Cagayan Fishing Development Co. Inc. vs. Sandiko (GR No.

L-43350, statute, or certain acts are required to be done, they are terms of the offer, and
December 23, 1937) must be complied with substantially before legal corporate existence can be
acquired.
FACTS:
That a corporation should have a full and complete organization and existence as an
Manuel Tabora is the registered owner of four parcels of land. To guarantee entity before it can enter into any kind of a contract or transact any business, would
the payment of two loans, he executed in favor of PNB two mortgages over the seem to be self-evident. A corporation, until organized, has no being, franchises or
four parcels of land. Later, a third mortgage on the same lands was executed in faculties. Nor do those engaged in bringing it into being have any power to bind it
favor of Severina Buzon. Thereafter, on May, 1930, Tabora executed a public by contract, unless so authorized by the charter there is not a corporation nor does
document, by virtue of which the four parcels of land were sold to the it possess franchise or faculties for it or others to exercise, until it acquires a
plaintiff company (Cagayan), said to be under process of incorporation. Cagayan complete existence.
filed its article incorporation with the Bureau of Commerce and Industry only on
October, 1930. A year later, the board of directors of Cagayan adopted a resolution
authorizing its president to sell the four parcels of lands in question to Teodoro
Sandiko. Through a deed of sale, Cagayan sold, ceded and transferred to Sandiko
all its right, titles, and interest in and to the four parcels of land. A promissory note
was drawn by the Sandiko in favor of Cagayan, payable after one year from the
date thereof. Sandiko failed to pay. Cagayan brought this action in the Court of First
Instance, which absolved Sandiko.

ISSUE:

Whether or not Cagayan has juridical capacity to enter into contract with Tabora

HELD:

No. The transfer made by Tabora to Cagayan was affected on May 31, 1930 and the
actual incorporation of said company was affected later on October 22, 1930. In
other words, the transfer was made almost five months before the incorporation of
the company. Unquestionably, a duly organized corporation has the power to
purchase and hold such real property as the purposes for which such corporation
was formed may permit and for this purpose may enter into such contracts as may
be necessary. But before a corporation may be said to be lawfully organized, many
things have to be done. Among other things, the law requires the filing of articles of
incorporation. In this case, Cagayan was not yet incorporated when it entered into
a contract of sale. Not being in legal existence then, it did not possess juridical
capacity to enter into the contract. Boiled down to its naked reality, the contract
was entered into not between Tabora and a non-existent corporation, but between
the Manuel Tabora as owner of the four parcels of lands on the one hand and the
same Manuel Tabora, his wife and others, as mere promoters of a corporations on
the other hand. These promoters could not have acted as agent for a projected
corporation since that which has no legal existence could have no agent. A
corporation, until organized, has no life and therefore no faculties.

Additional Notes:

Corporations are creatures of the law, and can only come into existence in the
manner prescribed by law. As has already been stated, general law authorizing the
formation of corporations are general offers to any persons who may bring
themselves within their provisions; and if conditions precedent are prescribed in the
1
G.R. No. L-48627
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners
vs.
THE HONORABLE COURT OF APPEALS and ALBERTO V.
ARELLANO, respondents
TOPIC: Theories on Liabilities for Promoter’s Contract
Author: Pasion
Doctrine: It is not necessary to determine whether it is the promoters of
the proposed corporation, or the corporation itself after its organization,
that shall be responsible for the expenses incurred in connection with the
corporation’s organization. The corporation should alone be liable for its
corporate acts as duly authorized by its officers and directors.
FACTS:
The lower court ordered the petitioners in this case ( initially defendant in the lower
court) to jointly and severally pay the respondent (claimant) the amount of
P50,000.00 for the preparation of the project study and his technical services that
led to the organization of the defendant corporation, plus P10,000.00 attorney's
fees.
The lower court’s ruling is based on the fact that it was upon the request of
defendants Barretto and Garcia that plaintiff handled the preparation of the project
study which project study was presented to defendant Caram so the latter was
convinced to invest in the proposed airlines. The project study was revised for
purposes of presentation to financiers and the banks. It was on the basis of this
study that defendant corporation was actually organized and rendered operational.
Defendants Garcia and Caram, and Barretto became members of the Board and/or
officers of defendant corporation. Since defendant Barretto was the moving spirit in
the pre-organization work of defendant corporation based on his experience and
expertise, hence he was logically compensated in the amount of P200,000.00 shares
of stock not as industrial partner but more for his technical services that brought to
fruition the defendant corporation. Thus the plaintiff should be similarly
compensated not only for having actively participated in the preparation of the
project study for several months and its subsequent revision but also in his having
been involved in the pre-organization of the defendant corporation, in the
preparation of the franchise, in inviting the interest of the financiers and in the
training and screening of personnel.
The petitioners contend that the order of the trial court has no support in fact and
law because they had no contract whatsoever with the private respondent regarding
the above-mentioned services. Their position is that as mere subsequent investors
in the corporation that was later created, they should not be held solidarily liable
with the Filipinas Orient Airways, a separate juridical entity, and with Barretto and
Garcia, their co-defendants in the lower court, who were the ones who requested
the said services from the private respondent.
ISSUE:
Whether or not the petitioners themselves are also and personally liable for such
expenses and, if so, to what extent.
HELD:
NO. They are not liable.
Petitioners were not involved in the initial stages of the organization of the airline,
which were being directed by Barretto as the main promoter. It was he who was
putting all the pieces together, so to speak. The petitioners were merely among the
financiers whose interest was to be invited and who were in fact persuaded, on the
strength of the project study, to invest in the proposed airline.
In the light of these circumstances, we hold that the petitioners cannot be held
personally liable for the compensation claimed by the private respondent for the
services performed by him in the organization of the corporation. To repeat, the
petitioners did not contract such services. It was only the results of such services
that Barretto and Garcia presented to them and which persuaded them to invest in
the proposed airline. The most that can be said is that they benefited from such
services, but that surely is no justification to hold them personally liable therefor.
Otherwise, all the other stockholders of the corporation, including those who came
in later, and regardless of the amount of their share holdings, would be equally and
personally liable also with the petitioners for the claims of the private respondent.
The petition is rather hazy and seems to be flawed by an ambiguous ambivalence.
Our impression is that it is opposed to the imposition of solidary responsibility upon
the Carams but seems to be willing, in a vague, unexpressed offer of compromise,
to accept joint liability. While it is true that it does here and there disclaim total
liability, the thrust of the petition seems to be against the imposition of solidary
liability only rather than against any liability at all, which is what it should have
categorically argued.
2
HALL v. PICCIO (1905) in any private suit to which such corporation may be a party. Such inquiry
may be made by the Solicitor General in a quo warranto proceeding.

Petitioner: C. Arnold Hall and Bradley P. Hall Issue: W/N the CFI had jurisdiction in the said case and to decree the dissolution of
Respondents: Edmundo S. Piccio, Judge of CFI Leyte, Fred Brown, Emma Brown, the company – Yes.
Hipolita Capuciong, in his capacity as Receiver of the Far Eastern Lumber And
Commercial Co., Inc.,
Held: YES.
Author: Plan
- The SC held that the said provision is not applicable in this case:
Topic: Corporate Contract Law; De Facto Corporation (Sec. 20); Elements - First, not having obtained the certificate of incorporation, the Far Eastern
Doctrines: Elements for Existence of De Facto Corporation: Lumber and Commercial Co. — even its stockholders — may not probably
(1) Valid law under which incorporated; claim "in good faith" to be a corporation.
(2) Attempt in good faith to incorporate; “colorable compliance;” - It is the issuance of a certificate of incorporation by the Director of the
(3) Assumption of corporate powers; and Bureau of Commerce and Industry which calls a corporation into being. The
(4) Issuance of certificate of incorporation immunity if collateral attack is granted to corporations "claiming in good
faith to be a corporation under this act." Such a claim is compatible with
Facts: the existence of errors and irregularities; but not with a total or substantial
- 28 May 1947, the petitioners and private respondents signed and disregard of the law. Unless there has been an evident attempt to comply
acknowledged in Leyte, the Article of Incorporation (AoI) of the Far Eastern with the law the claim to be a corporation "under this act" could not be
Lumber and Commercial Co., Inc., organized to engage in a general lumber made "in good faith."
business to carry on as general contractors, operators and managers, etc. - Second, the case was not a suit in which the corporation is a party. It is a
Attached was an affidavit of the treasurer stating that 23,428 shares of litigation between stockholders of the alleged corporation, for the purpose
stock had been subscribed and fully paid with certain properties transferred of obtaining its dissolution. Even the existence of a de jure corporation may
to the corporation described in a list appended thereto. be terminated in a private suit for its dissolution between stockholders,
- Immediately after the execution of said AoI, the corporation proceeded to without the intervention of the state.
do business with the adoption of by-laws and the election of its officers.
- 2 Dec 1947, the said AoI were filed in SEC for the issuance of the Disposition: Petition DISMISSED.
corresponding certificate of incorporation.
- 22 Mar 1948, while pending, the respondents filed before CFI Leyte Other Notes: (Yung elements nakita ko lang sa internet. Wala talaga siya sa case.)
alleging, among other things, that the Far Eastern Lumber and Commercial
Co. was an unregistered partnership; that they wished to have it dissolved
because of bitter dissension among the members, mismanagement and
fraud by the managers and heavy financial losses.
- The petitioners filed a motion to dismiss (MTD), contesting the court's
jurisdiction and the sufficiently of the cause of action. Judge Piccio denied
the MTD and ordered the dissolution of the company; and at the request of
plaintiffs, appointed of the properties thereof, upon the filing of a P20,000
bond.
- Petitioners offered to file a counter-bond for the discharge of the receiver,
but the judge refused to accept the offer and to discharge the receiver.
Hence, this petition.

- The petitioner contends that inasmuch as the Far Eastern Lumber and
Commercial Co., is a de facto corporation. Hence, sec 20 (sec 19 dati) of
the Corporation Code applies, and therefore the court had no jurisdiction to
take cognizance of said case:
BP blg. 68. Sec. 20. De facto corporations. – The due incorporation of any CORPORATION BY ESTOPPEL DOCTRINE
corporation claiming in good faith to be a corporation under this Code, and
its right to exercise corporate powers, shall not be inquired into collaterally SALVATIERRA V. GARLITOS (1958)

3
Petioner: Manuela T. Vda de Salvatierra
Respondent: Hon. Lorenzo Garlitos as Judge of CFI Leyte and Segundino Refuerzo
Author: Daniela
Doctrine: While as a general rule, a person who deals with an association in such a
way to recognize its existence as a corporate body is estopped from denying the
same in an action arising out of such transaction, yet this doctrine may not be held
to be applicable where fraud takes a part in the said transaction.
Issue: Whether or not Refeurzo can be held personally liable?
Facts:
Ruling + Ratio: Yes.
 Manuela Salvatierra owns a parcel of land located in Maghobas, Poblacion,
Burauen, leyte.
 March 7, 1954 Salvatierra entered into a contract of lease with Philippine
Fibers Producers Co, Inc., allegedly a corporation duly organized and
existing under the Philippine laws, domiciled in Burauen, Leyte and
represented by Segundino Refuerzo as president.
 It was stated in the contract that the period of lease will be 10 years, the
land will be planted with kenaf, ramie or other crops suitable to the soil and
that the lessee will declare the income derived from the harvest and that
the lessor will be entitled to 30 % of the net income without being
responsible for the cost of production.
 Salvatierra filed a complaint with the CFI against Refuerzo and Philippine
Fibers. That the company planted kenaf on the 3 hectares of land and they
refused to make an accounting and deliver her share, estimated that the
gross income was P4,500 and the deductible expense was P1,000. The
refusal of the company to do their obligation creates a violation thereof and
rescission was but proper.
 Refuerzo failed to file an answer, declared in default and the court accepted
the evidence of Salvatierra. The court rendered a judgement in favour of
Salvatierra stating that Refuerzo and company should render an
accounting, give Salvatierra her share and the contract was rescinded. No
appeal was made, it was perfected and upon motion of Salvatierra the
court issued a writ of execution.
 Since there was no available property of the company to be attached, the
Sheriff attached 3 parcels of land of Refuerzo.
 Refuerzo filed a motion stating that the decision was null and void with
respect to him being that there was no allegation as to his personal liability
and it should be limited as to the liability of the company. It was granted
and the sheriff was ordered to return the property, as there was no
evidence that he is personally liable.
 Salvatierra petition for relief was denied. She instituted the present petition
to declare the ruling of the said judge as null and void and that the judge
acted with grave abuse of discretion.
 While as a general rule, a person who deals with an association in such a
way to recognize its existence as a corporate body is estopped from
denying the same in an action arising out of such transaction, yet this
doctrine may not be held to be applicable where fraud takes a part in the
said transaction. In the instant case, on plaintiff's charge that she was
unaware of the fact that the defendant corporation had no juridical
personality, its president gave no confirmation or denial of the same and
the circumstance surrounding the execution of the contract lead to the
inescapable conclusion that plaintiff was really made to believe that such
corporation was duly organized in accordance with law.
 A corporation when registered has a juridical personality separate and
distinct from its component members or stockholders and officers, such
that a corporation cannot be held liable for the personal indebtedness of a
stockholder even if he should be its president (Walter A. Smith Co. vs.
Ford, SC-G. R. No. 42420) and conversely, a stockholder cannot be held
personally liable for any financial obligation by the corporation in excess of
his unpaid subscription. But this rule is understood to refer merely to
registered corporations and cannot be made applicable to the liability of
members of an unincorporated association. The reason behind this doctrine
is obvious— an unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes of a
corporation as provided by law, it cannot create agents or confer authority
on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk.
And as it is an elementary principle of law that a person who acts as an
agent without authority or without a principal is himself regarded as the
principal, possessed of all the right and subject to all the liabilities of a
principal, a person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for other acts
performed as such agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II
Tolentino's Commercial Laws of the Philippines, Fifth Ed., p. 689-690).
4
Other Notes: more than 6 months after the judgment or order was rendered, both
of which must be satisfied. In this case, Refuerzo filed it after 7
 Rule 38, Section 3, of the Rules of Court treats of 2 periods within
months and 23 days, it was clearly made beyond the prescriptive
which a petition for relief may be filed. The petition must be filed
period provided by the rules.
within 60 days after the petitioner learns of the judgment and not

5
 Asia Banking Corp v. Standard Products 46 Phil 145 (1924)

 Petitioner: Asia Banking Corporation
 Defendant: Standard tProducts Co., Inc.

 Topic: Corporation by Estoppel Doctrine
 Doctrine: The general rule is that in the absence of fraud a person who has contracted
or otherwise dealt with an association in such a way as to recognize and in effect admit
its legal existence as a corporate body is thereby estopped to deny its corporate
existence in any action leading out of or involving such contract or dealing, unless its
existence is attacked for cause which have arisen since making the contract or other
dealing relied on as an estoppel and this applies to foreign as well as to domestic
corporations.

 Facts:
 Standard Products borrowed PhP 37,757.22 from Asia Banking Corporation through
a promissory note executed last November 28, 1921. Defendant partly paid for their
loan. But when it failed to pay the remaining amount, Asia Banking instituted an action
to recover sum of PhP 24,147.34. The Court rendered judgment in favour of Asia
Banking. From this judgment, Standard Products appeals. Defendant contends that Asia
Banking failed to prove its corporate existence and the lower court erred in finding the
party, corporation with juridical personality.

 Issue: Whether Standard Products is estopped from denying the corporate existence of
Asia Banking

 Held: Yes

 The general rule is that in the absence of fraud a person who has contracted or
otherwise dealt with an association in such a way as to recognize and in effect admit its
legal existence as a corporate body is thereby estopped to deny its corporate existence
in any action leading out of or involving such contract or dealing, unless its existence is
attacked for cause which have arisen since making the contract or other dealing relied
on as an estoppel and this applies to foreign as well as to domestic corporations. (14 C.
J., 227; Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.)

 The defendant having recognized the corporate existence of the plaintiff by making
a promissory note in its favor and making partial payments on the same is therefore
estopped to deny said plaintiff's corporate existence. It is, of course, also estopped from
denying its own corporate existence. Under these circumstances it was unnecessary for
the plaintiff to present other evidence of the corporate existence of either of the parties.
It may be noted that there is no evidence showing circumstances taking the case out of
the rules stated.

Disposition: Appeal was denied.

6
Paz v. New International Environmental Universality, Inc.,

Section 21 of the Corporation Code explicitly provides that one who assumes an obligation to an
ostensible corporation, as such, cannot resist performance thereof on the ground that there was in
fact no corporation. (Doctrine of Estoppel)

FACTS:

! Priscillo Paz, entered into a MOA with Captain Allan J. Clarke, president of

International Environmental University , for the use of the aircraft hangar space at the said airport
exclusively for “company aircraft/helicopter” for a period of four years, unless pre-terminated with 6-
months notice.

By letters to “MR ALLAN J. CLARK, International Environmental Universality Inc. , Paz threatened to
cancel the contract since the company was using it to park trucks and equipments instead of aircraft.
More letters were sent demanding compliance with the MOA, to no avail.

Paz then caused disconnection of electric and telephone lines of respondent’s premises; and ordered
security guards to prevent respondent’s employees from entering the premises - without giving
respondent the 6-month notice as required under the MOA

Respondent then filed an action for breach of contract against Paz, alleging that his acts violated the
terms of the MOA

In his answer, Paz alleged that the company had no cause of action since he dealt with Mr. Allan J.
Clark in his personal capacity; there was no need to wait for the expiration of the contract since the
company was performing high risk works in the leased premises and the six-month notice was given
thru his letters given to Mr. Allan J. Clarke.

RTC rendered judgment in favour of the corporation

CA dismissed Priscillo’s appeal, ruling that, while there was no corporate entity at the time of the
execution of the MOA on March 1, 2000 when Capt. Clarke signed as “President of International
Environmental University,” petitioner is nonetheless estopped from denying that he had contracted
with respondent as a corporation, having recognized the latter as the “Second Party” in the MOA that
“will use the hangar space exclusively for company aircraft

7
GR. No. 117010 April 18, 1997 (1) the accused engages in the recruitment and placement of workers, as defined under Article 13 (b)
or in any prohibited activities under Article 34 of the Labor Code;
PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs. (2) accused has not complied with the guidelines issued by the Secretary of Labor and Employment,
ENGR. CARLOS GARCIA y PINEDA, PATRICIO BOTERO y VALES, LUISA MIRAPLES (at particularly with respect to the securing of a license or an authority to recruit and deploy workers,
large), accused, either locally or overseas; and

PATRICIO BOTERO y VALES, accused-appellant
Facts
The complainantsEdgardo Belen, Gloria Silaras, Alfredo Estinoso, Jose Erwin Esclada, Elsa
Delubio and Ariel Rivada testified that on various dates in March 1992, they went to Ricorn Philippine
International Shipping Lines, Inc. an entity which recruits workers for overseas employment. They
applied as seamen, cook, waiter, chambermaid or laundrywoman overseas. Esclada applied to
accused Botero. All the other complainants coursed their application to accused Garcia who
represented himself as president of Ricorn. Complainants were required to submit their NBI and
police clearance, birth certificate, passport, seaman’s book and Survival of Life at Sea (SOLAS). As
they did not have the last three (3) documents, they were asked to pay five thousand pesos
(P5,000.00) as processing fee. They paid to Ricorn’s treasurer, Luisa Miraples. They were issued
receipts signed by Miraples. The receipts were under Ricorn’s heading.
Garcia and Botero assured complainants of employment after the May 11, 1992 election.
Accused Botero, as the vice-president of Ricorn, followed-up their passports, seaman’s book and
SOLAS. He told some applicants to wait for their papers and informed the others that their papers
were in order.
After the election, complainants went back to Ricorn to check on their applications. They
discovered that Ricorn had abandoned its office at Jovan Building for non-payment of rentals. Hoping
against hope, they went back to the building several times to recover their money. Their persistence
was to no avail for Garcia and Botero were nowhere to be found. They then went to the Mandaluyong
Police Station and filed their complaints. They also checked with the Securities and Exchange
Commission (SEC) and discovered that Ricorn was not yet incorporated. They also found that Ricorn
was not licensed by the Department of Labor and Employment (DOLE) to engage in recruitment
activities.
RTC: Garcia and Botero were held guilty for the crime of Illegal Recruitment.
Issue: WON Garcia and Botero should be held liable for the crime of Illegal Recruitment.
(3) accused commits the same against three (3) or more persons, individually or as a group.
It is a fact that Ricorn had no license to recruit from DOLE. In the office of Ricorn, a notice
was posted informing job applicants that its recruitment license is still being processed. Yet, Ricorn
already entertained applicants and collected fees for processing their travel documents.
For engaging in recruitment of workers without obtaining the necessary license from the
POEA, Botero should suffer the consequences of Ricorn’s illegal act for “(i)f the offender is a
corporation, partnership, association or entity, the penalty shall be imposed upon the officer or
officers of the corporation, partnership, association or entity responsible for violation; . . .
The evidence shows that appellant Botero was one of the incorporators of Ricorn. For reasons that
cannot be discerned from the records, Ricorn’s incorporation was not consummated. Even then,
appellant cannot avoid his liabilities to the public as an incorporator of Ricorn. He and his co-accused
Garcia held themselves out to the public as officers of Ricorn. They received money from applicants
who availed of their services. They are thus estopped from claiming that they are not liable as
corporate officials of Ricorn. Section 25 of the Corporation Code provides that “(a)ll persons who
assume to act as a corporation knowing it to be without authority to do so shall be liable as general
partners for all the debts, liabilities and damages incurred or arising as a result thereof: Provided,
however, That when any such ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack
of corporate personality.

Ruling: YES.
Botero engaged in recruitment and placement activities in that he, through Ricorn, promised
the complainants employment abroad. Under the Labor Code, recruitment and placement refers to
“any act of canvassing, enlisting, contracting, transporting, utilizing, hiring or procuring workers, and
includes referrals, contract services, promising or advertising for employment, locally or abroad
whether for profit or not: Provided, That any person or entity which in any manner, offers or promises
for a fee employment to two or more persons shall be deemed engaged in recruitment, and
placement.”
All the essential elements of the crime of illegal recruitment in large scale are present in this
case, to wit:

8
International Express Travel & Tours Services, Inc. v. CA
Petitioner: International Express Travel & Tours Services, Inc.
Respondent/s: CA, Henri Kahn, Philippine Football Federation
Topic: Two Levels: (i) with “Fraud”, and (ii) without “Fraud”
Doctrine: It is a settled principle in corporation law that any person acting or purporting to act on
behalf of a corporation which has no valid existence assumes such privileges and becomes personally
liable for contract entered into or for other acts performed as such agent.
Federation was defectively incorporated, the petitioner cannot deny the corporate existence of the
Federation because it had contracted and dealt with the Federation in such a manner as to recognize
and in effect admit its existence. The doctrine of corporation by estoppel is mistakenly applied by the
respondent court to the petitioner. The application of the doctrine applies to a third party only when
he tries to escape liability on a contract from which he has benefited on the irrelevant ground of
defective incorporation.16 In the case at bar, the petitioner is not trying to escape liability from the
contract but rather is the one claiming from the contract.

Facts:

The petitioner and Federation entered into an agreement wherein the former will be the travel agent
of the latter. Petitioner secured the airline tickets for the trips of the athletes and officials of the
Federation to the South East Asian Games in Kuala Lumpur as well as various other trips to the
People's Republic of China and Brisbane. The total cost of the tickets amounted to P449,654.83. The
Federation made partial payments in the total amount of P176,467.50. Petitioner wrote the
Federation, through the private respondent a demand letter requesting for the unpaid balance. Henri
Kahn issued a personal check in the amount of P50,000 as partial payment for the outstanding
balance of the Federation. Thereafter, no further payments were made despite repeated demands.

Petitioner sued Henri Kahn in his personal capacity and as President of the Federation and impleaded
the Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid
balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly
guaranteed the said obligation. Henri Kahn averred that the petitioner has no cause of action against
him either in his personal capacity or in his official capacity as president of the Federation. He
maintained that he did not guarantee payment but merely acted as an agent of the Federation which
has a separate and distinct juridical personality.

Issue: WON Henri Kahn is not personally liable for the unpaid balance to petitioner.

Ruling: NO.

Henri Kahn is personally liable for the unpaid balance. It is a basic postulate that before a corporation
may acquire juridical personality, the State must give its consent either in the form of a special law or
a general enabling act. We cannot agree with the view of the appellate court and the private
respondent that the Philippine Football Federation came into existence upon the passage of these
laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the Philippine Football
Federation. These laws merely recognized the existence of national sports associations and provided
the manner by which these entities may acquire juridical personality.

The Court ruled that the Philippine Football Federation is not a national sports association within the
purview of the aforementioned laws and does not have corporate existence of its own. Thus being
said, it follows that private respondent Henry Kahn should be held liable for the unpaid obligations of
the unincorporated Philippine Football Federation.

It is a settled principle in corporation law that any person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and becomes personally liable for
contract entered into or for other acts performed as such agent. As president of the Federation, Henri
Kahn is presumed to have known about the corporate existence or non-existence of the Federation.
We cannot subscribe to the position taken by the appellate court that even assuming that the
9
Pioneer Insurance & Surety Corporation vs Court of Appeals
Jacob Lim was the owner of Southern Air Lines, a single proprietorship. In 1965, Lim convinced
Constancio Maglana, Modesto Cervantes, Francisco Cervantes, and Border Machinery and Heavy
Equipment Company (BORMAHECO) to contribute funds and to buy two aircrafts which would form
part a corporation which will be the expansion of Southern Air Lines. Maglana et al then contributed
and delivered money to Lim.
But instead of using the money given to him to pay in full the aircrafts, Lim, without the knowledge of
Maglana et al, made an agreement with Pioneer Insurance for the latter to insure the two aircrafts
which were brought in installment from Japan Domestic Airlines (JDA) using said aircrafts as security.
So when Lim defaulted from paying JDA, the two aircrafts were foreclosed by Pioneer Insurance.
It was established that no corporation was formally formed between Lim and Maglana et al.
ISSUE: Whether or not Maglana et al must share in the loss as general partners.
HELD: No. There was no de facto partnership. Ordinarily, when co-investors agreed to do business
through a corporation but failed to incorporate, a de facto partnership would have been formed, and
as such, all must share in the losses and/or gains of the venture in proportion to their contribution.
But in this case, it was shown that Lim did not have the intent to form a corporation with Maglana et
al. This can be inferred from acts of unilaterally taking out a surety from Pioneer Insurance and not
using the funds he got from Maglana et al. The record shows that Lim was acting on his own and not
in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare parts.
Other digest:
Facts:
1. In 1965, Jacob S. Lim was engaged in the airline business as owner-operator of Southern Air
Lines (SAL) a single proprietorship.
2. On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and
executed a sales contract for the sale and purchase of two DC-3A Type aircrafts and one set of
necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments.
3. On May 22, 1965, Pioneer Insurance and Surety Corporation as surety executed and issued its
Surety Bond in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and
spare parts.
4. It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco
and Modesto Cervantes (Cervanteses) and ConstancioMaglana contributed some funds used in the
purchase of the aircrafts and spare parts.
5. The funds were supposed to be their contributions to a new corporation proposed by Lim to
expand his airline business.
6. They executed two separate indemnity agreements in favor of Pioneer, one signed by Maglana
and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses.
7. The indemnity agreements stipulated that the indemnitors principally agree and bind
themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against
any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind
and nature which Pioneer may incur in consequence of having become surety upon the bond/note and
to pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts of
money which it or its representatives should or may pay or cause to be paid or become liable to pay
on them of whatever kind and nature.
8. Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of
chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein
that Lim transfer and convey to the surety the two aircrafts.
9. Lim defaulted on his subsequent installment payments prompting JDA to request payments
from the surety. Pioneer paid a total sum of P298,626.12.
10. Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage.
11. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners
of the aircrafts.
12. A decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint
against all other defendants.
Issues:
What legal rules govern the relationship among co-investors whose agreement was to do business
through the corporate vehicle but who failed to incorporate the entity in which they had chosen to
invest?
How are the losses to be treated in situations where their contributions to the intended 'corporation'
were invested not through the corporate form?
Ruling:
While it has been held that as between themselves the rights of the stockholders in a defectively
incorporated association should be governed by the supposed charter and the laws of the state
relating thereto and not by the rules governing partners, it is ordinarily held that persons who
attempt, but fail, to form a corporation and who carry on business under the corporate name occupy
the position of partners inter se. Thus, where persons associate themselves together under articles to
purchase property to carry on a business, and their organization is so defective as to come short of
creating a corporation within the statute, they become in legal effect partners inter se, and their
rights as members of the company to the property acquired by the company will be recognized. So,
where certain persons associated themselves as a corporation for the development of land for
irrigation purposes, and each conveyed land to the corporation, and two of them contracted to pay a
third the difference in the proportionate value of the land conveyed by him, and no stock was ever
issued in the corporation, it was treated as a trustee for the associates in an action between them for
an accounting, and its capital stock was treated as partnership assets, sold, and the proceeds
distributed among them in proportion to the value of the property contributed by each. However, such
a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of
10
partners, as between themselves, when their purpose is that no partnership shall exist, and it should
be implied only when necessary to do justice between the parties; thus, one who takes no part except
HELD:
to subscribe for stock in a proposed corporation which is never legally formed does not become a
partner with other subscribers who engage in business under the name of the pretended corporation,
so as to be liable as such in an action for settlement of the alleged partnership and contribution. A
partnership relation between certain stockholders and other stockholders, who were also directors,
will not be implied in the absence of an agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter.
It is therefore clear that the petitioner never had the intention to form a corporation with the
respondents despite his representations to them. This gives credence to the cross-claims of the
respondents to the effect that they were induced and lured by the petitioner to make contributions to
a proposed corporation which was never formed because the petitioner reneged on their agreement.
- Yes. From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had
decided to engage in a fishing business, which they started by buying boats worth P3.35
million, financed by a loan secured from Jesus Lim. In their Compromise Agreement, they
subsequently revealed their intention to pay the loan with the proceeds of the sale of the
boats, and to divide equally among them the excess or loss. These boats, the purchase and
the repair of which were financed with borrowed money, fell under the term “common fund”
under Article 1767. The contribution to such fund need not be cash or fixed assets; it could
be an intangible like credit or industry. That the parties agreed that any loss or profit from
the sale and operation of the boats would be divided equally among them also shows that
they had indeed formed a partnership.

No de facto partnership was created among the parties which would entitle the petitioner to a
reimbursement of the supposed losses of the proposed corporation. The record shows that the
petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting
the sale of the airplanes and spare parts.
LIM TONG LIM vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC.
Petitoner: Lim Tong Lim
Respondent: Philippine Fishing Gear Industries, Inc.
- Lim Tong Lim cannot argue that the principle of corporation by estoppels can only
be imputed to Yao and Chua. Unquestionably, Lim Tong Lim benefited from the use
of the nets found in his boats, the boat which has earlier been proven to be an
asset of the partnership. Lim, Chua and Yao decided to form a corporation.
Although it was never legally formed for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting parties in representation of it.
Clearly, under the law on estoppel, those acting on behalf of a corporation and
those benefited by it, knowing it to be without valid existence, are held liable as
general partners.

DOCTRINE: Clearly, under the law on estoppel, those acting on behalf of a corporation and
those benefited by it, knowing it to be without valid existence, are held liable as general
partners.

FACTS:
- It was established that Lim Tong Lim requested Peter Yao to engage in commercial fishing
with him and one Antonio Chua. The three agreed to purchase two fishing boats but since
they do not have the money they borrowed from one Jesus Lim (brother of Lim Tong Lim).
They again borrowed money and they agreed to purchase fishing nets and other fishing
equipments. Now, Yao and Chua represented themselves as acting in behalf of “Ocean Quest
Fishing Corporation” (OQFC) they contracted with Philippine Fishing Gear Industries (PFGI)
for the purchase of fishing nets amounting to more than P500k. They were however unable
to pay PFGI and so they were sued in their own names because apparently OQFC is a non-
existent corporation. Chua admitted liability and asked for some time to pay. Yao waived his
rights.
- Contention of the petitioner: Lim Tong Lim however argued that he’s not liable because
he was not aware that Chua and Yao represented themselves as a corporation; that the two
acted without his knowledge and consent.

ISSUE: Whether or not Lim Tong Lim is liable.

11

Phil. Trust Co. vs Rivera
Petitioner: PHILIPPINE TRUST COMPANY
Respondent: MARCIANO RIVERA
DOCTRINE: It is established doctrine that subscription to the capital of a corporation constitute a
fund to which creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for
the payment of its debts.
FACTS:
 The Cooperativa Naval Filipina was duly incorporated under the laws of the Philippine.
 Mariano Rivera was one of the incorporators of the company.
 The articles of incorporation were duly registered in the Bureau of Commerce and Industry.
 In the course of time, the company became insolvent and went into the hands of the
Philippine Trust Company as assignee in bankruptcy.
 Philippine Trust Company instituted an action to recover one-half of the unpaid stock
subscription of the defendant.
 Defendant contends that a resolution was adopted to the effect that the capital should be
reduced by 50 per centum and the subscribers is released from the obligation to pay any
unpaid balance of their subscription in excess of 50 per centum of the same.
ISSUE: Whether or not the reduction of the capital by releasing the subscribers from payment of their
subscription is valid.
RULING: NO
It is established doctrine that subscription to the capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its
debts.
A corporation has no power to release an original subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner an under the conditions prescribed by
the statute or the charter or the articles of incorporation. Moreover, strict compliance with the
statutory regulations is necessary
In this case, the resolution releasing the shareholders from their obligation to pay 50 per centum of
their respective subscriptions was an attempted withdrawal of so much capital from the fund upon
which the company's creditors were entitled ultimately to rely and, having been effected without
compliance with the statutory requirements, was wholly ineffectual.
12
HALLEY VS PRINTWELL Held: YES
Petitioner: Donnina Halley It is established doctrine that subscriptions to the capital of a corporation
constitute a fund to which creditors have a right to look for satisfaction of their
Respondent: Printwell, Inc.
claims and that the assignee in insolvency can maintain an action upon any unpaid
Author: Barba stock subscription in order to realize assets for the payment of its debts.

The creditor is allowed to maintain an action upon any unpaid subscription

Topic: Nature and coverage of Trust Fund Doctrine
Doctrine:
Subscriptions to the capital of a corporation constitute a fund to which creditors
have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to
realize assets for the payment of its debts.
Facts:
and thereby steps into the shoes of the corporation for the satisfaction of its debts.
To make them compelled to contribute payment of its debts, it is only necessary to
establish that stockholders have not in good faith paid the value of the stocks of the
corporation.
In this case, the alleged full payment of petitioner on her stock subscription
was not established because it appears that she paid by means of a check. As a rule
since check is not a legal tender, defendant must establish that not only they
delivered the checks but also that these checks were encashed. Also, the documents
presented had no bearing to the issue of payment of subscription because, they did
not by themselves, prove payment. Here, petitioner was liable pursuant to the trust
fund doctrine for the corporate obligation of BMPI by virtue of her subscription being
still unpaid. Printwell, as BMPI’s creditor, had a right to reach her unpaid
subscription in satisfaction of its claim.

1. Petitioner was an incorporator and original director of Business Media Philippines

which has an authorized capital stock of 3,000,000 with 300,000 shares.

2. Respondent on the other hand is engaged in commercial and industrial printing.

3. On October 1988-July 1989, BMPI commissioned Printwell for printing its

magazine with wrappers and subscription cards that BMPI published and sold. Also,
Printwell extended a 30-day credit accommodation to BMPI.

4. BMPI thereafter placed its orders on credit for Php 316,342.76 but it only paid
Php 25,000.00.

5. Printwell then filed a complaint suing BMPI for collection of the unpaid balance. It
impleaded the defendants as the original stockholders and incorporators to recover
the unpaid subscription.

6. Defendants averred however that they already paid the subscriptions in full and
that BMPI has a separate personality from those of its stockholder. For this purpose
BMPI submitted official receipt together with other documents such as a) audit
report; b) BMPI balance sheet; c) income statement; d) BMPI income tax return; e)
journal voucher; f) cash deposit slip; g) BPI savings account.

7. RTC ruled in favor of Printwell. It rejected the allegation of full payment because
of the irregularity of the receipts. It also observed that defendants used BMPI
corporate personality to evade payment and create injustice. RTC also held that
applying the trust fund doctrine, stockholders are liable pro rata.

8. Sps Halley and Vineza appealed. CA Affirmed RTC’s decision. Hence, this petition
for review.

Issue: Whether or not Printwell can enforce its claim against the stockholders.

13
ONG YONG VS TIU
FACTS:
 Construction of Masagana Citimall which was owned by First Landlink Asia
Development Corporation (FLADC) and in turn owned by respondents were
threatened with stoppage due to financial capabilities.
 Ongs and Tius entered into Pre-Subscription Agreement where they agreed
to have equal shareholdings of 1,000,000 shares at P100 par value each.
Ong paid P190M to settle the indebtedness of FLADC.
 Tius being the original owner, subscribe to an additional 549,800 shares in
addition to their already existing subscription of 450,200 shares. Additional
shares were in the following form: contribute to FLADC a 4-storey
building P20M (for 200K shares)and 2 parcels of land P30M (for 300K
shares) and P49.8M (for 49,800 shares). Ong added P100M share in
addition to the amount used to settle the indebtedness
 Tius were given the right to nominate the Vice-President and the Treasurer
plus 5 directors while Ongs nominate the President, the Secretary and 6
directors (including the chairman) to the board of directors of FLADC and
right to manage and operate the mall.
 Tius then rescinded their agreement and filed it to the SEC for confirmation
which it later on approved.
 Ongs filed reconsideration that their P70M was not a premium on capital
stock but an advance loan
 SEC en banc affirmed it was a premium on capital stock
 While CA, on the other hand mentioned that Ongs and the Tius were in pari
delicto but, "for practical considerations," that is, their inability to work
together, it was best to separate the two groups by rescinding the Pre-
Subscription Agreement, returning the original investment of the Ongs and
awarding practically everything else to the Tius.
 Tius claim that they are not provided appropriate offices and certain
provisions in the agreement were breached.
ISSUE:
WON the Tius could legally rescind the Pre-Subscription Agreement
RULING + RATIO:
NO. The court ruled that the subscription contract was between Ong and FLADC.
The act of providing appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-
President and Treasurer, respectively, had no bearing on their obligations under the
Pre-Subscription Agreement since the obligation pertained to FLADC itself. The
initial objective was to raise the amount needed to settle the indebtedness.
What the law requires is that the breach of contract should be so "substantial or
fundamental" as to defeat the primary objective of the parties in making the
agreement. Since the cash and other contributions now sought to be returned
already belong to FLADC, an innocent third party, said remedy may no longer be
availed of under the law.
Considering therefore that the real contracting parties to the subscription agreement
were FLADC and the Ongs alone, a civil case for rescission on the ground of breach
of contract filed by the Tius in their personal capacities will not prosper. Assuming it
had valid reasons to do so, only FLADC had the legal personality to file suit
rescinding the subscription agreement with the Ongs inasmuch as it was the real
party in interest therein.
The Corporation Code, SEC rules and even the Rules of Court provide for
appropriate and adequate intra-corporate remedies, other than rescission, in
situations like this. Rescission is certainly not one of them, specially if the party
asking for it has no legal personality to do so and the requirements of the law
therefor have not been met.
Even assuming that Tius have the legal standing to sue, said action will nevertheless
still not prosper since rescission will violate the Trust Fund Doctrine (see notes
below) and the procedures for the valid distribution of assets and property under
the Corporation Code.
Further, the court also ruled that a judicial order to decrease capital stock without
the assent of FLADC's directors and stockholders is a violation of the "business
judgment rule".
Such an act infringes on the law on reduction of capital stock. Ordering the return
and distribution of the Ongs' capital contribution without dissolving the corporation
or decreasing its authorized capital stock is not only against the law but is also
prejudicial to corporate creditors who enjoy absolute priority of payment over and
above any individual stockholder thereof.
The Ongs' shortcomings were far from serious and certainly less than substantial;
they were in fact remediable and correctable under the law. It would be totally
against all rules of justice, fairness and equity to deprive the Ongs of their interests
on petty and tenuous grounds.
DISPOSITION: MOTION FOR RECONSIDERATION GRANTED
OTHER NOTES: Section 60 Title VII
Any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription within the meaning
of this Title, notwithstanding the fact that theparties refer to it as a purchase or
some other contract
Trust fund doctrine are subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of
their claims. It allows the distribution of corporate capital only in three instances:
(1) amendment of the Articles of Incorporation to reduce the authorized capital
stock,24 (2) purchase of redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings,25 and (3) dissolution and eventual
liquidation of the corporation.
14
GSIS Family Bank-Thrift Bank V BPI Family Bank
Topic: Corporate Names; Deceptively Similar Corporate Names
Author: De Guia
Facts:
Petitioner was originally organized as Royal Savings Bank which started its
operation in 1971. In 1983 and 1984 GSIS encountered liquidity problema hence it
was placed under receivership and later closed by Central Bank of the Philippines.
After 2 months it re opened under the name of Comsavings Bank Inc. under the
management of Commercial Bank of Manila.
In 1987 GSIS acquired Comsavings from Commercial Bank of Manila, hence
its management is transferred to GSIS. It sought SECs approval to change its name
to “GSIS Family Bank, a Thrift Bank”
BPI Family Bank was a product of the merger between FBTC and the BPI. On
June 27,1969 the Gotianum family registered with SEC the corporate name “Family
First Savings Bank” which was amended to “Family Savings Bank”.
BPI Family Savings Banks was registered with the SEC as a wholly-owned
subsidiary of BPI it then registered with the Bureau of Domestic Trade the business
name “BPI Family Bank” and acquired reputation and goodwill under the name.
It reached the respondents attention that the petitioner is using or attempting
to use the name Family Bank hence it petitioned SEC-CRMD to disallow or prevent
the regustration of the name “GSIS Family Bank”.
ISSUE:
WON the use of GSIS Family Bank of the words “Family Bank” is deceptively and
confusingly similar to the name BPI Family Bank?
RULING:
YES!
CA ruled that the approvals by the BSP and by the DTI of petitioners
application to use the name “GSIS Family Bank” do not constitute authority for its
valid and lawful use. SEC has absolute jurisdiction, supervision and control over all
the corporations.
The SC uphold the ruling of CA.
Section 18 of the Corporation Code provides,
Section 18. Corporate name. - No corporate name may be allowed by the Securities
and Exchange Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing laws.
When a change in the corporate name is approved, the Commission shall issue an
amended certificate of incorporation under the amended name.chanrobleslaw
to fall within the prohibition of the law on the right to the exclusive use of a
corporate name, two requisites must be proven, namely:
(1) that the complainant corporation acquired a prior right over the use of such
corporate name; and
(2) the proposed name is either
(a) identical or
(b) deceptive or confusingly similar to that of any existing corporation or
to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.35
These two requisites are present in this case.
In this case, respondent was incorporated in 1969 as Family Savings Bank and in
1985 as BPI Family Bank. Petitioner, on the other hand, was incorporated as GSIS
Family - Thrift Bank only in 2002,38 or at least seventeen (17) years after
respondent started using its name. Following the precedent in the IRCP case, we
rule that respondent has the prior right over use of the corporate name.
The proposed name is (a) identical or (b) deceptive or confusingly similar to that of
any existing corporation or to any other name already protected by law.
On the first point (a), the words "Family Bank" present in both petitioner and
respondent's corporate name satisfy the requirement that there be identical names
in the existing corporate name and the proposed one. Respondent cannot justify its
claim under Section 3 of the Revised Guidelines in the Approval of Corporate and
Partnership Names,39 to wit:cralawlawlibrary
3. The name shall not be identical, misleading or confusingly similar to one already
registered by another corporation or partnership with the Commission or a sole
proprietorship registered with the Department of Trade and Industry.
If the proposed name is similar to the name of a registered firm, the proposed name
must contain at least one distinctive word different from the name of the company
already registered.chanrobleslaw
Section 3 states that if there be identical, misleading or confusingly similar name to
one already registered by another corporation or partnership with the SEC, the
proposed name must contain at least one distinctive word different from the name
of the company already registered. To show contrast with respondent's corporate
name, petitioner used the words "GSIS" and "thrift." But these are not sufficiently
distinct words that differentiate petitioner's corporate name from respondent's.
While "GSIS" is merely an acronym of the proper name by which petitioner is
identified, the word "thrift" is simply a classification of the type of bank that
petitioner is. Even if the classification of the bank as "thrift" is appended to
petitioner's proposed corporate name, it will not make the said corporate name
distinct from respondent's because the latter is likewise engaged in the banking
business.
On the second point (b), there is a deceptive and confusing similarity between
petitioner's proposed name and respondent's corporate name, as found by the SEC.
15
In determining the existence of confusing similarity in corporate names, the test is
whether the similarity is such as to mislead a person using ordinary care and
discrimination. And even without such proof of actual confusion between the two
corporate names, it suffices that confusion is probable or likely to occur.
Petitioner's corporate name is "GSIS Family Bank—A Thrift Bank" and respondent's
corporate name is "BPI Family Bank." The only words that distinguish the two are
"BPI," "GSIS," and "Thrift." The first two words are merely the acronyms of the
proper names by which the two corporations identify themselves; and the third
word simply describes the classification of the bank. The overriding consideration in
determining whether a person, using ordinary care and discrimination, might be
misled is the circumstance that both petitioner and respondent are engaged in the
same business of banking. "The likelihood of confusion is accentuated in cases
where the goods or business of one corporation are the same or substantially the
same to that of another corporation."
Under the facts of this case, the word "family" cannot be separated from the word
"bank." In asserting their claims before the SEC up to the Court of Appeals, both
petitioner and respondent refer to the phrase "Family Bank" in their submissions.
This coined phrase, neither being generic nor descriptive, is merely suggestive and
may properly be regarded as arbitrary. Arbitrary marks are "words or phrases used
as a mark that appear to be random in the context of its use. They are generally
considered to be easily remembered because of their arbitrariness. They are original
and unexpected in relation to the products they endorse, thus, becoming
themselves distinctive." Suggestive marks, on the other hand, "are marks which
merely suggest some quality or ingredient of goods. The strength of the suggestive
marks lies on how the public perceives the word in relation to the product or
service."
The enforcement of the protection accorded by Section 18 of the Corporation Code
to corporate names is lodged exclusively in the SEC. The jurisdiction of the SEC is
not merely confined to the adjudicative functions provided in Section 5 of the SEC
Reorganization Act, as amended. By express mandate, the SEC has absolute
jurisdiction, supervision and control over all corporations. It is the SEC's duty to
prevent confusion in the use of corporate names not only for the protection of the
corporations involved, but more so for the protection of the public. It has authority
to de-register at all times, and under all circumstances corporate names which in its
estimation are likely to generate confusion.
The SEC correctly applied Section 18 of the Corporation Code.
The SEC, after finding merit in respondent's claims, can compel petitioner to abide
by its commitment "to change its corporate name in the event that another person,
firm or entity has acquired a prior right to use of said name or one similar to it.
16
Petitioner: John Gokongwei
Respondent: SEC, Soriano et. al., San Miguel Corp
DOCTRINE: Every corporation has the inherent power to adopt by-laws and the
power to make and adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents.
FACTS: Gokongwei, as stockholder of San Miguel Copr, filed with SEC a petition for
declaration of nullity of amended by-laws against the majority members of the
Board of Directors.
Gokongwei alleged that the respondents amended the by-laws of the
corporation,basing their authority to do so on a resolution of the stockholders
adopted on March 13, 1961, when the outstanding capital stock of respondent
corporation was only P70,139.740.00, divided into 5,513,974 common shares.
At the time of the amendment, the outstanding and paid up shares totalled
30,127,047 with a total par value of P301,270,430.00. It was contended that
according to section 22 of the Corporation Law and Article VIII of the by-laws of the
corporation the power to amend, modify, repeal or adopt new by-laws may be
delegated to the Board of Directors only by affirmative vote of stockholders
representing not less than 2/3 of the subscribed and paid up capital stock of the
corporation.
Since the amendment was based on the 1961 authorization, petitioner
contended that the Board acted without authority and in usurpation of the power of
the stockholders.
Gokongwei prayed that the amended by-laws be declared null and void.
It was claimed that prior to the questioned amendment, Gokogwei had all
the qualifications to be a director of the corporation, being a substantial stockholder
thereof; that as a stockholder, Gokongwei had acquired rights inherent in stock
ownership, such as the rights to vote and to be voted upon in the election of
directors; and that in amending the by-laws, Soriano, et. al. purposely provided for
Gokongwei's disqualification and deprived him of his vested right as afore-
mentioned, hence the amended by-laws are null and void. As additional causes of
action, it was alleged that corporations have no inherent power to disqualify a
stockholder from being elected as a director and, therefore, the questioned act is
ultra vires and void.
Soriano et. al. and San Migue opposed. The corporation issued a notice of
special stockholders' meeting for the purpose of "ratification and confirmation of the
amendment to the By-laws". Soriano, et. al. conducted the special stockholders'
meeting wherein the amendments to the by-laws were ratified.
ISSUE: WON the corporation has the power to amend the by-laws, particularly the
authority to prescribe qualification of directors . WON they are valid an reasonable.
RULING: YES. The corporation has the power to amend.
The validity or reasonableness of a by-law of a corporation in purely a
question of law. Whether the by-law is in conflict with the law of the land, or with
the charter of the corporation, or is in a legal sense unreasonable and therefore
unlawful is a question of law.
Gokongwei claims that the amended by-laws are invalid and unreasonable
because they were tailored to suppress the minority and prevent them from having
representation in the Board
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano
and San Miguel Corporation content that ex. conclusion of a competitor from the
Board is legitimate corporate purpose, considering that being a competitor,
petitioner cannot devote an unselfish and undivided Loyalty to the corporation.
There are alleged areas of competition between Gokongwie corporation, Universal
Robina, and San Miguel.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS
EXPRESSLY CONFERRED BY LAW
Soriano et al. contends that the amended by-laws were adopted as a
measure of self-defense to protect the corporation from the clear and present
danger that the election of a business competitor to the Board which may cause to
the corporation and stockholder prejudice.
It is recognized by an authorities that 'every corporation has the
inherent power to adopt by-laws 'for its internal government, and to regulate
the conduct and prescribe the rights and duties of its members towards itself and
among themselves in reference to the management of its affairs.
At common law, the rule was ‘the power to make and adopt by-laws was
inherent in every corporation as one of its necessary and inseparable legal incidents.
Under US jurisprudence, in the absence of positive legislative provisions limiting it,
every private corporation has this inherent power as one of its necessary and
inseparable legal incidents, independent of any specific enabling provision in its
charter or in general law, such power of self-government being essential to enable
the corporation to accomplish the purposes of its creation.
Under the Corporation Law, a corporation may prescribe in its by-laws "the
qualifications, duties and compensation of directors, officers and employees”. The
Corporation Law expressly gives the power to the corporation to provide in its by-
laws for the qualifications of directors and is "highly prudent and in conformity with
good practice.
In the present case, the Court found that the amendment to the
corporation by-law which renders a stockholder ineligible to be director, if he be also
director in a corporation whose business is in competition with that of the other
corporation, is valid.
17
CHING v. QUEZON CITY SPORTS CLUB, INC
G.R. No. 200150, November 07, 2016
Author: Jay Dedicatoria
Facts:
Respondent Club is a duly registered domestic corporation providing recreational
activities, sports facilities, and exclusive privileges and services to its members.
Petitioner Catherine became a member and regular patron of respondent Club in
1989. Per policy of respondent Club, petitioner Catherine's membership privileges
were extended to immediate family members.
On June 15, 1999, the National Labor Relations Commission (NLRC) rendered a
Decision in NLRC NCR Case No. 00-07-06219, ordering respondent Club to pay
backwages, 13th and 14th month pay, and allowances to six illegally dismissed
employees. The successive appeals of respondent Club to the Court of Appeals and
this Court were unsuccessful, and the judgment for illegal dismissal against
respondent Club became final and executory. As a result, an alias writ of execution
of said judgment was served on respondent Club on September 19, 200 1 for the
total amount of P4,433,550.00.
Because respondent Club was not in a financial position to pay the monetary awards
in NLRC NCR Case, respondent BOD approved on September 20, 200I Board
Resolution No. 7-2001,entitled "Special Assessment for Club Members in Relation to
the Marie Rose Navarro, et al. v. QCSI, et al. Case," resolving to "seek the
assistance of its members by assessing each member the amount of TWO
THOUSAND FIVE HUNDRED PESOS (P2,500.00) payable in five (5) equal monthly
payments starting the month of September 2001."
Petitioner Catherine was duly notified of the implementation of the special
assessment through a Letter from the Treasurer of respondent Club. The amount of
P500.00 was debited and/or charged to Catherine's account each, as reflected in the
Statements of Account issued by respondent Club.
Petitioner Catherine believed that the imposition of the special assessment in Board
Resolution was unjust and/or illegal, however, she took no action against the same.
Petitioner Catherine simply avoided paying the special assessment by settling the
amounts due in her Statements of Account from September 2001 to January 2002
short of P500.00.
Respondent BOD then passed Board Resolution No. 3-2002 on April 18, 2002 which
suspended the privileges of the members of respondent Club who had not yet paid
the special assessment
To fully enforce Board Resolution and in order to be fair with the other members
who have already paid, the Board deemed it appropriate to suspend the privileges
of those members who would continue not to pay the said special assessment
despite receipt of the demand to do so.
Petitioner Laurence went to respondent Club intending to avail himself of its services
using the account of his mother, petitioner Catherine. Respondent Club refused to
accommodate petitioner Laurence because his mother's membership privileges had
been suspended.
Petitioner Catherine, through counsel, sent respondents a letter demanding the
immediate recall of the suspension of her membership privileges, an explanation
why she should not file a case for damages against respondents, and an apology for
besmirching her name and good reputation.
Issue:
Whether or not the non-payment of special assessment pursuant to a board
resolution grounds for suspension? Yes
Ruling:
Yes. The Court had previously recognized in Forest Hills Golf and Country Club, Inc.
v. Gardpro, Inc.,that articles of incorporation and by-laws of a country club are the
fundamental documents governing the conduct of the corporate affairs of said club;
they establish the norms of procedure for exercising rights, and reflected the
purposes and intentions of the incorporators. The by-laws are the self-imposed
rules resulting from the agreement between the country club and its
members to conduct the corporate business in a particular way. In that
sense, the by-laws are the private "statutes" by which the country club is
regulated, and will function. Until repealed, the by-laws are the continuing rules
for the government of the country club and its officers, the proper function being to
regulate the transaction of the incidental business of the country club. The by-laws
constitute a binding contract as between the country club and its members, and as
among the members themselves. The by-laws are self-imposed private laws binding
on all members, directors, and officers of the country club. The prevailing rule is
that the provisions of the articles of incorporation and the by-laws must be strictly
complied with and applied to the letter.
Being guided accordingly, the Court now turns to the pertinent By-Laws of
respondent Club.
At cursory glance, it would seem that the suspension of petitioner Catherine's
privileges was due to the P2,500.00 special assessment charged in her Statements
of Account from September 2001 to January 2002, which remained unpaid for over
three months by the time respondent BOD passed Board Resolution No. 3-2002 on
April 18, 2002; and for one year and four months by the time respondent Lopez
18
issued her Memorandum dated May 22, 2003. However, tracing back, the P2,500.00
special assessment was not an ordinary account or bill incurred by petitioners in
respondent Club, as contemplated in Section 33(a) of the By-Laws.

Section 33(a) of the By-Laws refers to the regular dues and ordinary
accounts or bills incurred by members as they avail of the services at
respondent Club, and for which the members are charged in their monthly
Statement of Account. The immediate payment or collection of the amount
charged in the member's monthly Statement of Account is essential so respondent
Club can carry-on its day-to-day operations, which is why Section 33(a) allows for
the automatic suspension of a nonpaying member after a specified period and
notification.

The special assessment in the instant case arose from an extraordinary

circumstance, i.e., the necessity of raising payment for the monetary
judgment against respondent Club in an illegal dismissal case. Thus,
petitioner Catherine's nonpayment of the special assessment was, ultimately, a
violation of Board Resolution No. 7-2001, covered by Section 35(a) of the By-Laws.

Section 35(a) of the By-Laws requires notice and hearing prior to a

member's suspension. Definitely, in this case, petitioner Catherine did not
receive notice specifically advising her that she could be suspended for
nonpayment of the special assessment imposed by Board Resolution No. 7-
2001 and affording her a hearing prior to her suspension through Board
Resolution No. 3-2002. Respondents merely relied on the general notice printed
in petitioner Catherine's Statements of Account from September 2001 to April 2002
warning of automatic suspension for accounts of over P20,000.00 which are past
due for 60 days, and accounts regardless of amount which are 75 days in arrears.
While said general notice in the Statements of Account might have been sufficient
for purposes of Section 33(a) of the By-Laws, it fell short of the stricter requirement
under Section 35(a) of the same By-Laws. Petitioner Catherine's right to due
process was clearly violated.

In all, there was no evidence that respondents acted in bad faith by particularly
singling out petitioners, from among all other members of respondent Club who did
not pay the assessment, to be harassed or humiliated.

Considering that there was justifiable ground for the suspension of petitioner
Catherine's privileges in respondent Club, but her right to due process was violated
as she was not afforded notice and hearing prior to the suspension, the Court
proceeds to determine the reliefs to which petitioners are entitled.

19
Rosita Peña v. The Honorable Court of Appeals, Sps. Yap (1991) (void The issue regarding the validity of the resolution resulting to the sale of the
resolution, no quorum) property was properly cognizable by the RTC.

Doctrine:
The by-laws of a corporation are its own private laws which substantially have the
same effect as the laws of the
corporation. In this sense they become part of the fundamental law of the
corporation with which the corporation
and its directors and officers must comply.
Facts:
 Pampanga Bus Co. (PAMBUSCO) owned several mortgaged lots. The
lots were foreclosed and were sold to Rosita Peña, as highest bidder, in
a public bidding.
 PAMBUSCO, through three of its five directors resolved to authorize one of
their directors, Briones, to execute a deed of assignment of their right
of redemption in favor of Marcelino Enriquez. It must be noted that the
three who voted were the only ones who attended the meeting.
 Enriquez then redeemed the properties. A day after he executed a deed of
sale covering the same properties in favor of the spouses Yap (private
respondents).
[Pambusco assigned to ->Enriquez, sold to - > Spouses Yap]
2. YES. The By-laws are the corporation’s own private laws. They become the
fundamental laws of the corporation which the corporation and its officers should
follow. Sec. 4 of PAMBUSCO’s by-laws provided that at least four directors
should be present to constitute a quorum. According to the Corporation Code
any action resolved by the board with less than the number provided in the by-laws
of the corporation to constitute a quorum
would not bind the corporation. When a quorum is not reached, all the
present directors could do is to adjourn. Moreover, the purported directors who
attended the meeting and voted in favor of the assignment were bogus directors as
they were not listed in the SEC as directors, nor were they stockholders of the
company.
[Side issue: Because there was no consideration for the deed of assignment, the
Court deemed it as merely a donation and because it lacked the proper formalities
for a valid donation, the donation is void.]

 Petitioner’s contention:
o Peña contends that there could be no valid sale to the spouses Yap
because the deed of assignment in favor of Enriquez was void.
She prays that a final deed of sale be executed in her favor because
the redemption period had already lapsed without a valid redemption
being effected. According to her, the deed of assignment was executed
ultra vires and against the by-laws of the corporation which provided:
Sec. 4. ... No failure or irregularity of notice of meeting shall invalidate
any regular meeting or proceeding thereat; Provided a quorum of
the Board is present, nor of any special meeting; Provided at
least four Directors are present.In the case at bar, only three
out of five directors were present.

o The RTC ruled in favor of Peña, the CA, however reversed. According to the
CA, the section would only apply if there were failure or irregularity of
notice, which according to them, Peña failed to prove. They also
ruled that the by-laws provided no categorical declaration that
failure to abide by the “four directors” requirements would
result to a void resolution. Moreover, the CA ruled that the RTC had
no jurisdiction to hear the case.

Issues:
1. W/N the RTC had jurisdiction to hear the case
2. W/N the act of the board was against the corporation’s by-laws, and
consequently, void.

Held:
1. YES. The SEC only has jurisdiction over intra-corporate disputes. In the case at
bar, neither respondents Yap, nor petitioner Peña were stockholders of PAMBUSCO.

20
CHINA BANKING CORPORATION v. CA
Petitioner: China Banking Corporation
Respondents: Court of Appeals and Valley Golf and Country Club, Inc.
Doctrine: The nature of by-laws being intramural instruments would mean that
they are not binding on third-praties, except those who have actual knowledge of
their contents.
Facts:
Calapatia pledged his stock in respondent VGCCI to petitioner CBC to
secure his loans with the latter.
The deed of pledge executed in CBC’s favor was duly recorded in VGCCI’s
corporate books. Calapatia failed to pay his loan obligation. CBC petitioned
for extrajudicial foreclosure and requested VGCCI to transfer the pledged
stock in its name.
VGCCI informed CBC of its inability to accede to the request in view of
Calapatia's unsettled accounts with the club. Notwithstanding, CBC
proceeded to foreclose the pledge. It emerged as the highest bidder and
was issued the corresponding certificate of sale.
Subsequently, VGCCI sold Calapatia’s stock at public auction for his failure
to settle his accounts with it (monthly dues). Thus when CBC requested
that a new certificate of stock be issued in its name, VGCCI replied it has
already been sold.
At the SEC, CBC sought to cancel the latter sale and have a new certificate
of stock issued in its name.
VGCCI anchors its prior right over the subject stock on a provision of its
by-laws: “after a member shall have been posted as delinquent, the Board
may order his x x x share sold to satisfy the claims of the Club...” VGCCI
maintains that CBC is bound by its by-laws arguing that CBC had actual
knowledge of its by-laws when CBC foreclosed the pledge and when CBC
purchased the pledged stocks.
Issue/s: W/N CBC is bound by VGCCI's by-laws. - NO
Ruling+Ratio:
No. A third person is not privy to the contract created by the by-laws between the
shareholder and the corporation. Concededly, it is the generally accepted rule that
third persons are not bound by by-laws, except when they have knowledge of their
contents.
Disposition: The assailed decision of the Court of Appeals is REVERSED and the
order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.
21
De la Rama vs. Ma-Ao Sugar Central Co., Inc.
TOPIC: Invest Corporation Funds for non-primary purpose endeavour. (Sec.
42)
DOCTRINE: a private corporation may invest its funds in any other corporation or
business or for any purpose other than the primary purpose for which it was
organized when approved by a majority of the board of directors or trustees and
ratified by the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3) of the members in the case of non-
stock corporations, at a stockholder's or member's meeting duly called for the
purpose. Provided, however, That where the investment by the corporation is
reasonably necessary to accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members shall not be necessary.
FACTS:
This was a representative or derivative suit by four minority stockholders against
the Ma-ao Sugar Central Co., Inc. and J. Amado Araneta and three other directors
of the corporation.
The complaint stated five causes of action, (1) for alleged illegal and ultra-vires acts
consisting of self-dealing irregular loans, and unauthorized investments; (2) for
alleged gross mismanagement; (3) for alleged forfeiture of corporate rights
warranting dissolution; (4) for alleged damages and attorney's fees; and (5) for
receivership.
On the other hand, the defendants alleged, among other things: (1) that the
complaint "is premature, improper and unjustified"; (2) that plaintiffs did not make
an "earnest, not simulated effort" to exhaust first their remedies within the
corporation before filing their complaint; (3) that no actual loss had been suffered
by the defendant corporation on account of the transactions questioned by
plaintiffs; (4) that the payments by the debtors of all amounts due to the defendant
corporation constituted a full, sufficient and adequate remedy for the grievances
alleged in the complaint and (5) that the dissolution and/or receivership of the
defendant corporation would violate and impair the obligation of existing contracts
of said corporation.
The Lower Court dismisses the petition for dissolution but condemns J. Amado
Araneta to pay unto Ma-ao Sugar Central Co., Inc. and orders Ma-ao from making
investments in Acoje Mining, Mabuhay Printing, and any other company whose
purpose is not connected with the Sugar Central business. This includes investment
to the Philippine Fiber, where the defendants admit having invested shares of stock
of this company but was ratified by the Board of Directors in later on. Defendants
contend that since said company was engaged in the manufacture of sugar bags it
was perfectly legitimate for Ma-ao Sugar either to manufacture sugar bags or invest
in another corporation engaged in said manufacture.
Both Parties appealed to the SC.
ISSUE: WON the investment to a sugar bag manufacturing company used in
packing sugar does not need ratification by stockholders.
HELD: Yes. The investment to a sugar bag manufacturing company used in packing
sugar falls within the implied poers of the sugar central as part of its primary
purpose and does not need ratification by the stockholders.
Under Sec. 17-1/2 (now sec 42) of the Corporation Law provides that:
No corporation organized under this act shall invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it
was organized unless its board of directors has been so authorized in a resolution by
the affirmative vote of stockholders holding shares in the corporation entitling them
to exercise at least two-thirds of the voting power on such proposal at the
stockholders' meeting called for the purpose.
The Court is convinced that that law should be understood to mean as the
authorities state, that it is prohibited to the Corporation to invest in shares of
another corporation unless such an investment is authorized by two-thirds of the
voting power of the stockholders, if the purpose of the corporation in which
investment is made is foreign to the purpose of the investing corporation because
surely there is more logic in the stand that if the investment is made in a
corporation whose business is important to the investing corporation and would aid
it in its purpose, to require authority of the stockholders would be to unduly curtail
the Power of the Board of Directors.
22
Bernas v. CA
DOCTRINE: Every corporation has the inherent power to adopt by-laws for its
internal government, and to regulate the conduct and prescribe the rights and
duties of its members towards itself and among themselves in reference to the
management of its affairs. The by-laws of a corporation are its own private laws
which substantially have the same effect as the laws of the corporation. They are in
effect written into the charter. In this sense they become part of the fundamental
law of the corporation with which the corporation and its directors and officers must
comply. The general rule is that a corporation, through its board of directors, should
act in the manner and within the formalities, if any, prescribed in its charter or by
the general law. Thus, directors must act as a body in a meeting called pursuant to
the law or the corporation's by-laws, otherwise, any action taken therein may be
questioned by the objecting director or shareholder
APPLICABLE LAWS:
The Corporation Code laid down the rules on the removal of the Directors of the
corporation by
providing, inter alia, the persons authorized to call the meeting and the number of
votes required for the purpose of removal, thus: Sec. 28. Removal of directors or
trustees. -Any director or trustee of a corporation may be removed from office by a
vote of the stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock, or if the corporation be a non-stock corporation, by a vote
of at least twothirds (2/3) of the members entitled to vote: Provided, That such
removal shall take place either at a regular meeting of the corporation or at a
special meeting called for the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention to propose such
removal at the meeting. A special meeting of the stockholders or members of a
corporation for the purpose of removal of directors or trustees, or any of them,
must be called by the secretary on order of the president or on the written demand
of the stockholders representing or holding at least a majority of the outstanding
capital stock, or, if it be a non-stock corporation, on the written demand of a
majority of the members entitled to vote. Should the secretary fail or refuse to call
the special meeting upon such demand or fail or refuse to give the notice, or if there
is no secretary, the call for the meeting may be addressed directly to the
stockholder
Facts
Makati Sports Club (MSC) is a domestic corporation duly organized and existing
under
Philippine laws for the primary purpose of establishing, maintaining, and providing
social, cultural, recreational and athletic . activities among its members. Bernas
group were members of the BOD whose term to expire on 1998 or 1999. While
Cinco group were elected as member of BOD on a Special Stockholders Meeting (17
December 1997) The MSC Oversight Committee (MSCOC) composed of past
presidents demanded from
Bernas group to resign due to anomalies in handling corporate fund to pave new
election. New officers were elected (CinCo group)
Bernas group initiated an action before the Securities Investigation and Clearing
Department (SICD) of the SEC docketed as SEC Case No. 5840 seeking for the
nullification of the 17 December 1997 Special Stockholders Meeting on the ground
that it was improperly called. Citing Section 28 of the Corporation Code, the Bernas
Group argued that the authority to call a meeting lies with the Corporate . Secretary
and not with the MSCOC which functions merely as an oversight body and is not
vested with the power to call corporate meetings. For being called by the persons
not authorized to do so, the Bernas Group urged the SEC. to declare the 17
DecembDecember 1997, stockholders Meeting on the ground that it was improperly
called. Citing Section 28 of the Corporation Code, the Bernas Group argued that the
authority to call a meeting lies with the Corporate . Secretary and not with the
MSCOC which functions merely as an oversight body and is not vested with the
power to call corporate meetings. For being called by the persons not authorized to
do so, the Bernas Group urged the SEC. to declare the 17 December 1997 Special
23
Stockholders' Meeting, including the removal of the sitting officers and the election
of new ones, be nullified.
In the Annual Stockholder's meeting (April 20, 1998) the majority approved,
confirm and ratify the special election
Due to the filing of several petitions for and against the removal of the Bernas
Group from
the Board pending before the SEC resulting in the piling up of legal controversies
involving MSC, the SEC En Banc, in its Decision dated 30 March 1999, resolved to
supervise the holding of the 1999 Annual Stockholders' Meeting. During the said
meeting, the stockholders once again approved, ratified and confirmed the holding
of the 17 December 1997 Special Stockholders' Meeting. This was ratified in 2000
Stockholders meeting. The SICD render invalid December 1997, April 20, 1998, and
April 19, 1999. The expulsion of Bernas was held invalid. The SEC En Banc reversed.
The CA invalid
RULING OF THE LOWER COURTS: CA – Reversed SEC
ISSUE: Whether the election is valid (December 1997)- NO Whether holding of
annual stockholders' meeting is valid– YES
RULING + RATIO: Corollarily, the pertinent provisions of MSC by-laws which govern
the manner of calling and sending of notices of the annual stockholders' meeting
and the special stockholders' meeting provide: SEC. 8. Annual Meetings. The annual
meeting of stockholders shall be held at the Clubhouse on the third Monday of April
of every year unless such day be a holiday in which case the annual meeting shall
be held on the next succeeding business day. At such meeting, the President shall
render a report to the stockholders of the clubs. x x x x
SEC. 10. Special Meetings. Special meetings of stockholders shall be held at the
Clubhouse when called by the President or by the Board of Directors or upon written
request of the stockholders representing not less than one hundred (100) shares.
Only matters specified in the notice and call will be taken up at special meetings. x x
xx
SEC. 25. Secretary. The Secretary shall keep the stock and transfer book and the
corporate seal, which he shall stamp on all documents requiring such seal, fill and
sign together with the President, all the certificates of stocks issued, give or caused
to be given all notices required by law of these By-laws as well as notices of all
meeting of the Board and of the stockholders; shall certify as to quorum at
meetings; shall approve and sign all correspondence pertaining to the Office of the
Secretary; shall keep the minutes of all meetings of the stockholders, the Board of
Directors and of all committee
The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood
for election, and who have actually been elected by the stockholders, on an annual
basis. Only in that way can the continued accountability to shareholders, and the
legitimacy of their decisions that bind the corporation's stockholders, be assured.
The shareholder vote is critical to the theory that legitimizes the exercise of power
by the directors or officers over the properties that they do not own. A corporation's
board of directors is understood to be that body which (1) exercises all powers
provided for under the Corporation Code; (2) conducts all business of the
corporation; and (3) controls and holds all the property of the corporation. Its
members have been characterized as trustees or directors clothed with fiduciary
character.25 It is ineluctably clear that the fiduciary relation is between the
stockholders and the board of directors and who are vested with the power to
manage the affairs of the corporation. The ordinary trust relationship of · directors
of a corporation and stockholders is not a matter of statutory or technical law. It
springs from the fact that directors have the control and guidance of corporate
affairs and property and hence of the property interests of the stockholders. Equity
24
recognizes that stockholders are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof. Should the board fail to perform its
fiduciary duty to safeguard the interest of the stockholders or commit acts
prejudicial to their interest, the law and the by-laws provide mechanisms to remove
and replace the erring director.. A distinction should be made between corporate
acts or contracts which are illegal and those which are merely ultra vires. The
former contemplates the doing of an act which are contrary to law, morals or public
policy or public duty, and are, like similar transactions between individuals, void:
They cannot serve as basis of a court action nor acquire validity by performance,
ratification or estoppel. Mere ultra vires acts, on the other hand, or those which are
not illegal or void ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and enforceable when
ratified by the stockholders. The 17 December 1997 Meeting belongs to the
category of the latter, that is, it is void ab initio and cannot be validated.
Consequently, such Special Stockholders' Meeting called by the Oversight
Committee cannot have any legal effect. The removal of the Bernas Group, as well
as the election of the Cinco Group, effected by the assembly in that improperly
called meeting is void, and since the Cinco Group has no legal right to sit in the
board, their subsequent acts of expelling Bernas from the club and the selling of his
shares. at the public auction, are likewise invalid. Apparently, the assumption of
office of the Cinco Group did not bear parallelism with the factual milieu in
Cojuangco and as such they cannot be considered as de facto officers and thus,
they are without colorable authority to authorize the removal of Bernas and the sale
of his shares at the public auction. They cannot bind the corporation to third
persons who acquired the shares of Bernas and such third persons cannot be
deemed as buyer in good faith.
SEC's assumption of jurisdiction over this case is proper, as the controversy involves
the election of PNCC's directors. Petitioner does not really contradict the nature of
the question presented and agrees that there is an intra-corporate question
involved. x x x x Prescinding from the above premises, it necessarily follows that
SEC can compel PNCC to hold a stockholders' meeting for the purpose of electing
members of the latter's board of directors. x x x As respondents point out, the SEC's
action is also justified by its regulatory and administrative powers to implement the
corporation code, specifically to compel PNCC to hold a stockholder's meeting for
election purposes.
Given the broad administrative and regulatory powers of the SEC outlined under
Section 50 of the Corporation Code and Section 6 of Presidential Decree (PD) No.
902-A, the Cinco Group cannot claim that if was left without recourse after the
Corporate Secretary previously refused to heed its demand to call a special
stockholders' meeting. If it be true that the Corporate Secretary refused to call a
meeting despite fervent demand from the MSCOC, the remedy of the stockholders
would have been to file a petition to the SEC to direct him to call a meeting by
giving proper notice required under the Code. To rule otherwise would open the
floodgates to abuse where any stockholder, who consider himself aggrieved by
certain corporate actions, could call a special stockholders' meeting for the purpose
of removing the sitting officers in direct violation of the rules pertaining to the call of
meeting laid down in the by-laws. Every corporation has the inherent power to
adopt by-laws for its internal government, and to regulate the conduct and
prescribe the rights and duties of its members towards itself and among themselves
in reference to the management of its affairs. The by-laws of a corporation are its
own private laws which substantially have the same effect as the laws of the
corporation. They are in effect written into the charter. In this sense they become
part of the fundamental law of the corporation with which the corporation and its
directors and officers must comply. The general rule that a corporation, through its
board of directors, should act in the manner and within the formalities, if any,
prescribed in its charter or by the general law. Thus, directors must act as a body in
a meeting called pursuant to the law or the corporation's by-laws, otherwise, any
action taken therein may be questioned by the objecting director or shareholder.
Certainly, the rules set in the by-laws are mandatory for every member of the
corporation to respect.1âwphi1 They are the fundamental law of the corporation
with which the corporation and its officers and members must comply. It is on this
score that we cannot upon the other hand sustain the Bernas Group's stance that
the subsequent annual stockholders' meetings were invalid. First, the 20 April 1998
Annual Stockholders Meeting was valid because it was sanctioned by Section 845 of
the MSC bylaws. Unlike in Special Stockholders Meeting46 wherein the bylaws
mandated that such meeting shall be called by specific persons only, no such
specific requirement can be obtained under Section 8.
Second, the 19 April 1999 Annual Stockholders Meeting is likewise valid because in
addition to the fact that it was conducted in accordance to Section 8 of the MSC
bylaws, such meeting was supervised by the SEC in the exercise of its regulatory
25
and administrative powers to implement the Corporation Code. Needless to say, the
conduct of SEC supervised Annual Stockholders Meeting gave rise to the
presumption that the corporate officers who won the election were duly elected to
their positions and therefore can be rightfully considered as de jure officers. As de
jure officials, they can lawfully exercise functions and legally perform such acts that
are within the scope of the business of the corporation except ratification of actions
that are deemed void from the beginning. Considering that a new set of officers
were already duly elected in 1998 and 1999 Annual Stockholders Meetings, the
Bernas Group cannot be permitted to use the holdover principle as a shield to
perpetuate in office. Members of the group had no right to continue as directors of
the corporation unless reelected by the stockholders in a meeting called for that
purpose every year. They had no right to hold-over brought about by the failure to
perform the duty incumbent upon them In fine, we hold that 17 December 1997
Special Stockholders' Meeting is null and void and produces no effect; the resolution
expelling the Bernas Group from the corporation and authorizing the sale of Bernas'
shares at the public auction is likewise null and void. The subsequent Annual
Stockholders' Meeting held on 20 April 1998, 19 April 1999 and 17 April 2000 are
valid and binding except the ratification of the removal of the Bernas Group and the
sale of Bernas' shares at the public auction effected by the body during the said
meetings. The expulsion of the Bernas Group and the subsequent auction of Bernas'
shares are void from the very beginning and therefore the ratifications effected
during the subsequent meetings cannot be sustained. A void act cannot be the
subject of ratification. WHEREFORE, premises considered, the petitions of Jose A.
Bernas, Cecile. H. Cheng, Victor Africa, Jesus B. Maramara, Jose T. Frondoso,
Ignacio A. Macrohon and Paulino T. Lim in G.R. Nos. 16335657 and of Jovencio
Cinco, Ricardo Librea and Alex Y. Pardo in G.R. Nos. 163368-69 are hereby
DEN~ED. The assailed Decision dated 28 April 2003 and Resolution dated 27 April
2004 of the Court of Appeals are hereby AFFIRMED.

26
SEC-OGC Opinion No. 16-22

Author: Masangcay

FACTS:

This letter is to address the want of the FODCC to enter into a Joint Venture
Agreement with another company having a similar purpose.

ISSUE:

Whether or not FODCC can enter into a Joint Venture Agreement with another
company having similar purpose.

RULING:

YES. SEC, in its opinion, stated that while the corporation has no power to enter
into a contract of partnership with an individual or another corporation
(EXCEPTIONS: 1) the authority to enter into a partnership is expressly conferred
upon on its charter of Articles of Incorporation; 2)if foreign corp, must obtain license
to transact business in Phils, in accordance with the Corpo Code), nevertheless it
may validly enter into a joint venture agreement, whenever the nature of that
venture is in line with the business authorized by its charter. SEC also provides that
while joint venture is a type of partnership as held by the Supreme Court, joint
venture as distinguish to a partnership is only limited to a particular project that will
allow the Boards of the co-venturers to anticipate and evaluate the corporations’
liabilities and responsibilities. Therefore, SEC is of opinion that two or more
corporations may enter into a joint venture through a contact or agreement if the
nature of the venture is in line with the business authorized by its charters; that JV
will not result in the formation of a partnership or corporation.

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