Forest Hills Golf & Country Club, Inc. v. Gardpro, Inc.

,
G.R. No. 164686 (2014)

126. What are the nature and functions of the articles of incorporation?

It is the document prepared by the incorporators organizing a corporation containing the matters
required by the RCC and filed with the SEC. It offers the ultimate evidence of the nature and
purpose of a corporation and defines the contractual relationships between the State and the
corporation, the stockholders and the State, and the corporation and the stockholders.

The articles of incorporation and the by-laws of a corporation define and regulate the relations
between the corporation and the stockholders. In interpreting them, the literal meaning of their
provisions shall control, and such provisions should be construed as a whole and not in isolation.

Facts

In 1996, Gardpro, Inc. (Gardpro) bought class "C" common shares of stock of Forest Hills, which were
special corporate shares that entitled the registered owner to designate two nominees or
representatives for membership in the Club. When Gadro designated Martin and Reyes to be its
corporate nominees, Forest Hills charged them membership fees of ₱50,000.00 each, prompting
Martin to complain about being thus charged despite having been assured that no such fees would
be collected from them. With the General Manager assuring that the fees were temporary, both
nominees of Gardpro paid the fees. Later, Gardpro decided to change its designated nominees, and
Forest Hills charged Gardpro new membership fees of ₱75,000.00 per nominee. When Gardpro
refused to pay, the replacement did not take place.

Gardpro filed a complaint in the SEC which ordered Forest Hills to refrain from collecting
membership fees for the two (2) replacement members and that the membership fees already paid
shall be applied as membership fees for the two (2) replacement members. Forest Hills appealed to
the CA, which denied the petition for review, and affirmed the ruling of the SEC.

It was found that nowhere in the By-Laws of Forest Hill is it provided that it is authorized to collect
membership fees every time a nominee of a corporate shareholder is to be replaced.

Issues

Whether Forest Hills was authorized under its by-laws to collect new membership fees each time a
nominee of a corporate shareholder was replaced. ❌
Ruling

Forest Hills was not authorized under its articles of incorporation and by-laws to collect new
membership fees for the replacement nominees of Gardpro.

According to the second paragraph of Section 13.6 of the by-laws, the transfer of playing rights
entailed the payment of ₱10,000.00. Yet, Section 2.2.2 of the by-laws stipulated a transfer fee for
every replacement. This warranted the conclusion that Gardpro should pay to Forest Hills the
transfer fee of ₱10,000.00 because it desired to change its nominees.

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There was an inconsistency between the by-laws of Forest Hills and the affidavit of Albert as to the
amounts of the membership fees of corporate members. On one hand, Section 13.7 (Membership
Fees) of the by-laws stated that "the membership fee of Forty Five Thousand Pesos (₱45,000.00) x x x
for corporate members must be paid by the applicant;" on the other, Albert’s affidavit alleged that
"each nominee shall pay the ₱75,000.00 membership fee." To resolve the inconsistency, the by-laws
should prevail because they constituted the private statutes of the corporation and its members and
must be strictly complied with and applied to the letter.

The relevant provisions of the articles of incorporation and the bylaws of Forest Hills governed the
relations of the parties as far as the issues between them were concerned. Indeed, the articles of
incorporation of Forest Hills defined its charter as a corporation and the contractual relationships
between Forest Hills and the State, between its stockholders and the State, and between Forest Hills
and its stockholder; hence, there could be no gainsaying that the contents of the articles of
incorporation were binding not only on Forest Hills but also on its shareholders. On the other hand,
the bylaws were the self-imposed rules resulting from the agreement between Forest Hills and its
members to conduct the corporate business in a particular way. In that sense, the by-laws were the
private "statutes" by which Forest Hills was regulated, and would function. The charter and the
by-laws were thus the fundamental documents governing the conduct of Forest Hills’ corporate
affairs; they established norms of procedure for exercising rights, and reflected the purposes and
intentions of the incorporators. Until repealed, the by-laws were a continuing rule for the
government of Forest Hills and its officers, the proper function being to regulate the transaction of
the incidental business of Forest Hills. The bylaws constituted a binding contract as between Forest
Hills and its members, and as between the members themselves. Every stockholder governed by the
by-laws was entitled to access them. The by-laws were self-imposed private laws binding on all
members, directors and officers of Forest Hills. 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.

In construing and applying the provisions of the articles of incorporation and the by-laws of Forest
Hills, the CA has leaned on the plain meaning rule embodied in Article 1370 of the Civil Code, to the
effect that if the terms of the contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.

The CA was also guided by Article 1374 of the Civil Code, which declares that "[t]he various
stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly." Verily, all stipulations of the contract are considered
and the whole agreement is rendered valid and enforceable, instead of treating some provisions as
superfluous, void, or inoperable.

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 Clavecilla Radio System v. Hon. Antillon
G.R. No. L-22238 (February 18, 1967)

131. What is the importance of indicating in the articles of incorporation the principal place of
business of the corporation?

The principal place of business of a corporation, as stated in the articles of incorporation,

determines its residence or domicile. As such, the place indicated in petitioner’s articles of
incorporation becomes controlling in determining the venue for the filing of legal action involving
the corporation. The principal office of the corporation is that which is stated in the articles of
incorporation and not the place of its actual operations.

The fact that it maintains branch offices in some parts of the country does not mean that it can be
sued in any of these places because to allow an action to be instituted in any place where a
corporate entity has its branch offices would create confusion and work untold inconvenience to
the corporation. The residence of a corporation is the place where its principal office is
established.

Facts

New Cagayan Grocery filed a complaint against the Clavecilla Radio System. After service of
summons, the Clavecilla Radio System filed a motion to dismiss the complaint on the grounds
that it states no cause of action and that the venue is improperly laid.

The lower court held that the Clavecilla Radio System may be sued either in Manila where it has
its principal office or in Cagayan de Oro City where it may be served, as in fact it was served,
with summons through the Manager of its branch office in said city. In other words, the court
upheld the authority of the city court to take cognizance of the case. However, the petitioner
contended that the suit should be filed in Manila, where its principal office is located.

Issue

Whether the venue for the lawsuit was properly laid in Cagayan de Oro, given that the Clavecilla
Radio System's principal place of business was in Manila. ❌
Ruling

It is clear that the case for damages filed with the city court is based upon tort and not upon a
written contract. Section 1 of Rule 4 of the New Rules of Court, governing venue of actions in
inferior courts, provides in its paragraph (b) (3) that when "the action is not upon a written
contract, then in the municipality where the defendant or any of the defendants resides or may
be served with summons."

Settled is the principle in corporation law that the residence of a corporation is the place where
its principal office is established. Since it is not disputed that the Clavecilla Radio System has its
principal office in Manila, it follows that the suit against it may properly be filed in the City of
Manila.

The appellee maintain, however, that with the filing of the action in Cagayan de Oro City, venue
was properly laid on the principle that the appellant may also be served with summons in that
city where it maintains a branch office. This Court has already held in the case of Cohen vs.
Benguet Commercial Co., Ltd., 34 Phil. 526; that the term "may be served with summons" does
not apply when the defendant resides in the Philippines for, in such case, he may be sued only

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in the municipality of his residence, regardless of the place where he may be found and served
with summons. As any other corporation, the Clavecilla Radio System maintains a residence
which is Manila in this case, and a person can have only one residence at a time (See Alcantara
vs. Secretary of the Interior, 61 Phil. 459; Evangelists vs. Santos, 86 Phil. 387). The fact that it
maintains branch offices in some parts of the country does not mean that it can be sued in any
of these places. To allow an action to be instituted in any place where a corporate entity has its
branch offices would create confusion and work untold inconvenience to the corporation.

It is important to remember, as was stated by this Court in Evangelista vs. Santos, et al., supra,
that the laying of the venue of an action is not left to plaintiff's caprice because the matter is
regulated by the Rules of Court. Applying the provision of the Rules of Court, the venue in this
case was improperly laid.

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 GSIS Family Bank v. BPI Family Bank
G.R. No. 175278 | September 23, 2015

145. Is the corporate name “GSIS Family Bank-A Thrift Bank” distinguishable from BPI Family
Bank?

It is not. 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 corporations are engaged in the same business of banking. The word
"family" cannot be separated from the word "bank." 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
service."

GSIS Family Bank-A Thrift Bank was thus ordered to change its corporate name. It changed its
name to simply “GSIS Thrift Bank”

Facts

Summary: The GSIS Family Bank - Thrift Bank (formerly Comsavings Bank, Inc.) sought to use the
name "GSIS Family Bank." However, BPI Family Bank, which had a prior claim to the name "Family
Bank," filed a petition with the Securities and Exchange Commission (SEC) to prevent GSIS Family
Bank from using the name, arguing that it was confusingly similar to its own. The SEC ruled in favor
of BPI Family Bank, leading to an appeal by GSIS Family Bank to the Court of Appeals, which upheld
the SEC's decision.

Petitioner was originally organized as Royal Savings Bank and started operations in 1971. Due to its
liquidity problems, it was placed under receivership in 1984 and temporarily closed by the Central
Bank of the Philippines. Two (2) months after its closure, petitioner reopened and was renamed
Comsavings Bank, Inc.

In 1987, GSIS acquired petitioner from the Commercial Bank of Manila. Petitioner sought Securities
and Exchange Commission (SEC) approval to change its corporate name to "GSIS Family Bank, a
Thrift Bank." Petitioner likewise applied with the Department of Trade and Industry (DTI) and
Bangko Sentral ng Pilpinas (BSP) for authority to use "GSIS Family Bank, a Thrift Bank" as its business
name. The DTI and the BSP approved the applications. Thus, petitioner operates under the
corporate name "GSIS Family Bank – a Thrift Bank”.

Respondent BPI Family Bank was a product of the merger between the Family Bank and Trust
Company (FBTC) and the Bank of the Philippine Islands (BPI). On June 27, 1969, the Gotianum family
registered with the SEC the corporate name "Family First Savings Bank," which was amended to
"Family Savings Bank," and then later to "Family Bank and Trust Company." Since its incorporation,
the bank has been commonly known as "Family Bank." In 1985, Family Bank merged with BPI, and the
latter acquired all the rights, privileges, properties, and interests of Family Bank, including the right
to use names, such as "Family First Savings Bank,"

"Family Bank," and "Family Bank and Trust Company." BPI Family Savings Bank was registered with
the SEC as a wholly-owned subsidiary of BPI. BPI Family Savings Bank then registered with the

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Bureau of Domestic Trade the trade or business name "BPI Family Bank," and acquired a reputation
and goodwill under the name.

Eventually, it reached respondent’s attention that petitioner is using or attempting to use the name
"Family Bank." Thus, respondent petitioned the SEC Company Registration and Monitoring
Department (SEC CRMD) to disallow or prevent the registration of the name "GSIS Family Bank" or
any other corporate name with the words "Family Bank" in it. Respondent claimed exclusive
ownership to the name "Family Bank," having acquired the name since its purchase and merger with
Family Bank and Trust Company way back 1985.

SEC CRMD ordered respondent GSIS FAMILY BANK to refrain from using the word "Family" as part
of its name and make good its commitment to change its name by deleting or dropping the subject
word from its corporate name within [thirty (30) days] from the date of actual receipt hereof.

Petitioner appealed the decision to the SEC En Banc, which denied the appeal.

Petitioner elevated the SEC En Banc Decision to the Court of Appeals, which dismissed the petition
for review for lack of merit.

Issue

Whether the use of the name "GSIS Family Bank" by the petitioner was deceptively and confusingly
similar to the name "BPI Family Bank," thereby violating the rules on corporate names as stipulated in
the Corporation Code.

Ruling

The Supreme Court affirmed the decision of the Court of Appeals, ruling that the names "GSIS
Family Bank" and "BPI Family Bank" were indeed confusingly similar. The Court emphasized that the
SEC has the authority to regulate corporate names to prevent public confusion. It noted that the
word "Family" in the corporate name is not generic and that the similarity in names could mislead
the public, especially since both entities operated in the banking sector. The Court upheld the SEC's
finding that BPI Family Bank had prior rights to the name and that GSIS Family Bank's use of "Family
Bank" could lead to confusion among consumers. Thus, GSIS Family Bank was directed to change its
corporate name to avoid such confusion, in accordance with Section 18 of the Corporation Code,
which prohibits the registration of names that are identical or confusingly similar to existing
corporate names.

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.
In Philips Export B.V. v. Court of Appeals, this Court ruled that 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.

These two requisites are present in this case.

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 Grace Christian High School v. Court of Appeals, et al.
G.R. No. 108905, October 23, 1997

Divina: A provision in the bylaws of the corporation stating that of the fifteen (15) members of its
board of directors, only fourteen (14) members would be elected while the remaining member
would be the representative of an educational institution located in the village of the homeowners,
which, however, is not a member of the corporation, is invalid for being contrary to law. The fact
that for fifteen (15) years it has not been questioned or challenged but, on the contrary, appears to
have been implemented by the members of the association cannot forestall a later challenge to its
validity because, if it is contrary to law, it is beyond the power of the members of the association
to waive its invalidity.

164. What are the characteristics of valid bylaws?

a.​ They must not be contrary to the RCC and existing laws.
b.​ They must not impair obligations of contracts
c.​ They must be general and uniform in their operation and not directed against particular
individuals.

Sec. 47 . Amendment to Bylaws

Voting requirement: Majority of BOD/T + Majority OCS/M

Facts

Grace Christian High School (Petitioner) had a representative who was recognized as a "permanent
director" on the board of directors of the Grace Village Association, Inc. for 15 years. However, in
1990, the association decided to require elections for all directors, leading to the denial of the
school's request for continued representation without election. The school filed a mandamus action
to compel recognition of its representative's right to a permanent seat, which was dismissed by the
Home Insurance and Guaranty Corporation (HIGC). The Court of Appeals upheld this dismissal,
ruling that the provision granting a permanent seat was contrary to law.

Issue

The primary issue was whether the provision in the by-laws allowing Grace Christian High School's
representative to hold a permanent seat on the board of directors was valid under the law.

Ruling

The Supreme Court affirmed the decision of the Court of Appeals, ruling that the provision in
question was indeed contrary to law. The Court emphasized that the practice of allowing an
unelected member to sit on the board was not legally valid, as it deprived other members of their
right to elect directors. The Court also noted that the proposed amendment to the by-laws, which
sought to grant the school a permanent seat, had never been ratified by the majority of the
association's members, thus lacking legal standing. The ruling reinforced the principle that by-laws
must comply with existing laws and cannot confer rights that are contrary to statutory provisions,
specifically citing the requirements for the election of directors under the Corporation Code.

The present Corporation Code (B.P. Blg. 68), which took effect on May 1, 1980, 12 similarly provides:

§23. The Board of Directors or Trustees. — Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or trustees to be elected

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from among the holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and until their successors are elected and
qualified. (Emphasis added)

These provisions of the former and present corporation law leave no room for doubt as to their
meaning: the board of directors of corporations must be elected from among the stockholders or
members. There may be corporations in which there are unelected members in the board but it is
clear that in the examples cited by petitioner the unelected members sit as ex officio members, i.e.,
by virtue of and for as long as they hold a particular office.But in the case of petitioner, there is no
reason at all for its representative to be given a seat in the board. Nor does petitioner claim a right
to such seat by virtue of an office held. In fact it was not given such seat in the beginning. It was only
in 1975 that a proposed amendment to the by-laws sought to give it one.

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 China Banking Corporation vs. Court of Appeals
G.R. No. 117604 | March 26, 1997

167. Are the bylaws of the corporation binding on third parties?

No, bylaws are only binding among the stockholders and members of the corporation. To be
bound, a third party must have acquired knowledge of the pertinent bylaws at the time the
transaction or agreement was entered into. Thus, a provision in the bylaws of a country club
granting it a preferred lien over the share of stock of a member for unpaid dues is not binding on
the pledge of the same share of stock if the latter had no actual knowledge of it when the shares
were assigned to it as security for a loan transaction.

Third persons are not bound by by-laws, except when they have knowledge of the provisions
either actually or constructively at the time the transaction or agreement between said third party
and the shareholder was entered into.

Facts

●​ Galicano Calapatia, Jr. (Calapatia), a stockholder of Valley Golf & Country Club, Inc. (VGCCI),
obtained a loan of P20,000.00 from China Banking Corporation (CBC), payment of which was
secured by an earlier executed pledge agreement of his stock certificate in VGCCI in favor of
CBC.
●​ Due to Calapatia's failure to pay his obligation, CBC filed a petition for extrajudicial
foreclosure requesting for a conduct of a public auction sale of the pledged stock.
●​ CBC informed VGCCI of the above-mentioned foreclosure proceedings and requested that
the pledged stock be transferred to CBC’s name and the same be recorded in the corporate
books.
●​ However, VGCCI refused to accede to petitioner's request in view of Calapatia's unsettled
accounts with the club.
○​ VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art VIII
of its by-laws which provides that "after a member shall have been posted as
delinquent, the Board may order his/her/its share sold to satisfy the claims of the
Club. . ."
●​ Despite the foregoing, a public auction was held in September 1985 and CBC emerged as the
highest bidder at P20,000.00 for the pledged stock. Consequently, CBC was issued the
corresponding certificate of sale.
●​ On 4 December 1986, VGCCI published in the newspaper a notice of auction sale of a number
of its stock certificates.
●​ On 5 May 1989, CBC advised VGCCI that it is the new owner of Calapatia's Stock Certificate
No. 1219 by virtue of being the highest bidder in the 17 September 1985 auction and
requested that a new certificate of stock be issued in its name.
●​ On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold
at the public auction held on 10 December 1986 for P25,000.00.
●​ On 9 March 1990, CBC protested the sale by VGCCI of the subject share of stock and
thereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10
December 1986 auction and for the issuance of a new stock certificate in its name.
●​ On 20 September 1990, CBC filed a complaint with the Securities and Exchange Commission
(SEC) for the nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any
new stock certificate issued pursuant thereto; for the issuance of a new certificate in CBC’s
name; and for damages, attorney's fees and costs of litigation.

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 ●​ SEC ruled in favor of VGCCI, stating in the main that "(c)onsidering that the said share is
delinquent, (VGCCI) had valid reason not to transfer the share in the name of the petitioner
in the books of (VGCCI) until liquidation of delinquency."
●​ CBC appealed to the SEC en banc and the Commission issued an order reversing the
decision of its hearing officer, declaring that CBC has a prior right over the pledged share
and because of pledgor's failure to pay the principal debt upon maturity, appellant-petitioner
can proceed with the foreclosure of the pledged share.
●​ VGCCI sought reconsideration. However, the SEC denied the same.
●​ VGCCI appealed to the Court of Appeals. The Court of Appeals nullified and set aside the
orders of the SEC and dismissed CBC’s original complaint.
●​ CBC moved for reconsideration but the same was denied by the Court of Appeals.
●​ Hence, this petition.

Issue

1.​ Whether the by-laws of the corporation is binding to CBC at the time of the execution of the
pledge and loan agreements. ❌
Ruling

In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the
time the transaction or agreement between said third party and the shareholder was entered into, in
this case, at the time the pledge agreement was executed. VGCCI could have easily informed
petitioner of its by-laws when it sent notice formally recognizing petitioner as pledgee of one of its
shares registered in Calapatia's name. Petitioner's belated notice of said by-laws at the time of
foreclosure will not suffice. The ruling of the SEC en banc is particularly instructive:

By-laws signifies the rules and regulations or private laws enacted by the corporation to regulate,
govern and control its own actions, affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among themselves in their relation to it. In other
words, by-laws are the relatively permanent and continuing rules of action adopted by the
corporation for its own government and that of the individuals composing it and having the
direction, management and control of its affairs, in whole or in part, in the management and control
of its affairs and activities. (9 Fletcher 4166, 1982 Ed.)

The purpose of a by-law is to regulate the conduct and define the duties of the members towards
the corporation and among themselves. They are self-imposed and, although adopted pursuant to
statutory authority, have no status as public law. (Ibid.)

Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except
when they have knowledge of the provisions either actually or constructively. In the case of Fleisher
v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law restricting the transfer of
shares cannot have any effect on the transferee of the shares in question as he "had no knowledge of
such by-law when the shares were assigned to him. He obtained them in good faith and for a
valuable consideration. He was not a privy to the contract created by the by-law between the
shareholder . . . and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a
purchaser. (Emphasis supplied.)

By analogy of the above-cited case, the Commission en banc is of the opinion that said case is
applicable to the present controversy. Appellant-petitioner bank as a third party can not be bound
by appellee-respondent's by-laws. It must be recalled that when appellee-respondent
communicated to appellant-petitioner bank that the pledge agreement was duly noted in the club's
books there was no mention of the shareholder-pledgor's unpaid accounts. The transcript of

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stenographic notes of the June 25, 1991 Hearing reveals that the pledgor became delinquent only in
1975. Thus, appellant-petitioner was in good faith when the pledge agreement was contracted.

The Commission en banc also believes that for the exception to the general accepted rule that third
persons are not bound by by-laws to be applicable and binding upon the pledgee, knowledge of the
provisions of the VGCI By-laws must be acquired at the time the pledge agreement was contracted.
Knowledge of said provisions, either actual or constructive, at the time of foreclosure will not affect
pledgee's right over the pledged share. Art. 2087 of the Civil Code provides that it is also of the
essence of these contracts that when the principal obligation becomes due, the things in which the
pledge or mortgage consists maybe alienated for the payment to the creditor.

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 National Power Corporation v. Vera
G.R. No. 83558 | February 27, 1989

176. Give examples of implied or incidental powers.

In the case of National Power Corporation v. Vera, the stevedoring services which involve the
unloading of the coal shipments in the NPC pier for its eventual conveyance to the power plant
were considered as incidental and indispensable to the operation of the plant. The Court ruled
that, “a corporation is not restricted to the exercise of powers expressly conferred upon it by its
charter, but has the power to do what is reasonably necessary or proper to promote the interest
or welfare of the corporation.”

XXX

Facts
The National Power Corporation (NPC) filed a petition to annul the order of a Regional Trial Court
judge that issued a writ of preliminary injunction. The injunction prevented NPC from undertaking
stevedoring and arrastre services at its pier in Calaca, Batangas, and directed NPC to either enter
into a contract for such services or conduct a public bidding. The private respondent, Sea Lion
International Port Terminal Services, Inc., alleged that NPC acted in bad faith by not renewing its
contract for stevedoring services and taking over the operations. NPC argued that it was within its
corporate powers to undertake these services and that the judge acted without jurisdiction in
issuing the injunction.

Issue
Whether NPC, under its corporate charter, has the authority to undertake stevedoring and arrastre
services as part of its corporate powers.

Ruling
The Supreme Court ruled in favor of NPC, holding that:
1.​ The judge acted without jurisdiction in issuing the writ of preliminary injunction, as
Presidential Decree No. 1818 prohibits courts from restraining government infrastructure
projects or public utility operations, including those of NPC.
2.​ NPC is empowered under its charter, Republic Act No. 6395, as amended, to undertake
activities reasonably necessary to achieve its corporate purposes. The stevedoring and
arrastre services at its pier were deemed incidental and indispensable to the operation of its
coal-fired power plant, as these services facilitated the unloading of coal shipments used to
generate electricity.
3.​ The court emphasized that NPC's corporate discretion in managing its operations, including
whether to contract out or directly undertake services, cannot be controlled by the judiciary.

In the instant case, it is an undisputed fact that the pier located at Calaca, Batangas, which is owned
by NPC, receives the various shipments of coal which is used exclusively to fuel the Batangas
Coal-Fired Thermal Power Plant of the NPC for the generation of electric power. The stevedoring
services which involve the unloading of the coal shipments into the NPC pier for its eventual
conveyance to the power plant are incidental and indispensable to the operation of the plant. The
Court holds that NPC is empowered under its Charter to undertake such services, it being
reasonably necessary to the operation and maintenance of the power plant.

The petition was granted, the judge's order was set aside, and the temporary restraining order
issued by the Supreme Court was made permanent. NPC's corporate powers were upheld as
reasonably encompassing the questioned activities.

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 Jorgenetics Swine Improvement Corporation v. Thick & Thin Agri-Products, Inc.
G.R. Nos. 201044 & 222691 | May 5, 2021

Divina: 179. Discuss the specific powers of the corporation under the theory of general capacity.

The chairperson and president of a corporation may sign the verification and certification without
need of board resolution. Moreover, lack of authority of a corporate officer to undertake an action
on behalf of the corporation may be cured by ratification through the subsequent issuance of a
board resolution.

Facts

Jorgenetics entered into a chattel mortgage agreement with Thick & Thin Agri-Products, Inc. (TTAI)
for 4,765 heads of hogs as security for a debt of Php 20,000,000. TTAI filed a complaint for replevin
against Jorgenetics after the latter failed to pay for feeds and supplies provided on credit. The trial
court initially dismissed the complaint for lack of jurisdiction due to improper service of summons.
However, TTAI filed a petition for certiorari, which led to the reinstatement of the replevin case.

Jorgenetics filed a Petition for Review on Certiorari before this Court, assailing the CA's
reinstatement of the replevin case. This was docketed as G.R. No. 201044.

TTAI contends that Mr. Romeo J. Jorge, the chairperson and president of petitioner, had no authority
to file the Petition in G.R. No. 201044 on behalf of Jorgenetics at the time of the filing thereof, and
that the belated submission of the Board Resolution indicating Mr. Jorge's authority and ratifying the
filing of the Petition will not cure the defect.

Issue

Whether the Petitions should be dismissed for failure of Jorgenetics to comply with the rules on
verification and certification of non-forum shopping; ❌
Ruling

In Cagayan Valley Drug Corp. v. Commissioner of Internal Revenue, this Court ruled that certain
officials or employees of a corporation can sign the verification and certification on its behalf
without need of a board resolution, such as but not limited to the chairperson of the board of
directors, the president of a corporation, the general manager or acting general manager, personnel
officer, and an employment specialist in a labor case. Moreover, the "lack of authority of a corporate
officer to undertake an action on behalf of the corporation may be cured by ratification through the
subsequent issuance of a board resolution, recognizing the validity of the action or the authority of
the concerned officer."

Given the foregoing, Mr. Jorge, as the chairperson and president of petitioner, is sufficiently
authorized to sign the verification and certification on behalf of Jorgenetics. Any doubt on his
authority to sign the verification and certification is likewise obviated by the secretary's certificate it
submitted upon the orders of this Court, which ratified Mr. Jorge's authority to represent petitioner
and file the Petition in G.R. No. 201044.

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 Metroplex Berhad and Paxell Investment Limited v. Sinophil Corporation
G.R. No. 208281 | June 28, 2021

RE: Power to Increase or Decrease Capital Stock

-​ Section 37, Revised Corporation Code
-​ Voting Requirement: Majority BOD + ⅔ OCS
-​ A corporation can only decrease its capital stock if the following are present:
a.​ Approval by a majority vote of the board of directors;
b.​ Written notice of the proposed diminution of the capital stock, and of the time and
place of a stockholders' meeting duly called for the purpose, addressed to each
stockholder at his place of residence;
c.​ 2/3 of the outstanding capital stock voting favorably at the said stockholders'
meeting duly;
d.​ Certificate in duplicate, signed by majority of the directors and countersigned by
the chairman and secretary of the stockholders' meeting stating that legal
requirements have been complied with;
e.​ Prior approval of the SEC; and
f.​ Effects do not prejudice the rights of corporate creditors.

Facts
●​ Sinophil entered into a Share Swap Agreement (Swap Agreement) with Metroplex and Paxell,
both foreign corporations, wherein Metroplex and Paxell would transfer 40% of their
shareholdings in Legend International Resorts Limited (Legend) for a combined 35.5% stake
in Sinophil.
●​ Pursuant to the Swap Agreement, Sinophil issued 2.41 billion shares to Metroplex and 1.45
billion shares to Paxell, totaling 3.87 billion shares.
●​ Metroplex pledged 2 billion of its Sinophil shares with Union Bank and Asian Bank to secure
the loans of Legend with the said banks.
●​ Subsequently, Sinophil and Belle executed a Memorandum of Agreement (Unwinding
Agreement) with Metroplex and Paxell rescinding the 1998 Swap Agreement. However,
Metroplex and Paxell were unable to return 1.87 billion of the Sinophil shares while another
two billion Sinophil shares remained pledged by Metroplex in favor of International
Exchange Bank and Asian Bank.
●​ On February 18, 2002 and June 3, 2005, the shareholders of Sinophil voted for the reduction
of Sinophil's authorized capital stock.
●​ On March 28, 2006, the CRMD and the CFD approved the first amendment of the Articles of
Incorporation of Sinophil, reducing its authorized capital stock by 1.87 billion shares. The
following day, the approval of the reduction of Sinophil's authorized capital stock was
disclosed to the Philippine Stock Exchange, Inc. (PSE).
●​ On June 21, 2007, the shareholders of Sinophil again approved the proposal of the Board of
Directors to reduce its authorized capital stock by another one billion shares.
●​ On June 24, 2008, the CRMD and the CFD approved the second amendment of the Articles of
Incorporation of Sinophil which further reduced its authorized capital stock by one billion
shares. On June 30, 2008, the approval of the reduction of Sinophil's authorized capital stock
was likewise disclosed to the PSE.
●​ On July 21, 2008, petitioners Yaw Chee Cheow (Yaw), Metroplex and Paxell filed a Petition for
Review Ad Cautelam Ex Abundanti before the SEC assailing the approval by the CRMD and
the CFD of the amendments by Sinophil of its Articles of Incorporation.

Issue

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Whether or not the SEC correctly upheld the validity of the reduction of Sinophil’s authorized
✅
capital stock and denied the prayer for the issuance of a cease and desist order.

Ruling

The Supreme Court affirmed the Court of Appeals' decision, ruling that the reduction of Sinophil's
capital stock was legal and proper. The Court emphasized that the SEC's role was ministerial in
nature. After a corporation faithfully complies with the requirements laid down in Section 38, the
SEC has nothing more to do other than approve the same. The Court found that Sinophil had met
the necessary legal requirements, including obtaining the requisite votes from stockholders and
providing proper notice of meetings. The Court also ruled that the SEC's approval was valid and that
there was no fraudulent act committed by Sinophil in the process. Consequently, the petitioners'
request for a temporary restraining order was denied, affirming the SEC's decision to allow the
capital stock reduction G.R. No. 208281 (2021).

1.​ Section 38 of the Corporation Code clearly lists down the requirements for a corporation to
decrease its capital stock.
2.​ SEC only has the ministerial duty to approve the decrease of a corporation's authorized
capital stock. - The "business judgment rule" simply means that "the SEC and the courts are
barred from intruding into business judgments of corporations, when the same are made in
good faith."
3.​ The issuance of an injunctive relief of temporary restraining order (TRO) is not warranted.

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 Lopez v. Lopez
G.R. Nos. 254957-58 | June 15, 2022

Divina: “In [this] case, it was ruled that subscription of shares out of the unissued portion of the
authorized capital stock not supported by board resolution and done to favor certain stockholders,
violated the pre-emptive right of the other stockholders not given the same opportunity. The voting of
these shares rendered the meeting void.”

Pre-emptive Right, when violated?

-​ Respondent Lolito purchased 33,495 unissued shares of iSpecialist Development
Corporation without any board resolution authorizing the sale and and eventually voted
such shares in the questioned elections of the Board.
-​ Respondent Lolito acquired 252,125 unissued shares of stock in LC Lopez, and 97,050
unissued shares of stock in Conqueror without any board resolution of the two aforesaid
corporations and used the shares to ostensibly elect, or cause to be elected, his
co­-defendants as directors for the two aforesaid corporations, in the process ousting
petitioner, Christina, and John Rusty as directors and officers thereof.

Prior authorization of the Board is necessary to validate the sale of the unissued shares.

The sale of the unissued shares must be made with the appropriate board resolution and must be
offered first to the stockholders in proportion to their respective shareholdings in recognition of
their right of pre-emption under Article 38 of the Revised Corporation Code.

Facts

Lily C. Lopez filed a petition for review on certiorari challenging the decisions of the Court of
Appeals regarding two separate cases involving a special stockholders' meeting and an election
contest in different corporations. The trial courts had previously ruled in favor of Lily, declaring the
meetings and elections null and void due to procedural violations, including lack of quorum and
absence of a board resolution authorizing the transactions. The Court of Appeals reversed these
decisions, prompting Lily to appeal to the Supreme Court.

Issue
Whether or not respondent Lolito Lopez's purchase of the unissued shares of stock was valid. ❌
The primary issue in this case was whether the special stockholders' meetings and the subsequent
elections were valid, particularly in relation to the violation of pre-emptive rights as stipulated under
the Corporation Code. Specifically, the case examined if the issuance and voting of unissued shares
without proper authorization violated the rights of existing stockholders.

Ruling: No, Lolito Lopez's purchase of the unissued shares of stock was not valid.

The Supreme Court ruled in favor of Lily C. Lopez, reinstating the trial courts' decisions. It found
that the special stockholders' meetings and the election of a new board of directors were void due to
lack of quorum and absence of a board resolution authorizing the issuance of unissued shares. The
Court emphasized that the right of pre-emption, as provided under Section 39 of the Corporation
Code [Section 38 of the Revised Corporation Code], was violated when unissued shares were allowed
to vote without offering them first to existing stockholders. Thus, the transactions were declared
null and void, affirming the protection of stockholders' rights in corporate governance.

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Anent respondent Lolito's purchase of the unissued shares, We agree with the rulings of the
courts a quo that the same could not be done in the absence of any board resolution
authorizing the transaction. This is explicitly provided by Section 23 of the Corporation Code
which reads as follows:

Section 23. The board of directors or trustees – Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property or such corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year and until their
successors are elected and qualified. x x x [Old Corporation Code]

[See Section 22 par. 1 of the Revised Corporation Code]

It is clear then that without the board resolution authorizing the sale of the erstwhile unissued
shares, respondent Lolito could not have validly purchased them. The sale being invalid,
respondent Lolito could not have legally used the same in voting for a new set of directors in
the concerned corporations.

For yet another reason to invalidate the sale, and as judiciously held by RTC-Marikina, it was
concluded in violation of petitioner's right of pre­emption granted her and the other
stockholders under Section 39 of the Corporation Code [Section 38, RCC].

RE: Validity of Special Stockholders’ Meeting

Not only is the sale invalid, but We find the special stockholders' meeting to be void itself for
lack of quorum. In determining the quorum, We would have to refer to the GIS of the subject
corporations, instead of the STB, in view of the undisputed findings of the court a quo that the
entries therein were of doubtful veracity, considering that first, it was made by Edna, who was
not the corporate secretary, and second, it was admitted by respondent Mario that the entries
therein, and the stock certificates themselves, were made a few days before the special
stockholders' meeting and that there apparently were no documents to support said entries.
Therefore, the latest GIS would have given a more accurate presentation of the actual
stockholdings to determine whether or not a quorum indeed was constituted during the
meeting.

The GIS of LC Lopez showed that there were 162,500 outstanding shares therein, and only
respondent Lolito's share of 61,750 was represented during the meeting, as the other
stockholders, by themselves or through their proxies, were prevented from attending it. In the
case of Conqueror, only the 17,000 shares of respondent Lolito, out of its 45,000 outstanding
shares, were represented, due also to the absence of the other stockholders. Very clearly, the
shareholdings of respondent Lolito alone could not have constituted the one-half plus one of
the total outstanding shares required to have a quorum.

It is beyond doubt that the special stockholders' meeting, and the sale and voting of the
unissued shares of stock, were both void and thus could not have produced any legal effect.

Disposition:

The Petition is granted. The Decisions of Branch 93 of the Regional Trial Court of Quezon City
and Branch 273 of the Regional Trial Court of Marikina City are hereby REINSTATED in toto.

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Power to deny pre-emptive rights (Divina)

211. What is pre-emptive right?

It is the right of stockholders to subscribe to all issues or disposition of shares of any class by
the corporation, in proportion to their respective shareholdings. In practical terms, this
means that the shares of stock of the corporation should first be offered proportionately to
the stockholders before they can be issued or sold to nonstockholders.

212. What is the rationale of pre-emptive right?

The foundation or underlying basis of this right is to maintain the proportionate voting
strength and control of existing stockholders, that is, the existing ratio of their interest and
voting power in the corporation. This right prevents the dilution and impairment of the
stockholders’ interest in the corporation.

For example, the authorized capital stock of the corporation is ₱ l00,000,000 divided into
100,000,000 shares with par value of ₱ l.00 per share, 50,000,000 of which is fully subscribed.
Of these shares, A, B, C, D, and E subscribed to 10 million shares each. Each of them gets to
receive 20% of the dividends that the corporation may declare. In case of dissolution, they
will also receive 20% each of the residual assets of the corporation. In case of new share
issuance, the stockholders should be given the first opportunity to subscribe thereto, in
proportion to their shareholdings in the corporation, before such new shares can be issued to
nonstockholders otherwise, the 20% equity stake of each stockholder will be diluted.

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 Nell vs. Pacific Farms, Inc.
G.R. No. L-20850 | November 29 1965

Divina:

Nell Doctrine - The general rule is that where one corporation sells or otherwise transfers all of its assets to
another corporation, that latter is not liable for the debts and liabilities of the transferor.

Exceptions to the Nell Doctrine:

a.​ When the buyer expressly or impliedly assumes the liabilities of the seller;
b.​ If the sale amounts to a merger or consolidation;
c.​ If the sale is entered into fraudulently or made in bad faith; and
d.​ If the buyer is merely a continuation of the personality of the seller or the so-called business-enterprise
transfer rule.

Facts

Edward J. Nell Co. (appellant) obtained a judgment against Insular Farms, Inc. for unpaid debts amounting to
₱1,853.80 — representing the unpaid balance of the price of a pump sold by appellant to Insular Farms — with
interest on said sum, plus P125.00 as attorney's fees and P84.00 as costs. However, the writ of execution was
returned unsatisfied as Insular Farms had no leviable property. Edward J. Nell Co. then filed a case against
Pacific Farms for the collection of the judgment aforementioned, Inc. (appellee), alleging that it was the alter
ego of Insular Farms and thus liable for the latter's debts. Pacific Farms had purchased 1,000 shares of stock of
Insular Farms for P285,126.99 and real and personal properties of Insular Farms, including leasehold rights over
public land for P10,000.00, over 6 months prior to the judgment against Insular Farms.

The municipal court dismissed appellant's complaint. Appellant appealed, with the same result, to the court of
first instance and, subsequently, to the Court of Appeals. Hence this appeal by certiorari, upon the ground that
the Court of Appeals had erred: (1) in not holding the appellee liable for said unpaid obligation of the Insular
Farms; and (2) in not granting attorney's fees to appellant.

Issue

Whether or not appellee is an alter ego of Insular Farms. ❌

Ruling: No, Pacific Farms is not an alter ego of Insular Farms.

These facts do not prove that the Pacific Farms is an alter ego of Insular Farms, or is liable for its debts.
Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the latter
is not liable for the debts and liabilities of the transferor, except:
1.​ where the purchaser expressly or impliedly agrees to assume such debts;
2.​ where the transaction amounts to a consolidation or merger of the corporations;
3.​ where the purchasing corporation is merely a continuation of the selling corporation; and
4.​ where the transaction is entered into fraudulently in order to escape liability for such debts.

In the case at bar, there is neither proof nor allegation that:

1.​ appellee had expressly or impliedly agreed to assume the debt of Insular Farms in favor of appellant
herein, or that
2.​ these transactions have resulted in the consolidation or merger of the Insular Farms and appellee
herein, or that
3.​ the appellee is a continuation of Insular Farms, or that
4.​ the sale of either the shares of stock or the assets of Insular Farms to the appellee has been entered
into fraudulently, in order to escape liability for the debt of the Insular Farms in favor of appellant
herein. - the sale of assets worth ₱285,126.99 was not fraudulent, as it was approved by the Securities
and Exchange Commission.

Disposition:
The appeal was dismissed, and the decision of the Court of Appeals was affirmed, with costs against the
appellant.

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