicial declaration to recogni#e the shares of the original incorporators wo"ld entail "nnecessary delay and expense on the part of the litigants, considering that the incorporators had already proved ownership of s"ch shares as shown in the articles of incorporation. M77N There was no declaration of who the individ"al owners of these shares were on the date of the prom"lgation of the De&ision. +s properly stated by the $%C in its 5rder dated 3@ B"ne 100=, to which the appellate co"rtJs De&ision sho"ld be related, Oif at all, the ownership of these shares sho"ld only be s"b9ected to the proper 9"dicial (probate) or extra9"dicial proceedings in order to determine the respective shares of the legal heirs of the deceased incorporators.P M74N 1HEREFORE, the petition is .%)-%. and the assailed De&ision is +,,-&(%.. Costs against petitioners. SO ORDERED. P!no, ;C$airman<, A!stria-%artine+, Calle7o, (r., and C$i&o-=a+ario, JJ., conc"r.

M1N

'rom"lgated by the $pecial Third .ivision, B"stice Eloria C. 'aras, 'residing B"stice, BB. %d"ardo E. (ontenegro and Fmar U. +min, conc"rring> #ollo, pp.1@3-11@. )d. at 13;. )d. at =1-11. )d. at 1?-?7. )d. at ?7-03. )d. at 14. Co"rt of +ppealsJ .ecision, )d. at 1@3. )d. at 1?. )d. at 1@0. )d. at 1@0-11@. )d. at 331-340.

M3N M;N M7N M4N M=N M1N M?N M0N

M1@N M11N

34
M13N

&ebecca +cayan, Bayne F. +b"id, 2illie F. +b"id and &enato Cervantes ". Co"rt of +ppeals, $ec"rities and %xchange Commission, .olores F. Fnr"bia, %lenita F. )olasco, B"an F. )olasco ---, %state of ,a"stina (. Fnr"bia and 'hilippine (erchant (arine $chool, -nc., filed on 37 .ecember 1001. #ollo, p. 371. )d. at ;44-;4?. )d. at ;?;-;?4. )d. at ;?1. (anila %lectric Company ". 'hilippine Cons"mers ,o"ndation, -nc., 734 'hil. =4, 1? (3@@3), &itin- 7= +( BU&. T417. &ep"blic ". Co"rt of +ppeals, ;?1 'hil. 44?, 4=7 (3@@@). Cr"# v. Co"rt of +ppeals, ;?? 'hil. 44@, 44= (3@@@). Cagayan de Fro Colise"m -nc. ". Co"rt of +ppeals, ;1? 'hil. 70?, 43@ (1000). (!pra note 10 at 440. )d. at 441. #ollo, pp. ;44-;=7. )d. at ;41. )d. at ;4. )d. at 1;@. Eovernment of the 'hilippine -slands ". (anila &ailroad Co., 43 'hil. =00, 1=;-1=7 (1030). The corresponding provision in *.'. *lg. =?, otherwise !nown as OThe Corporation Code of the 'hilippines,P reads: $ec. 17. Contents of articles of incorporation.I+ll corporations organi#ed "nder this Code shall file with the $ec"rities and %xchange Commission articles of incorporation in any of the official lang"ages d"ly signed and ac!nowledged by all of the incorporators, containing s"bstantially the following matters, except as otherwise prescribed by this Code or by special law: ... ?. -f it be a stoc! corporation, the amo"nt of its a"thori#ed capital stoc! in lawf"l money of the 'hilippines, the n"mber of shares into which it is divided, and in case the shares are par val"e shares, the par val"e of each, the names, nationalities and residences of the original s"bscribers, and the amo"nt s"bscribed and paid by each on his s"bscription, and if some or all of the shares are witho"t par val"e, s"ch fact m"st be stated> . . . .

M1;N M17N M14N M1=N M11N M1?N M10N M3@N M31N M33N M3;N M37N M34N M3=N M31N M3?N

M30N M;@N

#ollo, pp. ;1- 7;. )d. at 7@. +ttached to the articles of incorporation was the Treas"rerJs +ffidavit, which stated the shares act"ally s"bscribed and the amo"nt act"ally paid, and that at least 3@ percent of the entire capital stoc! has been s"bscribed and 34 percent thereof had been act"ally paid. $ec. 17, *.'. *lg. =?. 6%CTF& $. .% <%F), T6% CF&'F&+T-F) CF.% F, T6% '6-<-''-)%$ +))FT+T%., 1000 %dition, p. =@=. &itin- $%C Fpinion, 10 ,ebr"ary 1014, &itin- 4 ,letcher, p. 4@0. 1?+ +( BU& 3d T;;?. *itong ". Co"rt of +ppeals, ;47 'hil. 41=, 4;= (100?). 4 ,letcher Cyc. Corp. T33@3, p. ==1. 1?+ +( BU& 3d T;;?. Under $ec. ;1 of the old Code, 5"or"m for the election of directors was described as the ma9ority of the s"bscribed capital stoc! entitled to vote.

M;1N M;3N

M;;N M;7N M;4N M;=N M;1N

3=
M;?N M;0N M7@N M71N M73N

#ollo, pp. 07-1@@. )d. at 0?. 1?+ +( BU& 3d T1@;3, p. ?11. 1?+ +( BU& 3d T1;?, p. =@1. Qrosnar ". $chmidt Qrosnar (c)a"ghton Earett Co., 3?3 'a $"per 43=, 73; +3d ;1@, &ited in 1? + +( BU& 3d T1;?, p. =@?. 1?+ +( BU& 3d T1;?, p. =@?. #ollo, pp. 1@0-11@. )d. at 03.

M7;N M77N M74N

Lan6Ka "s. CA Lan6Ka "s. CA &R 'o. ,),)97 L March +80 +//; Facts4 'etitioners see! to n"llify the Co"rt of +ppealsJ De&ision in C+LE.&. $' )o. 7171;1 prom"lgated on 1? +"g"st 1001, affirming the $%C 5rder dated 3@ B"ne 100=, and the #esol!tion3 of the Co"rt of +ppeals dated ;1 Fctober 1001 which denied petitionersJ motion for reconsideration. U -n 1043, the 'hilippine (erchant (arine $chool, -nc. ('(($-) was incorporated, with seven h"ndred (1@@) fo"ndersJ shares and seventy-six (1=) common shares as its initial capital stoc! s"bscription reflected in the articles of incorporation U Fnr"bia et. al, who were in control of '(($- registered the companyJs stoc! and transfer boo! for the first time in 101?, recording thirty-three (;;) common shares as the only iss"ed and o"tstanding shares of '(($-. U -n 1010, a special stoc!holdersJ meeting was called and held on the basis of what was considered as a 5"or"m of twenty-seven (31) common shares, representing more than two-thirds (3D;) of the common shares iss"ed and o"tstanding. U -n 10?3, B"an +cayan, one of the heirs of the incorporators filed a petition for the registration of their property rights was filed before the $%C over 13@ fo"ndersJ shares and 13 common shares owned by their father U $%C 6earing Ffficer: heirs of +cayan were entitled to the claimed shares and called for a special stoc!holdersJ meeting to elect a new set of officers. U $%C en banc: affirmed the decision U +s a res"lt, the shares of +cayan were recorded in the stoc! and transfer boo!. U Fn (ay =, 1003, a special stoc!holdersJ meeting was held to elect a new set of directors U Fnr"bia et al filed a petition with $%C 5"estioning the validity of said meeting alleging that the 5"or"m for the said meeting sho"ld not be based on the 1=4 iss"ed and o"tstanding shares as per the stoc! and transfer boo!, b"t on the initial s"bscribed capital stoc! of seven h"ndred seventy-six (11=) shares, as reflected in the 1043 +rticles of -ncorporation U 'etition was dismissed U $C en banc: shares of the deceased incorporators sho"ld be d"ly represented by their respective administrators or heirs concerned. Called for a stoc!holders meeting on the basis of the stoc!holdings reflected in the articles of incorporation for the p"rpose of electing a new set of officers for the corporation U <an"#a, +cayan et al, who are '(($- stoc!holders, filed a petition for review with the C+, raising the following iss"es: 1. whether the basis the o"tstanding capital stoc! and accordingly also for determining the 5"or"m at stoc!holdersJ meetings it sho"ld be the 101? stoc! and transfer boo! or if it sho"ld be the 1043 articles of incorporation (They contended that the basis is the stoc! and transfer boo!, not articles of incorporation in comp"ting the 5"or"m) +. whether the %spe9o decision (decision of $%C en banc ordering the recording of the shares of Bose +cayan in the stoc! and transfer boo!) is applicable to the benefit of Fnr"bia et al U C+ decision: U

31
1. ,or p"rposes of transacting b"siness, the 5"or"m sho"ld be based on the o"tstanding capital stoc! as fo"nd in the articles of incorporation 3. To re5"ire a separate 9"dicial declaration to recogni#e the shares of the original incorporators wo"ld entail "nnecessary delay and expense. *esides. the incorporators have already proved their stoc!holdings thro"gh the provisions of the articles of incorporation. U +ppeal was made by <an"#a et al before the $C U <an"#a et alJ contention: a. 1003 stoc!holdersJ meeting was valid and legal b. &eliance on the 1043 articles of incorporation for determining the 5"or"m negates the existence and validity of the stoc! and transfer boo! Fnr"bia et al prepared c. Fnr"bia et al m"st show and prove entitlement to the fo"nders and common shares in a separate and independent actionDproceeding in order to avail of the benefits sec"red by the heirs of +cayan U U U Fnr"bia et alJs contention, based on the (emorand"m: petition sho"ld be dismissed on the gro"nd of res 9"dicata +nother appeal was made <an"#a et alJs contention: instant petition is separate and distinct from E.&. )o. 1;1;14, there being no identity of parties, and more importantly, the parties in the two petitions have their own distinct rights and interests in relation to the s"b9ect matter in litigation Fnr"bia et alJs manifestation and motion: moved for the dismissal of the case 2ss6e4 2hat sho"ld be the basis of 5"or"m for a stoc!holdersJ meetingIthe o"tstanding capital stoc! as indicated in the articles of incorporation or that contained in the companyJs stoc! and transfer boo!K R65ing4 Artic5es of 2ncor oration .efines the charter of the corporation and the contract"al relationships between the $tate and the corporation, the stoc!holders and the $tate, and between the corporation and its stoc!holders. Contents are binding, not only on the corporation, b"t also on its shareholders. Stoc> and transfer .oo> *oo! which records the names and addresses of all stoc!holders arranged alphabetically, the installments paid and "npaid on all stoc! for which s"bscription has been made, and the date of payment thereof> a statement of every alienation, sale or transfer of stoc! made, the date thereof and by and to whom made> and s"ch other entries as may be prescribed by law necessary as a meas"re of preca"tion, expediency and convenience since it provides the only certain and acc"rate method of establishing the vario"s corporate acts and transactions and of showing the ownership of stoc! and li!e matters )ot p"blic record, and th"s is not excl"sive evidence of the matters and things which ordinarily are or sho"ld be written therein -n this case, the articles of incorporation indicate that at the time of incorporation, the incorporators were bona fide stoc!holders of 1@@ fo"ndersJ shares and 1= common shares. 6ence, at that time, the corporation had 11= iss"ed and o"tstanding shares. +ccording to $ec. 43 of the Corp Code, Oa 5"or"m shall consist of the stoc!holders representing a ma9ority of the o"tstanding capital stoc!.P +s s"ch, 5"or"m is based on the totality of the shares which have been s"bscribed and iss"ed, whether it be fo"ndersJ shares or common shares To base the comp"tation of 5"or"m solely on the obvio"sly deficient, if not inacc"rate stoc! and transfer boo!, and completely disregarding the iss"ed and o"tstanding shares as indicated in the articles of incorporation wo"ld wor! in9"stice to the owners andDor s"ccessors in interest of the said shares. The stoc! and transfer boo! of '(($- cannot be "sed as the sole basis for determining the 5"or"m as it does not reflect the totality of shares which have been s"bscribed, more so when the articles of incorporation show a significantly larger amo"nt of shares iss"ed and o"tstanding as compared to that listed in the stoc! and transfer boo!.

U U -

3?
U Fne who is act"ally a stoc!holder cannot be denied his right to vote by the corporation merely beca"se the corporate officers failed to !eep its records acc"rately. + corporationJs records are not the only evidence of the ownership of stoc! in a corporation. -t is no less than the articles of incorporation that declare the incorporators to have in their name the fo"nders and several common shares. Th"s, to disregard the contents of the articles of incorporation wo"ld be to pretend that the basic doc"ment which legally triggered the creation of the corporation does not exist and accordingly to allow great in9"stice to be ca"sed to the incorporators and their heirs 1HEREFORE, the petition is .%)-%. and the assailed De&ision is +,,-&(%.. Costs against petitioners d. Contracts and Agree-ents Affecting Stoc>ho5ders a. $roC: (Section ;8 of the Cor oration Code!

Sec. ;8. $roCies. - $toc!holders and members may vote in person or by proxy in all meetings of stoc!holders or members. 'roxies shall in writing, signed by the stoc!holder or member and filed before the sched"led meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. )o proxy shall be valid and effective for a period longer than five (4) years at any one time. (n) . .. V%A (Section ;9 of the Cor oration Code! Sec. ;9. Voting tr6sts. - Fne or more stoc!holders of a stoc! corporation may create a voting tr"st for the p"rpose of conferring "pon a tr"stee or tr"stees the right to vote and other rights pertaining to the shares for a period not exceeding five (4) years at any time: 'rovided, That in the case of a voting tr"st specifically re5"ired as a condition in a loan agreement, said voting tr"st may be for a period exceeding five (4) years b"t shall a"tomatically expire "pon f"ll payment of the loan. + voting tr"st agreement m"st be in writing and notari#ed, and shall specify the terms and conditions thereof. + certified copy of s"ch agreement shall be filed with the corporation and with the $ec"rities and %xchange Commission> otherwise, said agreement is ineffective and "nenforceable. The certificate or certificates of stoc! covered by the voting tr"st agreement shall be canceled and new ones shall be iss"ed in the name of the tr"stee or tr"stees stating that they are iss"ed p"rs"ant to said agreement. -n the boo!s of the corporation, it shall be noted that the transfer in the name of the tr"stee or tr"stees is made p"rs"ant to said voting tr"st agreement. The tr"stee or tr"stees shall exec"te and deliver to the transferors voting tr"st certificates, which shall be transferable in the same manner and with the same effect as certificates of stoc!. The voting tr"st agreement filed with the corporation shall be s"b9ect to examination by any stoc!holder of the corporation in the same manner as any other corporate boo! or record: 'rovided, That both the transferor and the tr"stee or tr"stees may exercise the right of inspection of all corporate boo!s and records in accordance with the provisions of this Code.

30
+ny other stoc!holder may transfer his shares to the same tr"stee or tr"stees "pon the terms and conditions stated in the voting tr"st agreement, and there"pon shall be bo"nd by all the provisions of said agreement. )o voting tr"st agreement shall be entered into for the p"rpose of circ"mventing the law against monopolies and illegal combinations in restraint of trade or "sed for p"rposes of fra"d. Unless expressly renewed, all rights granted in a voting tr"st agreement shall a"tomatically expire at the end of the agreed period, and the voting tr"st certificates as well as the certificates of stoc! in the name of the tr"stee or tr"stees shall thereby be deemed canceled and new certificates of stoc! shall be reiss"ed in the name of the transferors. The voting tr"stee or tr"stees may vote by proxy "nless the agreement provides otherwise. (;=a) &ep"blic of the 'hilippines S#$REME CO#R% (anila T6-&. .- -$-F)

&.R. 'o. 9)89; Fe.r6ar: 70 ,99+ RAMO' C. LEE and A'%O'2O DM. LACDAO0 petitioners, vs. %HE HO'. CO#R% OF A$$EALS0 SACOBA MA'#FAC%#R2'& COR$.0 $ABLO &O'=ALES0 @R. and %HOMAS &O'=ALES0 respondents. Cayan-a, 3!ni-a > An-el 2aw 5ffi&es for petitioners. 4imbol > Asso&iates for pri"ate respondents.

&#%2ERRE=0 @R.0 J.: 2hat is the nat"re of the voting tr"st agreement exec"ted between two parties in this caseK 2ho owns the stoc!s of the corporation "nder the terms of the voting tr"st agreementK 6ow long can a voting tr"st agreement remain valid and effectiveK .id a director of the corporation cease to be s"ch "pon the creation of the voting tr"st agreementK These are the 5"estions the answers to which are necessary in resolving the principal iss"e in this petition for &ertiorari I whether or not there was proper service of s"mmons on +lfa -ntegrated Textile (ills (+<,+, for short) thro"gh the petitioners as president and vice-president, allegedly, of the s"b9ect corporation after the exec"tion of a voting tr"st agreement between +<,+ and the .evelopment *an! of the 'hilippines (.*', for short). ,rom the records of the instant case, the following antecedent facts appear: Fn )ovember 14, 10?4, a complaint for a s"m of money was filed by the -nternational Corporate *an!, -nc. against the private respondents who, in t"rn, filed a third party complaint against +<,+ and the petitioners on (arch 11, 10?=.

;@
Fn $eptember 11, 10?1, the petitioners filed a motion to dismiss the third party complaint which the &egional Trial Co"rt of (a!ati, *ranch 4? denied in an Frder dated B"ne 31, 10??. Fn B"ly 1?, 10??, the petitioners filed their answer to the third party complaint. (eanwhile, on B"ly 13, 10??, the trial co"rt iss"ed an order re5"iring the iss"ance of an alias s"mmons "pon +<,+ thro"gh the .*' as a conse5"ence of the petitioner/s letter informing the co"rt that the s"mmons for +<,+ was erroneo"sly served "pon them considering that the management of +<,+ had been transferred to the .*'. -n a manifestation dated B"ly 33, 10??, the .*' claimed that it was not a"thori#ed to receive s"mmons on behalf of +<,+ since the .*' had not ta!en over the company which has a separate and distinct corporate personality and existence. Fn +"g"st 7, 10??, the trial co"rt iss"ed an order advising the private respondents to ta!e the appropriate steps to serve the s"mmons to +<,+. Fn +"g"st 1=, 10??, the private respondents filed a (anifestation and (otion for the .eclaration of 'roper $ervice of $"mmons which the trial co"rt granted on +"g"st 11, 10??. Fn $eptember 13, 10??, the petitioners filed a motion for reconsideration s"bmitting that &"le 17, section 1; of the &evised &"les of Co"rt is not applicable since they were no longer officers of +<,+ and that the private respondents sho"ld have availed of another mode of service "nder &"le 17, $ection 1= of the said &"les, i.e.,thro"gh p"blication to effect proper service "pon +<,+. -n their Comment to the (otion for &econsideration dated $eptember 31, 10??, the private respondents arg"ed that the voting tr"st agreement dated (arch 11, 10?1 did not divest the petitioners of their positions as president and exec"tive vice-president of +<,+ so that service of s"mmons "pon +<,+ thro"gh the petitioners as corporate officers was proper. Fn Ban"ary 3, 10?0, the trial co"rt "pheld the validity of the service of s"mmons on +<,+ thro"gh the petitioners, th"s, denying the latter/s motion for reconsideration and re5"iring +<,+ to filed its answer thro"gh the petitioners as its corporate officers. Fn Ban"ary 10, 10?0, a second motion for reconsideration was filed by the petitioners reiterating their stand that by virt"e of the voting tr"st agreement they ceased to be officers and directors of +<,+, hence, they co"ld no longer receive s"mmons or any co"rt processes for or on behalf of +<,+. -n s"pport of their second motion for reconsideration, the petitioners attached thereto a copy of the voting tr"st agreement between all the stoc!holders of +<,+ (the petitioners incl"ded), on the one hand, and the .*', on the other hand, whereby the management and control of +<,+ became vested "pon the .*'. Fn +pril 34, 10?0, the trial co"rt reversed itself by setting aside its previo"s Frder dated Ban"ary 3, 10?0 and declared that service "pon the petitioners who were no longer corporate officers of +<,+ cannot be considered as proper service of s"mmons on +<,+. Fn (ay 14, 10?0, the private respondents moved for a reconsideration of the above Frder which was affirmed by the co"rt in its Frder dated +"g"st 17, 10?0 denying the private respondent/s motion for reconsideration. Fn $eptember 1?, 10?0, a petition for &ertiorari was belatedly s"bmitted by the private respondent before the p"blic respondent which, nonetheless, resolved to give d"e co"rse thereto on $eptember 31, 10?0. Fn Fctober 11, 10?0, the trial co"rt, not having been notified of the pending petition for &ertiorari with p"blic respondent iss"ed an Frder declaring as final the Frder dated +pril 34, 10?0. The private respondents in the said Frder were re5"ired to ta!e positive steps in prosec"ting the third party complaint in order that the co"rt wo"ld not be constrained to dismiss the same for fail"re to prosec"te. $"bse5"ently, on Fctober 34, 10?0 the private respondents filed a motion for reconsideration on which the trial co"rt too! no f"rther action. Fn (arch 10, 100@, after the petitioners filed their answer to the private respondents/ petition for &ertiorari, the p"blic respondent rendered its decision, the dispositive portion of which reads:

;1
26%&%,F&%, in view of the foregoing, the orders of respondent 9"dge dated +pril 34, 10?0 and +"g"st 17, 10?0 are hereby $%T +$-.% and respondent corporation is ordered to file its answer within the reglementary period. (C+ .ecision, p. ?> #ollo, p. 37) Fn +pril 11, 100@, the petitioners moved for a reconsideration of the decision of the p"blic respondent which resolved to deny the same on (ay 1@, 100@. 6ence, the petitioners filed this &ertiorari petition imp"ting grave ab"se of discretion amo"nting to lac! of 9"risdiction on the part of the p"blic respondent in reversing the 5"estioned Frders dated +pril 34, 10?0 and +"g"st 17, 10?0 of the co"rt a !o, th"s, holding that there was proper service of s"mmons on +<,+ thro"gh the petitioners. -n the meantime, the p"blic respondent inadvertently made an entry of 9"dgment on B"ly 1=, 100@ erroneo"sly applying the r"le that the period d"ring which a motion for reconsideration has been pending m"st be ded"cted from the 14-day period to appeal. 6owever, in its &esol"tion dated Ban"ary ;, 1001, the p"blic respondent set aside the aforestated entry of 9"dgment after f"rther considering that the r"le it relied on applies to appeals from decisions of the &egional Trial Co"rts to the Co"rt of +ppeals, not to appeals from its decision to "s p"rs"ant to o"r r"ling in the case of #efra&tories Corporation of t$e P$ilippines ". )ntermediate Appellate Co!rt, 11= $C&+ 4;0 M10?0N. (C+ #ollo, pp. 370-34@) -n their memorand"m, the petitioners present the following arg"ments, to wit: (1) that the exec"tion of the voting tr"st agreement by a stoc!holders whereby all his shares to the corporation have been transferred to the tr"stee deprives the stoc!holders of his position as director of the corporation> to r"le otherwise, as the respondent Co"rt of +ppeals did, wo"ld be violative of section 3; of the Corporation Code ( #ollo, pp. 31@-;31;)> and (3) that the petitioners were no longer acting or holding any of the positions provided "nder &"le 17, $ection 1; of the &"les of Co"rt a"thori#ed to receive service of s"mmons for and in behalf of the private domestic corporation so that the service of s"mmons on +<,+ effected thro"gh the petitioners is not valid and ineffective> to maintain the respondent Co"rt of +ppeals/ position that +<,+ was properly served its s"mmons thro"gh the petitioners wo"ld be contrary to the general principle that a corporation can only be bo"nd by s"ch acts which are within the scope of its officers/ or agents/ a"thority ( #ollo, pp. 31;-314) -n resolving the iss"e of the propriety of the service of s"mmons in the instant case, we dwell first on the nat"re of a voting tr"st agreement and the conse5"ent effects "pon its creation in the light of the provisions of the Corporation Code. + voting tr"st is defined in *allentine/s <aw .ictionary as follows: (a) tr"st created by an agreement between a gro"p of the stoc!holders of a corporation and the tr"stee or by a gro"p of identical agreements between individ"al stoc!holders and a common tr"stee, whereby it is provided that for a term of years, or for a period contingent "pon a certain event, or "ntil the agreement is terminated, control over the stoc! owned by s"ch stoc!holders, either for certain p"rposes or for all p"rposes, is to be lodged in the tr"stee, either with or witho"t a reservation to the owners, or persons designated by them, of the power to direct how s"ch control shall be "sed. (0? +<& 3d. ;10 sec. 1 MdN> 10 +m B 3d Corp. sec. =?4). Under $ection 40 of the new Corporation Code which expressly recogni#es voting tr"st agreements, a more definitive meaning may be gathered. The said provision partly reads: $ec. 40. 'otin- 4r!sts I Fne or more stoc!holders of a stoc! corporation may create a voting tr"st for the p"rpose of conferring "pon a tr"stee or tr"stees the right to vote and other rights pertaining to the share for a period rights pertaining to the shares for a period not exceeding five (4) years at any one time: 'rovided, that in the case of a voting tr"st specifically re5"ired as a condition in a loan agreement, said voting tr"st may be for a period exceeding (4) years b"t shall a"tomatically expire "pon f"ll payment of the loan. + voting tr"st agreement m"st be in writing and notari#ed, and shall specify the terms and conditions thereof. + certified copy of s"ch agreement shall be filed with the corporation and with the $ec"rities and %xchange Commission> otherwise, said agreement is ineffective and "nenforceable. The certificate or certificates of stoc! covered by the voting tr"st agreement shall be cancelled and new ones shall be iss"ed in the name of the tr"stee or tr"stees stating that they are iss"ed p"rs"ant to said

;3
agreement. -n the boo!s of the corporation, it shall be noted that the transfer in the name of the tr"stee or tr"stees is made p"rs"ant to said voting tr"st agreement. *y its very nat"re, a voting tr"st agreement res"lts in the separation of the voting rights of a stoc!holder from his other rights s"ch as the right to receive dividends, the right to inspect the boo!s of the corporation, the right to sell certain interests in the assets of the corporation and other rights to which a stoc!holder may be entitled "ntil the li5"idation of the corporation. 6owever, in order to disting"ish a voting tr"st agreement from proxies and other voting pools and agreements, it m"st pass three criteria or tests, namely: (1) that the voting rights of the stoc! are separated from the other attrib"tes of ownership> (3) that the voting rights granted are intended to be irrevocable for a definite period of time> and (;) that the principal p"rpose of the grant of voting rights is to ac5"ire voting control of the corporation. (4 ,letcher, Cy&lopedia of t$e 2aw on Pri"ate Corporations, section 3@14 M101=N p. ;;1&itin- Tan!ersly v. +lbright, ;17 ,. $"pp. 4;?) Under section 40 of the Corporation Code, s!pra, a voting tr"st agreement may confer "pon a tr"stee not only the stoc!holder/s voting rights b"t also other rights pertaining to his shares as long as the voting tr"st agreement is not entered 8for the p"rpose of circ"mventing the law against monopolies and illegal combinations in restraint of trade or "sed for p"rposes of fra"d.8 (section 40, 4th paragraph of the Corporation Code) Th"s, the traditional concept of a voting tr"st agreement primarily intended to single o"t a stoc!holder/s right to vote from his other rights as s"ch and made irrevocable for a limited d"ration may in practice become a legal device whereby a transfer of the stoc!holder/s shares is effected s"b9ect to the specific provision of the voting tr"st agreement. The exec"tion of a voting tr"st agreement, therefore, may create a dichotomy between the e5"itable or beneficial ownership of the corporate shares of a stoc!holders, on the one hand, and the legal title thereto on the other hand. The law simply provides that a voting tr"st agreement is an agreement in writing whereby one or more stoc!holders of a corporation consent to transfer his or their shares to a tr"stee in order to vest in the latter voting or other rights pertaining to said shares for a period not exceeding five years "pon the f"lfillment of stat"tory conditions and s"ch other terms and conditions specified in the agreement. The five year-period may be extended in cases where the voting tr"st is exec"ted p"rs"ant to a loan agreement whereby the period is made contingent "pon f"ll payment of the loan. -n the instant case, the point of controversy arises from the effects of the creation of the voting tr"st agreement. The petitioners maintain that with the exec"tion of the voting tr"st agreement between them and the other stoc!holders of +<,+, as one party, and the .*', as the other party, the former assigned and transferred all their shares in +<,+ to .*', as tr"stee. They arg"e that by virt"e to of the voting tr"st agreement the petitioners can no longer be considered directors of +<,+. -n s"pport of their contention, the petitioners invo!e section 3; of the Corporation Code which provides, in part, that: %very director m"st own at least one (1) share of the capital stoc! of the corporation of which he is a director which share shall stand in his name on the boo!s of the corporation. +ny director who ceases to be the owner of at least one (1) share of the capital stoc! of the corporation of which he is a director shall thereby cease to be director . . . (#ollo, p. 31@) The private respondents, on the contrary, insist that the voting tr"st agreement between +<,+ and the .*' had all the more safeg"arded the petitioners/ contin"ance as officers and directors of +<,+ inasm"ch as the general ob9ect of voting tr"st is to ins"re permanency of the ten"re of the directors of a corporation. They cited the commentaries by 'rof. +g"edo +gbayani on the right and stat"s of the transferring stoc!holders, to wit: The 8transferring stoc!holder8, also called the 8depositing stoc!holder8, is e5"itable owner for the stoc!s represented by the voting tr"st certificates and the stoc! reversible on termination of the tr"st by s"rrender. -t is said that the voting tr"st agreement does not destroy the stat"s of the transferring stoc!holders as s"ch, and th"s render them ineligible as directors. *"t a more acc"rate statement seems to be that for some p"rposes the depositing stoc!holder holding voting tr"st certificates in lie" of his stoc! and being the beneficial owner thereof, remains and is treated as a stoc!holder. -t seems to be ded"cible from the case that he may s"e as a stoc!holder if the s"it is in e5"ity or is of an e5"itable nat"re, s"ch as, a technical stoc!holders/ s"it in right of the corporation. MCommercial <aws of the 'hilippines by +gbayani, ol. ; pp. 703-70;, &itin- 4 ,letcher ;3=, ;31N (#ollo, p. 301)

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2e find the petitioners/ position meritorio"s. *oth "nder the old and the new Corporation Codes there is no disp"te as to the most immediate effect of a voting tr"st agreement on the stat"s of a stoc!holder who is a party to its exec"tion I from legal titleholder or owner of the shares s"b9ect of the voting tr"st agreement, he becomes the e5"itable or beneficial owner. ($alonga, P$ilippine 2aw on Pri"ate Corporations, 104? ed., p. 3=?> 'ineda and Carlos, 4$e 2aw on Pri"ate Corporations and Corporate Pra&ti&e , 10=0 ed., p. 114> Campos and <ope#-Campos, 4$e Corporation Code/ Comments, =otes > (ele&ted Cases, 10?1, ed., p. ;?=> +gbayani, Commentaries and J!rispr!den&e on t$e Commer&ial 2aws of t$e P$ilippines, ol. ;, 10?? ed., p. 4;=). The pen"ltimate 5"estion, therefore, is whether the change in his stat"s deprives the stoc!holder of the right to 5"alify as a director "nder section 3; of the present Corporation Code which deletes the phrase 8in his own right.8 $ection ;@ of the old Code states that: %very director m"st own in $is own ri-$t at least one share of the capital stoc! of the stoc! corporation of which he is a director, which stoc! shall stand in his name on the boo!s of the corporation. + director who ceases to be the owner of at least one share of the capital stoc! of a stoc! corporation of which is a director shall thereby cease to be a director . . . (%mphasis s"pplied) Under the old Corporation Code, the eligibility of a director, strictly spea!ing, cannot be adversely affected by the simple act of s"ch director being a party to a voting tr"st agreement inasm"ch as he remains owner (altho"gh beneficial or e5"itable only) of the shares s"b9ect of the voting tr"st agreement p"rs"ant to which a transfer of the stoc!holder/s shares in favor of the tr"stee is re5"ired (section ;= of the old Corporation Code). )o dis5"alification arises by virt"e of the phrase 8in his own right8 provided "nder the old Corporation Code. 2ith the omission of the phrase 8in his own right8 the election of tr"stees and other persons who in fact are not beneficial owners of the shares registered in their names on the boo!s of the corporation becomes formally legali#ed ( see Campos and <ope#-Campos, s!pra, p. 30=) 6ence, this is a clear indication that in order to be eligible as a director, what is material is the legal title to, not beneficial ownership of, the stoc! as appearing on the boo!s of the corporation (3 ,letcher, Cy&lopedia of t$e 2aw of Pri"ate Corporations, section ;@@, p. 03 M10=0N&itin- 'eople v. <ihme, 3=0 -ll. ;41, 1@0 ).%. 1@41). The facts of this case show that the petitioners, by virt"e of the voting tr"st agreement exec"ted in 10?1 disposed of all t$eir s$ares t$ro!-$ assi-nment and deli"ery in fa"or of t$e DBP, as tr!stee . Conse5"ently, the petitioners ceased to own at least one share standing in their names on the boo!s of +<,+ as re5"ired "nder $ection 3; of the new Corporation Code. They also ceased to have anything to do with the management of the enterprise. The petitioners ceased to be directors. 6ence, the transfer of the petitioners/ shares to the .*' created vacancies in their respective positions as directors of +<,+. The transfer of shares from the stoc!holder of +<,+ to the .*' is the essence of the s"b9ect voting tr"st agreement as evident from the following stip"lations: 1. The T&U$TF&$ hereby assign and deliver to the T&U$T%% the certificate of the shares of the stoc!s owned by them respectively and shall do all things necessary for the transfer of their respective shares to the T&U$T%% on the boo!s of +<,+. 3. The T&U$T%% shall iss"e to each of the T&U$TF&$ a tr"st certificate for the n"mber of shares transferred, which shall be transferrable in the same manner and with the same effect as certificates of stoc! s"b9ect to the provisions of this agreement> ;. The T&U$T%% shall vote "pon the shares of stoc! at all meetings of +<,+, ann"al or special, "pon any resol"tion, matter or b"siness that may be s"bmitted to any s"ch meeting, and s$all possess in t$at respe&t t$e same powers as owners of t$e e !itable as well as t$e le-al title to t$e sto&k > 7. The T&U$T%% may ca"se to be transferred to any person one share of stoc! for the p"rpose of 5"alifying s"ch person as director of +<,+, and ca"se a certificate of stoc! evidencing the share so transferred to be iss"ed in the name of s"ch person> xxx xxx xxx

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0. +ny stoc!holder not entering into this agreement may transfer his shares to the same tr"stees witho"t the need of revising this agreement, and this agreement shall have the same force and effect "pon that said stoc!holder. (C+ #ollo, pp. 1;1-1;?> %mphasis s"pplied) Considering that the voting tr"st agreement between +<,+ and the .*' transferred legal ownership of the stoc! covered by the agreement to the .*' as tr"stee, the latter became the stoc!holder of record with respect to the said shares of stoc!s. -n the absence of a showing that the .*' had ca"sed to be transferred in their names one share of stoc! for the p"rpose of 5"alifying as directors of +<,+, the petitioners can no longer be deemed to have retained their stat"s as officers of +<,+ which was the case before the exec"tion of the s"b9ect voting tr"st agreement. There appears to be no disp"te from the records that .*' has ta!en over f"ll control and management of the firm. (oreover, in the Certification dated Ban"ary 37, 10?0 iss"ed by the .*' thro"gh one %lsa +. E"evarra, ice-'resident of its $pecial +cco"nts .epartment --, &emedial (anagement Ero"p, the petitioners were no longer incl"ded in the list of officers of +<,+ 8as of +pril 10?3.8 (C+ #ollo, pp. 17@-173) -nasm"ch as the private respondents in this case failed to s"bstantiate their claim that the s"b9ect voting tr"st agreement did not deprive the petitioners of their position as directors of +<,+, the p"blic respondent committed a reversible error when it r"led that: . . . while the individ"al respondents (petitioners <ee and <acdao) may have ceased to be president and vice-president, respectively, of the corporation at the time of service of s"mmons on them on +"g"st 31, 10?1, they were at least "p to that time, still directors . . . The afore5"oted statement is 5"ite inacc"rate in the light of the express terms of $tip"lation )o. 7 of the s"b9ect voting tr"st agreement. *oth parties, +<,+ and the .*', were aware at the time of the exec"tion of the agreement that by virt"e of the transfer of shares of +<,+ to the .*', all the directors of +<,+ were stripped of their positions as s"ch. There can be no reliance on the inference that the five-year period of the voting tr"st agreement in 5"estion had lapsed in 10?= so that the legal title to the stoc!s covered by the said voting tr"st agreement ipso fa&to reverted to the petitioners as beneficial owners p"rs"ant to the =th paragraph of section 40 of the new Corporation Code which reads: Unless expressly renewed, all rights granted in a voting tr"st agreement shall a"tomatically expire at the end of the agreed period, and the voting tr"st certificate as well as the certificates of stoc! in the name of the tr"stee or tr"stees shall thereby be deemed cancelled and new certificates of stoc! shall be reiss"ed in the name of the transferors. Fn the contrary, it is manifestly clear from the terms of the voting tr"st agreement between +<,+ and the .*' that the d"ration of the agreement is contingent "pon the f"lfillment of certain obligations of +<,+ with the .*'. This is shown by the following portions of the agreement. 26%&%+$, the T&U$T%% is one of the creditors of +<,+, and its credit is sec"red by a first mortgage on the man"fact"ring plant of said company> 26%&%+$, +<,+ is also indebted to other creditors for vario"s financial accomodations and beca"se of the b"rden of these obligations is enco"ntering very serio"s diffic"lties in contin"ing with its operations. 26%&%+$, in consideration of additional accommodations from the T&U$T%%, +<,+ had offered and the T&U$T%% has accepted participation in the management and control of the company and to ass"re the aforesaid participation by the T&U$T%%, the T&U$TF&$ have agreed to exec"te a voting tr"st covering their shareholding in +<,+ in favor of the T&U$T%%> +). 26%&%+$, .*' is willing to accept the tr"st for the p"rpose aforementioned. )F2, T6%&%,F&%, it is hereby agreed as follows: xxx xxx xxx

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=. This +greement shall last for a period of ,ive (4) years, and is renewable for as long as the obligations of +<,+ with .*', or any portion thereof, remains o"tstanding> (C+ #ollo, pp. 1;1-1;?) 6ad the five-year period of the voting tr"st agreement expired in 10?=, the .*' wo"ld not have transferred all its rights, titles and interests in +<,+ 8effective B"ne ;@, 10?=8 to the national government thro"gh the +sset 'rivati#ation Tr"st (+'T) as attested to in a Certification dated Ban"ary 37, 10?0 of the ice 'resident of the .*'/s $pecial +cco"nts .epartment --. -n the same certification, it is stated that the .*', from 10?1 "ntil 10?0, had handled +'T/s acco"nt which incl"ded +<,+/s assets p"rs"ant to a management agreement by and between the .*' and +'T (C+ #ollo, p. 173) 6ence, there is evidence on record that at the time of the service of s"mmons on +<,+ thro"gh the petitioners on +"g"st 31, 10?1, the voting tr"st agreement in 5"estion was not yet terminated so that the legal title to the stoc!s of +<,+, then, still belonged to the .*'. -n view of the foregoing, the "ltimate iss"e of whether or not there was proper service of s"mmons on +<,+ thro"gh the petitioners is readily answered in the negative. Under section 1;, &"le 17 of the &evised &"les of Co"rt, it is provided that: $ec. 1;. (er"i&e !pon pri"ate domesti& &orporation or partners$ip . I -f the defendant is a corporation organi#ed "nder the laws of the 'hilippines or a partnership d"ly registered, service may be made on the president, manager, secretary, cashier, agent or any of its directors. -t is a basic principle in Corporation <aw that a corporation has a personality separate and distinct from the officers or members who compose it. ((ee $"lo ng *ayan -nc. v. +raneta, -nc., 13 $C&+ ;71 M101=N> Fsias +cademy v. .epartment of <abor and %mployment, et al., E.&. )os. ?;341-4?, .ecember 31, 100@). Th"s, the above r"le on service of processes of a corporation en"merates the representatives of a corporation who can validly receive co"rt processes on its behalf. )ot every stoc!holder or officer can bind the corporation considering the existence of a corporate entity separate from those who compose it. The rationale of the aforecited r"le is that service m"st be made on a representative so integrated with the corporation s"ed as to ma!e it a priori s"pposable that he will reali#e his responsibilities and !now what he sho"ld do with any legal papers served on him. (,ar Corporation v. ,rancisco, 17= $C&+ 101 M10?=N &itin- illa &ey Transit, -nc. v. ,ar %ast (otor Corp. ?1 $C&+ ;@; M101?N). The petitioners in this case do not fall "nder any of the en"merated officers. The service of s"mmons "pon +<,+, thro"gh the petitioners, therefore, is not valid. To r"le otherwise, as correctly arg"ed by the petitioners, will contravene the general principle that a corporation can only be bo"nd by s"ch acts which are within the scope of the officer/s or agent/s a"thority. (see icente v. Eeralde#, 43 $C&+ 31@ M101;N). 26%&%,F&%, premises considered, the petition is hereby E&+)T%.. The appealed decision dated (arch 10, 100@ and the Co"rt of +ppeals/ resol"tion of (ay 1@, 100@ are $%T +$-.% and the Frders dated +pril 34, 10?0 and Fctober 11, 10?0 iss"ed by the &egional Trial Co"rt of (a!ati, *ranch 4? are &%-)$T+T%.. $F F&.%&%.. Feli&iano, Bidin, Da"ide, Jr. and #omero, JJ., &on&!r.

Lee "s. CA Case Digest H&R 9)89;0 7 Fe.r6ar: ,99+I Facts4 Fn 14 )ovember 10?4, a complainant for s"m of money was filed by the -nternational Corporate *an!, -nc. against $acoba (an"fact"ring Corp., 'ablo Eon#ales Br., and Tomas Eon#ales who, in t"rn, filed a third party complaint against +lfa -ntegrated Textile (ills (+<,+), &amon C. <ee (+<,+/s president) and +ntonio .(. <acdao (+<,+/s vice president) on 11 (arch 10?=. Fn 11 $eptember 10?1, <ee and <acdao filed a motion to dismiss the third party complaint which the &egional Trial Co"rt of (a!ati, *ranch 4? denied in an Frder dated 31 B"ne 10??. Fn 1? B"ly 10??, <ee and <acdao filed their answer to the third party complaint. (eanwhile, on 13 B"ly 10??, the trial iss"ed an order re5"iring the

;=
iss"ance of an alias s"mmons "pon +<,+ thro"gh the .*' as a conse5"ence of <ee and <acdao/s letter informing the co"rt that the s"mmons for +<,+ was erroneo"sly served "pon them considering that the management of +<,+ had been transferred to the .*'. -n a manifestation dated 33 B"ly 10??, the .*' claimed that it was not a"thori#ed to receive s"mmons on behalf of +<,+ since the .*' had not ta!en over the company which has a separate and distinct corporate personality and existence. Fn 7 +"g"st 10??, the trial co"rt iss"ed an order advising $acoba (an"fact"ring, et. al. to ta!e the appropriate steps to serve the s"mmons to +<,+. Fn 1= +"g"st 10??, $acoba (an"fact"ring, et. al. filed a (anifestation and (otion for the .eclaration of 'roper $ervice of $"mmons which the trial co"rt granted on 11 +"g"st 10??. Fn 13 $eptember 10??, <ee and <acdao filed a motion for reconsideration s"bmitting that the &"le 17, section 1; of the &evised &"les of Co"rt is not applicable since they were no longer officers of +<,+ and $acoba (an"fact"ring, et. al. sho"ld have availed of another mode of service "nder &"le 17, $ection 1= of the said &"les, i.e., thro"gh p"blication to effect proper service "pon +<,+. Fn 3 Ban"ary 10?0, the trial co"rt "pheld the validity of the service of s"mmons on +<,+ thro"gh <ee and <acdao, th"s, denying the latter/s motion for reconsideration and re5"iring +<,+ to file its answer thro"gh <ee and <acdao as its corporate officers. Fn 10 Ban"ary 10?0, a second motion for reconsideration was filed by <ee and <acdao reiterating their stand that by virt"e of the voting tr"st agreement they ceased to be officers and directors of +<,+, hence, they co"ld no longer receive s"mmons or any co"rt processes for or on behalf of +<,+. -n s"pport of their second motion for reconsideration, <ee and <acdao attached thereto a copy of the voting tr"st agreement between all the stoc!holders of +<,+ (<ee and <acdao incl"ded), on the one hand, and the .*', on the other hand, whereby the management and control of +<,+ became vested "pon the .*'. Fn 34 +pril 10?0, the trial co"rt reversed itself by setting aside its previo"s Frder dated 3 Ban"ary 10?0 and declared that service "pon <ee and <acdao who were no longer corporate officers of +<,+ cannot be considered as proper service of s"mmons on +<,+. Fn 14 (ay 10?0, $acoba (an"fact"ring, et. al. moved for a reconsideration of the Frder which was affirmed by the co"rt in is Frder dated 17 +"g"st 10?0 denying $acoba (an"fact"ring, et. al./s motion for reconsideration. Fn 1? $eptember 10?0, a petition for certiorari was belatedly s"bmitted by $acoba (an"fact"ring, et. al. before the Co"rt of +ppeals which, nonetheless, resolved to give d"e co"rse thereto on 31 $eptember 10?0. Fn 11 Fctober 10?0, the trial co"rt, not having been notified of the pending petition for certiorari with the appellate co"rt iss"ed an Frder declaring as final the Frder dated 34 +pril 10?0. $acoba (an"fact"ring, et. al. in the said Frder were re5"ired to ta!e positive steps in prosec"ting the third party complaint in order that the co"rt wo"ld not be constrained to dismiss the same for fail"re to prosec"te. $"bse5"ently, on 34 Fctober 10?0 $acoba (an"fact"ring, et. al. filed a motion for reconsideration on which the trial co"rt too! no f"rther action. Fn 10 (arch 100@, after <ee and <acdao filed their answer to $acoba (an"fact"ring, et. al./s petition for certiorari, the appellate co"rt rendered its decision, setting aside the orders of trial co"rt 9"dge dated 34 +pril 10?0 and 17 +"g"st 10?0. Fn 11 +pril 100@, <ee and <acdao moved for a reconsideration of the decision of the appellate co"rt which resolved to deny the same on 1@ (ay 100@. <ee and <acdao filed the petition for certiorari. -n the meantime, the appellate co"rt inadvertently made an entry of 9"dgment on 1= B"ly 100@ erroneo"sly applying the r"le that the period d"ring which a motion for reconsideration has been pending m"st be ded"cted from the 14-day period to appeal. 6owever, in its &esol"tion dated ; Ban"ary 1001, the appellate co"rt set aside the aforestated entry of 9"dgment after f"rther considering that the r"le it relied on applies to appeals from decisions of the &egional Trial Co"rts to the Co"rt of +ppeals, not to appeals from its decision to the $"preme Co"rt p"rs"ant to the $"preme Co"rt/s r"ling in the case of &efractories Corporation of the 'hilippines v. -ntermediate +ppellate Co"rt, 11= $C&+ 4;0 M10?0N. 2ss6e4 1. 2hether the exec"tion of the voting tr"st agreement by <ee and <acdao whereby all their shares to the corporation have been transferred to the tr"stee deprives the stoc!holder of their positions as directors of the corporation. 3. 2hether the five-year period of the voting tr"st agreement in 5"estion had lapsed in 10?= so that the legal title to the stoc!s covered by the said voting tr"st agreement ipso facto reverted to <ee and <acdao as beneficial owners p"rs"ant to the =th paragraph of section 40 of the new Corporation Code. ;. 2hether there was proper service of s"mmons on +<,+ thro"gh <ee and <acdao, to bind +<,+. He5d4 1. <ee and <acdao, by virt"e of the voting tr"st agreement exec"ted in 10?1 disposed of all their shares thro"gh assignment and delivery in favor of the .*', as tr"stee. Conse5"ently, <ee and <acdao ceased to own at least one share standing in their names on the boo!s of +<,+ as re5"ired "nder $ection 3; of the new Corporation Code. They also ceased to have anything to do with the management of the enterprise. <ee and <acdao ceased to be directors. 6ence, the transfer of their shares to the .*' created vacancies in their respective positions as directors of +<,+. The transfer of shares from the stoc!holders of +<,+ to the .*' is the essence of the s"b9ect voting tr"st agreement. Considering that the voting tr"st agreement between +<,+ and the .*' transferred legal ownership of the stoc!s covered by the

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agreement to the .*' as tr"stee, the latter beca"se the stoc!holder of record with respect to the said shares of stoc!s. -n the absence of a showing that the .*' had ca"sed to be transferred in their names one share of stoc! for the p"rpose of 5"alifying as directors of +<,+, <ee and <acdao can no longer be deemed to have retained their stat"s as officers of +<,+ which was the case before the exec"tion of the s"b9ect voting tr"st agreement. There is no disp"te from the records that .*' has ta!en over f"ll control and management of the firm. 3. The =th paragraph of section 40 of the new Corporation Code reads that 8Unless expressly renewed, all rights granted in a voting tr"st agreement shall a"tomatically expire at the end of the agreed period, and the voting tr"st certificates as well as the certificates of stoc! in the name of the tr"stee or tr"stees shall thereby be deemed cancelled and new certificates of stoc! shall be reiss"ed in the name of the transferors.8 6owever, it is manifestly clear from the terms of the voting tr"st agreement between +<,+ and the .*' that the d"ration of the agreement is contingent "pon the f"lfillment of certain obligations of +<,+ with the .*'. 6ad the five-year period of the voting tr"st agreement expired in 10?=, the .*' wo"ld not have transferred an its rights, titles and interests in +<,+ 8effective B"ne ;@, 10?=8 to the national government thro"gh the +sset 'rivati#ation Tr"st (+'T) as attested to in a Certification dated 37 Ban"ary 10?0 of the ice 'resident of the .*'/s $pecial +cco"nts .epartment --. -n the same certification, it is stated that the .*', from 10?1 "ntil 10?0, had handled s acco"nt which incl"ded +<,+/s assets p"rs"ant to a management agreement by and between the .*' and +'T. 6ence, there is evidence on record that at the time of the service of s"mmons on +<,+ thro"gh <ee and <acdao on 31 +"g"st 10?1, the voting tr"st agreement in 5"estion was not yet terminated so that the legal title to the stoc!s of +<,+, then, still belonged to the .*'. ;. -t is a basic principle in Corporation <aw that a corporation has a personality separate and distinct from the officers or members who compose it. Th"s, the role on service of processes on a corporation en"merates the representatives of a corporation who can validly receive co"rt processes on its behalf. )ot every stoc!holder or officer can bind the corporation considering the existence of a corporate entity separate from those who compose it. The rationale of the r"le is that service m"st be made on a representative so integrated with the corporation s"ed as to ma!e it a priori s"pposable that he will reali#e his responsibilities and !now what he sho"ld do with any legal papers served on him. 6erein, <ee and <acdao do not fall "nder any of the en"merated officers. The service of s"mmons "pon +<,+, thro"gh <ee and <acdao, therefore, is not valid. To r"le otherwise will contravene the general principle that a corporation can only be bo"nd by s"ch acts which are within the scope of the officer/s or agent/s a"thority.

&ep"blic of the 'hilippines S#$REME CO#R% (anila $%CF). .- -$-F) &.R. 'o. L()7,9+ @6ne )/0 ,988 'A%2O'AL 2'VES%ME'% A'D DEVELO$ME'% COR$ORA%2O'0 E#SEB2O V2LLA%#3A MAR2O 3. CO'S2'& and ROBER%O S. BE'ED2C%O0 etitioners0 "s. HO'. BE'@AM2' AG#2'O0 in his officia5 ca acit: as $residing @6dge of Branch V222 of the Co6rt of First 2nstance of RiKa50 BA%@AE 2'C.0 &RAC2A'O A. &ARC2A and MARCEL2'O CAL2'A1A' @R.0 res ondents. &.R. 'o. L()7+,) @6ne )/0 ,988 $H2L2$$2'E 'A%2O'AL BA'E0 petitioner, vs. HO'. BE'@AM2' H. AG#2'O0 in his ca acit: as $residing @6dge of the Co6rt of First 2nstance of RiKa50 Branch V222 and BA%@AE 2'COR$ORA%ED0 respondents. Cr!+, Palafo., Alfonso and Asso&iates for petitioner =)DC in G.#. =o. ?@0AB. 4$e C$ief 2e-al Co!nsel for petitioner P=B in G.#. =o. ?@B0?.

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#eyes and (!ndiam 2aw 5ffi&e for respondent Bat7ak, )n&. D!ran, C$!ani&o 5ebanda, Benemerito > Asso&iates for pri"ate respondents in G.#. =os. ?@0AB > ?@B0?. 4olentino, Gar&ia, Cr!+ > #eyes for mo"ant in G.#. =o. 2-?@0AB.

$AD2LLA0 J.: These two (3) separate petitions for certiorari and prohibition, with preliminary in9"nction, see! to ann"l and set aside the orders of respondent 9"dge, dated 1= +"g"st 1011 and ;@ $eptember 1011, in Civil Case )o. 17743 of the Co"rt of ,irst -nstance of &i#al, entitled *at9a! -nc. vs. )-.C et al.8 The order of 1= +"g"st 1011 , granted the alternative petition of private respondent *at9a!, -nc. *at9a! for short) for the appointment of receiver and denied petitioners/ motion to dismiss the complaint of said private respondent. The order dated ;@ $eptember 1011 + denied petitioners/ motion for reconsideration of the order dated 1= +"g"st 1011. The herein petitions li!ewise see! to prohibit the respondent 9"dge from hearing andDor cond"cting any f"rther proceedings in Civil Case )o. 17743 of said co"rt. *at9a!, (*asic +gric"lt"ral Traders Bointly +dministered Qasamahan) is a ,ilipino-+merican corporation organi#ed "nder the laws of the 'hilippines, primarily engaged in the man"fact"re of cocon"t oil and copra ca!e for export. -n 10=4, *at9a!/s financial condition deteriorated to the point of ban!r"ptcy. +s of that year, *at9a!/s indebtedness to some private ban!s and to the 'hilippine )ational *an! (')*) amo"nted to '11,014,@@@.@@, shown as follows: &ep"blic *an! ' 3,;37,@@@.@@ 'hilippine Commercial and -nd"strial *an! 1,;7=,@@@.@@ (anila *an!ing Corporation 3,@@@,@@@.@@ (an"fact"rers *an! 77@,@@@.@@ 6ong!ong and $hanghai *an!ing Corporation 34@,@@@.@@ ,oreign %xport +dvances (against immediate shipment) 444,@@@.@@ ')* export advance line (against immediate shipment) 4,@@@,@@@.@@ TFT+< 11,014,@@@.@@ +s sec"rity for the payment of its obligations and advances against shipments, *at9a! mortgaged its three (;) cocoprocessing oil mills in $asa, .avao City, Bimene#, (isamis Fccidental and Tana"an, <eyte to (anila *an!ing Corporation ((anila *an!), &ep"blic *an! (&*), and 'hilippine Commercial and -nd"strial *an! ('C-*), respectively. -n need for additional operating capital to place the three (;) coco-processing mills at their optim"m capacity and maxim"m efficiency and to settle, pay or otherwise li5"idate pending financial obligations with the different private ban!s, *at9a! applied to

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')* for additional financial assistance. Fn 4 Fctober 10=4, a ,inancial +greement was s"bmitted by ')* to *at9a! for acceptance. The ,inancial +greement reads: '6-<-''-)% )+T-F)+< *+)Q (anila, 'hilippines -nternational .epartment Fctober 4, 10=4 *+TB+Q, -)CF&'F&+T%. ;rd ,loor, E. '"yat *ldg. %scolta, (anila +ttn.: (r. C-&-+CF *. (%).FV+ ice-'resident A Eeneral (anager Eentlemen: 2e are pleased to advise that o"r *oard of .irectors approved for yo" the following: 1) That )-.C shall invest '=,133,4@@.@@ in the form of preferred shares of stoc!s at 0G c"m"lative, participating and convertible within 4 years at par into common stoc!s to li5"idate yo"r acco"nts with the &ep"blic *an!, (an"fact"rers *an! A Tr"st Company and the 'C-* which, however, shall be applied to the latter three (;) ban!s acco"nts with the <oans A .isco"nts .ept. )-.C shall match yo"r ' 1@ million s"bscription by an additional investment of ';,311,4@@ within a period of one to two years at )-.C/s option> 3) That )-.C will g"aranty for five (4) years yo"r acco"nt with the (anila *an!ing Corporation> ;) That the above ban!s (&ep"blic *an!, 'C-*, (*TC and (anila *an!ing Corp.) shall release in favor of ')* the first and any mortgage they hold on yo"r properties> 7) That yo" shall exercise (exec"te) a first mortgage on all yo"r properties located at $asa, .avao City> Bimene#, (isamis Fccidental> and Tana"an, <eyte and assign leasehold rights on the property on which yo"r plant at $asa, .avao City is erected in favor of ')*> 4) That a voting tr"st agreement for five (4) years over =@G of the o"standing paid "p and s"bscribed shares shall be exec"ted by yo"r stoc!holders in favor of )-.C> =) That this accomodation shall be sec"red by the 9oint and several signat"res of officers and directors> 1) That the n"mber of the *oard of .irectors shall be increased to seven (1), three (;) from yo"r firm and the other fo"r (7) from the ')*-)-.C> ?) That a comptroller, at yo"r expense, shall be appointed by ')*-)-.C to s"pervise the financial management of yo"r firm> 0) That the past d"e acco"nts of ' 4 million with the -nternational .epartment of the ')* shall be transferred to the <oans A .isco"nt .epartment and to be treated as a .emand <oan>

7@
1@) That any excess of )-.C investment as re5"ired in Condition 1 after payment of the obligations to three (;) *an!s (&*, (*TC, A 'C-*) shall be applied to red"ce the above .emand <oan of ' 4 million> 11) That we shall grant yo" an export advance of '; million to be "sed for copra p"rchases, s"b9ect to the following conditions: a) That the line shall expire on $eptember ;@, 10== b"t revocable at the *an!(s) option> b) That drawings against the line shall be allowed only when an irrevocable export <DC for cocon"t prod"cts has been established or assigned in yo"r favor and yo" shall assign to "s all proceeds of negotiations to be received from yo"r letters of credit> c) That drawings against the line be limited to =@G of the peso val"e of the export letters of credit comp"ted at ';.4@ per W1.@@ b"t total drawings shall not in any event exceed ';,@@@,@@@.@@> d) That release or releases against the line shall be covered by promissory note or notes for 0@ days b"t not beyond the expiry dates of the coveting <DC and proceeds of said <DC shall first be applied to the correspondent drawings on the line> e) That drawings against the line shall be charged interest at the rate of 0G per ann"m and s"b9ect to 1D3G penalty charge on all drawings not paid or extended on mat"rity date> and f) That within 0@ days from date of release against the line, yo" shall negotiate with "s on e5"ivalent amo"nt in export bills, otherwise, the line shag be temporarily s"spended "ntil the o"tstanding export advance is f"lly li5"idated. 2e are writing the )ational -nvestment A .evelopment Corporation, the &ep"blic *an!, the 'hilippine Commercial A -nd"strial *an! and the (an"fact"rers *an! A Tr"st Company and the (anila *an!ing Corporation regarding the above. -n connection with the above, !indly s"bmit to "s two (3) copies of yo"r board resol"tion certified to "nder oath by yo"r corporate secretary accepting the conditions en"merated above a"thori#ing the above transactions and the officer or officers to sign on behalf of the corporation. Than! yo". ery tr"ly yo"rs, ($E..) BF$% *. $+($F) ) The terms and conditions of the ,inancial +greement were d"ly accepted by *at9a!. Under said +greement, )-.C wo"ld, as it act"ally did, invest '=,133,4@@.@@ in *at9a! in the form of preferred shares of stoc! convertible within five (4) years at par into common stoc!, to li5"idate *at9a!/s obligations to &ep"blic *an! (&*), (an"fact"rers *an! and Tr"st Company ((*TC) and 'hilippine Commercial A -nd"strial *an! ('C-*), and the balance of the investment was to be applied to *at9a!/s past d"e acco"nt of ' 4 million with the ')*. Upon receiving payment, &*, 'C-*, and (*TC released in favor of ')* the first and any mortgages they held on the properties of *at9a!. +s agreed, ')* also granted *at9a! an export-advance line of ' ; million, later increased to ' 4million, and a standby letter of credit facility in the amo"nt of '4,?4@,@@@.@@. +s of 30 $eptember 10==, the financial accomodation that had been extended by ')* to *at9a! amo"nted to a total of ' 17,3@1,?40.41.

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+s li!ewise agreed, *at9a! exec"ted a first mortgage in favor of ')* on all its properties located at Bimene#, (isamis Fccidental and Tana"an, <eyte. *at9a!/s plant in $asa, .avao City was mortgaged to the (anila *an! which, in 10=1, instit"ted foreclos"re proceedings against the same b"t which were aborted by the payment by *at9a! of the s"m of '3,7@@,@@@.@@ to (anila *an!, and which amo"nt was advanced to *at9a! by )-.C, a wholly-owned s"bsidiary of ')*. To sec"re the advance, *at9a! mortgaged the oil mill in $asa, .avao City to )-.C. 7 )ext, a oting Tr"st +greement was exec"ted on 3= Fctober 10=4 in favor of )-.C by the stoc!holders representing =@G of the o"tstanding paid-"p and s"bscribed shares of *at9a!. This agreement was for a period of five (4) years and, "pon its expiration, was to be s"b9ect to negotiation between the parties. The voting Tr"st +greement reads: FT-)E T&U$T +E&%%(%)T Q)F2 +<< (%) *C T6%$% '&%$%)T$: This +E&%%(%)T made and exec"ted by the "ndersigned stoc!holders of *+TB+Q, -)C., a corporation d"ly organi#ed and existing "nder the laws of the 'hilippines, whose names are hereinbelow s"bscribed hereinafter caged the $U*$C&-*%&$, and the )+T-F)+< -) %$T(%)T +). .% %<F'(%)T CF&'F&+T-F), hereinafter referred to as the tr"stee. 2-T)%$$%T6: 26%&%+$, the $U*$C&-*%&$ are owners respectively of the capital stoc! of the *+TB+Q, -)C. (hereinafter called the CF&'F&+T-F)) in the amo"nts represented by the n"mber of shares set fort opposite their respective names here"nder> +). 26%&%+$, with a view or establishing a safe and competent management to operate the corporation for the best interest of all the stoc!holders thereof, and as m"t"ally agreed between the $U*$C&-*%&$ and the T&U$T%%, this oting Tr"st +greement has been exec"ted "nder the following terms and conditions. )F2 T6%&%,F&%, the "ndersigned stoc!holders, in consideration of the premises and of the m"t"al covenants and agreements herein contained and to carry o"t the foregoing p"rposes in order to vest in the T&U$T%% the voting rights of the shares of stoc! held by the "ndersigned in the CF&'F&+T-F) as hereinafter stated it is m"t"ally agreed as follows: 1. '%&-F. F, .%$-E)+T-F) I ,or a period of five (4) years from and after date hereof, witho"t power of revocation on the part of the $U*$C&-*%&$, the T&U$T%% designated in the manner herein provided is hereby made, constit"ted and appointed as a FT-)E T&U$T%% to act for and in the name of the $U*$C&-*%&$, it being "nderstood, however, that this oting Tr"st +greement shall, "pon its expiration be s"b9ect to a re-negotiation between the parties, as may be warranted by the balance and attending circ"mstance of the loan investment of the T&U$T%% or otherwise in the CF&'F&+T-F). 3. +$$-E)(%)T F, $TFCQ C%&T-,-C+T%$ U'F) -$$U+)C% I The "ndersigned stoc!holders hereby transfer and assign their common shares to the capital stoc! of the CF&'F&+T-F) to the extent shown here"nder: B+(%$ +. Q%-$T%& 31,4@@ shares BF6))C <-%U$F) 3@,;@@ shares C*( ,-)+)C% A -) %$T(%)T CF&'. (C.*. (endo#a, 'res.) 4,@@@ shares +<%B+).&F E. *%<T&+) 7,@@@ shares

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%$'%&+)V+ +. V+(F&+ ;,@@@ shares C-&-+CF *. (%).FV+ 3,@@@ shares ,-.%<+ .% EUV(+) 3,@@@ shares <<FC. .. CF(*$ 3,@@@ shares &%)+TF *. *%B+& 3@@ shares TFT+< =@,@@@ shares to the T&U$T%% by virt"e of the provisions hereof and do hereby a"thori#e the $ecretary of the CF&'F&+T-F) to iss"e the corresponding certificate directly in the name of the T&U$T%% and on which certificates it shall appear that they have been iss"ed p"rs"ant to this oting Tr"st +greement and the said T&U$T%% shall hold in escrow all s"ch certificates d"ring the term of the +greement. -n t"rn, the T&U$T%% shall deliver to the "ndersigned stoc!holders the corresponding oting Tr"st certificates provided for in $ec. ;= of +ct )o. 1740. ;. FT-)E 'F2%& F, T&U$T%% I The T&U$T%% and its s"ccessors in tr"st, if anym shall have the power and it shall be its d"ty to vote the shares of the "ndersigned s"b9ect hereof and covered by this +greement at all ann"al, ad9o"rned and special meetings of the CF&'F&+T-F) on all 5"estions, motions, resol"tions and matters incl"ding the election of directors and s"ch matters on which the stoc!holders, by virt"e of the by-laws of the CF&'F&+T-F) and of the existing legislations are entitled to vote, which may be voted "pon at any and all said meetings and shall also have the power to exec"te and ac!nowledge any agreements or doc"ments that may be necessary in its opinion to express the consent or assent of all or any of the stoc!holders of the CF&'F&+T-F) with respect to any matter or thing to which any consent or assent of the stoc!holders may be necessary, proper or convenient. 7. ,-<-)E of +E&%%(%)T I +n exec"ted copy of this +greement shall be filed with the CF&'F&+T-F) at its office in the City of (anila wherever it may be transfered therefrom and shall constit"te irrevocable a"thority and absol"te direction of the officers of the CF&'F&+T-F) whose d"ty is to sign and deliver stoc! certificates to ma!e delivery only to said voting tr"stee of the shares and certificates of stoc! s"b9ect to the provisions of this +greement as aforesaid. $"ch copy of this +greement shall at all times be open to inspection by any stoc!holder, as provided by law. 4. .- -.%). I the f"ll and absol"te beneficial interest in the shares s"b9ect of this +greement shall remain with the stoc!holders exec"ting the same and any all dividends which may be declared by the CF&'F&+T-F) shall belong and be paid to them excl"sively in accordance with their stoc!holdings after ded"cting therefrom or applying the same to whatever liabilities the stoc!holders may have in favor of the T&U$T%% by virt"e of any +greement or Contract that may have been or will be exec"ted by and between the T&U$T%% and the CF&'F&+T-F) or between the former and the "ndersigned stoc!holders. = CF('%)$+T-F)> -((U)-TC I The T&U$T%% or its s"ccessor in tr"st shall not receive any compensation for its serviceexcept perhaps that which the CF&'F&+T-F) may grant to the T&U$T%%/s a"thori#ed representative, if any. %xpenses costs, champs, and other liabilities inc"rred in the carrying o"t of the b"t herein established or by reason thereof, shall be paid for with the f"nds of the CF&'F&+T-F). The T&U$T%% or any of its d"ly a"thori#ed representative shall inc"r no liability by reason of any error of law or of any matter or thing done or omitted "nder this +greement, except for his own individ"al malfeasance. 1. &%'&%$%)T+T-F) I The T&U$T%%, being a corporation and a 9"ridical person shall accomplish the foregoing ob9ectives and perform its f"nctions "nder this +greement as well as en9oy and exercise the powers, privileges, rights and interests herein established thro"gh its d"ly a"thori#ed and accredited re resentatives . p with f"ll a"thority "nder the specific appointment or designation or 'roxy.

7;
?. -&&% FC+*-<-TC I This +greement shall d"ring its 4-year term or any extension thereof be binding "pon and in"re to the benefit of the "ndersigned stoc!holders and their respective legal representatives, pledges, transferees, andDor assigns and shall be irrevocable d"ring the said terms andDor its extension p"rs"ant to the provisions of paragraph 1 hereof. -t is hereby "nderstood and the "ndersigned stoc!holders have bo"nd as they hereby bind themselves to ma!e a condition of every pledge, transfer of assignment of their interests in the CF&'F&+T-F) that the interests and participation so pledged, transferred or assigned is evidenced by annotations in the certificates of stoc!s or in the boo!s of the corporation, shall be s"b9ect to this +greement and the same shall be binding "pon the pledgees, transferees and assigns while the tr"st herein created still s"bsists. 0. T%&(-)+T-F) I Upon termination of this +greement as heretofore provided, the certificates delivered to the T&U$T%% by virt"e hereof shall be ret"rned and delivered to the "ndersigned stoc!holders as the absol"te owners thereof, "pon s"rrender of their respective voting tr"st certificates, and the d"ties of the T&U$T%% shall cease and terminate. 1@. +CC%'T+)C% F, T&U$T I The T&U$T%% hereby accepts the tr"st created by this +greement "nder the signat"re of its d"ly a"thori#ed representative affixed hereinbelow and agrees to perform the same in accordance with the termDs hereof. -) 2-T)T%$$ 6%&%F,, the "ndersigned stoc!holders and the T&U$T%% by its representatives, have here"nto affixed their signat"res this 3= day of Fctober, 10=4 in the City of (anila, 'hilippines. ($E.) B+(%$ +. Q%-$%& ($E.) BF6))C <-%U$F) $toc!holder $toc!holder C*( ,-)+)C% A -) %$T(%)T CF&'F&+T-F) *y: ($E.) C.*. (%).FV+ 'resident %$'%&+)V+ +. V+(F&+ ($E.) +<%B+).&F E. *%<T&+) *y: ($E.) (+&-+)F V+(F&+ $toc!holder %$'%&+)V+ +. V+(F&+ ($E.) ,-.%<+ .% EUV(+) ($E.) C-&-+CF *. (%).FV+ $toc!holder $toc!holder ($E.) &%)+TF *. *%B+& ($E.) <<FC. .. CF(*$ $toc!holder $toc!holder )+T-F)+< -) %$T(%)T +). .% %<F'(%)T CF&'F&+T-F) *y: ($E.) -E)+C-F .%*USU% B&. ice-'resident ;

77
-n B"ly 10=1, forced by the insolvency of *at9a!, ')* instit"ted extra9"dicial foreclos"re proceedings against the oil mills of *at9a! located in Tana"an, <eyte and Bimene#, (isamis Fccidental. The properties were sold to ')* as the highest bidder. Fne year thereafter, or in $eptember 10=?, final Certificates of $ale were iss"ed by the provincial sheriffs of <eyte 8 and (isamis Fccidental * for the two (3) oil mills in Tana"an and Bimene# in favor of ')*, after *at9a! failed to exercise its right to redeem the foreclosed properties within the allowable one year period of redemption. $"bse5"ently, ')* transferred the ownership of the two (3) oil mills to )-.C which, as aforestated, was a wholly-owned ')* s"bsidiary. +s regards the oil mill located at $asa, .avao City, the same was similarly foreclosed extra9"dicial by )-.C. -t was sold to )-.C as the highest bidder. +fter *at9a! failed to redeem the property, )-.C consolidated its ownership of the oil mill. 8 Three (;) years thereafter, or on ;1 +"g"st 101@, *at9a! represented by ma9ority stoc!holders, thro"gh +tty. +mado ."ran, legal co"nsel of private respondent *at9a!, wrote a letter to )-.C in5"iring if the latter was still interested in negotiating the renewal of the oting Tr"st +greement. 9 Fn 33 $eptember 101@, legal co"nsel of *at9a! wrote another letter to )-.C informing the latter that *at9a! wo"ld now safely ass"me that )-.C was no longer interested in the renewal of said oting Tr"st +greement and, in view thereof, re5"ested for the t"rn-over and transfer of all *at9a! assets, properties, management and operations. ,/ Fn 3; $eptember 101@, legal co"nsel of *at9a! sent stin another letter to )-.C, this time as!ing for a complete acco"nting of the assets, properties, management and operation of *at9a!, preparatory to their t"rn-over and transfer to the stoc!holders of *at9a!. ,, )-.C replied, confirming the fact that it had no intention whatsoever to comply with the demands of *at9a!.
,+

Fn 37 ,ebr"ary 1011, *at9a! filed before the Co"rt of ,irst -nstance of &i#al a special civil action for mandam"s with preliminary in9"nction against herein petitioners doc!eted as Civil Case )o. 17743. ,) Fn 17 +pril 1011, in said Civil Case )o. 17743, *at9a! filed an "rgent e. parte motion for the iss"ance of a writ of preliminary prohibitory and mandatory in9"nction. ,7 Fn the same day, respondent 9"dge iss"ed a restraining order 8prohibiting defendants (herein petitioners) from removing any record, boo!s, commercial papers or cash, and leasing, renting o"t, disposing of or otherwise transferring any or all of the properties, machineries, raw materials and finished prod"cts andDor by-prod"cts thereof now in the factory sites of the three (;) modem coco milling plants sit"ated in Bimene#, (isamis Fccidental, $asa, .avao City, and Tana"an, <eyte.8 ,; The order of 17 +pril 1011 was s"bse5"ently amended by respondent 9"dge "pon an e. parte motion of private respondent *at9a! so as to incl"de the premises of )-.C in (a!ati and those of ')* in (anila, as among the premises which private respondent *at9a! was a"thori#ed to enter in order to cond"ct an inventory. Fn 37 +pril 1011, )-.C and ')* filed an opposition to the e. parte application for the iss"ance of a writ of preliminary prohibitory and mandatory in9"nction and a motion to set aside restraining order. *efore the co"rt co"ld act on the said motion, private respondent *at9a! filed on ; (ay 1011 a petition for receivership as alternative to writ of preliminary prohibitory and mandatory in9"nction. ,8 This was opposed by ')* and )-.C . ,* Fn ? (ay 1011., )-.C and ')* filed a motion to dismiss *at9a!/s complaints.
,8

Fn 1= +"g"st 1011, respondent 9"dge iss"ed the now assailed order denying petitioners/ motion to dismiss and appointing a set of three (;) receivers. ,9 )-.C moved for reconsideration of the aforesaid order. +/ Fn ;@ $eptember 1011, respondent 9"dge denied the motion for reconsideration. +, 6ence, these two (3) petitions, which have been consolidated, as they involve a resol"tion of the same iss"es. -n their manifestation with motion for early decision, dated 34 +"g"st 10?=, private respondent, *at9a! contends that the )-.C has already been abolished or scrapped by its parent company, the ')*. +fter a caref"l st"dy and examination of the records of the case, the Co"rt finds and holds for the petitioners. 1. 5n t$e denial of petitionersC motion to dismiss .

74
+s a general r"le, an order denying a motion to 5"ash or to dismiss is interloc"tory and cannot be the s"b9ect of a petition for certiorari. The remedy of the aggrieved party in a denied motion to dismiss is to file an answer and interpose, as defense or defenses, the ob9ection or ob9ections raised by him in said motion to dismiss, then proceed to trial and, in case of adverse decision, to elevate the entire case by appeal in d"e co"rse. 6owever, "nder certain sit"ations, reco"rse to the extraordinary legal remedies of certiorari, prohibition and mandam"s to 5"estion the denial of a motion to dismiss or 5"ash is considered proper, in the interest of more enlightened and s"bstantial 9"stice. +s the co"rt said in Pineda and Ampil %an!fa&t!rin- Co. "s. Bartolome , 04 'hil. 0;@,0;? ,or analogo"s reasons it may be said that the petition for certiorari interposed by the acc"sed against the order of the co"rt a !o denying the motion to 5"ash may be entertained, not only beca"se it was rendered in a criminal case, b"t beca"se it was rendered, as claimed, with grave ab"se of discretion, as fo"nd by the Co"rt of +ppeals. .. and reiterated in %ead ". Ar-el ++ citing ,ap ". 2!tero (1@4 'hil. 1;@1): 6owever, were we to re5"ire adherence to this pretense, the case at bar wo"ld have to be dismissed and petitioner re5"ired to go thro"gh the inconvenience, not to say the mental agony and tort"re, of s"bmitting himself to trial on the merits in Case )o. 1==77;, apart from the expenses incidental thereto, despite the fact that his trial and conviction therein wo"ld violate one of this MsicN constit"tional rights, and that, an appeal to this Co"rt, we wo"ld, therefore, have to set aside the 9"dgment of conviction of the lower co"rt. This wo"ld, obvio"sly, be most "nfair and "n9"st. Under the circ"mstances obtaining the present case, the flaw in the proced"re followed by petitioner herein may be overloo!ed, in the interest of a more enlightened and s"bstantial 9"stice. Th"s, where there is patent grave ab"se of discretion, in denying the motion to dismiss, as in the present case, this Co"rt may entertain the petition for certiorari interposed by the party against whom the said order is iss"ed. -n their motion to dismiss *at9a!s complaint, in Civil Case )o. 17743, )-.C and ')* raised common gro"nds for its allowance, to wit: 1. This 6onorable Co"rt (the trial co"rt) has no 9"risdiction over the s"b9ect of the action or s"it> 3. The ven"e is improperly laid> and ;. 'laintiff has no legal capacity to s"e. -n addition, ')* contended that the complaint states no ca"se of action (&"le 1=, $ec. 1, 'ar. a, c, d A g, &"les of Co"rt). +nent the first gro"nd, it is a well-settled r"le that the 9"risdiction of a Co"rt of ,irst -nstance to iss"e a writ of preliminary or permanent in9"nction is confined within the bo"ndaries of the province where the land in controversy is sit"ated. +) The petition for mandam"s of *at9a! prayed that )-.C and ')* be ordered to s"rrender, relin5"ish and t"rnover to *at9a! the assets, management and operation of *at9a! partic"larly the three (;) oil mills located in $asa, .avao City, Bimene#, (isamis Fccidental and Tana"an, <eyte. Clearly, what *at9a! as!ed of respondent co"rt was the exercise of power or a"thority o"tside its 9"risdiction. Fn the matter of proper ven"e, *at9a!/s complaint sho"ld have been filed in the provinces where said oil mills are located. Under &"le 7, $ec. 3, paragraph + of the &"les of Co"rt, 8actions affecting title to, or for recovery of possession, or for partition or condemnation of, or foreclos"re of mortgage on, real property, shall be commenced and tried in the province where the property or any part thereof lies.8 -n s"pport of the third gro"nd of their motion to dismiss, ')* and )-.C contend that *at9a!/s complaint for mandam"s is based on its claim or right to recovery of possession of the three (;) oil mills, on the gro"nd of an alleged breach of fid"ciary relationship. )oteworthy is the fact that, in the oting Tr"st +greement, the parties thereto were )-.C and certain stoc!holders of *at9a!. *at9a! itself was not a signatory thereto. Under $ec. 3, &"le ; of the &"les of Co"rt, every action m"st be prosec"ted and defended in the name of the real party in interest. +pplying the r"le in the present case, the action sho"ld have been filed by the stoc!holders of *at9a!, who exec"ted the oting Tr"st +greement with )-.C, and

7=
not by *at9a! itself which is not a party to said agreement, and therefore, not the real party in interest in the s"it to enforce the same. -n addition, ')* claims that *at9a! has no ca"se of action and prays that the petition for mandam"s be dismissed. + caref"l reading of the oting Tr"st +greement shows that ')* was really not a party thereto. 6ence, mandam"s will not lie against ')*. (oreover, the action instit"ted by *at9a! before the respondent co"rt was a special civil action for mandam"s with prayer for preliminary mandatory in9"nction. Eenerally, mandam"s is not a writ of right and its allowance or ref"sal is a matter of discretion to be exercised on e5"itable principles and in accordance with well-settled r"les of law, and that it sho"ld never be "sed to effect"ate an in9"stice, b"t only to prevent a fail"re of 9"stice. +7 The writ does not iss"e as a matter of co"rse. -t will iss"e only where there is a clear legal right so"ght to be enforced. -t will not iss"e to enforce a do"btf"l right. + clear legal right within the meaning of $ec. ;, &"le =4 of the &"les of Co"rt means a right clearly fo"nded in or granted by law, a right which is enforceable as a matter of law. +pplying the above-cited principles of law in the present case, the Co"rt finds no clear right in *at9a! to be entitled to the writ prayed for. -t sho"ld be noted that the petition for mandam"s filed by it prayed that )-.C and ')* be ordered to s"rrender, relin5"ish and t"rn-over to *at9a! the assets, management, and operation of *at9a! partic"larly the three (;) oil mills and to ma!e the order permanent, after trial, and ordering )-.C and ')* to s"bmit a complete acco"nting of the assets, management and operation of *at9a! from 10=4. -n effect, what *at9a! see!s to recover is title to, or possession of, real property (the three (;) oil mills which really made "p the assets of *at9a!) b"t which the records show already belong to )-.C. -t is not disp"ted that the mortgages on the three (;) oil mills were foreclosed by ')* and )-.C and ac5"ired by them as the highest bidder in the appropriate foreclos"re sales. Fwnership thereto was s"bse5"ently consolidated by ')* and )-.C, after *at9a! failed to exercise its right of redemption. The three (;) oil mills are now titled in the name of )-.C. ,rom the foregoing, it is evident that *at9a! had no clear right to be entitled to the writ prayed for. -n 2amb "s. P$ilippines (33 'hil. 74=) citing the case of Gon+ales '. (ala+ar "s. 4$e Board of P$arma&y , 3@ 'hil. ;=1, the Co"rt said that the writ of mandam"s will not iss"e to give to the applicant anything to which he is not entitled by law. 3. 5n t$e appointment of re&ei"er. + receiver of real or personal property, which is the s"b9ect of the action, may be appointed by the co"rt when it appears from the pleadings that the party applying for the appointment of receiver has an interest in said property. +; The right, interest, or claim in property, to entitle one to a receiver over it, m"st be present and existing. +s borne o"t by the records of the case, ')* ac5"ired ownership of two (3) of the three (;) oil mills by virt"e of mortgage foreclos"re sales. )-.C ac5"ired ownership of the third oil mill also "nder a mortgage foreclos"re sale. Certificates of title were iss"ed to ')* and )-.C after the lapse of the one (1) year redemption period. $"bse5"ently, ')* transferred the ownership of the two (3) oil mills to )-.C. There can be no do"bt, therefore, that )-.C not only has possession of, b"t also title to the three (;) oil mills formerly owned by *at9a!. The interest of *at9a! over the three (;) oil mills ceased "pon the iss"ance of the certificates of title to ')* and )-.C confirming their ownership over the said properties. (ore so, where *at9a! does not imp"gn the validity of the foreclos"re proceedings. )either *at9a! nor its stoc!holders have instit"ted any legal proceedings to ann"l the mortgage foreclos"re aforementioned. *at9a! premises its right to the possession of the three (;) off mills on the oting Tr"st +greement, claiming that "nder said agreement, )-.C was constit"ted as tr"stee of the assets, management and operations of *at9a!, that d"e to the expiration of the oting Tr"st +greement, on 3= Fctober 101@, )-.C sho"ld t"m over the assets of the three (;) oil mills to *at9a!. The relevant provisions of the oting Tr"st +greement, partic"larly paragraph 7 A )o. 1 thereof, are hereby reprod"ced: )F2 T6%&%,F&%, the "ndersigned stoc!holders, in consideration of the premises and of the m"t"al covenants and agreements herein contained and to carry o"t the foregoing p"rposes in order to vest in the T&U$T%% the voting right.? of the shares of stoc! held by the "ndersigned in the CF&'F&+T-F) as hereinafter stated it is m"t"ally agreed as follows: 1. '%&-F. F, .%$-E)+T-F) I ,or a period of five (4) years from and after date hereof, witho"t power of revocation on the part of the $U*$C&-*%&$, the T&U$T%% designated in the manner herein provided is hereby made, constit"ted and appointed as a FT-)E T&U$T%% to act for and in the name of the

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$U*$C&-*%&$, it being "nderstood, however, that this oting Tr"st +greement shall, "pon its expiration be s"b9ect to a re-negotiation between the parties, as may be warranted by the balance and attending circ"mstance of the loan investment of the T&U$T%% or otherwise in the CF&'F&+T-F). and )o. ; thereof reads: ;. FT-)E 'F2%& F, T&U$T%% I The T&U$T%% and its s"ccessors in tr"st, if any, shall have the power and it shall be its d"ty to vote the shares of the "ndersigned s"b9ect hereof and covered by this +greement at all ann"al, ad9o"rned and special meetings of the CF&'F&+T-F) on all 5"estions, motions, resol"tions and matters incl"ding the election of directors and all s"ch matters on which the stoc!holders, by virt"e of the by-laws of the CF&'F&+T-F) and of the existing legislations are entitled to vote, which may be voted "pon at any and all said meetings and shall also have the power to exec"te and ac!nowledge any agreements or doc"ments that may be necessary in its opinion to express the consent or assent of all or any of the stoc!holders of the CF&'F&+T-F) with respect to any matter or thing to which any consent or assent of the stoc!holders may be necessary, proper or convenient. ,rom the foregoing provisions, it is clear that what was assigned to )-.C was the power to vote the shares of stoc! of the stoc!holders of *at9a!, representing =@G of *at9a!/s o"tstanding shares, and who are the signatories to the agreement. The power entr"sted to )-.C also incl"ded the a"thority to exec"te any agreement or doc"ment that may be necessary to express the consent or assent to any matter, by the stoc!holders. )owhere in the said provisions or in any other part of the oting Tr"st +greement is mention made of any transfer or assignment to )-.C of *at9a!/s assets, operations, and management. )-.C was constit"ted as tr"stee only of the voting rights of =@G of the paid-"p and o"tstanding shares of stoc! in *at9a!. This is confirmed by paragraph )o. 0 of the oting Tr"st +greement, th"s: 0. T%&(-)+T-F) I Upon termination of this +greement as heretofore provided, the certificates delivered to the T&U$T%% by virt"e hereof shall be ret"rned and delivered to the "ndersigned stoc!holders as the absol"te owners thereof, "pon s"rrender of their respective voting tr"st certificates, and the d"ties of the T&U$T%% shall cease and terminate.Under the aforecited provision, what was to be ret"rned by )-.C as tr"stee to *at9a!/s stoc!holders, "pon the termination of the agreement, are the certificates of shares of stoc! belonging to *at9a!/s stoc!holders, not the properties or assets of *at9a! itself which were never delivered, in the first place to )-.C, "nder the terms of said oting Tr"st +greement. -n any event, a voting tr"st transfers only voting or other rights pertaining to the shares s"b9ect of the agreement or control over the stoc!. The law on the matter is $ection 40, 'aragraph 1 of the Corporation Code (*' =?) which provides: $ec. 40. 'otin- 4r!sts I Fne or more stoc!holders of a stoc! corporation may create a voting tr"st for the p"rpose of confering "pon a tr"stee or tr"sties the right to vote and other rights pertaining to the shares for a period not exceeding five (4) years at any one time: ... +8 The ac5"isition by ')*-)-.C of the properties in 5"estion was not made or effected "nder the capacity of a tr"stee b"t as a foreclosing creditor for the p"rpose of recovering on a 9"st and valid obligation of *at9a!. (oreover, the prevention of imminent danger to property is the g"iding principle that governs co"rts in the matter of appointing receivers. Under $ec. 1 (b), &"le 40 of the &"les of Co"rt, it is necessary in granting the relief of receivership that the property or fired be in danger of loss, removal or material in9"ry. -n the case at bar, *at9a! in its petition for receivership, or in its amended petition therefor, failed to present any evidence, to establish the re5"isite condition that the property is in danger of being lost, removed or materially in9"red "nless a receiver is appointed to g"ard and preserve it. 26%&%,F&%, the petitions are E&+)T%.. The orders of the respondent 9"dge, dated 1= +"g"st 1011 and ;@ $eptember 1011, are hereby +))U<<%. and $%T +$-.%. The respondent 9"dge andDor his s"ccessors are ordered to desist from hearing andDor cond"cting any f"rther proceedings in Civil Case )o. 17743, except to dismiss the same. 2ith costs against private respondents. $F F&.%&%..

7?
,ap, C.J., %elen&io-*errera, Paras and (armiento, JJ., &on&!r.

Footnotes 1 +nnex *, p. 117, &ollo of E.&. )o. ;7103. 3 +nnex C, p. 1;=, &ollo of E.&. )o. ;7103. ; +nnex %, p. 143, &ollo of E.&. )o. ;7103. 7 +nnex E, p. 144, &ollo of E.&. )o. ;7103. 4 +nnex 3, p. 7=0, &ollo of E.&. )o. ;731;. = +nnex (, p. 111, &ollo of E.&. )o. ;7103. 1 +nnex ), p. 104, &ollo of E.&. )o. ;7103. ? +nnex F, p. 3=4, &ollo of E.&. )o. ;7103. 0 +nnex S, p. 33=, &ollo of E.&. )o. ;7103. 1@ +nnex &, p. 33?, &ollo of E.&. )o. ;7103. 11 +nnex $, p. 3;@, &ollo of E.&. )o. ;7103. 13 +nnex T, p. 3;3, &ollo of E.&. )o. ;7103. 1; +nnex ', p. 3@=, &ollo of E.&. )o. ;7103. 17 +nnex V, p. 3=7, &ollo of E.&. )o. ;7103. 14 +nnex ++, p. 31;, &ollo of E.&. )o. ;7103. 1= +nnex 6, p. 1;?, &ollo of E.&. )o. ;731;. 11 +nnex ,,, p. ;3;, &ollo of E.&. )o. ;7103 for ')*. 1? +nnex EE, p. ;;1, &ollo of E.&. )o. ;7103 for )-.C> +nnex B, p 11?, &ollo of E.&. )o. ;731; for ')*. 10 +nnex *, p. 117, &ollo of E.&. )o. ;7103 3@ +nnex <<, p. 71=, &ollo of E.&. )o. ;7103. 31 +nnex C, p. 1;=, &ollo of E.&. )o. ;7103. 33 E.&. )o. <-7104?, B"ly 3@, 10?3, 114 $C&+ 34=,3=3. 3; +costa vs. +lvendia, E.&. )o. <-1740?, Fct. ;1, 10=@> Central *an! of the 'hilippines vs. Ca9igal E.&. )o. <-1031?, .ec. 30, 10=3, = $C&+ 1@13, 1@1=.

70
3;a ()FT%: .ag"pan %lectric vs. 'ano, 04 $C&+ =0;, cannot be applied since the principal offices of ')* and )-.C are in (anila) 37 (arcelo $teel Corporation vs. -mport Central *oard, ?1 'hil. ;14. 34 $ec. 1(b), &"le 40 of the &"les of Co"rt. 3= ,ormerly $ec. ;= of the Corporation <aw or +ct. )o. 1740. $oo5ing agree-ents (Section ,// of the Cor oration Code! Sec. ,//. Agree-ents .: stoc>ho5ders. ( 1. +greements by and among stoc!holders exec"ted before the formation and organi#ation of a close corporation, signed by all stoc!holders, shall s"rvive the incorporation of s"ch corporation and shall contin"e to be valid and binding between and among s"ch stoc!holders, if s"ch be their intent, to the extent that s"ch agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of s"ch agreements are contained, except those re5"ired by this Title to be embodied in said articles of incorporation. 3. +n agreement between two or more stoc!holders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a proced"re agreed "pon by them. ;. )o provision in any written agreement signed by the stoc!holders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the gro"nd that its effect is to ma!e them partners among themselves. 7. + written agreement among some or all of the stoc!holders in a close corporation shall not be invalidated on the gro"nd that it so relates to the cond"ct of the b"siness and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: 'rovided, That s"ch agreement shall impose on the stoc!holders who are parties thereto the liabilities for managerial acts imposed by this Code on directors. 4. To the extent th the stoc!holders are actively engaged in the management or operation of the b"siness and affairs of a close corporation, the stoc!holders shall be held to strict fid"ciary d"ties to each other and among themselves. $aid stoc!holders shall be personally liable for corporate torts "nless the corporation has obtained reasonably ade5"ate liability ins"rance. C. E'FORCEME'% OF R2&H%S OF SHAREHOLDERS

4@
a. &ight to -nspect ,. S ecified Records (Sections *7 and *; of the Cor oration Code! Sec. *7. Boo>s to .e >e tB stoc> transfer agent . - %very corporation shall !eep and caref"lly preserve at its principal office a record of all b"siness transactions and min"tes of all meetings of stoc!holders or members, or of the board of directors or tr"stees, in which shall be set forth in detail the time and place of holding the meeting, how a"thori#ed, the notice given, whether the meeting was reg"lar or special, if special its ob9ect, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, tr"stee, stoc!holder or member, the time when any director, tr"stee, stoc!holder or member entered or left the meeting m"st be noted in the min"tes> and on a similar demand, the yeas and nays m"st be ta!en on any motion or proposition, and a record thereof caref"lly made. The protest of any director, tr"stee, stoc!holder or member on any action or proposed action m"st be recorded in f"ll on his demand. The records of all b"siness transactions of the corporation and the min"tes of any meetings shall be open to inspection by any director, tr"stee, stoc!holder or member of the corporation at reasonable ho"rs on b"siness days and he may demand, writing, for a copy of excerpts from said records or min"tes, at his expense. +ny officer or agent of the corporation who shall ref"se to allow any director, tr"stees, stoc!holder or member of the corporation to examine and copy excerpts from its records or min"tes, in accordance with the provisions of this Code, shall be liable to s"ch director, tr"stee, stoc!holder or member for damages, and in addition, shall be g"ilty of an offense which shall be p"nishable "nder $ection 177 of this Code: 'rovided, That if s"ch ref"sal is made p"rs"ant to a resol"tion or order of the board of directors or tr"stees, the liability "nder this section for s"ch action shall be imposed "pon the directors or tr"stees who voted for s"ch ref"sal: and 'rovided, f"rther, That it shall be a defense to any action "nder this section that the person demanding to examine and copy excerpts from the corporation/s records and min"tes has improperly "sed any information sec"red thro"gh any prior examination of the records or min"tes of s"ch corporation or of any other corporation, or was not acting in good faith or for a legitimate p"rpose in ma!ing his demand. $toc! corporations m"st also !eep a boo! to be !nown as the 8stoc! and transfer boo!8, in which m"st be !ept a record of all stoc!s in the names of the stoc!holders alphabetically arranged> the installments paid and "npaid on all stoc! for which s"bscription has been made, and the date of payment of any installment> a statement of every alienation, sale or transfer of stoc! made, the date thereof, and by and to whom made> and s"ch other entries as the by-laws may prescribe. The stoc! and transfer boo! shall be !ept in the principal office of the corporation or in the office of its stoc! transfer agent and shall be open for inspection by any director or stoc!holder of the corporation at reasonable ho"rs on b"siness days. )o stoc! transfer agent or one engaged principally in the b"siness of registering transfers

41
of stoc!s in behalf of a stoc! corporation shall be allowed to operate in the 'hilippines "nless he sec"res a license from the $ec"rities and %xchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable ann"ally: 'rovided, That a stoc! corporation is not precl"ded from performing or ma!ing transfer of its own stoc!s, in which case all the r"les and reg"lations imposed on stoc! transfer agents, except the payment of a license fee herein provided, shall be applicable. (41a and ;3a> *. '. )o. 3=?.) Sec. *;. Right to financia5 state-ents. - 2ithin ten (1@) days from receipt of a written re5"est of any stoc!holder or member, the corporation shall f"rnish to him its most recent financial statement, which shall incl"de a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the res"lt of its operations. +t the reg"lar meeting of stoc!holders or members, the board of directors or tr"stees shall present to s"ch stoc!holders or members a financial report of the operations of the corporation for the preceding year, which shall incl"de financial statements, d"ly signed and certified by an independent certified p"blic acco"ntant. 6owever, if the paid-"p capital of the corporation is less than '4@,@@@.@@, the financial statements may be certified "nder oath by the treas"rer or any responsible officer of the corporation. (n)

+. Re-edies

G.R. No. 15568, Philpotts v. Philippine Manufacturing o!pan" and #err", $% Phil. $&1 &ep"blic of the 'hilippines S#$REME CO#R% (anila %) *+)C .%C-$-F)

43
)ovember ?, 1010 E.&. )o. 144=? 1. &. $H2L$O%%S, petitioner, vs. $H2L2$$2'E MA'#FAC%#R2'& COM$A'3 and F. '. BERR3, respondents. 2awren&e and #oss for petitioner. Crossfield and 5CBrien for defendants. S%REE%0 J.4 The petitioner, 2. E. 'hilpotts, a stoc!holder in the 'hilippine (an"fact"ring Company, one of the respondents herein, see!s by this proceeding to obtain a writ of mandam"s to compel the respondents to permit the plaintiff, in person or by some a"thori#ed agent or attorney, to inspect and examine the records of the b"siness transacted by said company since Ban"ary 1, 101?. The petition is filed originally in this co"rt "nder the a"thority of section 414 of the Code of Civil 'roced"re, which gives to this trib"nal conc"rrent 9"risdiction with the Co"rt of ,irst -nstance in cases, among others, where any corporation or person "nlawf"lly excl"des the plaintiff from the "se and en9oyment of some right to which he is entitled. The respondents interposed a dem"rrer, and the controversy is now before "s for the determination of the 5"estions th"s presented. The first point made has reference to a s"pposed defect of parties, and it is said that the action can not be maintained 9ointly against the corporation and its secretary witho"t the addition of the allegation that the latter is the c"stodian of the b"siness records of the respondent company. *y the plain lang"age of sections 414 and 333 of o"r Code of Civil 'roced"re, the right of action in s"ch a proceeding as this is given against the corporation> and the respondent corporation in this case was the only absol"tely necessary party. -n the Fhio case of Cincinnati ol!sblatt Co. vs. 6offmister (=1 Fhio $t., 7;3> 7? <. &. +., 1;4), only the corporation was named as defendant, while the complaint, in lang"age almost identical with that in the case at bar, alleged a demand "pon and ref"sal by the corporation. )evertheless the propriety of naming the secretary of the corporation as a codefendant cannot be 5"estioned, since s"ch official is c"stomarily charged with the c"stody of all doc"ments, correspondence, and records of a corporation, and he is pres"mably the person against whom the personal orders of the co"rt wo"ld be made effective in case the relief so"ght sho"ld be granted. Certainly there is nothing in the complaint to indicate that the secretary is an improper person to be 9oined. The petitioner might have named the president of the corporation as a respondent also> and this official might be bro"ght in later, even after 9"dgment rendered, if necessary to the effect"ation of the order of the co"rt.

4;
$ection 333 of o"r Code of Civil 'roced"re is ta!en from the California Code, and a decision of the California $"preme Co"rt - *arber vs. ("lford (111 Cal., ;4=) - is 5"ite clear "pon the point that both the corporation and its officers may be 9oined as defendants. The real controversy which has bro"ght these litigants into co"rt is "pon the 5"estion arg"ed in connection with the second gro"nd of dem"rrer, namely, whether the right which the law concedes to a stoc!holder to inspect the records can be exercised by a proper agent or attorney of the stoc!holder as well as by the stoc!holder in person. There is no pretense that the respondent corporation or any of its officials has ref"sed to allow the petitioner himself to examine anything relating to the affairs of the company, and the petition prays for a peremptory order commanding the respondents to place the records of all b"siness transactions of the company, d"ring a specified period, at the disposal of the plaintiff or his d"ly a"thori#ed agent or attorney, it being evident that the petitioner desires to exercise said right thro"gh an agent or attorney. -n the arg"ment in s"pport of the dem"rrer it is conceded by co"nsel for the respondents that there is a right of examination in the stoc!holder granted "nder section 41 of the Corporation <aw, b"t it is insisted that this right m"st be exercised in person. The pertinent provision of o"r law is fo"nd in the second paragraph of section 41 of+ct )o. 1740, which reads as follows: 8The record of all b"siness transactions of the corporation and the min"tes of any meeting shall be open to the inspection of any director, member or stoc!holder of the corporation at reasonable ho"rs.8 This provision is to be read of co"rse in connecting with the related provisions of sections 41 and 43, defining the d"ty of the corporation in respect to the !eeping of its records. )ow it is o"r opinion, and we accordingly hold, that the right of inspection given to a stoc!holder in the provision above 5"oted can be exercised either by himself or by any proper representative or attorney in fact, and either with or witho"t the attendance of the stoc!holder. This is in conformity with the general r"le that what a man may do in person he may do thro"gh another> and we find nothing in the stat"te that wo"ld 9"stify "s in 5"alifying the right in the manner s"ggested by the respondents. This concl"sion is s"pported by the "ndo"bted weight of a"thority in the United $tates, where it is generally held that the provisions of law conceding the right of inspection to stoc!holders of corporations are to be liberally constr"ed and that said right may be exercised thro"gh any other properly a"thori#ed person. +s was said in ,oster vs. 2hite (?= +la., 7=1), 8The right may be regarded as personal, in the sense that only a stoc!holder may en9oy it> b"t the inspection and examination may be made by another. Ftherwise it wo"ld be "navailing in many instances.8 +n observation to the same effect is contained in (artin vs. *ienville Fil 2or!s Co. (3? <a., 3@7), where it is said: 8The possession of the right in 5"estion wo"ld be f"tile if the possessor of it, thro"gh lac! of !nowledge necessary to exercise it, were debarred the right of proc"ring in his behalf the services of one who co"ld exercise it.8 -n .eadrec! vs. 2ilson (? *axt. MTenn.N, 1@?), the co"rt said: 8That stoc!holders have the right to inspect the boo!s of the corporation, ta!ing min"tes from the same, at all

47
reasonable times, and may be aided in this by experts and co"nsel, so as to ma!e the inspection val"able to them, is a principle too well settled to need disc"ssion.8 +"thorities on this point co"ld be acc"m"lated in great ab"ndance, b"t as they may be fo"nd cited in any legal encyclopedia or treaties devoted to the s"b9ect of corporations, it is "nnecessary here to refer to other cases anno"ncing the same r"le. -n order that the r"le above stated may not be ta!en in too sweeping a sense, we deem it advisable to say that there are some things which a corporation may "ndo"btedly !eep secret, notwithstanding the right of inspection given by law to the stoc!holder> as for instance, where a corporation, engaged in the b"siness of man"fact"re, has ac5"ired a form"la or process, not generally !nown, which has proved of "tility to it in the man"fact"re of its prod"cts. -t is not o"r intention to declare that the a"thorities of the corporation, and more partic"larly the *oard of .irectors, might not adopt meas"res for the protection of s"ch process form p"blicity. There is, however, nothing in the petition which wo"ld indicate that the petitioner in this case is see!ing to discover anything which the corporation is entitled to !eep secret> and if anything of the sort is involved in the case it may be bro"ght o"t at a more advanced stage of the proceedings. The dem"rrer is overr"led> and it is ordered that the writ of mandam"s shall iss"e as prayed, "nless within 4 days from notification hereof the respondents answer to the merits. $o ordered. Arellano, C.J., 4orres, Jo$nson, Ara!llo, %al&olm and A"an&eDa, JJ., &on&!r. Copyright X 3@@1-3@17 'hilippine<aw.info Theme by Theme 6orse &ep"blic of the 'hilippines S#$REME CO#R% (anila %) *+)C &.R. 'o. L(++77+ A6g6st ,0 ,9+7

A'%O'2O $ARDO0 etitioner0 "s. %HE HERC#LES L#MBER CO.0 2'C.0 and 2&'AC2O FERRER0 res ondents. W.J. 5CDono"an and %.*. de Joya for petitioner. (!m!lon- and 2a"ides and #oss, 2awren&e and (elp$ for respondents. S%REE%0 J.: The petitioner, +ntonio 'ardo, a stoc!holder in the 6erc"les <"mber Company, -nc., one of the respondents herein, see!s by this original proceeding in the $"preme Co"rt to obtain a writ of mandam!s to compel the respondents to permit the plaintiff and his d"ly a"thori#ed agent and representative to examine the records and b"siness transactions of said company. To this petition the respondents interposed an answer, in which, after admitting certain allegations of the petition, the respondents set forth the facts "pon which they mainly rely as a defense to the petition. To this answer the petitioner in t"rn interposed a dem"rrer, and the ca"se is now before "s for determination of the iss"e th"s presented.

44
-t is inferentially, if not directly admitted that the petitioner is in fact a stoc!holder in the 6erc"les <"mber Company, -nc., and that the respondent, -gnacio ,errer, as acting secretary of the said company, has ref"sed to permit the petitioner or his agent to inspect the records and b"siness transactions of the said 6erc"les <"mber Company, -nc., at times desired by the petitioner. )o serio"s 5"estion is of co"rse made as to the right of the petitioner, by himself or proper representative, to exercise the right of inspection conferred by section 41 of +ct )o. 1740. $aid provision was "nder the consideration of this co"rt in the case of 'hilpotts "s. 'hilippine (an"fact"ring Co., and *erry (7@ 'hil., 711), where we held that the right of examination there conceded to the stoc!holder may be exercised either by a stoc!holder in person or by any d"ly a"thori#ed agent or representative. The main gro"nd "pon which the defense appears to be rested has reference to the time, or times, within which the right of inspection may be exercised. -n this connection the answer asserts that in article 1@ of the *y-laws of the respondent corporation it is declared that 8%very shareholder may examine the boo!s of the company and other doc"ments pertaining to the same "pon the days which the board of directors shall ann"ally fix.8 -t is f"rther averred that at the directors/ meeting of the respondent corporation held on ,ebr"ary 1=, 1037, the board passed a resol"tion to the following effect: The board also resolved to call the "s"al general (meeting of shareholders) for (arch ;@ of the present year, with notice to the shareholders that the boo!s of the company are at their disposition from the 14th to 34th of the same month for examination, in appropriate ho"rs. The contention for the respondent is that this resol"tion of the board constit"tes a lawf"l restriction on the right conferred by stat"te> and it is insisted that as the petitioner has not availed himself of the permission to inspect the boo!s and transactions of the company within the ten days th"s defined, his right to inspection and examination is lost, at least for this year. 2e are entirely "nable to conc"r in this contention. The general right given by the stat"te may not be lawf"lly abridged to the extent attempted in this resol"tion. -t may be admitted that the officials in charge of a corporation may deny inspection when so"ght at "n"s"al ho"rs or "nder other improper conditions> b"t neither the exec"tive officers nor the board of directors have the power to deprive a stoc!holder of the right altogether. + by-law "nd"ly restricting the right of inspection is "ndo"btedly invalid. +"thorities to this effect are too n"mero"s and direct to re5"ire extended comment. (17 C.B., ?40> 1 &.C.<., ;34> 7 Thompson on Corporations, 3nd ed., sec. 7411> 6ar!ness "s. E"thrie, 31 Utah, 37?> 1@1 +m., $t. &ep., ==7. =?1.) Under a stat"te similar to o"r own it has been held that the stat"tory right of inspection is not affected by the adoption by the board of directors of a resol"tion providing for the closing of transfer boo!s thirty days before an election. ($tate "s. $t. <o"is &ailroad Co., 30 (o., +p., ;@1.) -t will be noted that o"r stat"te declares that the right of inspection can be exercised 8at reasonable ho"rs.8 This means at reasonable ho"rs on b"siness days thro"gho"t the year, and not merely d"ring some arbitrary period of a few days chosen by the directors. -n addition to relying "pon the by-law, to which reference is above made, the answer of the respondents calls in 5"estion the motive which is s"pposed to prompt the petitioner to ma!e inspection> and in this connection it is alleged that the information which the petitioner see!s is desired for "lterior p"rposes in connection with a competitive firm with which the petitioner is alleged to be connected. -t is also insisted that one of the p"rposes of the petitioner is to obtain evidence preparatory to the instit"tion of an action which he means to bring against the corporation by reason of a contract of employment which once existed between the corporation and himself. These s"ggestions are entirely apart from the iss"e, as, generally spea!ing, the motive of the shareholder exercising the right is immaterial. (1 &.C.<., ;31.) 2e are of the opinion that, "pon the allegations of the petition and the admissions of the answer, the petitioner is entitled to relief. The dem"rrer is, therefore, s"stained> and the writ of mandam!s will iss"e as prayed, with the costs against the respondent. $o ordered. Jo$nson, %al&olm, 'illamor, 5strand, and #om!alde+, JJ., &on&!r. &ep"blic of the 'hilippines S#$REME CO#R% (anila %) *+)C

4=
&.R. 'o. L()*/87 Octo.er 70 ,9)+

E#&E'2O VERA&#%H0 Director and Stoc>ho5der of the 2sa.e5a S6gar Co- an:0 2nc.0 petitioner, vs. 2SABELA S#&AR COM$A'30 2'C.0 &2L MO'%2LLA0 Acting $resident0 and A&#S%2' B. MO'%2LLA0 Secretar: of the sa-e cor oration0 respondents. Jose B. Gamboa for petitioner. A-!stin P. (e"a for respondents.

MALCOLM0 J.: The parties to this action are %"genio erag"th, a director and stoc!holder of the -sabela $"gar Company, -nc., who is the petitioner, and the -sabela $"gar Company, -nc., Eil (ontilla, acting president of the company, and +g"stin *. (ontilla, secretary of the company, who are the respondents. The petitioner prays: ( a) That the respondents be re5"ired within five days from receipt of notice of this petition to show ca"se why they ref"se to notify the petitioner, as director, of the reg"lar and special meetings of the board of directors, and to place at his disposal at reasonable ho"rs, the min"tes, and doc"ments, and boo!s of the aforesaid corporation, for his inspection as director and stoc!holder, and to iss"e, "pon payment of the fees, certified copies of any doc"mentation in connection with said min"tes, doc"ments, and boo!s of the corporation> and (b) that, in view of the memoranda and hearing of the parties, a final and absol"te writ of mandam!s be iss"ed to each and all of the respondents to notify immediately the petitioner within the reglamentary period, of all reg"lar and special meetings of the board of directors of the -sabela $"gar Central Company, -nc., and to place at his disposal at reasonable ho"rs the min"tes, doc"ments, and boo!s of said corporation for his inspection as director and stoc!holder, and to iss"e immediately, "pon payment of the fees, certified copies of any doc"mentation in connection with said min"tes, doc"ments, and the boo!s of the aforesaid corporation. To the petition an answer has been interposed by the respondent, too long to be here s"mmari#ed, which raised 5"estions of fact and law. ,ollowing the ta!ing of considerable before the cler! as commissioner, the case has been s"bmitted on memoranda. -t sho"ld first be observed that when the case was filed here, it was, in accordance with settled practice, dismissed witho"t pre9"dice to the right of the petitioner to present the action before the Co"rt of ,irst -nstance of Fccidental )egros. Thereafter, on a motion of reconsideration being presented, this order was set aside and the case was permitted to contin"e in this co"rt. Fn f"rther reflection, we now feel that this was error, and that it wo"ld have been the correct practice to have re5"ired the petitioner to present the action in a co"rt of ,irst -nstance which is better e5"ipped for the ta!ing of testimony and the resol"tion of 5"estions of fact than is the appellate co"rt. Fnly with considerable diffic"lty, therefore, can we decide the iss"es of fact, since none of the members of the co"rt saw or heard the witnesses testify. $pea!ing to the first point with which the petition is concerned, relating to the alleged fail"re of the secretary of the company to notify the petitioner in d"e time of a special meeting of the company, we find by-laws, together with a resol"tion of the board of directors, providing for the holding of ordinary and special meetings. 2hether there was a malicio"s attempt to !eep .irector erag"th from attending a special meeting of the board of the board of directors at which the compensation of the attorneys of the company was fixed, or whether .irector erag"th, in a spirit of antogonism, has made this merely a pretext to ca"se tro"ble, we are "nable definitely to say. This m"ch, however, can appropriately be stated and is decisive, and this is that the meeting in 5"estion is in the past and, therefore, now merely presents an academic 5"estion> that no damage was ca"sed to erag"th by the action ta!en at the special meeting which he did not attend, since his interests were f"lly protected by the 'hilippine )ational *an!> and that as to meetings in the f"t"re it is to be pres"med that the secretary of the company will f"lfill the re5"irements of the resol"tions of the company pertaining to reg"lar and special meetings. -t will, of co"rse, be inc"mbent "pon erag"th to give formal notice to the secretary of his post-office address if he desires notice sent to a partic"lar residence. 0awp$il.net Fn the second 5"estion pertaining to the right of inspection of the boo!s of the company, we find .irector erag"th telegraphing the secretary of the company, as!ing the latter to forward in the shortest possible time a certified copy of the resol"tion of the board of directors concerning the payment of attorney/s fees in the case against the -sabela $"gar Company and others. To this the secretary made answer by letter stating that, since the min"tes of the meeting in 5"estion had not been signed by the directors present, a certified copy co"ld not be f"rnished and that as to other proceedings of the stoc!holders a re5"est sho"ld be made to the president of the -sabela $"gar Company, -nc. -t f"rther

41
appears that the board of directors adopted a resol"tion providing for inspection of the boo!s and the ta!ing of copies 8by a"thority of the 'resident of the corporation previo"sly obtained in each case.8 The Corporation <aw, section 41, provides that: +ll b"siness corporations shall !eep and caref"lly preserve a record of all b"siness transactions, and a min"te of all meetings of directors, members, or stoc!holders, in which shall be set forth in detail the time and place of holding the meeting was reg"lar or special, if special its ob9ect, those present and absent, and every act done or ordered done at the meeting. . . . The record of all b"siness transactions of the corporation and the min"tes of any meeting shall be open to the inspection of any director, member, or stoc!holder of the corporation at reasonable ho"rs. The above p"ts in stat"tory form the general principles of Corporation <aw. .irectors of a corporation have the "n5"alified right to inspect the boo!s and records of the corporation at all reasonable times. 'retexts may not be p"t forward by officers of corporations to !eep a director or shareholder from inspecting the boo!s and min"tes of the corporation, and the right of inspection is not to be denied on the gro"nd that the director or shareholder is on "nfriendly terms with the officers of the corporation whose records are so"ght to be inspected. + director or stoc!holder can not of co"rse ma!e copies, abstracts, and memoranda of doc"ments, boo!s, and papers as an incident to the right of inspection, b"t cannot, witho"t an order of a co"rt, be permitted to ta!e boo!s from the office of the corporation. 2e do not conceive, however, that a director or stoc!holder has any absol"te right to sec"re certified copies of the min"tes of the corporation "ntil these min"tes have been written "p and approved by the directors. ( (ee ,isher/s 'hilippine <aw of $toc! Corporations, sec. 14;, and ,letcher Cyclopedia Corporations, vol. 7, Chap. 74.) Combining the facts and the law, we do not thin! that anything improper occ"rred when the secretary declined to f"rnish certified copies of min"tes which had not been approved by the board of directors, and that while so m"ch of the last resol"tion of the board of directors as provides for prior approval of the president of the corporation before the boo!s of the corporation can be inspected p"ts an illegal obstacle in the way of a stoc!holder or director, that resol"tion, so far as we are aware, has not been enforced to the detriment of anyone. -n addition, it sho"ld be said that this is a family disp"te, the petitioner and the individ"al respondents belonging to the same family> that a test case between the petitioner and the respondents has not been beg"n in the Co"rt of ,irst -nstance of Fccidental )egros involving h"ndreds of tho"sands of pesos, and that the appellate co"rt sho"ld not intr"de its views to give an advantage to either party. 2e r"le that the petitioner has not made o"t a case for relief by mandam!s. 'etition denied with costs. A"an&eDa, C.J., 'illamor, 'illa-#eal, *!ll and )mperial, JJ., &on&!r.

Se arate O inions

V2CEERS0 J., dissenting: - dissent. +n extraordinary meeting of the directors of the defendant corporation was held at -sabela, Fccidental )egros, on +pril 31, 10;3. + notice of this meeting was sent to the plaintiff by registered letter, b"t the notice was not received by him "ntil (ay 7th, beca"se the letter was addressed to the plaintiff at -sabela. The post-office address of the plaintiff at that time was '"l"pandan, Fccidental )egros, and this fact was !nown to the defendant officers of the corporation, as is evidenced

4?
by the notices refer, beca"se these notices were not mailed "ntil the day of the respective meetings, altho"gh the notice were dated three days prior to the dates when they were mailed. These notices of ,ebr"ary 3; and (arch 11, 10;3 were not admissible over the ob9ection of the attorney for the defendants for the p"rpose of proving that the plaintiff was not notified of those two meetings, beca"se there is no allegation to that effect in the complaint. They were, however, admissible for the p"rpose of showing that the defendant officers of the corporation !new the plaintiff/s post-office address to be '"l"pandan. -t is clear, therefore, that no notice of the meeting of +pril 31, 10;3 was given the plaintiff, beca"se the notice of said meeting was sent to -sabela instead of '"l"pandan. Ta!ing into consideration the relations existing between the parties, - am satisfied that this notice was addressed to -sabela instead of '"l"pandan for the p"rpose of depriving the plaintiff of an opport"nity of attending the meeting. -n the ma9ority opinion it is stated that the meeting in 5"estion having already been held, the fail"re of the defendants to notify the plaintiff of said meeting is now merely an academic 5"estion. - cannot agree with that concl"sion. The plaintiff see!s the protection of his right to a notice of all meetings of the board of directors, and prays that the defendant officers be re5"ired to perform their d"ties in accordance with the law. -t is obvio"s that if the defendant officers sho"ld again fail to notify the plaintiff of any meeting of the board of directors, he wo"ld be in no better position than he is at the present time. Under the theory of the ma9ority opinion the plaintiff wo"ld have no redress. +s to the second gro"nd of plaintiff/s complaint, or the ref"sal of the secretary of the corporation to allow the plaintiff to read the resol"tion adopted on +pril 31, 10;3, on the gro"nd that it had not been signed by the directors, the plaintiff was clearly within his rights in demanding that he be given an opport"nity to examine said resol"tion. -t does not appear that there was any necessity for the directors to sign the resol"tion in 5"estion. $"ch a resol"tion was a part of the secretary/s min"tes of the meeting, which wo"ld ordinarily be reported for approval at the next meeting. -n any event the directors had adopted the resol"tion, and whether it was to be signed or not, the plaintiff as a director of the corporation had a right to see it. +s to the fact that ill-feeling exists between the parties and another s"it between them is now pending, that seems to me only an additional reason why the plaintiff sho"ld be protected in the lawf"l rights which he now see!s to enforce. ,or the foregoing reasons, the writ prayed for sho"ld be granted. (treet, 5strand and Abad (antos, JJ., &on&!r. B#%%E0 J., dissenting: - conc"r in the foregoing dissent insofar as it relates to the actions of the respondent corporation and its officers in denying to the petitioner, as stoc!holder and as director, the rights which stat"tes confer "pon him to examine and ma!e or receive copies of any and all of the boo!s and papers of the corporation pertaining to the cond"ct of its b"siness. The record shows clearly that the officers and remaining directors have adopted a policy of obstr"ction toward the petitioner in this respect and imposed for the f"t"re, by resol"tion, illegal conditions "pon the petitioner/s exercise of the said right.

&onKa5es "s $'B ,++ SCRA 789 ,+CT$:E o n # a l e s i n s t i t " t e d a s " i t , a s a t a x p a y e r , a g a i n s t $ e c . o f ' " b l i c 2 o r ! s a n d Comm"nications, the Commissioner of '"blic 6ighways, and ')* for alleged anomaliescommitted regarding the ban!Js extension of credit to import p"blic wor!s e5"ipmenti n t e n d e d f o r t h e m a s s i v e d e v e l o p m e n t p r o g r a m . T h e p e t i t i o n e r J s s t a n d i n g w a s 5 " e s t i o n e d b e c a " s e h e d i d n o t o w n e d a n y s h a r e i n ' ) * . C o n s e 5 " e n t l y , ' e t i t i o n e r bo"ght 1 share of ')* stoc!s in order to gain standing as a stoc!holder.'etitioner thereafter so"ght to in5"ire and ordered ')* to prod"ce its boo!s and recordswhich the *an! ref"sed, invo!ing the provisions from its charter created by Congress.The petitioner filed petition for mandam"s to compel ')* to prod"ce its boo!s and r e c o r d s . T h e & T C d i s m i s s e d t h e p e t i t i o n a n d i t r " l e d t h a t t h e r i g h t t o e x a m i n e a n d inspect corporate boo!s is not absol"te, b"t is limited to p"rposes reasonably related tothe interest of the stoc!holder, m"st be as!ed for in good faith for a specific and honestp " r p o s e a n d n o t g r a t i f y c " r i o s i t y o r f o r s p e c " l a t i v e o r v i c i o " s p " r p o s e s > t h a t s " c h exami nation wo"ld violate the confidentiality of the records of the respondent ban! asprovided in $ection 1= of its charter, &ep"blic +ct )o. 1;@@, as amended> and that thepetitioner has not exha"sted his administrative remedies. -$$U%:2hether or not 'etitioner may compel ')* to prod"ce its boo!s and records

40

6%<.:)o. +s may be noted from the $ec 17 *' *lg. =?, among the changes introd"ced in then e w C o d e w i t h r e s p e c t t o t h e r i g h t o f i n s p e c t i o n g r a n t e d t o a s t o c ! h o l d e r a r e t h e f o l l o w i n g t h e r e c o r d s m " s t b e ! e p t a t t h e p r i n c i p a l o f f i c e o f t h e c o r p o r a t i o n > t h e inspection m"st be made on b"siness days> the stoc!holder may demand a copy of theexcerpts of the records or min"tes> and the ref"sal to allow s"ch inspection shall s"b9ectthe erring officer or agent of the corporation to civil and criminal liabilities. 6owever,w h i l e s e e m i n g l y e n l a r g i n g t h e r i g h t o f i n s p e c t i o n , t h e n e w C o d e h a s p r e s c r i b e d limitations to the same. -t is now expressly re5"ired as a condition for s"ch examinationthat the one re5"esting it m"st not have been g"ilty of "sing improperly any informationthro"gh a prior examination, and that the person as!ing for s"ch examination m"st be8acting in good faith and for a legitimate p"rpose in ma!ing his demand.8+ l t h o " g h t h e p e t i t i o n e r h a s c l a i m e d t h a t h e h a s 9 " s t i f i a b l e m o t i v e s i n s e e ! i n g t h e inspe ction of the boo!s of the respondent ban!, he has not set forth the reasons and thep"rposes for which he desires s"ch inspection, except to satisfy himself as to the tr"th of p"blished reports regarding certain transactions entered into by the respondent ban!and to in5"ire into their validity. The circ"mstances "nder which he ac5"ired one shareof stoc! in the respondent ban! p"rposely to exercise the right of inspection do not arg"e in favor of his good faith and proper motivation. +dmittedly he so"ght to be a stoc!holder in order to pry into transactions entered into by the respondent ban! even before he became a stoc!holder. 6is obvio"s p"rpose was to arm himself with materials which hecan "se against the respondent ban! for acts done by the latter when the petitioner wasa total stranger to the same. 6e co"ld have been impelled by a la"dable sense of civicconscio"sness, b"t it co"ld not be said that his p"rpose is germane to his interest as astoc!holder.T h e i n s p e c t i o n s o " g h t t o b e e x e r c i s e d b y t h e p e t i t i o n e r w o " l d b e v i o l a t i v e o f t h e p r o v i s i o n s o f i t s c h a r t e r o f ' ) * . T h e ' h i l i p p i n e ) a t i o n a l * a n ! i s n o t a n o r d i n a r y corporation. 6aving a charter of its own, it is not governed, as a r"le, by the CorporationCode of the 'hilippines. $ection 7 of the said Code provides:$%C. 7. Corporations created by special laws or charters . I Corporationsc r e a t e d b y s p e c i a l l a w s o r c h a r t e r s s h a l l b e g o v e r n e d p r i m a r i l y b y t h e provisions of the special law or charter creating them or applicable to them.s"pplemented by the provisions of this Code, insofar as they are applicable.The provision of $ection 17 of *atas 'ambansa *lg. =? of the new Corporation Code with respect to the right of a stoc!holder to demand an inspection or examination of theboo!s of the corporation may not be reconciled with the above5"oted provisions of thecharter of the respondent ban!. -t is not correct to claim, therefore, that the right of inspection "nder $ection 17 of the new Corporation Code may apply in a s"pplementarycapacity to the charter of the respondent ban!. ;. Confidentia5 'at6re of SEC ECa-inations (Section ,7+ of the Cor oration Code! Sec. ,7+. Confidentia5 nat6re of eCa-ination res65ts. ( +ll interrogatories propo"nded by the $ec"rities and %xchange Commission and the answers thereto, as well as the res"lts of any examination made by the Commission or by any other official a"thori#ed by law to ma!e an examination of the operations, boo!s and records of any corporation, shall be !ept strictly confidential, except insofar as the law may re5"ire the same to be made p"blic or where s"ch interrogatories, answers or res"lts are necessary to be presented as evidence before any co"rt. (n) .. A raisa5 Right (Sections 8, to 88 of the Cor oration Code! raisa5 right. ( +ny stoc!holder of a corporation shall have the Sec. 8,. 2nstances of a instances: 1. -n case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stoc!holder or class of shares, or of a"thori#ing preferences in any respect s"perior to those of o"tstanding

right to dissent and demand payment of the fair val"e of his shares in the following

=@
shares of any class, or of extending or shortening the term of corporate existence> 3. -n case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or s"bstantially all of the corporate property and assets as provided in the Code> and ;. -n case of merger or consolidation. (n) Sec. 8+. Ho9 right is eCercised. ( The appraisal right may be exercised by any stoc!holder who shall have voted against the proposed corporate action, by ma!ing a written demand on the corporation within thirty (;@) days after the date on which the vote was ta!en for payment of the fair val"e of his shares: 'rovided, That fail"re to ma!e the demand within s"ch period shall be deemed a waiver of the appraisal right. -f the proposed corporate action is implemented or affected, the corporation shall pay to s"ch stoc!holder, "pon s"rrender of the certificate or certificates of stoc! representing his shares, the fair val"e thereof as of the day prior to the date on which the vote was ta!en, excl"ding any appreciation or depreciation in anticipation of s"ch corporate action. -f within a period of sixty (=@) days from the date the corporate action was approved by the stoc!holders, the withdrawing stoc!holder and the corporation cannot agree on the fair val"e of the shares, it shall be determined and appraised by three (;) disinterested persons, one of whom shall be named by the stoc!holder, another by the corporation, and the third by the two th"s chosen. The findings of the ma9ority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (;@) days after s"ch award is made: 'rovided, That no payment shall be made to any dissenting stoc!holder "nless the corporation has "nrestricted retained earnings in its boo!s to cover s"ch payment: and 'rovided, f"rther, That "pon payment by the corporation of the agreed or awarded price, the stoc!holder shall forthwith transfer his shares to the corporation. (n) Sec. 8). Effect of de-and and ter-ination of right. - ,rom the time of demand for payment of the fair val"e of a stoc!holder/s shares "ntil either the abandonment of the corporate action involved or the p"rchase of the said shares by the corporation, all rights accr"ing to s"ch shares, incl"ding voting and dividend rights, shall be s"spended in accordance with the provisions of this Code, except the right of s"ch stoc!holder to receive payment of the fair val"e thereof: 'rovided, That if the dissenting stoc!holder is not paid the val"e of his shares within ;@ days after the award, his voting and dividend rights shall immediately be restored. (n) Sec. 87. 1hen right to a:-ent ceases. - )o demand for payment "nder this Title may be withdrawn "nless the corporation consents thereto. -f, however, s"ch demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the $ec"rities and %xchange Commission where s"ch approval is necessary, or if the $ec"rities and %xchange Commission determines that s"ch stoc!holder is not entitled to the appraisal right, then the right of said stoc!holder to be paid the fair val"e of his shares shall cease,

=1
his stat"s as a stoc!holder shall there"pon be restored, and all dividend distrib"tions which wo"ld have accr"ed on his shares shall be paid to him. (n) Sec. 8;. 1ho .ears costs of a raisa5. - The costs and expenses of appraisal shall be borne by the corporation, "nless the fair val"e ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stoc!holder, in which case they shall be borne by the latter. -n the case of an action to recover s"ch fair val"e, all costs and expenses shall be assessed against the corporation, "nless the ref"sal of the stoc!holder to receive payment was "n9"stified. (n) Sec. 88. 'otation on certificatesB rights of transferee. - 2ithin ten (1@) days after demanding payment for his shares, a dissenting stoc!holder shall s"bmit the certificates of stoc! representing his shares to the corporation for notation thereon that s"ch shares are dissenting shares. 6is fail"re to do so shall, at the option of the corporation, terminate his rights "nder this Title. -f shares represented by the certificates bearing s"ch notation are transferred, and the certificates conse5"ently canceled, the rights of the transferor as a dissenting stoc!holder "nder this Title shall cease and the transferee shall have all the rights of a reg"lar stoc!holder> and all dividend distrib"tions which wo"ld have accr"ed on s"ch shares shall be paid to the transferee. (n)

c.

Deri"ati"e S6its

8,7 $.+d 8)8 (,98/! Dona5d @. R2CHARDSO'0 &ro"e L. Coo> and 1a:ne 1ea"er0 2ndi"id6a55: and for and on .eha5f of a55 si-i5ar5: sit6ated shareho5ders of Ma?or Oi5 Cor oration0 $5aintiffs and Res ondents0 ". AR2=O'A F#ELS COR$ORA%2O'0 a #tah Cor oration0 E6gene Da5ton0 an 2ndi"id6a50 Deanna @. Da5ton0 an 2ndi"id6a50 and Ma?or Oi5 Cor oration0 a #tah Cor oration0 Defendants and A )o. 14=01. S6 re-e Co6rt of #tah. (ay 1, 10?@. Y=;1 <e&oy $. +xland and .avid &. Flsen, of $"itter, +xland A +rmstrong, $alt <a!e City, for defendants and appellants. 'a"l ). Cotro-(anes, 'ar!er (. )ielson, $alt <a!e City, for plaintiffs and respondents. e55ants.

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$T%2+&T, B"stice: 2e here review on interloc"tory appeal an order of the district co"rt of $alt <a!e Co"nty appointing a receiver for defendant (a9or Fil Corporation (hereafter 8(a9or8) and certifying this case as a class action. +ll references to r"les refer to the Utah &"les of Civil 'roced"re. 'laintiffs .onald B. &ichardson, Erove <. Coo!, and 2ayne 2eaver are stoc!holders of (a9or who bro"ght this action individ"ally and on behalf of all other stoc!holders of (a9or. The original complaint named as defendants +ri#ona ,"els, -nc.> %"gene .alton> and .eanna B. .alton. +ri#ona ,"els is alleged to be the legal or beneficial owner of 71G of the iss"ed and o"tstanding shares of stoc! of (a9or. %"gene .alton is alleged to be the controlling stoc!holder, officer and director of +ri#ona ,"els and the controlling officer and director of (a9or. .eanna .alton is alleged to be an officer and director of both (a9or and +ri#ona ,"els. The complaint was s"bse5"ently amended, inter alia, to name (a9or as an invol"ntary defendant, p"rs"ant to &"le 10(a). The amended complaint describes this action as one bro"ght as a class action p"rs"ant to &"le 3; and as a stoc!holders/ derivative action p"rs"ant to &"le 3;.1. 'laintiffs moved for an order certifying this s"it as a class action and for appointment of a receiver for (a9or p"rs"ant to &"le ==. *oth motions were granted by the district co"rt. .efendants attac! the order on the gro"nds (1) that the appointment of a receiver was not 9"stified, (3) that certification of all the claims in the s"it as a class action was improper, and (;) alternatively, that the district co"rt erred in not designating "nder which s"bsection of &"le 3;(b) this action is to proceed. 'laintiffs/ motions were granted solely on the basis of the verified amended complaint. Y=;? 2e first consider the propriety of the appointment of a receiver. The gro"nd for appointment, as stated in the amended complaint, is that the defendants/ cond"ct has ca"sed (a9or to become insolvent or placed (a9or in imminent danger of becoming insolvent. &"le ==(a)(4) permits appointment of a receiver 8MiNn cases where a corporation . . . is insolvent or in imminent danger of insolvency . . ..8 The a"thorities are generally in agreement that the appointment of a receiver for a corporation is permissible at the re5"est of stoc!holders of the corporation s"ing either individ"ally or on behalf of the corporation. ; Clark on #e&ei"ers T 1;?(d) (;rd ed. 1040)> 1= ,letcher, Cy&lopedia of t$e 2aw of Pri"ate Corporations T 1=?? (rev. perm. ed. 1010) (hereinafter cited as 8,letcher8)> =4 +m.B"r.3d #e&ei"ers T 11 (1013)> 10 C.B.$. Corporations T ?;;c. (107@). .efendants attac! the appointment on the gro"nd that it is not 9"stified by allegations on information and belief, even tho"gh those allegations were stated in a verified complaint. The amended complaint contains n"mero"s allegations based on information and belief of fra"d"lent and otherwise wrongf"l cond"ct on the part of defendants. The allegations specify s"spect transactions and state details of alleged fra"d. The allegations re5"esting appointment of a receiver, however, are made witho"t any 5"alification as to information and belief, and these allegations are not controverted by defendants, either by pleading or affidavit. -n determining whether a receiver sho"ld be appointed, the district co"rt sho"ld consider the pleadings as a whole. &eceivers have historically been appointed in cases where misappropriation of corporate assets by corporate insiders is asserted. (te"ens ". (o!t$ 5-den 2and, Bld-. > )mpro"ement Co., 17 Utah 3;3, 71 '. ?1 (1?0=)> Booko!t ". Atlas Finan&ial Corp., ;04 ,. $"pp. 1;;? (..Ea. 1017). -f defendants serio"sly contend that insolvency is not imminent or that a receivership is not appropriate "nder the circ"mstances, they had ab"ndant opport"nity to provide fact"al s"pport for their contention. The record discloses that they did not do so. The appointment of a receiver is among those discretionary powers s"b9ect to review for ab"se, b"t we cannot find ab"se where the gro"nd for appointment is stated in the lang"age of the r"les and remains "ncontroverted thro"gh a f"ll hearing with extensive preliminary written memoranda.

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The next iss"e is whether the district co"rt erred in certifying this matter as a class action. -t is alleged in the amended complaint that 8some8 of the ca"ses of action fo"nd therein belong to (a9or, and that as to those ca"ses plaintiffs bring the s"it derivatively on behalf of the corporation p"rs"ant to &"le 3;.1. + class action and a derivative action rest "pon f"ndamentally different principles of s"bstantive law> to ignore those differences is not a minor proced"ral solecism. + derivative action m"st necessarily be based on a claim for relief which is owned by the stoc!holders/ corporation. -ndeed, a prere5"isite for filing a derivative action is the fail"re of the corporation to initiate the action in its own name. The stoc!holder, as a nominal party, has no right, title or interest whatsoever in the claim itself I whether the action is bro"ght by the corporation or by the stoc!holder on behalf of the corporation. + class action, on the other hand, is predicated on ownership of the claim for relief s"ed "pon in the representative of the class and all other class members in their capacity as indi"id!als. $hareholders of the corporation may, of co"rse, have claims for relief directly against their corporation beca"se the corporation itself has violated rights possessed by the shareholders, and a class action wo"ld be an appropriate means for enforcing their claims. + recovery in a class action is a recovery which belongs directly to the shareholders. 6owever, in a derivative action, the plaintiff shareholder recovers nothing and the 9"dgment r"ns in favor of the corporation. The difference in the two proced"res and their relationship to "nderlying s"bstantive law has been stated as follows: E9?A (!its w$i&$ are said to be deri"ati"e, and t$erefore &ome wit$in t$e r!le, are t$ose w$i&$ seek to enfor&e any ri-$t w$i&$ belon-s to t$e &orporation and is not bein- enfor&ed, s!&$ as t$e liability of &orporate offi&ers or ma7ority s$are$olders for mismana-ement, to re&o"er &orporate assets and related &laims, to enfor&e ri-$ts of t$e &orporation by "irt!e of its &ontra&t wit$ a t$ird person, and to en7oin t$ose in &$ar-e of t$e &orporation from &a!sin- it to &ommit an !ltra "ires a&t. FFootnotes omitted.G F?B %ooreCs Federal Pra&ti&e H B?.0.09F0G ;Bnd ed. 0A:I<.G Fn the other hand, FiGf t$e in7!ry is one to t$e plaintiff as a sto&k$older and to $im indi"id!ally, and not to t$e &orporation, as w$ere t$e a&tion is based on a &ontra&t to w$i&$ $e is a party, or on a ri-$t belon-in- se"erally to $im, or on a fra!d affe&tin$im dire&tly, it is an indi"id!al a&tion. FFootnotes omitted.G F0? Flet&$er J KA00 ;0ALI<.G -t is the d"ty of the district co"rt to apply caref"lly the criteria set forth in &"le 3;(a) and (b) to the facts of the case to determine whether an action may be maintained as a class action. ;* %ooreCs Federal Pra&ti&e Z 3;.4. -f the criteria of &"le 3; are complied with, it is within the so"nd discretion of the district co"rt to determine whether a s"it, or some of the iss"es in a laws"it, sho"ld proceed as a class action. )d. -n this case, neither the memorand"m decision nor the order of the district co"rt does any more than recite that the s"it may be maintained as a class action. ,"rthermore, the amended complaint in alleging that the action sho"ld be maintained as a class action, does no more than mimic the lang"age of &"le 3;. +s was pointed o"t in Jones ". Diamond,410 ,.3d 1@0@, 1@0? (4th Cir.1014), 82itho"t more, mere mimicry is ins"fficient to "ndergird a decision either way on the propriety of class certification.8 $ee also #ossin ". (o!t$ern Mnion Gas Co., 713 ,.3d 1@1, 113 (1@th Cir.101;)> Weat$ers ". Peters #ealty Corp., 700 ,.3d 1101, 13@@ (=th Cir.1017). 2e therefore direct o"r attention to the contents of the verified amended complaint, which was the basis "pon which the district co"rt made its determination. The amended complaint states twelve ca"ses of action, the first eight of which allege some fra"d"lent appropriation of or scheme to appropriate (a9or/s assets by defendants. These ca"ses of action see! to re5"ire the defendants to disgorge and ret"rn to (a9or the assets wrongf"lly obtained. Ff the remaining fo"r ca"ses, three see! compensatory or p"nitive damages for in9"ry attrib"table to alleged breaches of fid"ciary d"ty implicit in the fra"d"lent acts en"merated in the first eight ca"ses. The final ca"se of action see!s appointment of a receiver.

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There is no do"bt that the first eight ca"ses of action allege in9"ry to the corporation only. The in9"ry alleged can be asserted by plaintiffs only derivatively as stoc!holders on behalf of the corporation. This leaves the ninth, tenth and eleventh ca"ses of action to be analy#ed to determine if they state claims which may be p"rs"ed by the stoc!holders as a class to redress in9"ries to the stoc!holders as individ"als. The ninth ca"se of action alleges initially that the defendants 8breached their fid"ciary d"ties to (a9or Fil and to its stoc!holders . . ..8 +s a general r"le, directors and other officers of a corporation stand in a fid"ciary relation to the corporation. Bran&$ ". Western Fa&tors, )n&., 3? Utah 3d ;=1, 4@3 '.3d 41@ (1013)> ; ,letcher T ?;?. 2hile the statement is made that directors and officers stand in a li!e relation to the stoc!holders of the corporation, ; ,letcher T ?;?, in Utah it is clear that that relation is to the stoc!holders &olle&ti"ely. Jones %in. Co. ". Cardiff %in. > %ill. Co., 4= Utah 770, 74=, 101 '. 73=, 73? (103@)> accord, *ansen ". Granite *oldin- Co., 111 Utah 4;@, 31? '.3d 317 (104@)> ; ,letcher T ?;? at 177. The distinction between a fid"ciary d"ty owed to the corporation as a whole as opposed to the stoc!holders collectively does not appear to be one of s"bstance in this case. There is no important Y=7@ iss"e as to whether the ca"se of action states a corporate claim. +ltho"gh plaintiff frames this claim, in the alternative, as one belonging to the shareholders, the claim for relief belongs to the corporation. The ninth ca"se of action then goes on to allege that the defendants 8mismanaged the corporate and pr"dential affairs of (a9or Fil . . ..8 The r"le in Utah is that mismanagement of the corporation gives rise to a ca"se of action in the corporation, even if the mismanagement res"lts in damage to stoc!holders by depreciating the val"e of the corporation/s stoc!. %orris ". 5-den (tate Bank, ?7 Utah 131, 17@-71, 3? '.3d 1;?, 17; (10;7). Therefore, any compensatory damages which may be recovered on acco"nt of any breach by defendants of their fid"ciary d"ty as directors and officers or arising as a res"lt of mismanagement of the corporation by defendants belong to the corporation and not to the stoc!holders individ"ally. The ninth ca"se of action also prays for p"nitive damages based on the nat"re of defendants/ cond"ct. *eca"se there is no claim for relief for p"nitive damages as s"ch, a claim for p"nitive damages m"st be related to an "nderlying ca"se of action on which the p"nitive damages may be based. Gra$am ". (treet, 3 Utah 3d 177, 31@ '.3d 74= (1047)> 33 +m.B"r.3dDama-es T 371 (10=4). $ince we have concl"ded that the other aspects of the ninth ca"se of action state a corporate claim, the p"nitive damages claim alleged m"st li!ewise belong to the corporation. -n short, the ninth ca"se of action states a claim belonging to the corporation and precl"des that claim from being alleged as a class action. The tenth ca"se of action alleges that the defendants 8defra"ded the stoc!holders of (a9or Fil Company . . ..8 The fra"d is premised on defendants/ fid"ciary d"ty owed to the stoc!holders of the corporation. That d"ty is alleged to have been breached in six partic"lars. %ach of the six alleged defalcations states a claim belonging to the corporation and not to the stoc!holders or any of them individ"ally. The tenth ca"se of action is ro"nded o"t by allegations of the defendants/ !nowledge of their wrongf"l cond"ct, the reasonable reliance of the plaintiffs on defendants/ performance of defendants/ fid"ciary d"ties, and the res"lting damage to the stoc!holders. 6owever, in no regard can the tenth ca"se of action be interpreted as stating a claim belonging to the stoc!holders individ"ally, and therefore that claim for relief will not s"pport a class action. The eleventh ca"se of action alleges the possibility of other conversions of (a9or/s assets and alleges that the defendants sho"ld be re5"ired to acco"nt to the stoc!holders for all of the assets of (a9or and disgorge themselves of any assets so converted. This claim also clearly belongs to the corporation. +ltho"gh class actions have historical antecedents in r"les of e5"ity that go bac! several cent"ries in %nglish 9"rispr"dence,M1N it is not to be gainsaid that the modern class action r"le is one of the most farreaching and important changes in legal proced"re in many a decade. -ts impact on the enforcement of cons"mer rights, antitr"st claims, sec"rities claims and civil rights actions, to name b"t a few areas, has been mon"mental. 6owever, the class action device, if "sed inappropriately and in lie" of a derivative action, is li!ely to res"lt in grave in9"stices, not the least of which is the diversion of assets recovered in a laws"it from creditors of a corporation to stoc!holders, thereby reversing long

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established s"bstantive r"les of law as to the relative priorities of the claims of creditors and stoc!holders to the assets of an insolvent corporation. 2e therefore reverse the district co"rt/s certification of this s"it as a class action and remand for f"rther proceedings not inconsistent with this opinion. Costs to .efendants. C&FCQ%TT, C.B., and 2-<Q-)$, (+UE6+) and 6+<<, BB., conc"r. M1N $ee Chaffee, (ome Problems of E !ity (104@)> ;* %ooreCs Federal Pra&ti&e Z 3;.@3M1N. ,-&$T .- -$-F)

H&.R. 'o. ,+);;). @65: ,)0 ,998I

'ORA A. B2%O'&0 petitioner, vs. CO#R% OF A$$EALS (F2F%H D2V2S2O'!0 E#&E'2A D. A$OS%OL0 @OSE A. A$OS%OL0 MR. ' M(. $#BL2SH2'& CO.0 LE%%3 @. MA&SA'OC0 A'D ADORAC2O' &. '#3DA0 respondents. 'ORA A. B2%O'&0 petitioner, vs. CO#R% OF A$$EALS (F2F%H D2V2S2O'! and ED&ARDO B. ES$2R2%#0 respondents. DEC2S2O' BELLOS2LLO0 J.4 These twin cases originated from a derivative s"it M1N filed by petitioner )ora +. *itong before the (e&!rities and E.&$an-e Commission ((EC hereafter) allegedly for the benefit of private respondent %r. > %s. P!blis$in- Co., )n&. (%r. > %s. hereafter), among others, to hold respondent spo"ses %"genia .. +postol and Bose +. +postolM3N liable for fra"d, misrepresentation, disloyalty, evident bad faith, conflict of interest and mismanagement in directing the affairs of %r. > %s. to the damage and pre9"dice of %r. > %s. and its stoc!holders, incl"ding petitioner. +lleging before the (EC that she had been the Treas"rer and a (ember of the *oard of .irectors of %r. > %s. from the time it was incorporated on 30 Fctober 101= to 11 +pril 10?0, and was the registered owner of 1,@@@ shares of stoc! o"t of the 7,@?? total o"tstanding shares, petitioner complained of irreg"larities committed from 10?; to 10?1 by %"genia .. +postol, 'resident and Chairperson of the *oard of .irectors. 'etitioner claimed that except for the sale of the name P$ilippine )n !irer to P$ilippine Daily )n !irer (PD) hereafter) all other transactions and agreements entered into by %r. > %s. with PD) were not s"pported by any bond andDor stoc!holdersJ resol"tion. +nd, "pon instr"ctions of %"genia .. +postol, %r. > %s. made several cash advances to PD) on vario"s occasions amo"nting to ';.31= million. Fn some of these borrowings PD) paid no interest whatsoever. .espite the fact that the advances made by %r. > %s. to PD) were boo!ed as advances to an affiliate, there existed no board or stoc!holdersJ resol"tion, contract nor any other doc"ment which co"ld legally a"thori#e the creation of and s"pport to an affiliate. 'etitioner f"rther alleged that respondents %"genia and Bose +postol were stoc!holders, directors and officers in both %r. > %s.and PD). -n fact on 3 (ay 10?= respondents %"genia .. +postol, <eticia B. (agsanoc and +doracion E. )"yda s"bscribed to PD) shares of stoc! at '4@,@@@.@@ each or a total of '14@,@@@.@@. The stoc! s"bscriptions were paid for by %r. > %s. and initially treated as receivables from officers and employees. *"t, no payments were ever received from respondents, (agsanoc and )"yda. The petition principally so"ght to (a) en9oin respondents %"genia .. +postol and Bose +. +postol from f"rther acting as president-director and director, respectively, of %r. > %s. and disb"rsing any money or f"nds except for the payment of salaries and similar expenses in the ordinary co"rse of b"siness, and from disposing of their %r. > %s. shares> (b) en9oin respondents +postol spo"ses, (agsanoc and )"yda from disposing of the PD) shares of stoc! registered in their names>

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(c) compel respondents %"genia and Bose +postol to acco"nt for and reconvey all profits and benefits accr"ing to them as a res"lt of their improper and fra"d"lent acts> (d) compel respondents (agsanoc and )"yda to acco"nt for and reconvey to %r. > %s. all shares of stoc! paid from cash advances from it and all accessions or fr"its thereof> (e) hold respondents %"genia and Bose +postol liable for damages s"ffered by %r. > %s. and the other stoc!holders, incl"ding petitioner, by reason of their improper and fra"d"lent acts> (f) appoint a management committee for %r. > %s. d"ring the pendency of the s"it to prevent f"rther dissipation and loss of its assets and f"nds as well as paraly#ation of b"siness operations> and, (g) direct the management committee for %r. > %s. to file the necessary action to enforce its rights against PD) and other third parties. 'rivate respondents +postol spo"ses, (agsanoc, )"yda, and %r. > %s., on the other hand, ref"ted the allegations of petitioner by starting with a narration of the beginnings of %r. > %s. They reco"nted that on 0 (arch 101= E. 2ibris P!blis$in- Co., )n&. (E. 2ibris hereafter) was incorporated for the p"rpose of p"blishing a wee!ly maga#ine. -ts original principal stoc!holders were spo"ses $enator B"an 'once %nrile (then (inister of )ational .efense) and Cristina 'once %nrile thro"gh Jaka )n"estments Corporation (JANA hereafter), and respondents %"genia and Bose +postol. 2hen E. 2ibris s"ffered financial diffic"lties, JANA and the +postols, together with new investors <"is illaf"erte and &amon $iy, restr"ct"red %x <ibris by organi#ing a new corporation !nown as %r. > %s. The original stoc!holders of %r. > %s., i.e., JANA, <"is illaf"erte, &amon $iy, the +postols and E. 2ibris contin"ed to be virt"ally the same "p to 10?0. Thereafter it was agreed among them that, they being close friends, %r. > %s. wo"ld be operated as a partnership or a close corporation> respondent %"genia .. +postol wo"ld manage the affairs of %r. > %s.> and, no shares of stoc! wo"ld be sold to third parties witho"t first offering the shares to the other stoc!holders so that transfers wo"ld be limited to and only among the original stoc!holders. 'rivate respondents also asserted that respondent %"genia .. +postol had been informing her b"siness partners of her actions as manager, and obtaining their advice and consent. Conse5"ently the other stoc!holders consented, either expressly or impliedly, to her management. They offered no ob9ections. +s a res"lt, the b"siness prospered. Th"s, as shown in a statement prepared by the acco"nting firm P!non-bayan and Ara!llo, there were increases from 101= to 10?? in the total assets of %r. > %s. from '741,4=0.@@ to '1@,17;,@7=.@@> in the total stoc!holdersJ e5"ity from '3@;,;1?.@@ to '3,;37,047.@@> and, in the net sales, from ';@1,7?0.@@ to '1=,;34,=1@.@@. <i!ewise, cash dividends were distrib"ted and received by the stoc!holders. 'rivate respondents f"rther contended that petitioner, being merely a holder-in-tr"st of JANA shares, only represented and contin"ed to represent JANA in the board. -n the beginning, petitioner cooperated with and assisted the management "ntil mid-10?= when relations between her and her principals on one hand, and respondent %"genia .. +postol on the other, became strained d"e to political differences. 6ence from mid-10?= to mid-10?? petitioner ref"sed to spea! with respondent %"genia .. +postol, and in 10?? the former became openly critical of the management of the latter. )evertheless, respondent %"genia .. +postol always made available to petitioner and her representatives all the boo!s of the corporation. 'rivate respondents averred that all the PD) shares owned by respondents %"genia and Bose +postol were ac5"ired thro"gh their own private f"nds and that the loan of '14@,@@@.@@ by PD) from %r. > %s. had been f"lly paid with 3@G interest per ann"m. +nd, it was PD), not %r. > %s., which loaned off '34@,@@@.@@ each to respondents (agsanoc and )"yda. 'rivate respondents f"rther arg"ed that petitioner was not the tr"e party to this case, the real party being JANA which contin"ed to be the tr"e stoc!holder of %r. > %s.> hence, petitioner did not have the personality to initiate and prosec"te the derivative s"it which, conse5"ently, m"st be dismissed. Fn = .ecember 100@, the $%C 6earing 'anel M;N iss"ed a writ of preliminary in9"nction en9oining private respondents from disb"rsing any money except for the payment of salaries and other similar expenses in the reg"lar co"rse of b"siness. The 6earing 'anel also en9oined respondent +postol spo"ses, )"yda and (agsanoc from disposing of their PD) shares, and f"rther r"led x x x respondentsJ contention that petitioner is not entitled to the provisional reliefs prayed for beca"se she is not the real party in interest x x x x is bereft of any merit. )o less than respondentsJ +mended +nswer, specifically paragraph , )o. ? on +ffirmative +llegationsD.efenses states that [The petitioner being herself a minor stoc!holder and holder-in-tr"st of JANA shares represented and contin"es to represent JANA in the *oard.J This statement refers to petitioner sitting in the board of directors of %r. > %s. in two capacities, one as a minor stoc!holder and the other as the holder in tr"st of the shares ofJANA in %r. > %s. $"ch reference all"ded to by the respondents indicates an admission on respondentsJ part of the petitionerJs legal personality to file a derivative s"it for the benefit of the respondent %r. > %s. '"blishing Co., -nc. The 6earing 'anel however denied petitionerJs prayer for the constit"tion of a management committee.

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Fn 34 (arch 1001 private respondents filed a %otion to Amend Pleadin-s to Conform to E"iden&e alleging that the iss"e of whether petitioner is the real party-in-interest had been tried by express or implied consent of the parties thro"gh the admission of doc"mentary exhibits presented by private respondents proving that the real party-in-interest was JANA, not petitioner *itong. +s s"ch, )o. ?, par. (Affirmati"e Alle-ations8Defenses), Answer to t$e Amended Petition, was stip"lated d"e to inadvertence and exc"sable mista!e and sho"ld be amended. Fn 1@ Fctober 1001 the 6earing 'anel denied the motion for amendment. 'etitioner testified at the trial that she became the registered and beneficial owner of 001 shares of stoc! of %r. > %s. o"t of the 7,@?? total o"tstanding shares after she ac5"ired them from JANAthro"gh a deed of sale exec"ted on 34 B"ly 10?; and recorded in the $toc! and Transfer *oo! of %r. > %s. "nder Certificate of $hares of $toc! )o. @@?. $he pointed o"t that $enator %nrile decided that JANA sho"ld completely divest itself of its holdings in %r. > %s. and this res"lted in the sale to her of JANAJs interest and holdings in that p"blishing firm. 'rivate respondents ref"ted the statement of petitioner that she was a stoc!holder of %r. > %s. since 34 B"ly 10?; as respondent %"genia .. +postol signed Certificate of $toc! )o. @@? only on 11 (arch 10?0, and not on 34 B"ly 10?;. &espondent %"genia .. +postol explained that she stopped "sing her long signat"re (%"genia .. +postol) in 10?1 and changed it to %... +postol, the signat"re which appeared on the face of Certificate of $toc! )o. @@? bearing the date 34 B"ly 10?;. +nd, since the $toc! and Transfer *oo! which petitioner presented in evidence was not registered with the $%C, the entries therein incl"ding Certificate of $toc! )o. @@? were fra"d"lent. &espondent %"genia .. +postol claimed that she had not seen the $toc! and Transfer *oo! at any time "ntil 31 (arch 10?0 when it was delivered by petitioner herself to the office of %r. > %s., and that petitioner repeatedly referred to $enator %nrile as 8my principal8 d"ring the %r. > %s. board meeting of 33 $eptember 10??, seven (1) times no less. Fn ; +"g"st 100;, after trial on the merits, the $%C 6earing 'anel dismissed the derivative s"it filed by petitioner and dissolved the writ of preliminary in9"nction barring private respondents from disposing of their PD) shares and any of %r. > %s. assets. The 6earing 'anel r"led that there was no serio"s mismanagement of %r. > %s. which wo"ld warrant drastic corrective meas"res. -t gave credence to the assertion of respondent %"genia .. +postol that %r. > %s. was operated li!e a close corporation where important matters were disc"ssed and approved thro"gh informal cons"ltations at brea!fast conferences. The 6earing 'anel also concl"ded that while the evidence presented tended to show that the real party-in-interest indeed was JANA andDor $enator %nrile, it viewed the real iss"e to be the alleged mismanagement, fra"d and conflict of interest on the part of respondent %"genia .. +postol, and allowed petitioner to prosec"te the derivative s"it if only to resolve the real iss"es. 6ence, for this p"rpose, the 6earing 'anel considered petitioner to be the real party-in-interest. Fn 10 +"g"st 100; respondent +postol spo"ses sold the PD) shares registered in the name of their holding company, B+%. (anagement Corporation, to %dgardo *. %spirit". Fn 34 +"g"st 100; petitioner *itong appealed to the (EC En Ban&. Fn 37 Ban"ary 1007 the (EC En Ban&M7N reversed the decision of the 6earing 'anel and, among others, ordered private respondents to acco"nt for, ret"rn and deliver to %r. > %s. any and all f"nds and assets that they disb"rsed from the coffers of the corporation incl"ding shares of stoc!, profits, dividends andDor fr"its that they might have received as a res"lt of their investment in PD), incl"ding those arising from the '14@,@@@.@@ advanced to respondents %"genia .. +postol, <eticia B. (agsanoc and +doracion E. )"yda> acco"nt for and ret"rn any profits and fr"its of all amo"nts irreg"larly or "nlawf"lly advanced to PD) and other third persons> and, cease and desist from managing the affairs of %r. > %s. for reasons of fra"d, mismanagement, disloyalty and conflict of interest. The (EC En Ban& also declared the 10 +"g"st 100; sale of the PD) shares of JAED %ana-ement Corporation to %dgardo *. %spirit" to be tainted with fra"d, hence, n"ll and void, and considered %r. > %s. as the tr"e and lawf"l owner of all the PD) shares ac5"ired by respondents %"genia .. +postol, (agsanoc and )"yda. -t also declared all s"bse5"ent transferees of s"ch shares as tr"stees for the benefit of %r. > %s. and ordered them to forthwith deliver said shares to %r. > %s. Conse5"ently, respondent +postol spo"ses, (agsanoc, )"yda, and %r. > %s. filed a petition for review before respondent Co"rt of +ppeals, doc!eted as C+-E& )o. $' ;;301, while respondent %dgardo *. %spirit" filed a petition for &ertiorari and prohibition also before respondent Co"rt of +ppeals, doc!eted as C+-E& )o. $' ;;?1;. Fn ? .ecember 1007 the two (3) petitions were consolidated. Fn ;1 +"g"st 1004 respondent appellate co"rt rendered a decision reversing the (EC En Ban& and held that from the evidence on record petitioner was not the owner of any share of stoc! in %r. > %s. and therefore not the real party-ininterest to prosec"te the complaint she had instit"ted against private respondents. +ccordingly, petitioner alone and by herself as an agent co"ld not file a derivative s"it in behalf of her principal. ,or not being the real party-in-interest, petitionerJs complaint did not state a ca"se of action, a defense which was never waived> hence, her petition sho"ld have

=?
been dismissed. &espondent appellate co"rt r"led that the assailed orders of the $%C were iss"ed in excess of 9"risdiction, or want of it, and th"s were n"ll and void. M4N Fn 1? Ban"ary 100=, petitioner/s motion for reconsideration was denied for lac! of merit. *efore this Co"rt, petitioner s"bmits that in paragraph 1 "nder the caption O). 4$e PartiesO of her Amended Petition before the $%C, she stated that she was a stoc!holder and director of %r. > %s. -n par. 1 "nder the caption O)). 4$e Fa&tsO she declared that she 8is the registered owner of 1,@@@ shares of stoc! of (r. A (s. o"t of the latterJs 7,@?? total o"tstanding shares8 and that she was a member of the *oard of .irectors of %r. > %s. and treas"rer from its inception "ntil 11 +pril 10?0. 'etitioner contends that private respondents did not deny the above allegations in their answer and therefore they are concl"sively bo"nd by this 9"dicial admission. Conse5"ently, private respondentsJ admission that petitioner has 1,@@@ shares of stoc! registered in her name in the boo!s of %r. > %s. forecloses any 5"estion on her stat"s and right to bring a derivative s"it on behalf of %r. > %s. )ot necessarily. + party whose pleading is admitted as an admission against interest is entitled to overcome by evidence the apparent inconsistency, and it is competent for the party against whom the pleading is offered to show that the statements were inadvertently made or were made "nder a mista!e of fact. -n addition, a party against whom a single cla"se or paragraph of a pleading is offered may have the right to introd"ce other paragraphs which tend to destroy the admission in the paragraph offered by the adversary. M=N The Amended Petition before the (EC alleges -. T6% '+&T-%$ 1. 'etitioner is a stoc!holder and director of %r. > %s. x x x x --. T6% ,+CT$ 1. 'etitioner is the registered owner of 1,@@@ shares of stoc! of %r. > %s. o"t of the latterJs 7,@?? total o"tstanding shares. 'etitioner, at all times material to this petition, is a member of the *oard of .irectors of %r. > %s. and from the inception of %r. > %s. "ntil 11 +pril 10?0 was its treas"rer x x x x Fn the other hand, the Amended Answer to the Amended Petition states -. '+&T-%$ 1. &espondents admit the allegations contained in Caption -, pars. 1 to 7 of the 'etition referring to the personality, addresses and capacity of the parties to the petition except x x x x b"t 5"alify said admission insofar as they are limited, 5"alified andDor expanded by allegations in the +ffirmative +llegationsD.efenses x x x x --. T6% ,+CT$ 1. &espondents admit paragraph 1 of the 'etition, b"t 5"alify said admission as to the beneficial ownership of the shares of stoc! registered in the name of the petitioner, the tr"th being as stated in the +ffirmative +llegationsD.efenses of this +nswer x x x x . +,,-&(+T- % +<<%E+T-F)$D.%,%)$%$ &espondents respectf"lly allege by way of +ffirmative +llegationsD.efenses, that x x x x ;. ,ort"nately, respondent +postol was able to convince (r. <"is illaf"erte to ta!e interest in the b"siness and he, together with the original investors, restr"ct"red the E. 2ibris '"blishing Company by organi#ing a new corporation !nown as %r. > %s. '"blishing Co., -nc.x x x x (r. <"is illaf"erte contrib"ted his own '1@@,@@@.@@. JANA and respondent Bose V. +postol, original investors of E. 2ibriscontrib"ted '1@@,@@@.@@ each> E. 2ibris '"blishing Company was paid ?@@ shares for the name of %r. > %s. maga#ine and goodwill. Th"s, the original stoc!holders of respondent (r. A (s. were: Cert.D)o.D.ate )ame of $toc!holder )o. of $hares G

=0
@@1-0-14-1= @@3-0-14-1= @@;-0-14-1= @@7-0-14-1= @@4-0-14-1= JANA -nvestments Corp. <"is illaf"erte &amon <. $iy Bose V. +postol E. 2ibris '"blishing Co. 1,@@@ 1,@@@ 1,@@@ ?@@ 1,@@@ 31G 31G 31G 1=G 7,?@@ 0=G 31G

7. The above-named original stoc!holders of respondent %r. > %s. contin"e to be virt"ally the same stoc!holders "p to this date x x x x ?. The petitioner being herself a minor stoc!holder and holder-in-tr"st of JANA shares, represented and contin"es to represent JANA in the *oard x x x x 31. 'etitioner )ora +. *itong is not the tr"e party to this case, the tr"e party being JANA )n"estments Corporation which contin"es to be the tr"e stoc!holder of respondent %r. > %s. '"blishing Co., -nc., conse5"ently, she does not have the personality to initiate and prosec"te this derivative s"it, and sho"ld therefore be dismissed x x x x The answer of private respondents shows that there was no 9"dicial admission that petitioner was a stoc!holder of %r. > %s. to entitle her to file a derivative s"it on behalf of the corporation. 2here the statements of the private respondents were 5"alified with phrases s"ch as, 8insofar as they are limited, 5"alified andDor expanded by,8 8the tr"th being as stated in the Affirmati"e Alle-ations8Defenses of t$is Answer 8 they cannot be considered definite and certain eno"gh, cannot be constr"ed as 9"dicial admissions.M1N (ore so, the affirmative defenses of private respondents directly ref"te the representation of petitioner that she is a tr"e and gen"ine stoc!holder of %r. > %s. by stating "ne5"ivocally that petitioner is not the tr"e party to the case b"t JANA which contin"es to be the tr"e stoc!holder of %r. > %s. -n fact, one of the reliefs which private respondents prayed for was the dismissal of the petition on the gro"nd that petitioner did not have the legal interest to initiate and prosec"te the same. 2hen ta!en in its totality, the Amended Answer to t$e Amended Petition , or even the Answer to t$e Amended Petition alone, clearly raises an iss"e as to the legal personality of petitioner to file the complaint. %very alleged admission is ta!en as an entirety of the fact which ma!es for the one side with the 5"alifications which limit, modify or destroy its effect on the other side. The reason for this is, where part of a statement of a party is "sed against him as an admission, the co"rt sho"ld weigh any other portion connected with the statement, which tends to ne"trali#e or explain the portion which is against interest. -n other words, while the admission is admissible in evidence, its probative val"e is to be determined from the whole statement and others intimately related or connected therewith as an integrated "nit. +ltho"gh acts or facts admitted do not re5"ire proof and cannot be contradicted, however, evidence ali!nde can be presented to show that the admission was made thro"gh palpable mista!e. M?N The r"le is always in favor of liberality in constr"ction of pleadings so that the real matter in disp"te may be s"bmitted to the 9"dgment of the co"rt. M0N 'etitioner also arg"es that since private respondents failed to appeal the = .ecember 100@ Frder and the ; +"g"st 100; .ecision of the $%C 6earing 'anel declaring that she was the real party-in-interest and had legal personality to s"e, they are now estopped from 5"estioning her personality. )ot 5"ite. The = .ecember 100@ Frder is clearly an interloc"tory order which cannot be considered as having finally resolved on the merits the iss"e of legal capacity of petitioner. The $%C 6earing 'anel disc"ssed the iss"e of legal capacity solely for the p"rpose of r"ling on the application for writ of preliminary in9"nction as an incident to the main iss"es raised in the complaint. *eing a mere interloc"tory order, it is not appealable. ,or, an interloc"tory order refers to something between the commencement and end of the s"it which decides some point or matter b"t it is not the final decision of the whole controversy. M1@N Th"s, even tho"gh the = .ecember 100@ Frder was adverse to private respondents, they had the legal right and option not to elevate the same to the (EC En Ban& b"t

1@
rather to await the decision which resolves all the iss"es raised by the parties and to appeal therefrom by assigning all errors that might have been committed by the 6earing 'anel. Fn the other hand, the ; +"g"st 100; .ecision of the 6earing 'anel dismissing the derivative s"it for fail"re to prove the charges of mismanagement, fra"d, disloyalty and conflict of interest and dissolving the writ of preliminary in9"nction, was favorable to private respondents. 6ence, they were not expected to appeal therefrom. -n fact, in the ; +"g"st 100; .ecision, the 6earing 'anel categorically stated that the evidence presented showed that the real party-in-interest was not petitioner *itong b"t JANA andDor $enator %nrile. 'etitioner was merely allowed to prosec"te her complaint so as not to sidetrac! 8the real iss"e to be resolved (which) was the allegation of mismanagement, fra"d and conflict of interest allegedly committed by respondent %"genia .. +postol.8 -t was only for this reason that petitioner was considered to be capacitated and competent to file the petition. +ccordingly, with the dismissal of the complaint of petitioner against private respondents, there was no compelling reason for the latter to appeal to the (EC En Ban&. -t was in fact petitionerJs t"rn as the aggrieved party to exercise her right to appeal from the decision. -t is worthy to note that even d"ring the appeal of petitioner before the (EC En Ban& private respondents maintained their vigoro"s ob9ection to the appeal and reiterated petitionerJs lac! of legal capacity to s"e before the $%C. 'etitioner then contends that she was a holder of the proper certificates of shares of stoc! and that the transfer was recorded in the $toc! and Transfer *oo! of %r. > %s. $he invo!es $ec. =; of 4$e Corporation Code which provides that no transfer shall be valid except as between the parties "ntil the transfer is recorded in the boo!s of the corporation, and "pon its recording the corporation is bo"nd by it and is estopped to deny the fact of transfer of said shares. 'etitioner alleges that even in the absence of a stoc! certificate, a stoc!holder solely on the strength of the recording in the stoc! and transfer boo! can exercise all the rights as stoc!holder, incl"ding the right to file a derivative s"it in the name of the corporation. +nd, she need not present a separate deed of sale or transfer in her favor to prove ownership of stoc!. $ection =; of 4$e Corporation Code expressly provides $ec. =;. Certifi&ate of sto&k and transfer of s$ares. - The capital stoc! of stoc! corporations shall be divided into shares for which certificates signed by the president or vice president, co"ntersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be iss"ed in accordance with the by-laws. $hares of stoc! so iss"ed are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally a"thori#ed to ma!e the transfer. )o transfer however shall be valid except as between the parties "ntil the transfer is recorded in the boo!s of the corporation showing the names of the parties to the transaction, the date of the transfer, the n"mber of the certificate or certificates and the n"mber of shares transferred x x x x This provision above 5"oted envisions a formal certificate of stoc! which can be iss"ed only "pon compliance with certain re5"isites. First, the certificates m"st be signed by the president or vice-president, co"ntersigned by the secretary or assistant secretary, and sealed with the seal of the corporation. + mere typewritten statement advising a stoc!holder of the extent of his ownership in a corporation witho"t 5"alification andDor a"thentication cannot be considered as a formal certificate of stoc!.M11N (e&ond, delivery of the certificate is an essential element of its iss"ance. 6ence, there is no iss"ance of a stoc! certificate where it is never detached from the stoc! boo!s altho"gh blan!s therein are properly filled "p if the person whose name is inserted therein has no control over the boo!s of the company. M13N 4$ird, the par val"e, as to par val"e shares, or the f"ll s"bscription as to no par val"e shares, m"st first be f"lly paid. Fo!rt$, the original certificate m"st be s"rrendered where the person re5"esting the iss"ance of a certificate is a transferee from a stoc!holder. The certificate of stoc! itself once iss"ed is a contin"ing affirmation or representation that the stoc! described therein is valid and gen"ine and is at least prima fa&ie evidence that it was legally iss"ed in the absence of evidence to the contrary. 6owever, this pres"mption may be reb"tted. M1;N $imilarly, boo!s and records of a corporation which incl"de even the stoc! and transfer boo! are generally admissible in evidence in favor of or against the corporation and its members to prove the corporate acts, its financial stat"s and other matters incl"ding oneJs stat"s as a stoc!holder. They are ordinarily the best evidence of corporate acts and proceedings. 6owever, the boo!s and records of a corporation are not concl"sive even against the corporation b"t are prima fa&ie evidence only. 'arol evidence may be admitted to s"pply omissions in the records, explain ambig"ities, or show what transpired where no records were !ept, or in some cases where s"ch records were contradicted. M17N The effect of entries in the boo!s of the corporation which p"rport to be reg"lar records of the proceedings of its board of directors or stoc!holders can be destroyed by testimony of a more concl"sive character than mere s"spicion that there was an irreg"larity in the manner in which the boo!s were !ept. M14N

11
The foregoing considerations are fo"nded on the basic principle that stoc! iss"ed witho"t a"thority and in violation of law is void and confers no rights on the person to whom it is iss"ed and s"b9ects him to no liabilities. M1=N 2here there is an inherent lac! of power in the corporation to iss"e the stoc!, neither the corporation nor the person to whom the stoc! is iss"ed is estopped to 5"estion its validity since an estoppel cannot operate to create stoc! which "nder the law cannot have existence.M11N +s fo"nd by the 6earing 'anel and affirmed by respondent Co"rt of +ppeals, there is overwhelming evidence that despite what appears on the certificate of stoc! and stoc! and transfer boo!, petitioner was not a bona fide stoc!holder of %r. > %s. before (arch 10?0 or at the time the complained acts were committed to 5"alify her to instit"te a stoc!holderJs derivative s"it against private respondents. +side from petitionerJs own admissions, several corporate doc"ments disclose that the tr"e party-in-interest is not petitioner b"t JANA. Th"s, while petitioner asserts in her petition that Certificate of $toc! )o. @@? dated 34 B"ly 10?; was iss"ed in her name, private respondents arg"e that this certificate was signed by respondent %"genia .. +postol as 'resident only in 10?0 and was fra"d"lently antedated by petitioner who had possession of the Certificate *oo! and the $toc! and Transfer *oo!. 'rivate respondents stress that petitionerJs co"nsel entered into a stip"lation on record before the 6earing 'anel that the certificate was indeed signed by respondent +postol only in 10?0 and not in 10?;. -n her reply, petitioner admits that while respondent %"genia .. +postol signed the Certificate of $toc! )o. @@? in petitionerJs name only in 10?0, it was iss"ed by the corporate secretary in 10?; and that the other certificates covering shares in %r. > %s. had not yet been signed by respondent %"genia .. +postol at the time of the filing of the complaint with the $%C altho"gh they were iss"ed years before. *ased on the foregoing admission of petitioner, there is no tr"th to the statement written in Certificate of $toc! )o. @@? that the same was iss"ed and signed on 34 B"ly 10?; by its d"ly a"thori#ed officers specifically the 'resident and Corporate $ecretary beca"se the act"al date of signing thereof was 11 (arch 10?0. erily, a formal certificate of stoc! co"ld not be considered iss"ed in contemplation of law "nless signed by the president or vice-president and co"ntersigned by the secretary or assistant secretary. -n this case, contrary to petitionerJs s"bmission, the Certificate of $toc! )o. @@? was only legally iss"ed on 11 (arch 10?0 when it was act"ally signed by the 'resident of the corporation, and not before that date. 2hile a certificate of stoc! is not necessary to ma!e one a stoc!holder, e.g., where he is an incorporator and listed as stoc!holder in the articles of incorporation altho"gh no certificate of stoc! has yet been iss"ed, it is s"pposed to serve as paper representative of the stoc! itself and of the ownerJs interest therein. 6ence, when Certificate of $toc! )o. @@? was admittedly signed and iss"ed only on 11 (arch 10?0 and not on 34 B"ly 10?;, even as it indicates that petitioner owns 001 shares of stoc! of %r. > %s., the certificate has no evidentiary val"e for the p"rpose of proving that petitioner was a stoc!holder since 10?; "p to 10?0. +nd even the fact"al antecedents of the alleged ownership by petitioner in 10?; of shares of stoc! of %r. > %s. are indistinctive if not enshro"ded in inconsistencies. -n her testimony before the 6earing 'anel, petitioner said that early in 10?;, to relieve %r. > %s. from political press"re, $enator %nrile decided to divest the family holdings in %r. > %s. as he was then part of the government and %r. > %s.was evolving to be an opposition newspaper. The JANA shares n"mbering 1,@@@ covered by Certificate of $toc! )o. @@1 were th"s transferred to respondent %"genia .. +postol in tr"st or in blan!.M1?N 'etitioner now claims that a few days after JANAJs shares were transferred to respondent %"genia .. +postol, $enator %nrile sold to petitioner 001 shares of JANA. ,or this p"rpose, a deed of sale was exec"ted and antedated to 1@ (ay 10?;.M10N This s"bmission of petitioner is however contradicted by the records which show that a deed of sale was exec"ted by JANA transferring 1,@@@ shares of %r. > %s. to respondent +postol on 1@ (ay 10?; and not to petitioner. M3@N Then $enator %nrile testified that in (ay or B"ne 10?; he was as!ed at a media interview if his family owned shares of stoc! in %r. > %s. +ltho"gh he and his family were stoc!holders at that time he denied it so as not to embarrass the maga#ine. 6e called "p petitioner and instr"cted her to wor! o"t the doc"mentation of the transfer of shares from JANA to respondent +postol to be covered by a declaration of tr"st. 6is instr"ction was to transfer the shares of JANA in %r. > %s. and E. 2ibris to respondent +postol as a nominal holder. 6e then finally decided to transfer the shareholdings to petitioner.M31N 2hen as!ed if there was any doc"ment or any written evidence of that divestment in favor of petitioner, $enator %nrile answered that there was an endorsement of the shares of stoc!. 6e said that there was no other doc"ment evidencing the assignment to petitioner beca"se the stoc!s were personal property that co"ld be transferred even orally. M33N Contrary to $enator %nrileJs testimony, however, petitioner maintains that $enator %nrile exec"ted a deed of sale in her favor.

13
+ caref"l per"sal of the records shows that neither the alleged endorsement of Certificate of $toc! )o. @@1 in the name of JANA nor the alleged deed of sale exec"ted by $enator %nrile directly in favor of petitioner co"ld have legally transferred or assigned on 34 B"ly 10?; the shares of stoc! in favor of petitioner beca"se as of 1@ (ay 10?; Certificate of $toc! )o. @@1 in the name of JANA was already cancelled and a new one, Certificate of $toc! )o. @@1, iss"ed in favor of respondent +postol by virt"e of a .eclaration of Tr"st and .eed of $ale. M3;N -t sho"ld be emphasi#ed that on 1@ (ay 10?; JANA exec"ted a deed of sale over 1,@@@ %r. > %s. shares in favor of respondent %"genio .. +postol. Fn the same day, respondent +postol signed a declaration of tr"st stating that she was the registered owner of 1,@@@ %r. > %s. shares covered by Certificate of $toc! )o. @@1. The declaration of tr"st f"rther showed that altho"gh respondent +postol was the registered owner, she held the shares of stoc! and dividends which might be paid in connection therewith solely in tr"st for the benefit of JANA, her principal. -t was also stated therein that being a tr"stee, respondent +postol agreed, on written re5"est of the principal, to assign and transfer the shares of stoc! and any and all s"ch distrib"tions or dividends "nto the principal or s"ch other person as the principal wo"ld nominate or appoint. 'etitioner was well aware of this tr"st, being the person in charge of this doc"mentation and being one of the witnesses to the exec"tion of this doc"ment. M37N 6ence, the mere alleged endorsement of Certificate of $toc! )o. @@1 by $enator %nrile or by a d"ly a"thori#ed officer of JANA to effect the transfer of shares of JANA to petitioner co"ld not have been legally feasible beca"se Certificate of $toc! )o. @@1 was already canceled by virt"e of the deed of sale to respondent +postol. +nd, there is nothing in the records which shows that JANA had revo!ed the tr"st it reposed on respondent %"genia .. +postol. )either was there any evidence that the principal had re5"ested her to assign and transfer the shares of stoc! to petitioner. -f it was tr"e that the shares of stoc! covered by Certificate of $toc! )o. @@1 had been transferred to petitioner, the person who co"ld legally endorse the certificate was private respondent %"genia .. +postol, she being the registered owner and tr"stee of the shares of stoc! covered by Certificate of $toc! )o. @@1. -t is a settled r"le that the tr"stee sho"ld endorse the stoc! certificate to validate the cancellation of her share and to have the transfer recorded in the boo!s of the corporation.M34N -n fine, the records are "nclear on how petitioner allegedly ac5"ired the shares of stoc! of JANA. 'etitioner being the chief exec"tive officer of JANA and the sole person in charge of all b"siness and financial transactions and affairs of JANAM3=N was s"pposed to be in the best position to show convincing evidence on the alleged transfer of shares to her, if indeed there was a transfer. Considering that petitionerJs stat"s is being 5"estioned and several fact"al circ"mstances have been presented by private respondents disproving petitionerJs claim, it was inc"mbent "pon her to s"bmit reb"ttal evidence on the manner by which she allegedly became a stoc!holder. 6er fail"re to do so ta!en in the light of several s"bstantial inconsistencies in her evidence is fatal to her case. The r"le is that the endorsement of the certificate of stoc! by the owner or his attorney-in-fact or any other person legally a"thori#ed to ma!e the transfer shall be s"fficient to effect the transfer of shares only if the same is co"pled with delivery. The delivery of the stoc! certificate d"ly endorsed by the owner is the operative act of transfer of shares from the lawf"l owner to the new transferee. Th"s, for a valid transfer of stoc!s, the re5"irements are as follows: (a) There m"st be delivery of the stoc! certificate> (b) The certificate m"st be endorsed by the owner or his attorney-in-fact or other persons legally a"thori#ed to ma!e the transfer> and, (c) to be valid against third parties, the transfer m"st be recorded in the boo!s of the corporation. M31N +t most, in the instant case, petitioner has satisfied only the third re5"irement. Compliance with the first two re5"isites has not been clearly and s"fficiently shown. Considering that the re5"irements provided "nder $ec. =; of 4$e Corporation Code sho"ld be mandatorily complied with, the r"le on pres"mption of reg"larity cannot apply. The reg"larity and validity of the transfer m"st be proved. +s it is, even the credibility of the stoc! and transfer boo! and the entries thereon relied "pon by petitioner to show compliance with the third re5"isite to prove that she was a stoc!holder since 10?; is highly do"btf"l. The records show that the original stoc! and transfer boo! and the stoc! certificate boo! of %r. > %s. were in the possession of petitioner before their c"stody was transferred to the Corporate $ecretary, +tty. +"g"sto $an 'edro. M3?N Fn 34 (ay 10??, +ssistant Corporate $ecretary &enato Bose Unson wrote %r. > %s. abo"t the lost stoc! and transfer boo! which was also noted by the corporationJs external a"ditors, P!non-bayan and Ara!llo, in their a"dit. +tty. Unson even informed respondent %"genia .. +postol as 'resident of %r. > %s. that steps wo"ld be "nderta!en to prepare and register a new $toc! and Transfer *oo! with the $%C. -ncidentally, perhaps strangely, "pon verification with the (EC, it was discovered that the general file of the corporation with the (EC was missing. 6ence, it was even possible that the original $toc! and Transfer *oo! might not have been registered at all.

1;
Fn 3@ Fctober 10?? respondent %"genia .. +postol wrote +tty. +"g"sto $an 'edro noting the changes he had made in the $toc! and Transfer *oo! witho"t prior notice to the corporate officers. M30N -n the 31 Fctober 10?? directors/ meeting, respondent %"genia .. +postol as!ed abo"t the doc"mentation to s"pport the changes in the $toc! and Transfer *oo! with regard to the JANA shares. 'etitioner answered that +tty. $an 'edro made the changes "pon her instr"ctions conformably with established practice.M;@N This simply shows that as of 10?? there still existed certain iss"es affecting the ownership of the JANA shares, th"s raising do"bts whether the alleged transactions recorded in the $toc! and Transfer *oo! were proper, reg"lar and a"thori#ed. Then, as if to magnify and compo"nd the "ncertainties in the ownership of the shares of stoc! in 5"estion, when the corporate secretary resigned, the $toc! and Transfer *oo! was delivered not to the corporate office where the boo! sho"ld be !ept b"t to petitioner.M;1N That JANA retained its ownership of its %r. > %s. shares was clearly shown by its receipt of the dividends iss"ed in .ecember 10?=.M;3N This only means, very obvio"sly, that %r. > %s. shares in 5"estion still belonged to JANA and not to petitioner. ,or, dividends are distrib"ted to stoc!holders p"rs"ant to their right to share in corporate profits. 2hen a dividend is declared, it belongs to the person who is the s"bstantial and beneficial owner of the stoc! at the time regardless of when the distrib"tion profit was earned. M;;N ,inally, this Co"rt ta!es notice of the glaring and open admissions of petitioner made, not 9"st seven (1) b"t nine (0) times, d"ring the 33 $eptember 10?? meeting of the board of directors that the %nriles were her principals or shareholders, as shown by the min"tes thereof which she d"ly signed M;7N 4. (rs. %. +postol explained to the .irectors that thro"gh her efforts, the asset base of the Company has improved and profits were reali#ed. -t is for this reason that the Company has declared a 1@@G cash dividend in 10?=. $he said that it is "p for the *oard to decide based on this performance whether she sho"ld contin"e to act as *oard Chairman or not. -n this regard, (s. ).+. *itong expressed her recollection of how %x-<ibrisD %r. > %s. were organi#ed and her participation for and on behalf of her principals, as follows: $he recalled that her principals were invited by (rs. %. +postol to invest in %x-<ibris and event"ally %r. > %s. The relationship between her principals and (rs. %. +postol made it possible for the latter to have access to several information concerning certain political events and iss"es. -n many instances, her principals s"pplied first hand and newsworthy information that made %r. > %s. a pop"lar paper x x x x =. +ccording to (s. *itong, her principals were instr"mental in helping %r. > %s. s"rvive d"ring those years that it was cash strapped x x x x (s. ).+. *itong pointed o"t that the practice of "sing the former (inisterJs infl"ence and stat"re in the government is one thing which her principals themselves are strongly against x x x x 1. x x x x +t this point, (s. ). *itong again expressed her recollection of the s"b9ect matter as follows: (a) (rs. %. +postol, she remembers, bro"ght "p the concept of a cooperative-ran newspaper company in one of her brea!fast session with her principals sometime d"ring the end of 10?4. 6er principals when as!ed for an opinion, said that they recogni#ed the concept as something very noble and visible x x x x Then (s. *itong as!ed a very specific 5"estion 82hen yo" concept"ali#ed %x-<ibris and %r. > %s., did yo" not thin! of my shareholders the 'once %nriles as liabilitiesK 6ow come yo" associated yo"rself with them then and not nowK 2hat is the differenceK8 (rs. +postol did not answer the 5"estion. The admissions of a party against his interest inscribed "pon the record boo!s of a corporation are competent and pers"asive evidence against him.M;4N These admissions render n"gatory any arg"ment that petitioner is a bona fide stoc!holder of %r. > %s. at any time before 10?? or at the time the acts complained of were committed. There is no do"bt that petitioner was an employee of JANA as its managing officer, as testified to by $enator %nrile himself. M;=N 6owever, in the absence of a special a"thority from the board of directors of JANA to instit"te a derivative s"it for and in its behalf, petitioner is dis5"alified by law to s"e in her own name. The power to s"e and be s"ed in any co"rt by a corporation even as a stoc!holder is lodged in the board of directors that exercises its corporate powers and not in the president or officer thereof.M;1N -t is well settled in this 9"risdiction that where corporate directors are g"ilty of a breach of tr"st, not of mere error of 9"dgment or ab"se of discretion, and intracorporate remedy is f"tile or "seless, a stoc!holder may instit"te a s"it in behalf of himself and other stoc!holders and for the benefit of the corporation, to bring abo"t a redress of the wrong inflicted directly "pon the corporation and indirectly "pon the stoc!holders. M;?N The stoc!holderJs right to instit"te a derivative s"it is not based on any express provision of 4$e Corporation Code b"t is impliedly recogni#ed when the law ma!es corporate directors or officers liable for damages s"ffered by the corporation and its stoc!holders for violation of their fid"ciary d"ties.

17
6ence, a stoc!holder may s"e for mismanagement, waste or dissipation of corporate assets beca"se of a special in9"ry to him for which he is otherwise witho"t redress. M;0N -n effect, the s"it is an action for specific performance of an obligation owed by the corporation to the stoc!holders to assist its rights of action when the corporation has been p"t in defa"lt by the wrongf"l ref"sal of the directors or management to ma!e s"itable meas"res for its protection. M7@N The basis of a stoc!holderJs s"it is always one in e5"ity. 6owever, it cannot prosper witho"t first complying with the legal re5"isites for its instit"tion. The most important of these is the bona fideownership by a stoc!holder of a stoc! in his own right at the time of the transaction complained of which invests him with standing to instit"te a derivative action for the benefit of the corporation.M71N 1HEREFORE, the petition is .%)-%.. The ;1 +"g"st 1004 .ecision of the Co"rt of +ppeals dismissing the complaint of petitioner )ora +. *itong in C+-E.&. )o. $' ;;301, and granting the petition for &ertiorari and prohibition filed by respondent %dgardo *. %spirit" as well as ann"lling the 4 )ovember 100;, 37 Ban"ary 1007 and 1? ,ebr"ary 1007 Frders of the (EC En Ban& in C+-E.&. )o. $' ;;?1;, is +,,-&(%.. Costs against petitioner. $F F&.%&%.. Da"ide, Jr., ;C$airman<, 'it!-, and P!is!mbin-, JJ., conc"r. Pan-aniban, J., no part. 'articipated, as a former practicing lawyer, in negotiations to b"y s"b9ect shares.
M1N

The derivative s"it, doc!eted as $%C Case )o. @;=@7, was commenced on 4 B"ly 10?0 thro"gh a petition for in9"nction, acco"nting and damages with prayer for the appointment of a management committee and for a writ of preliminary in9"nction and a temporary retraining order. M3N The name of respondent Bose +postol has been interchangeably designated in the records as 8Bose +. +postol8 and as 8Bose V. +postol.8 ,or "niformity, 8Bose +. +postol8 or simply 8Bose +postol8 is "sed in this .ecision. M;N The $%C 6earing 'anel was composed of 6earing Ffficers Bosefina <. 'asay-'a#, +ntonio (. %steves and (an"el '. 'erea. M7N +ssociate Commissioners &odolfo <. $amarista, (erle F. (an"el, ,e %loisa C. Eloria and 'erfecto &. Casay, Br., conc"rred in the Frder, while Chairman &osario ). <ope# d id not participate. M4N C+ .ecision penned by +ssociate B"stice 'edro +. &amire#, Chairman of the %ight .ivision (.ivision of ,ive), with +ssociate B"stices Baime (. <antin and Cancio C. Earcia conc"rring, and +ssociate B"stices <o"rdes Q. Tayao-Bag"ros and %"genio $. <abitoria dissenting. M=N 30+ +mB"r 3d, p. 17;. M1N +lmer v. 6obart Corp. ((o +pp) ?70 $23d 1;4, CC6 'rod <iab &ep 1;44@ cited in 30+ +mB"r 3d, p. 1;1. M?N Eranada v. ')*, )o. <-3@174, 3 $eptember 10==, 1? $C&+ 1. M0N Easpar v. .orado, )o. <-11??7, 30 )ovember 10=4, 14 $C&+ ;;1. M1@N *lac!Js <aw .ictionary, ,ifth %dition, p. 1;1. M11N $%C Fpinion, 3@ Fctober 101@ in $ehwani -nvestment A (anagement Co., cited in <ope#, &., The Corporation Code of the 'hilippines, ol. 3, 1007 %d. M13N T"ason v. <a 'revisora ,ilipina, =1 'hil. ;= M10;?N. M1;N ,letcher, 2illiam (eade, %ncyclopedia of the <aw of 'rivate Corporations, ol. , p. 41=?. M17N 1? +mB"r 3d 1@=. M14N )d., p. 1@1. M1=N $ee )ote 1;, p. 41=4. M11N )d., p. 4117. M1?N T$), 37 +"g"st 10?0, pp. ;?-;0> = +pril 100@, pp. 1@-11. M10N 'etition for &eview on Certiorari before this Co"rt, p. 1@> &ollo, p. ?1. M3@N %xh. 8318 for petitioner. M31N T$), 3@ +"g"st 100@, pp. 4-1?. M33N )d., p. 7@. M3;N %xhs. 31 and 31-+ for 'rivate &espondents. M37N &ollo, p. 3@1. M34N <ope#, &osario, The Corporation Code of the 'hilippines, vol. --, 1007 ed., p. ?37. M3=N T$), 3@ +"g"st 100@, pp. ;1-;7. M31N $ee )ote 34, pp. ?@;-?@1. M3?N %xh. O;4P for private respondents. M30N %xh. O;@P for private respondents. M;@N %xh. 8;18 for private respondents. M;1N %xh. 8;=8 for private respondents. M;3N %xh. 83=-*8 for private respondents.

14
M;;N M;7N

+gbayani, +g"edo ,., Commercial <aws of the 'hilippines, ol. ---, 10?? %d., p. 7@0. %xh. 8,8 for petitioner. M;4N $ee )ote 34. M;=N $ee )ote 3=. M;1N $ee )ote ;;, citing &' v. 'hil. &eso"rces .evelopment Corp., E.&. )o. 1@171, ;1 Ban"ary 104?. M;?N 'asc"al v. .el $an# Fro#eo, 10 'hil. ?3 \1011). M;0N $ee )ote 11, p. ?4;, citing (imna"gh v. +tlantic City %lectric Co., 1 )B $"per ;1@, $"per ;1@, 1@+ (3d) 0@7. M7@N +shwander v. Tennessee alley +"thority, 301 U$ 13?, ?@ < %d 1@11, 4= $"p Ct 4??. M71N $(C, represented by %d"ardo de los +ngeles v. Qahn, E.&. )o. ?4;;0, 11 +"g"st 10?0, 11= $C&+ 7=1.

&ep"blic of the 'hilippines S#$REME CO#R% (anila %) *+)C &.R. 'o. L(*97; Dece-.er ,0 ,9,7 CA'D2DO $ASC#AL0 plaintiff-appellant, vs. E#&E'2O DEL SA= ORO=CO0 E% AL.0 defendants-appellees. C. W. =ey and 5CBrien > De Witt for appellant. *a!sermann, Co$n > Fis$er for appellees.

%RE'%0 J.: The plaintiff appeals from a 9"dgment "pon the merits in favor of the defendants, and insists that the co"rt erred: 1. -n holding that the interpretation placed "pon article ;@ of the ban!/s charter by the decision of the $"preme Co"rt herein is not t$e law of t$e &ase. 3. -n holding that the defendants had a right to ded"ct their compensation from the gross profits of the ban!. ;. -n holding that it was proper for defendants to comp"te their compensation "pon the gross profits before charging against s"ch gross profits the aggregate amo"nt of acco"nts written off as "ncollectible (d"dosa y fallida) as shown in %xhibits C-1 to C-0, incl"sive. 7. -n holding that any of the debit items appearing in %xhibits C-1 to C-0 and especially the ind"strial and internalreven"e taxes, are items that sho"ld be charged against capital and not against c"rrent profits. 0awp$il.net 4. -n holding that it was within the power of the stoc!holders of the ban! to ratify the so-called interpretation by defendants of said article ;@. This action was commenced by the plaintiff as a shareholder of the *anco %spa]ol-,ilipino for the benefit of the ban! and all of the stoc!holders thereof. -ts p"rpose is to re5"ire the defendants as former directors and co"ncilors of the ban! to ref"nd a portion of the compensation paid to them for their services, on the gro"nd that the amo"nts thereof have been wrongf"lly comp"ted. The complaint contains three separate ca"ses of action, of which the first only is here involved. The defendants/ dem"rrer to this ca"se of action was s"stained "pon the gro"nd that the facts alleged therein were not s"fficient to entitle the plaintiff to the relief so"ght. Upon appeal this 9"dgment was reversed and the record ret"rned for f"rther proceedings. (10 'hil. &ep., ?3.) The complaint was not thereafter amended.

1=
The 5"estion raised by the plaintiff in his first assignment of error re5"ires an examination of the pertinent allegations in the first ca"se of action. These allegations are as follows. R. That, notwithstanding the fact that article ;@ of the said by-laws (%xhibit *) clearly and "ne5"ivocally prescribes that the net profits of the said ban! shall be apportioned as follows: Then per cent for the board of directors, five per cent for the board of managers (composed of co"nselors and tr"stees) in compensation for their services as s"ch, and the remainder, eighty-five per cent, inte-rally for the shareholders of the said ban!, the defendants, as s"ch members of the said boards of directors and managers, respectively, did, d"ring each and all of the years specified, fra"d"lently and to the great detriment of the said *an! and its shareholders, and witho"t the !nowledge, consent or ac5"iescence of the latter, appropriate to themselves for their own "se from the profits of the said *an! s"ms of money reaching an approximate amo"nt of twenty tho"sand pesos, or a total s"m of one h"ndred tho"sand pesos d"ring the five years aforementioned, by ded"cting their said ten and five per cent, respectively, from the gross profits instead of ded"cting them from the net profits of the said ban!. R-. That the said defendants, d"ring the time mentioned, caref"lly concealed in all the balances and reports of the said *an! p"blished by them every indication that might gave the stoc!holders of the said *an! the slightest s"spicion that the said defendants were fra"d"lently appropriating to themselves the f"nds of the same> and that the plaintiff learned of s"ch appropriation, by a mere chance, in the month of )ovember, 10@1. The *anco %spa]ol-,ilipino was a ban!ing corporation which, "ntil Ban"ary 1, 10@?, was controlled by the by-laws and reg"lations annexed to the complaint as %xhibits + and *. Fn )ovember 1;, 10@;, the plaintiff ac5"ired 1@ shares of the capital stoc! and has been the registered holder of these shares since that date. The defendants filled, d"ring the time mentioned in the complaint, the offices of director, &onsiliario, and sindi&o, and collectively constit"ted the board of government. The only compensation to which the defendants were entitled for their services is that prescribed by article ;@ of the by-laws then in force. This article reads: 8Ff the profits or gains which may res"lt from the ban!/s operations, after ded"cting all the expenses of its administration and the part, if any, which corresponds to the legal reserve f"nd, there shall be set apart ten per cent remaining shall belong integrally to the shareholders pro data the n"mber of shares owned by each.8 $ince the date on which the plaintiff ac5"ired his shares, the earnings of each half-year of the ban! have been li5"idated in the manner set forth in the %xhibits C-1 to C-0, incl"sive, attached to the agreed statement of facts, and the respective defendants have individ"ally collected for their services the s"ms specified in %xhibit .. Under date of )ovember 14, 30@1, the plaintiff addressed to the defendants a letter alleging that the earnings of the ban! had not been apportioned in accordance with the provisions of article ;@, s!pra, and ma!ing demand "pon them for the ref"nd to the ban! of a portion of the amo"nts received by them in compensation for their services. The defendants ref"sed to comply with this demand and on .ecember 1, 10@1, the plaintiff commenced an action see!ing the same relief herein prayed for. This action was dismissed, and on .ecember 31, 10@1, the shareholders of the ban! were convened in a special meeting 8for the express p"rpose of disc"ssing and ta!ing action relative to the alleged interpretation of article ;@ of the by-laws.8 +t this shareholders/ meeting there were present, either in person or by proxy, 1?; persons and entities, holding =,700 shares of the total iss"e of 1,4@@. +mong those present at this meeting was plaintiff/s attorney. The plaintiff/s letter, referred to above, was read, as was the complaint which the plaintiff had previo"sly filed, and, after a disc"ssion in which the appellant/s attorney too! part, a resol"tion was adopted ratifying and approving the distrib"tion of the ban!/s earnings as made, and a"thori#ing the defendants to proceed in the same manner with the earnings of the latter half of the year 10@1. -n favor of this resol"tion there was a total of 444 votes, representing 4,44@ shares. $oon thereafter the present action was commenced. +s will be seen from the plaintiff/s first assignment of error and the arg"ment of co"nsel relating thereto, it is strongly "rged that in5"iry respecting the interpretation and application of article ;@, s!pra, has been closed by the decision of this co"rt rendered "pon the dem"rrer of the defendants to the complaint. Under the doctrine of stare de&isis the plaintiff insists that 8the law of the case8 has been established and that it has been necessarily decided that the rem"neration received by the defendants for their services was not in accordance with article ;@. The decision is relied "pon by the plaintiff is that of Pas&!al "s. Del (a+ 5ro+&o (10 'hil. &ep., ?3). 8The law of the case,8 established by that decision, is the law of the case which was before the co"rt and which the co"rt thereby decided.0awp$il.net

11
The plaintiff, as will be seen from paragraphs 1@ and 11, above 5"oted, whose s"fficiency was then and there "nder consideration, alleged that the defendants, in violation of article ;@, had fra!d!lently misappropriated to themselves certain f"nds of the ban! by comp"ting their percentages "pon the gross earnings of the ban! and, by a series of fra"d"lent concealment/s, had withheld the !nowledge thereof from the shareholders. The dem"rrer admitted the facts as alleged and raised the 5"estion of the right of the plaintiff to recover "pon those facts. The r"ling of the lower co"rt was to the effect that, even ass"ming the facts to be as alleged in the complaint, the plaintiff had no right of action. Fn appeal the $"preme Co"rt considered this very 5"estion and necessarily none other, which relates to the point now "nder consideration, and, in reversing the r"ling of the lower co"rt, decided that, ass"ming the facts to be as alleged in the complaint, the plaintiff did have a ca"se of action. -f these were the facts of the case now "nder consideration, there wo"ld be neither occasion nor opport"nity to f"rther disc"ss the law applicable thereto. *"t the case which the present appeal presents is not the case at all. $ince that decision was rendered the case has been tried and the facts now before the co"rt for consideration are not the allegations that the defendants fra"d"lently mis-appropriated to themselves certain f"nds of the ban!, and by a series of concealment/s withheld the !nowledge thereof from the shareholders, b"t the real facts as they have been stip"lated in the agreed statement. These facts are that the defendants did not, as alleged, fra"d"lently misappropriate certain f"nds of the ban! by comp"ting their percentages "pon the gross earnings, b"t the first ded"ct the expenses of administration, and that none of the acts of the defendants were tainted in any way with fra"d. -n this partic"lar the case now "nder consideration is clearly differentiated and disting"ished from the former case. -n the case the co"rt decided that the defendants may not fra"d"lently comp"te their percentages "pon the gross earnings, and that a complaint which alleges that they have done so states a ca"se of action. This was 5"estion s"bmitted and decided. The 5"estion s"bmitted "pon the present appeal is whether the comp"tation really made is in accordance with article ;@. This holding is not in conflict with the r"le anno"nced in the cases cited and relied "pon by co"nsel for the plaintiff. ,or example, in the case of *eidt "s. %inor (11; Cal., ;?4), the co"rt said: 8(oreover, the r"le of the law of the case only applies when, on s"bse5"ent trial, the iss"es and the facts fo"nd remain s"bstantially the same.8 it&Qalf -n the case of Fore-erson et al. "s. (mit$ (1@7 -nd., 37=), the co"rt laid down this r"le: 8*"t where the 5"estions are necessarily involved, . . . the 9"dgment on appeal r"les the case thro"gho"t all its s"bse5"ent stages. The decision is an ad9"dication concl"ding the co"rts and the parties. -t is not, of co"rse, concl"sive in 9"dgment in the case in which it was rendered, "pon the parties and those in privity with them. . . . 2e regard the former decision as ad9"dicating all of the controlling 5"estions in the case, for it was not possible to reach the concl"sion there anno"nced witho"t deciding that the property in the promissory notes in controversy was in the administrator of the estate of (ahala $haw deceased.8 -n (tandard (ewin- %a&$ine Co. "s. 2eslie (11? ,ed., 441), the co"rt "sed this lang"age: 8-t is a familiar and entirely righteo"s r"le that a co"rt of review is precl"ded from agitating the 5"estions that were made, considered, and decided on previo"s reviews. The former decision f"rnishes /the law of the case/ not only to the trib"nal to which the ca"se is remanded, b"t to the appellate trib"nal itself on a s"bse5"ent writ or appeal.8 )ow, has the rem"neration of the defendants for their services been comp"ted in accordance with article ;@ of the bylawsK The item of 8profit and loss8 for each half year, d"ring the entire period covered by the complaint, was made "p by crediting to it all the items of net profits prod"ced by the vario"s acco"nts of the ban!, incl"ding the acco"nts of c"rrent debtors, the profits from exchange, the profits in the sale of money, the profits from the disco"nt of bills and notes, the net proceeds from the real properties of the ban! after the payment of all the expense thereof, incl"ding taxes, ins"rance, and repairs, and all other net profits obtained by the ban!. To the debit of this 8profit and loss8 acco"nt were entered all s"ms paid o"t by the ban! as interest "pon fixed deposits or credit balances of c"rrent acco"nts. The items of 8general expenses8 incl"ded salaries, light , water, stationery, stamps, attorneys/ fees, and all other items of general expenses inc"rred either by the main office in (anila or by the branch office in -loilo. -n short, it appears that every expendit"re of whatever nat"re made from the f"nds of the ban!, with the exception of the ind"strial tax (later internal-reven"e tax) and amo"nts set off against bad acco"nts, was incl"ded in the item of 8general expenses,8 or, what amo"nted to the same thing, ded"cted from the 8profit and loss8 acco"nt before comp"ting the rem"neration received by the respective defendants for their services. Upon this point it might be well to set o"t in f"ll %xhibit C-1. (%xhibits C-3 to C-0, incl"sive, were made "p in the same manner.) This exhibit is as follows: 10@;.

1?
.ecember ;1. *alance of the acco"nt of profit and loss ............................. W10=,4?@.33 .ed"ction of s"rpl"s of B"ne ;@, last ..................................... 1,?1=.;? ^^^^^^^^^ 1??,1=;.?7 .o. Eeneral expenses ............................................................... 41,14;.11 ^^^^^^^^^ 1;1,@1@.@1 Compensation for the board of government, 14 per cent ....................................................................................... 3@,441.41 ^^^^^^^^^ 11=,74?.4= .ividend of 7 per cent on W1,4@@,@@@ .................................... =@,@@@.@@ ^^^^^^^^^ 4=,74?.4= -nd"strial tax (later internal reven"e) 4 per cent of W=@,@@@ ....................................................................................... ;,@@@.@@ ^^^^^^^^^ 4;,74?.4= *alance on B"ne ;@ carried forward ..................................... 1,?1=.;? ^^^^^^^^^ =1,317.07 +mo"nt for bad acco"nts .................................................... =@,@@@.@@ ^^^^^^^^^ *alance for next semester ................................. 1,317.07 ^^^^^^^^^ To this method of comp"ting the defendants/ rem"neration the ob9ection of the plaintiff is twofold: (a) That before comp"ting the defendants/ rem"neration there was not first ded"cted from the earnings or gains the amo"nt payable as ind"strial tax (later internal reven"e), and (b) That before comp"ting the defendant/s rem"neration there was not first ded"cted from the earnings or gains the amo"nts retained to cover bad acco"nts. ,rom an examination of article ;@ it will be seen that only two items from the gross profits of the ban! are to be ded"cted before comp"ting the compensation of the directors and board of government (the defendants constit"ted both the directors and the board of government), to wit: %xpenses of administration and the amo"nt, if any, corresponding to the legal reserve f"nd. Fn .ecember ;1, 10@;, the legal reserve f"nd of '334,@@@ was not only completed, b"t a vol"ntary reserve f"nd of '==4,@@@, a"thori#ed by the charter, had acc"m"lated. ,rom the vario"s %xhibits, C-1 to C-0, incl"sive, it is apparent that nothing whatever was applied to this reserve f"nd, and, as the correctness of these exhibits is not disp"ted, it is also apparent that nothing was d"e this f"nd at any time d"ring the period covered by the complaint. Unless, therefore, the items of ind"strial tax (later internal-reven"e tax) and the amo"nts set aside to cover bad debts that there is no merit in the plaintiff/s contention. +t the o"tset it may be said that the proper disposition of this case is rendered diffic"lt by the inacc"rate lang"age "sed in article ;@. This article provides for a percentage of the profits ("tilidades y ganacias), and it may be at once said that these are not necessarily net profits, as claimed by co"nsel for the plaintiff. 'rofits may be either gross profits or net profits, and there are inn"merable methods of comp"ting each of these. <i!ewise, 8expenses of administration8 may or may not incl"de all amo"nts expended in the cond"ct of b"siness. -ndeed, it is somewhat "n"s"al that a provision of the ban!/s charter, so diffic"lt of exact definition, sho"ld be so lac!ing in precision. 6ardly less "n"s"al, from an +merican point of view, is the incorporation into the ban!/s charter of the meas"re of rem"neration of the board of government. This, is +merica, has generally been considered a detail in the internal management of a corporation to be controlled by the shareholders themselves, who, in many instances, even delegate to the directors the power of fixing their own salaries. The rem"neration received by the defendants is not even alleged to be excessive. The two active managers of the ban! received, d"ring the period in 5"estion, s"ms amo"nting to approximately '14,@@@ per year, while the other defendants, not participating in the active management of the corporation, received s"ms amo"nting in no instance to a salary of '3,4@@ per year. +ll of the defendants received, d"ring the fo"r and a half years, '3@1,?34.?1, or an approximate yearly average of '74,@@@ per year *earing in mind the magnit"de of the b"siness and the fact that the ban! prospered "nder the management of the defendants, there is no wonder that no claim is made of excessive compensation. ."ring all these years the plaintiff, as well as the other shareholders of the ban!, remained silent, apparently content with the increased prosperity of the b"siness, altho"gh at the increased prosperity of the b"siness, altho"gh at the end of each fiscal year they had the opport"nity to examine the boo!s of the ban! and inform themselves of the method by which the defendants comp"ted their compensation. +nd, f"rthermore, an extraordinary meeting of the shareholders was d"ly convened on .ecember 31, 10@1, for the express p"rpose, as we have indicated, of disc"ssing the interpretation placed "pon article ;@ by the defendants. The ind"strial tax, which the appellant insists sho"ld be first ded"cted from the earnings before comp"ting the percentages, was fixed by law at 4 per cent of the dividends distrib"ted among the shareholders of the ban!. -n order to ma!e the ded"ction of this tax, its amo"nt m"st first be a !nown 5"antity. $ince its amo"nt is a percentage of the dividends, the amo"nt of the latter m"st li!ewise by a !nown 5"antity before the operation can be made. The amo"nt available as dividends is dependent "pon the amo"nt d"e and payable o"t of profits to the defendants for their services.

10
Therefore, this amo"nt d"e the defendants from the profits m"st be !nown before the amo"nt remaining for dividends can be fixed. ,or example, if the remaining earnings, after ded"cting from the gross earnings the general expenses, is the s"m of '4?,@@@, how m"ch is to be ded"cted therefrom as internal-reven"e tax before comp"ting the percentage of the defendantsK The law said that the amo"nt of this tax sho"ld be 4 per cent of the dividends distrib"ted. The amo"nt to be distrib"ted depends "pon how m"ch may be left after the rem"neraton of the defendants is paid. -t is no reply to this arg"ment to point o"t that the total profits may be or are "s"ally s"fficiently great to permit a declaration of the maxim"m dividend of '=@,@@@ and that in s"ch cases t is simple matter to comp"te 4 per cent of '=@,@@@, for the r"le of comp"tation, established by article ;@, is a general one, applicable ali!e in all cases, whether the earnings of the ban! be great in small. This article does not establish two r"les of comp"tations, one which is only feasible or practicable when the earnings are s"fficiently large to warrant a dividend in the maxim"m amo"nt and another and different r"le when the dividend falls below that amo"nt. +gain, in o"r opinion the nat"re of the old ind"strial tax negatives the idea that it is one of the items of 8expenses of administration8 referred to in article ;@. This tax was levied by law, not "pon the earnings or profits of the ban!, b"t only "pon s"ch earnings or profits as were act"ally distrib"ted among the shareholders as dividends. -t was p"rely a dividend tax, collected for convenience in a l"mp s"m from the company, b"t levied solely and excl"sively "pon the distrib"ted dividends. To ded"ct this tax from the amo"nt "pon which the rem"neration of the defendants was comp"ted wo"ld have made the defendants contrib"tors to the tax levied "pon the company-shareholders. +rticle ;@ does not re5"ire the defendants as employees of the ban! to contrib"te to the payment of the ban!/s taxes. The discrimination made by article ;@ between 8expenses of administration8 and other disb"rsements is reasonable and in accordance with the principles of the contract which existed between the ban! and the defendants. That was a contract of employment in which one of the contracting parties agreed to s"pply the capital and the other his services, and to divide in a stip"lated proportion the proceeds of the application of the services of the one to the capital of the other. $ince it was inc"mbent "pon the ban! to f"rnish the capital, so it was inc"mbent "pon it to maintain the same. +ny tax which tended directly to impair the amo"nt of the capital sho"ld conse5"ently have been paid by the hirer of the services and not by the servant. There co"ld be no real difference in principle between the fail"re to f"rnish the capital in the first place and the fail"re to replace any part of it which disappears by reason of a tax levied thereon. 2e, therefore, concl"de that the method employed by the defendants for the li5"idation of the ban!/s b"siness, in so far as the ind"strial tax (internal-reven"e tax) is concerned, was strictly in accordance with article ;@ of the by-laws. .%.UCT-F) F, +(FU)T$ TF CF %& *+. +CCFU)T$ 2hen the defendant Fro#co too! over the management of the ban!, he reported to the board of directors its financial sit"ation, embracing among other thins a loss from bad acco"nts for the past of over '4@@,@@@. -t probably wo"ld have been possible to cover this entire amo"nt of losses from f"nds in the reserve, existing for 9"st s"ch p"rposes, b"t to have done so wo"ld have left the ban! witho"t a present reserve. -t was decided to preserve the reserve f"nd intact, and carry the bad acco"nts as acco"nts in s"spense "ntil the same co"ld be grad"ally and conveniently wiped o"t. Conse5"ently, in each half yearly li5"idation the dividends distrib"ted to the shareholders were strictly limited to 7 per cent per semester, and the earnings after payment of the expenses of administration, the rem"neration of defendants, the taxes, and the said dividends were applied pro tanto to the extinction of the ad acco"nts held in s"spense. -t does not clearly appear whether these f"nds, which were "sed for that p"rpose, first went into the vol"ntary reserve f"nd and were then applied to the extinction of the bad acco"nts in s"spense or were applied directly by the semiann"al li5"idation/s from the profit and loss acco"nts. The process followed is immaterial since the res"lt m"st be the same. The important fact is that in each semester there was an excess of net profits over and above the 7 per cent provided in article ;1 of the by-laws. This excess of net profits was divisible "nder that article, one-half to the shareholders and one-half to the legal reserve, vol"ntary reserve, or additional dividends as the case might be. -nstead, the entire excess of net profits went to exting"ish bad acco"nts whose extinction wo"ld have exha"sted the reserve f"nd and re5"ired its replenishment. To the extent that one-half of the excess of net profits were not distrib"ted as dividends, b"t were p"t to the p"rposes of reserve, the shareholders made a sacrifice for their own welfare. 2hether this was validly done or not is of no importance of this time for the reason that the rem"neration of the defendants was not affected in any way thereby. +s to the remaining half of the excess net profits, the application made was in direct accord with the by-laws, since the application of the f"nds to the p"rposes of the reserve f"nd is exactly the same as if the reserve f"nd had been employed for the p"rpose and then replenishment by these f"nds. +ccording to article ;@, the net profits belonged to the shareholders. +ccording to article ;1, these not profits, belonging to the shareholders, sho"ld be partially divided among them and partially !ept intact in the ban!, according to the amo"nt thereof, to the stat"s of the legal reserve, and to the wishes of the board of government respecting a vol"ntary reserve. ,rom the fact that part of either the legal or vol"ntary reserve, it cannot be said that s"ch portion of the net profits had

?@
ceased to belong to the share-holders. these excess net profits are, in a sense, still in the ban! and still belong to the shareholders within the meaning of article ;@. to hold that the bad acco"nts of the ban! sho"ld have been exting"ished by the gross earnings instead of the net profits, wo"ld, in effect, compel the defendants, as employees, to contrib"te to the replenishing of the depleted reserves of the ban!. -t wo"ld be wholly "n9"st to incl"de "nder 8expenses of administration8 d"ring the time the defendants were in charge, the losses previo"sly s"stained by the defendants/ predecessors in office. These defendants were in no wise connected with the ban! no were they in any way responsible for those losses. To interpret article ;@ so wo"ld res"lt in the incoming manager becoming an heir to an insolvent inheritance. Under s"ch conditions no one wo"ld be fo"nd to accept the office and the ban! wo"ld have to cease its operations. +s to the responsibility of the defendants for the losses which occ"rred d"ring the period covered by the complaint, it might be said in the first place that the greater part of these losses constit"tes the third ca"se of action of appellant/s complaint and was made the s"b9ect of a separate appeal to this co"rt. -n the second place, it has not been shown that any part of s"ch losses were written off as bad debts d"ring the period of time in 5"estion. +nd it is "pon this fact that we rest o"r holding on this point. Therefore, we are not now called "pon to decide whether the defendants co"ld have treated these losses in the same manner as they did those occ"rring prior to .ecember ;1, 10@4. The 9"dgment appealed from is affirmed. , -n this opinion it has been o"r intention to set forth at some length o"r reasons for affirming this 9"dgment at the close of the last session. Arellano, C.J., Carson and Ara!llo, JJ., &on&!r. ,ootnotes 1 (arch 31, 1017. )ot reported.

G.R. No. )*1&+1, ,vangelista et al. v. (antos, 86 Phil. -8& &ep"blic of the 'hilippines S#$REME CO#R% (anila %) *+)C (ay 10, 104@ E.&. )o. <-1131 @#A' D. EVA'&EL2S%A E% AL.0 plaintiffs-appellants, vs. RAFAEL SA'%OS0 defendant-appellee. Antonio Gon+ales for appellants. Ben7amin *. 4irol for appellee. RE3ES0 J.4

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This is an action by the minority stoc!holders of a corporation against its principal officer for damages res"lting from his mismanagement of its affairs and mis"se of its assets. The complaint alleges that plaintiffs are minority stoc!holders of the itali <"mber Company, -nc., a 'hilippine corporation organi#ed for the exploitation of a l"mber concession in Vamboanga, 'hilippines> that defendant holds more than 4@ per cent of the stoc!s of said corporation and also is and always has been the president, manager, and treas"rer thereof> and that defendant, in s"ch triple capacity, thro"gh fa"lt, neglect, and abandonment allowed its l"mber concession to lapse and its properties and assets, among them machineries, b"ildings, wareho"ses, tr"c!s, etc., to disappear, th"s ca"sing the complete r"in of the corporation and total depreciation of its stoc!s. The complaint therefore prays for 9"dgment re5"iring defendant: (1) to render an acco"nt of his administration of the corporate affairs and assets: (3) to pay plaintiffs the val"e of t heir respective participation in said assets on the basis of the val"e of the stoc!s held by each of them> and (;) to pay the costs of s"it. 'laintiffs also as! for s"ch other remedy as may be and e5"itable. The complaint does not give plaintiffs/ residence, b"t, b"t p"rposes of ven"e, alleges that defendant resides at 3113 .ewey *o"levard, corner <ibertad $treet, 'asay, province of &i#al. 6aving been served with s"mmons at that place, defendant filed a motion for the dismissal of the complaint on the gro"nd of improper ven"e and also on the gro"nd that the complaint did not state a ca"se of action in favor of plaintiffs. -n s"pport of the ob9ection to the ven"e, the motion, which is "nder oath, states that defendant is a resident of -loilo City and not of 'asay, and at the hearing of the motion defendant also presented f"rther affidavit to the effect that while he has a ho"se in 'asay, where members of his family who are st"dying in (anila live and where he himself is so9o"rning for the p"rpose of attending to his interests in (anila, yet he has permanent residence in the City of -loilo where he is registered as a voter for election p"rposes and has been paying his residence certificate. 'laintiffs opposed the motion for dismissal b"t presented no co"nter proof and merely called attention to the $heriff/s ret"rn showing service of s"mmons on defendant personally at his alleged residence at )o. 3113 .ewey *o"levard, 'asay. +fter hearing, the lower co"rt rendered its order, granting the motion for dismissal "pon the two gro"nds alleged by defendant, and reconsideration of this order having been denied, plaintiffs have appealed to this Co"rt. The appeal presents two 5"estions. The first refers to ven"e and the second, to the right of the plaintiffs to bring this action for their benefit. +s to the first 5"estion, it is important to remember that the laying of the ven"e of an action is not left to plaintiff/s caprice. The matter is reg"lated by the &"les of Co"rt. +nd in actions li!e the present, which is one in personam, the reg"lation applicable is that contained in section 1 of &"le 4, which provides:

?3
Civil actions in Co"rts of ,irst -nstance may be commenced and tried where the defendant or any of the defendant resides or may be fo"nd, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff. Fb9ection to improper ven"e may be interposed at any time prior to the trial. ((oran/s Comments on the &"les of Co"rt, ol. -, 3nd ed., p. 1@?.) *elieving that defendant resided in the province of &i#al, herein plaintiffs bro"ght their action in the Co"rt of ,irst -nstance of that province. *"t that belief proved erroneo"s, for the lower co"rt fo"nd after hearing that defendant had his residence in -loilo. The finding is based on defendant/s sworn statement not reb"tted by any proof to the contrary. There is nothing to the contention that defendant/s motion to dismiss necessarily pres"pposes a hypothetical admission of the allegations of the complaint, among them the averment that defendant is a resident of &i#al province, for the motion precisely denies that averment and alleges that his real residence is in -loilo City. This, defendant had the right to do in ob9ecting to the co"rt/s 9"risdiction on the gro"nd of improper ven"e. $ection 1 of &"le 4 may seem, at first bl"sh, to a"thori#e the laying of the ven"e in the province where the defendant 8may be fo"nd.8 *"t this phrase has already been held to have a limited application. -t is the same phrase "sed in section ;11 of +ct 10@ from which section 1 of &"le 4 was ta!en, and as constr"ed by this Co"rt it applies only to cases where defendant has no residence in the 'hilippine -slands. This was the constr"ction adopted in the case of Cohen "s. *eng"et Commercial Co., <td., ;7 'hil. 43=, which was an action bro"ght in (anila by a nonresident against a corporation which had its residence for legal p"rposes in *ag"io b"t whose 'resident was fo"nd in (anila and there served with s"mmons. This Co"rt there said: $ection ;11 provides that actions of this character 8may be bro"ght in any province where the defendants or any necessary party defendant may reside or be fo"nd, or in any province where the plaintiff or one of the plaintiffs resides, at the election of the plaintiff.8 The plaintiff in this action has no residence in the 'hilippine -slands. Fnly one of the parties to the action resides here. There can be, therefore, no election by plaintiff as to the trial. -t m"st be in the province where the defendant resides. The defendant resides, in the eye of the law, in *ag"io. 2as it 8fo"nd8 in the city of (anila "nder section ;11, its president being in that city where the service of s"mmons was madeK 2e thin! not. The word 8fo"nd8 as "sed section ;11 has a different meaning that belongs to it as "sed in section ;07, which refers excl"sively to the place where the s"mmons may be served. +s we have said a s"mmons may be legally served on a defendant wherever he may be 8fo"nd,8 i. e., wherever he may be, provided he be in the 'hilippine -slands> b"t the ven"e cannot be laid wherever the defendant may be 8fo"nd.8 There is an element entering in section ;11 which is not present in section ;07, that is a residen&e. &esidence of the plaintiff or defendant does not affect the place where a s"mmons may be served> b"t residence is the vital thing when we deal with ven"e. The ven"e m"st be laid in the province where one of the parties resides. -f the plaintiff is a nonresident the ven"e m"st laid in the province of the defendant/s residence. The ven"e can be

?;
laid in the province where defendant is 8fo"nd8 only when defendant has no residence in the 'hilippine -slands. + defendant can not have a residence in one province and be 8fo"nd8 in another. +s long as he has a residence in the 'hilippine -slands he can be 8fo"nd,8 for the p"rposes of section ;11, only in the province of his residence. -n s"ch case the words 8residence8 and 8fo"nd8 are synonymo"s. -f he is a nonresident then the ven"e may laid in the province where he is 8fo"nd8 at the time ven"e the action is commenced or in the province of plaintiff/s residence. This applies also to a domestic corporation. 2hile the service of the s"mmons was good in either *ag"io or (anila we are of the opinion that the ob9ection of the defendant to the place of trial was proper in both cases and that the trial co"rt sho"ld have held that the ven"e was improperly laid. +nd elaborating on the point when the case came "p for reconsideration, the Co"rt f"rther said: The moving party contends that the ven"e was properly laid "nder section ;11 in that was laid in the province where the defendant was fo"nd at the time s"mmons was served on its president, he having been fo"nd and served with process in the city of (anila. for the p"rpose of the disc"ssion we ass"med in the main case, as the plaintiff claimed, that the defendant was in fact and in law fo"nd in the city of (anila> and proceeded to decide the ca"se "pon the theory that, even if the defendant were fo"nd in the city of (anila, that did not 9"stify, "nder the facts of the case, the laying of the ven"e in the city of (anila. 2e do not believe that the moving party/s ob9ection that o"r constr"ction deprives the word 8fo"nd8 of all significance and res"lts, in effect, in eliminating it from the stat"e, is so"nd. 2e do not deprive it of all significance and effect and do not eliminate it from the stat"e. 2e give it the only effect which can be given it and still accord with the other provisions of the section which give defendant the right to have the ven"e laid in the province of his residence, the effect which it was intended by the legislat"re they sho"ld have. 2e held that the word 8fo"nd8 was applicable in certain cases, and in s"ch cases gave it f"ll significance and effect. 2e declared that it was applicable and effective in cases where the defendant is a nonresident. -n s"ch cases where the defendant is a nonresident. -n s"ch cases the ven"e may be laid wherever he may be fo"nd in the 'hilippine -slands at the time of the service of the process, b"t we also held that where he is a resident of the 'hilippine -slands the word 8fo"nd8 has no application and the ven"e m"st be laid in the province where he resides. The constr"ction which the moving party as!s "s to place on that provision of section ;11 above 5"oted wo"ld res"lt in the destr"ction of the privilege conferred by the section "pon a resident defendant which re5"ires the ven"e to be laid in the province where he resides. This is clear> for, if the ven"e may be laid in any province where the defendant, altho"gh a resident of some other province, any be fo"nd at the time process is served on him, then the provision that it shall be laid in the province where he resides is no val"e to him. -f a defendant residing in the province of &i#al is helpless when the

?7
ven"e is laid in the province of (indoro in an action in which the plaintiff is a nonresident or resides in (anila, what is the val"e of a residence in &i#alK -f a defendant residing in Bolo is witho"t remedy when a nonresident plaintiff or a plaintiff residing in Bolo lays the ven"e in *ontoc beca"se the defendant happens to be fo"nd there, of what significance is a residence in BoloK The phrases 8where the defendant ... may reside8 and 8or be fo"nd8 m"st be constr"ed together and in s"ch manner that both may be given effect. The constr"ction as!ed for by the moving party wo"ld deprive the phrase 8where the defendant ... may reside8 of all significance, as the plaintiff co"ld always elect to lay the ven"e in the province where the defendant was 8fo"nd8 and not where he resided> whereas the constr"ction which we place "pon these phrases permits both to have effect. 2e declare that, when the defendant is a resident of the 'hilippine -slands, the ven"e m"st be laid either in the province where the plaintiff resides or in the province where the defendant resides, and in no other province. 2here, however, the defendant is a nonresident the ven"e may be laid wherever defendant may be fo"nd in the 'hilippine -slands. This constr"ction gives both phrases their proper and legitimate effect witho"t doing violence to the spirit which informs all laws relating to ven"e and which insists always that the action shall tried in the place where the greater convenience of the parties will be served. Frdinarily a defendant/s witness are fo"nd where the defendant resides> and plaintiff/s witnesses are generally fo"nd where he resides or where the defendant resides. -t is, therefore, generally desirable to have the action tried where on of the resides. 2here the plaintiff is a nonresident and the contract "pon which s"it is bro"ght was made in the 'hilippine -slands it may safely be asserted that the convenience of the defendant wo"ld be best served by a trial in the province where he resides. The fact that defendant was so9o"rning in 'asay t the time he was served with s"mmons does not ma!e him a resident of that place for p"rposes of ven"e. &esidence is 8the permanent home, the place to which, whenever absent for b"siness or pleas"re, one intends to ret"rn, ...8 (=1 C.B., pp. 13;-137.) + man can have b"t one domicile at a time (+lcantara "s. $ecretary of -nterior, =1 'hil., 740), and residence is anonymo"s with domicile "nder section 1 of &"le 4 ((oran/s Comments, s!pra, p. 1@7). -n view of the foregoing, we hold that the ob9ection to the ven"e was correctly s"stained by the lower co"rt. +s to the second 5"estion, the complaint shows that the action is for damages res"lting from mismanagement of the affairs and assets of the corporation by its principal officer, it being alleged that defendant/s maladministration has bro"ght abo"t the r"in of the corporation and the conse5"ent loss of val"e of its stoc!s. The in9"ry complained of is th"s primarily to the corporation, so that the s"it for the damages claimed sho"ld be by the corporation rather than by the stoc!holders (; ,letcher, Cyclopedia of Corporation pp. 011-0?@). The stoc!holders may not directly claim those damages for themselves for that wo"ld res"lt in the appropriation by, and the distrib"tion among them of part of the corporate assets before the dissol"tion of the corporation and the li5"idation of its debts and liabilities, something which cannot be legally done in view of section 1= of the Corporation <aw, which provides:

?4
)o shall corporation shall ma!e or declare any stoc! or bond dividend or any dividend whatsoever from the profits arising from its b"siness, or divide or distrib"te its capital stoc! or property other than act"al profits among its members or stoc!holders "ntil after the payment of its debts and the termination of its existence by limitation or lawf"l dissol"tion. *"t while it is to the corporation that the action sho"ld pertain in cases of this nat"re, however, if the officers of the corporation, who are the ones called "pon to protect their rights, ref"se to s"e, or where a demand "pon them to file the necessary s"it wo"ld be f"tile beca"se they are the very ones to be s"ed or beca"se they hold the controlling interest in the corporation, then in that case any one of the stoc!holders is allowed to bring s"it (; ,letcher/s Cyclopedia of Corporations, pp. 011-0?@). *"t in that case it is the corporation itself and not the plaintiff stoc!holder that is the real property in interest, so that s"ch damages as may be recovered shall pertain to the corporation ('asc"al "s. .el $a# Frosco, 10 'hil. ?3, ?4). -n other words, it is a derivative s"it bro"ght by a stoc!holder as the nominal party plaintiff for the benefit of the corporation, which is the real property in interest (1; ,letcher, Cyclopedia of Corporations, p. 304). -n the present case, the plaintiff stoc!holders have bro"ght the action not for the benefit of the corporation b"t for their own benefit, since they as! that the defendant ma!e good the losses occasioned by his mismanagement and pay to them the val"e of their respective participation in the corporate assets on the basis of their respective holdings. Clearly, this cannot be done "ntil all corporate debts, if there be any, are paid and the existence of the corporation terminated by the limitation of its charter or by lawf"l dissol"tion in view of the provisions of section 1= of the Corporation <aw. -t res"lts that plaintiff/s complaint shows no ca"se of action in their favor so that the lower co"rt did not err in dismissing the complaint on that gro"nd. 2hile plaintiffs as! for remedy to which they are not entitled "nless the re5"irement of section 1= of the Corporation <aw be first complied with, we note that the action stated in their complaint is s"sceptible of being converted into a derivative s"it for the benefit of the corporation by a mere change in the prayer. $"ch amendment, however, is not possible now, since the complaint has been filed in the wrong co"rt, so that the same last to be dismissed. The order appealed from is therefore affirmed, b"t witho"t pre9"dice to the filing of the proper action in which the ven"e shall be laid in the proper province. +ppellant/s shall pay costs. $o ordered. %oran, C.J., 5+aeta, Pablo, Ben-+on, 4!ason, and %ontemayor, JJ., &on&!r. Copyright X 3@@1-3@17 'hilippine<aw.info Theme by Theme 6orse

&ep"blic of the 'hilippines S#$REME CO#R% (anila

?=
%) *+)C &.R. 'o. L(++)99 March )/0 ,98*

RE$#BL2C BA'E0 re resented in this action .: DAMASO $. $ERE=0 etc.0 plaintiff-appellant, vs. M2&#EL C#ADER'O0 B2E'VE'2DO D2=O'0 $ABLO ROMA'0 %HE BOARD OF D2REC%ORS OF %HE RE$#BL2C BA'E A'D %HE MO'E%AR3 BOARD OF %HE CE'%RAL BA'E OF %HE $H2L2$$2'ES0 defendants-appellees. Cris in D. BaiKas and Associates and Ha5i5i0 *olinao and +ssociates for plaintiff-appellant. =. %. Balboa, F.E. E"an-elista and (. %al"ar for defendant-appellee %onetary Board. =orberto J. P!is!mbin- and *.'. P!is!mbin- for ot$er defendants-appellees. RE3ES0 @.B.L.0 J.: .irect appeal from an order of the Co"rt of ,irst -nstance of (anila, in its civil case )o. 4;0;=, dismissing the petitioner/s complaint on the gro"nd of fail"re to state ca"se of action. -n the Co"rt below, .amaso 'ere#, a stoc!holder of the &ep"blic *an!, a 'hilippine ban!ing corporation domiciled in (anila, instit"ted a derivative s"it for and in behalf of said *an!, against (ig"el C"aderno, *ienvenido .i#on, the *oard of .irectors of the &ep"blic *an!, and the (onetary *oard of the Central *an! of the 'hilippines. 'aragraph = of the Complaint (&ec. on +ppeal, p. 1) expressly pleaded the following: . =. That the relator herein filed the present derivative s"it witho"t any f"rther demand on the *oard of .irectors of the &ep"blic *an! for the reason that s"ch formal demand to instit"te the present complaint wo"ld be a f"tile formality since the members of the board are personally chosen by defendant 'ablo &oman himself. ,or a ca"se of action plaintiff alleged, inter alia, that .amaso 'ere# had complained to the (onetary *oard of the Central *an! against certain fra"ds allegedly committed by defendant 'ablo &oman, in that being chairman of the *oard of .irectors of the &ep"blic *an!, and of its %xec"tive <oan Committee, in 1041 to 1040, 8in grave ab"se of his fid"ciary d"ty and ta!ing advantage of his said positions and in connivance with other officials of the &ep"blic *an!8, &oman had fra"d"lently granted or ca"sed to be granted loans to fictitio"s and non-existing persons and to their close friends, relatives andDor employees, who were in reality their d"mmies, on the basis of fictitio"s and inflated appraised val"es of real estate properties> that said loans amo"nted to almost 7 million pesos> that acting "pon the complaint, (ig"el C"aderno (then Eovernor of the Central *an!) and the (onetary *oard ordered an investigation, which was carried o"t by *an! %xaminers> that they and the $"perintendent of *an!s of the Central *an! reported that certain mortgage loans amo"nting to '3,;@;,7@@.@@ were granted in violation of sections 11, 1? and ?? of the Eeneral *an!ing +ct> that acting on said reports, the (onetary *oard, of which defendant C"aderno was a member, ordered a new *oard of .irectors of the &ep"blic *an! to be elected, which was done, and s"bse5"ently approved by the (onetary *oard> that on Ban"ary 4, 10=@, the latter accepted the offer of 'ablo &oman to p"t "p ade5"ate sec"rity for the 5"estioned loans made by the &ep"blic *an!, and s"ch sec"rity was made a condition for the res"mption of the *an!/s normal operations> that s"bse5"ently, the Central *an! thro"gh its Eovernor, (ig"el C"aderno, referred to special prosec"tors of the .epartment of B"stice on B"ly 33, 10=@, the ban!ing fra"ds and violations of the *an!ing +ct, reported by the $"perintendent of *an!s, for investigation and prosec"tion, b"t no information was filed "p to the time of the retirement of C"aderno in 10=1> that other similar fra"ds were s"bse5"ently discovered> that to ne"trali#e the impending action against him, 'ablo &oman engaged (ig"el C"aderno as technical cons"ltant at a compensation of '13,4@@.@@ per month, and selected *ienvenido .i#on as chairman of the *oard of .irectors of the &ep"blic *an!> that the *oard of .irectors composed of individ"als personally selected and chosen by &oman, connived and confederated in approving the appointment and selection of C"aderno and .i#on> that s"ch action was motivated by bad faith and witho"t intention to protect the interest of the &ep"blic *an! b"t were prompted to protect 'ablo &oman from criminal prosec"tion> that the appointment of C"aderno and his acceptance of the position of technical cons"ltant are immoral, anomalo"s and illegal, and his compensation highly "nconscionable, beca"se co"rt actions involving the act"ations of C"aderno as Eovernor and (ember or Chairman of the (onetary *oard are still pending in co"rt> that as member of the (onetary *oard from 10=1 to 10=3, *ienvenido .i#on exercised s"pervision over the &ep"blic *an!> that the selection of .i#on as chairman of the *oard of the &ep"blic *an! after he was forced to resign from the presidency of the 'hilippine )ational *an! and from membership of the (onetary *oard and within one year thereafter is in violation of option ;, s"b-paragraph (d) of the +nti-Eraft and

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Corr"pt 'ractices +ct> that both C"aderno and .i#on were alter e-os of 'ablo &oman> that the (onetary *oard was abo"t to approve the appointment of C"aderno and .i#on and wo"ld do so "nless en9oined. The complaint, therefore, prayed for a writ of preliminary in9"nction against the (onetary *oard to prevent its confirmation of the appointments of .i#on and C"aderno> against the *oard of .irectors of the &ep"blic *an! from recogni#ing C"aderno as technical cons"ltant and .i#on as Chairman of the *oard> and against 'ablo &oman from appointing or selecting officers or directors of the &ep"blic *an!, and against the recognition of any s"ch appointees "ntil final determination of the action. +nd concl"ded by praying that after d"e hearing, 9"dgment be rendered, I a) ma!ing the writ of in9"nction permanent> b) declaring the appointment of defendant (ig"el C"aderno as technical cons"ltant with monthly compensation of '13,4@@.@@ "nconscionable, immoral, illegal and n"ll and void> c) declaring the selection of defendant *ienvenido .i#on as chairman of the *oard of .irectors of the &ep"blic *an! violative of $ection ;, s"b-paragraph (d) of &ep"blic +ct )o. 4@10, otherwise !nown as the +nti-Eraft and Corr"pt 'ractices +ct, and therefore, illegal and n"ll and void> d) declaring that defendant 'ablo &oman, in view of his criminal liability for the fra"d"lent real estate mortgage loans in the &ep"blic *an! amo"nting to '7 million, has no right to select or to be allowed to select person or persons who are his alter egos to manage the &ep"blic *an!, and en9oining the defendant *oard of .irectors of the &ep"blic *an! from recogni#ing any officers or directors appointed or selected by defendant 'ablo &oman> e) ordering defendants (ig"el C"aderno and *ienvenido .i#on to ret"rn to the &ep"blic *an! all amo"nts they may have received either in the form of compensation, rem"neration or emol"ment, with an interest thereon at the rate of =G> or to order defendant 'ablo &oman to ref"nd the amo"nts paid to said defendant (ig"el C"aderno and defendant *ienvenido .i#on, and to pay s"ch reasonable damages to the plaintiff &ep"blic *an!> f) ordering all the defendants to pay the s"m of '34,@@@.@@ as attorney/s fees, incl"ding all expenses of litigation and costs of this s"it. The (onetary *oard filed an answer with denials, admissions and affirmative defenses> b"t the other defendants filed separate motions to dismiss on practically the same gro"nds: no valid ca"se of action against the individ"al movants> lac! of legal capacity of plaintiff-relator to s"e> and non-exha"stion of intra-corporate remedies. These motions were d"ly opposed by plaintiff .amaso 'ere#.0Rwp$S0.DTt Fn Fctober 37, 10=;, the co"rt, 8ta!ing into consideration the gro"nds alleged in the motions to dismiss and the opposition for the iss"ance of a writ of preliminary in9"nction and the affirmative defenses filed by the defendants and the arg"ments in s"pport thereof8, and 8that there are already eight cases pending in the different branches of this co"rt between practically the same parties8, denied the petition for a writ of preliminary in9"nction and dismissed the case. The co"rt in effect s"ggested that the matter at iss"e in the case may be presented in any of the pending eight cases by means of amended and s"pplemental pleadings. 'laintiff .amaso 'ere# there"pon appealed to this Co"rt. The iss"e in this appeal, then, is whether or not the Co"rt below erred in dismissing the complaint. -n this connection, it sho"ld be remembered that the defenses of the (onetary *oard of the Central *an!, being interposed in an answer and not in a motion to dismiss, are not here at iss"e. F"r sole concern is with the motions to dismiss of the other defendants, &oman, C"aderno, .i#on, and the *oard of .irectors of the &ep"blic *an!. They mainly controvert the right of plaintiff to 5"estion the appointment and selection of defendants C"aderno and .i#on, which they contend to be the res"lt of corporate acts with which plaintiff, as stoc!holder, cannot interfere. )ormally, this is correct, b"t 'hilippine 9"rispr"dence is settled that an individ"al stoc!holder is permitted to instit"te a derivative or representative s"it on behalf of the corporation wherein he holds stoc! in order to protect or vindicate corporate rights, whenever the officials of the corporation ref"se to s"e, or are the ones to be s"ed or hold the control of the corporation. -n s"ch actions, the s"ing stoc!holder is regarded as a nominal party, with the corporation as the real party in interest ('asc"al vs. .el $a# Fro#co, 10 'hil. ?3, ?4> %verett vs. +sia *an!ing Corp., 74 'hil. 41?> +ngeles vs. $antos, =7 'hil.

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=01> %vangelista vs. $antos, ?= 'hil. ;??). 'laintiff-appellant/s action here is precisely in conformity, with these principles. 6e is neither alleging nor vindicating his own individ"al interest or pre9"dice, b"t the interest of the &ep"blic *an! and the damage ca"sed to it. The action he has bro"ght is a derivative one, expressly manifested to be for and in behalf of the &ep"blic *an!, beca"se it was f"tile to demand action by the corporation, since its .irectors were nominees and creat"res of defendant 'ablo &oman (Complaint, p. =). The fra"ds charged by plaintiff are fra"ds against the *an! that redo"nded to its pre9"dice. The complaint expressly pleads that the appointment of C"aderno as technical cons"ltant, and of *ienvenido .i#on to head the *oard of .irectors of the &ep"blic *an!, were made only to shield 'ablo &oman from criminal prosec"tion and not to f"rther the interests of the *an!, and avers that both men are &oman/s alter e-os. There is no denying that the facts th"s pleaded in the complaint constit"te a ca"se of action for the ban!: if the 5"estioned appointments were made solely to protect &oman from criminal prosec"tion, by a *oard composed by &oman/s creat"res and nominees, then the moneys disb"rsed in favor of C"aderno and .i#on wo"ld be an "nlawf"l wastage or diversion of corporate f"nds, since the &ep"blic *an! wo"ld have no interest in shielding &oman, and the directors in approving the appointments wo"ld be committing a breach of tr"st> the *an!, therefore, co"ld s"e to n"llify the appointments, en9oin disb"rsement of its f"nds to pay them, and recover those paid o"t for the p"rpose, as prayed for in the complaint in this case (+ngeles vs. $antos, s!pra.). ,acts pleaded in the complaint are to be deemed accepted by the defendants who file a motion to dismiss the complaint for fail"re to state a ca"se of action. This is the cardinal principle in the matter. +nd, it has been r"led that the test of s"fficiency of the facts alleged is whether or not the Co"rt co"ld render a valid 9"dgment as prayed for, accepting as tr"e the excl"sive facts set forth in the complaint. 1$o rigid is the norm prescribed that if the Co"rt sho"ld do"bt the tr"th of the facts averred it m"st not dismiss the complaint b"t re5"ire an answer and proceed to trial on the merits. 3 .efendants "rge that the action is improper beca"se the plaintiff was not a"thori#ed by the corporation to bring s"it in its behalf. +ny s"ch a"thority co"ld not be expected as the s"it is aimed to n"llify the action ta!en by the manager and the board of directors of the &ep"blic *an!> and any demand for intra-corporate remedy wo"ld be f"tile, as expressly pleaded in the complaint. These circ"mstances permit a stoc!holder to bring a derivative s"it (%vangelista vs. $antos, ?= 'hil. ;07). That no other stoc!holder has chosen to ma!e common ca"se with plaintiff 'ere# is irrelevant, since the smallness of plaintiff/s holdings is no gro"nd for denying him relief (+shwander vs. T +, ?@ <. %d. =??). +t any rate, it is yet too early in the proceedings for the absence of other stoc!holders to be of any significance, no iss"es having even been 9oined. There remains the proced"ral 5"estion whether the corporation itself m"st be made party defendant. The %nglish practice is to ma!e the corporation a party plaintiff, while in the United $tates, the "sage leans in fa"or of its being 9oined as party defendant (see %ditorial )ote, 41 <&+ M)$N 13;). Fb9ections can be raised against either method. +bsence of corporate a"thority wo"ld seem to militate against ma!ing the corporation a party plaintiff, while 9oining it as defendant places the entity in the aw!ward position of resisting an action instit"ted for its benefit. 2hat is important is that the corporation/ sho"ld be made a party, in order to ma!e the Co"rt/s 9"dgment binding "pon it, and th"s bar f"t"re relitigation of the iss"es. Fn what side the corporation appears loses importance when it is considered that it lay within the power of the trial co"rt to direct the ma!ing of s"ch amendments of the pleadings, by adding or dropping parties, as may be re5"ired in the interest of 9"stice (&evised &"le ;, sec. 11). (is9oinder of parties is not a gro"nd to dismiss an action. ( )bid.) 2e see no reason to s"pport the contention of defendant *ienvenido .i#on that the action of plaintiff amo"nts to a !o warranto proceeding. 'laintiff 'ere# is not claiming title to .i#on/s position as head of the &ep"blic *an!/s board of directors. The s"it is aimed at preventing the waste or diversion of corporate f"nds in paying officers appointed solely to protect 'ablo &oman from criminal prosec"tion, and not to carry on the corporation/s ban! b"siness. 2hether the complaint/s allegations to s"ch effect are tr"e or not m"st be determined after d"e hearing. -ndependently of the gro"nds advanced by the defendants in their motions to dismiss, the Co"rt a !o gave as a f"rther pretext for the dismissal of the action the pendency of eight other laws"its between practically the same parties> reasoning that the 5"estion at iss"e in the present case co"ld be incorporated in any one of the other actions by amended or s"pplemental pleading. 2e fail to see that this 9"stifies the dismissal of the case "nder appeal. -n the first place, there is no pretense that the ca"se of action here was already incl"ded in any of the other pending cases. +s a matter of fact, dismissal of the present action was not so"ght on the gro"nd of pendency of another action between the same parties. $econdly, the amendment of a complaint after a responsive pleading is filed, wo"ld rest "pon the discretion of the party and the Co"rt. 6ence, this case cannot be dismissed simply beca"se of the possibility that the ca"se of action here can be incorporated or introd"ced in any of those of the pending cases.

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-n view of the foregoing, the order dismissing the complaint is reversed and set aside. The case is remanded to the co"rt of origin with instr"ctions to overr"le the motions to dismiss and re5"ire the defendants to answer the complaint. Thereafter, the case shall be tried and decided on its merits. Costs against defendants-appellees. $o ordered. Con&ep&ion, C.J., Di+on, #e-ala, Ben-+on, J.P., 3aldi"ar, (an&$e+ and Castro, JJ., &on&!r. %akalintal, J., took no part. Footnotes
1

'aminsan vs. Costales, 3? 'hil. 7?1> *lay vs. *atangas Transportation Co., ?@ 'hil. ;1;> .e Bes"s vs. *elarmino, 04 'hil. ;==> alencia A Co. vs. <ay"g, C+-E.&. )o. <-11@=@, (ay 3;, 104?.
3

'i]ero vs. %nri5"e#, ?7 'hil. 117> .imay"ga vs. .imay"ga, 0= 'hil. ;==.

G.R. No. )*16.8+, Re"es v. /an and Justiniani, - ( R0 1.8 &ep"blic of the 'hilippines S#$REME CO#R% (anila %) *+)C $eptember ;@, 10=1 E.&. )o. <-1=0?3 CA%AL2'A R. RE3ES0 petitioner, vs. HO'. B2E'VE'2DO A. %A'0 as @6dge of the Co6rt of First 2nstance of Mani5a0 Branch J222 and FRA'C2SCA R. @#S%2'2A'20 respondents. Jose W. Diokno for petitioner. =orberto J. P!is!mbin- for respondents. LABRADOR0 J.: This is a petition for &ertiorari to review and set aside an order of the Co"rt of ,irst -nstance of (anila, 6on. *ienvenido +. Tan, presiding, in Civil Case )o. 73;14, entitled 8,rancisca &. B"stiniani vs. 2adh"mal .alamal, et al.8, appointing a receiver of the corporation &oxas-Qalaw Textile (ills, -nc. -n said action, plaintiff B"stiniani as!s the co"rt to order the directors of the corporation, 9ointly and severally, to repair the damage ca"sed to the corporation, of which all the plaintiff and defendants are members. The action was filed abo"t Ban"ary of 10=@ and the order for the appointment of the receiver iss"ed on ,ebr"ary 14, 10=@, while the designation of the receiver was made in an order of the co"rt dated +pril ;@, 10=@. -n the complaint in said Civil Case )o. 73;14, it is alleged that the corporation, &oxas-Qalaw Textile (ills, -nc., was organi#ed on B"ne 4, 1047 by defendants Cesar Q. &oxas, +delia Q. &oxas, *en9amin (. &oxas, Bose (a. *arcelona and

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(orris 2ilson, for and on behalf of the following primary principals with the following shareholdings: +delia Q. &oxas, 13@@ Class + shares> -. $herman, 0@@ Class + shares> &obert 2. *orn, 74@ Class + shares and (orris 2ilson, 74@ Class + shares> that the plaintiff holds both Class + and Class * shares and n"mber and val"e thereof are is follows: Class + I 4@ shares, Class * I 1,34@ shares> that on (ay ?, 1041, the *oard of .irectors approved a resol"tion designating one .ayaram as co-manager with the specific "nderstanding that he was to act as defendant 2adh"mal .alamal/s designee, (orris 2ilson was li!ewise designated as co-manager with responsibilities for the management of the factory only, that an office in )ew Cor! was opened for the p"rpose of s"pervising p"rchases, which p"rchases m"st have the "nanimo"s agreement of Cesar Q. &oxas, )ew Cor! resident member of the board of directors, &obert *orn and 2adh"mal .alamal or their respective representatives> that several p"rchases aggregating W3?0,=1?.?= were made in )ew Cor! for raw materials s"ch as greige cloth, rayon and grey goods for the textile mill and shipped to the 'hilippines, which shipment were fo"nd o"t to consist not of raw materials b"t already finished prod"cts, s"ch as, 2est 'oint Qha!i rayon s"iting materials dyed in the piece, finished rayon tafetta in c"bes, cotton eyelets, etc., for which reasons the Central *an! of the 'hilippines stopped all dollar allocations for raw materials for the corporation which necessarily led to the paraly#ation of the operation of the textile mill and its b"siness> that the s"pplier of the aforesaid finished goods was the United Commercial Company of )ew Cor! in which defendant .alamal had interests and the letter of credit for said goods were g"aranteed by the -ndian Commercial Company and the -ndian Traders in which firms defendant .alamal li!ewise held interests> that the resale of the finished goods was the b"siness of the -ndian Commercial Company of (anila, which company co"ld not obtain dollar allocations for importations of finished goods "nder the Central *an! reg"lations> that plaintiff and some members of the board of directors "rged defendants to proceed against .alamal, exposing his offense to the Central *an!, and to initiate s"it against .alamal for his fra"d against the corporation> that defendants ref"sed to proceed against .alamal and instead contin"ed to deal with the -ndian Commercial Company to the damage and pre9"dice of the corporation. The prayer as!s for the appointment of a receiver and a 9"dgment mar!ing defendants 9ointly and severally liable for the damages. +fter a denial of a motion to dismiss and the filing of an answer alleging that the complaint states no ca"se of action, the motion for the appointment of a receiver was set for hearing and s"bse5"ently the co"rt entered the order for the appointment of a receiver. The co"rt fo"nd and held: The second gro"nd of the defendant/s motion to dismiss and or deny the petition is the allegedly want of a ca"se of action of the plaintiff/s complaint. 'hilippine 9"rispr"dence is complete with a"thorities "pholding the principle that this gro"nd for dismissal m"st appear in the face of the complaint itself> and that to determine the s"fficiency of the ca"se of action, only the facts alleged in the complaint and no other, sho"ld be considered> in fine, the test of s"fficiency of ca"se of action is whether or not, admitting the facts alleged in the complaint, the Co"rt co"ld render a valid 9"dgment "pon the same in accordance with the prayer of the petition (e.g., 'aminsan v. Costales, 30 'hil. 4?1, 7?0). The complaint in the instant case abo"nds with arg"ments establishing and s"pporting plaintiff/s ca"se of action for and in behalf of the &oxas-Qalaw

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Textile (ills, -nc. against all the defendants ($ee e.g. paragraphs 7, 4, = and 1 of the Complaint). Ta!ing these paragraphs of the complaint in context, it is clear that the plaintiff has s"fficient averred facts constit"ting a ca"se or basis for a derivative s"it for 8in9"ries to the corporation, as by negligence, mismanagement or fra"d of its directors, are normally dealt with as wrong to the whole gro"p of share holders in their corporate capacity, to be redressed in a s"it by or on behalf of the corporation. %vident from the defendants/ motion to dismiss andDor to deny the petition for receivership is their complete fail"re to come "p with a valid and s"bstantial defense against or denial of the complaint/s allegations of mismanagement, if not the act"al commission of "ltra vires and illegal acts. -nvariably the props of defendants/ motion consist of the "nconvincing co"ntercharges of the plaintiff/s non-observance of the technicalities of o"r proced"ral law and disregard of technical and evidently f"tile intracorporate remedies to redress the violations charged against the defendants. -t is clear that the controlling ma9ority did nothing for two years to protect the interests of corporation. ($ee pars. 4-1, complaint.) The defendants themselves having admitted in open co"rt d"ring the oral disc"ssion of their motion to dismiss and the plaintiff/s motion for receivership that the ma9ority stoc!holders will "nder any condition entertain any s"ggestion of the minority shareholders, the appointment of an independent third party in the management of the corporation becomes imperative for the s"rvival of the company. (Frder dated ,eb. 14, 10=@). Fn +pril ;@, 10=@, the co"rt iss"ed mother order which reads as follows: +fter this incident wherein it was clearly shown that the minority stoc!holders, represented by the plaintiff, have no reco"rse whatsoever before the ma9ority stoc!holders of the company, and after it has been shown that the ma9ority has violated the law by importing into the 'hilippines finished goods instead of raw materials as stip"lated in their license, and since these acts are pre9"dicial to the company beca"se it might res"lt in the cancellation of their license, the Co"rt is of the opinion and so holds that the appointment of a receiver is absol"tely necessary for the protection not only of the rights of the minority b"t also those of the ma9ority stoc!holders of the company. -n the first assignment of error, petitioner claims that respondent B"stiniani neither alleged nor proved the existence of an emergency re5"iring the immediate appoinment of a receiver of the &oxas-Qalaw Textile (ill, -nc.> that the alleged fra"d"lent transaction too! place more than two years before the application for receivership, and so was the ref"sal of the directors to s"e or prosec"te .alamal. This contention is not well fo"nded. +t the hearing of the petition for the appointment of a receiver held on Ban"ary ;@, 10=@, vario"s records of shipments of finished textile goods on dollar allocations for raw materials were exhibited. '"blicity had also been given to the importations of textiles by the corporation, in place of cotton raw materials. The record shows the list of the vario"s doc"ments proving the p"rchase of letters of credit for textiles. These textiles were denied importation and had to be re-exported. The fact of the importation

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of finished textiles on dollar allocations for raw materials in violation of Central *an! reg"lations was, therefore, concl"sively shown. -t is also not denied by petitioner that the allocation of dollars to the corporation for the importation of raw materials was s"spended. -n the eyes of the co"rt below, as well as in o"r own, the importation of textiles instead of raw materials, as well as the fail"re of the *oard of .irectors to ta!e action against those directly responsible for the mis"se of dollar allocations constit"te fra"d, or consent thereto on the part of the directors. Therefore, a breach of tr"st was committed which 9"stified the derivative s"it by a minority stoc!holder on behalf of the corporation. -t is well settled in this 9"risdiction that where corporate directors are g"ilty of a breach of tr"st I not of mere error of 9"dgment or ab"se of discretion I and intracorporate remedy is f"tile or "seless, a stoc!holder may instit"te a s"it in behalf of himself and other stoc!holders and for the benefit of the corporation, to bring abo"t a redress of the wrong inflicted directly "pon the corporation and indirectly "pon the stoc!holders. +n ill"stration of a s"it of this !ind is fo"nd in the case of Pas&!al "s. Del (a+ 5ro+&o (10 'hil. ?3), decided by this Co"rt as early as 1011. -n that case, the *anco %spa]ol-,ilipino s"ffered heavy losses d"e to fra"d"lent connivance between a depositor and an employee of the ban!, which losses, it was contended, co"ld have been avoided if the president and directors had been more vigilant in the administration of the affairs of the ban!. The stoc!holders constit"ting the minority bro"ght a s"it in behalf of the ban! against the directors to recover damages, and this over the ob9ection of the ma9ority of the stoc!holders and the directors. This co"rt held that the s"it co"ld properly be maintained. (+ngeles vs. $antos ME.&. )o. <-7;71;, prom. +"g"st ;1, 10;1N =7 'hil. p. =01). The claim that respondent B"stiniani did not ta!e steps to remedy the illegal importation for a period of two years is also witho"t merit. ."ring that period of time respondent had the right to ass"me and expect that the directors wo"ld remedy the anomalo"s sit"ation of the corporation bro"ght abo"t by their own wrong doing. Fnly after s"ch period of time had elapsed co"ld respondent concl"de that the directors were remiss in their d"ty to protect the corporation property and b"siness. Co"nsel for petitioner claims that respondent B"stiniani was treas"rer of the corporation for sometime and had control of f"nds and this notwithstanding, she had not ta!en the steps to remedy the sit"ation. -n answer we state that the fra"d consisted in importing finished textile instead of raw cotton for the textile mill> the fra"d, therefore, was committed by the manager of the b"siness and was consented to by the directors, evidently beyond reach of respondent. The directors permitted the fra"d"lent transaction to go "np"nished and nothing appears to have been done to remove the erring p"rchasing managers. -n a way the appointment of a receiver may have been tho"ght of by the co"rt below so that the dollar allocation for raw material may be revived and the textile mill placed on an operating basis. -t is possible that if a receiver in which the Central *an! may have confidence is appointed, the dollar allocation for raw material may

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be restored. Claim is made that if a receiver is appointed, the 'hilippine )ational *an! to which the corporation owes considerable s"ms of money might be led to foreclose the mortgage. 'recisely the appointment of a receiver in whom the ban! may have had confidence might rehabilitate the b"siness and bring a restoration of the dollar allocation m"ch needed for raw material and an improvement in the b"siness and assets the corporation, th"s ins"ring the collection of the ban!/s loan. Considering the above circ"mstances we are led to agree with the 9"dge below that the appointment of a receiver was not only expedient b"t also necessary to restore the faith and confidence of the Central *an! a"thorities in the administration of the affairs of the corporation, th"s "ltimately leading to a restoration of the dollar allocation so essential to the operation of the textile mills. The first assignment of error is, therefore, overr"led. -n the second assignment of error, petitioner claims that the management has been changed and the new management has not been afforded a chance to show what it can do. This gro"nd of the petition was not mentioned or raised as a gro"nd of defense or ob9ection to the appointment of a receiver in the co"rt below. -t is only raised for the first time before Us in the petition for &ertiorari. The principle has long ago been en"nciated by Us that an appellate co"rt may not consider any gro"nd of ob9ection that was not raised in the co"rt below. (Tan (achan v. Trinidad, ; 'hil. =?7> &amiro v. Era]o, 47 'hil. 177> da. de illar"el, et al. v. (anila (otor Co., -nc., et al., E.&. )o. <-1@;07, .ec. 1;, 104?> Collector of -nternal &even"e v. %state of ,. '. *"an, et al., E.&. )os. <-117;?-;0, and <-11473-7=, B"ly ;1, 104?> $. .$. 'ict"res, -nc., et al. v. The Co"rt of +ppeals, et al., E.&. )o. <-1@14, Ban"ary 30, 10=@> %lena 'eralta da. de Caina vs. 6on. +ndres &eyes, et al., E.&. )o. <-14103, (ay ;@, 10=@). The s"pposed new management, alleged as a gro"nd for the reversal of the order of the co"rt below appointing a receiver, is not in itself a gro"nd of ob9ection to the appointment of a receiver. The parties fo"nd to be g"ilty of the fra"d, as a ca"se of which receivership proceedings were instit"ted, were the *oard of .irectors, which too! no action to stop the anomalies being perpetrated by the management. *"t it appears that the management m"st have acted directly "nder orders of the *oard of .irectors. The appointment of a new management, therefore, wo"ld not remedy the anomalo"s sit"ation in which the corporation is fo"nd, beca"se s"ch sit"ation was not d"e to the management alone b"t principally beca"se of direction of the *oard of .irectors. The second gro"nd for the petition is, therefore, also witho"t merit. 26%&%,F&%, the co"rt finds that the co"rt below did not commit an ab"se of discretion in appointing a receiver for the corporation and the petition to set aside the order for the appointment of a receiver sho"ld be, as it is hereby, dismissed. 2ith costs against the petitioner. Ben-+on, C.J., Padilla, #eyes, J.B.2., Paredes and De 2eon, JJ., &on&!r.