TOPIC: I. Formation and Organization of Corporations. B.CLASSIFICATION OF CORPORATIONS, 9.Other Corporations Case No 13 Boy Scouts of the Philippines vs. Commission on Audit GR No. 177131, June 7,2011 Facts: The Boy Scout of the Philippine (BSP) Charter, Commonwealth Act No. 111, created the BSP as a public corporation to serve t public interest or purpose. The Commission on Audit (COA), through a Resolution, deemed the BSP a public corporation under the ambit of its power to conduct annual financial audits and for the purposes of audit, the BSP shall be classified among the government corporations belonging to the Educational, Social, Scientific, Civic and Research Sector. The BSP sought reconsideration of the COA Resolution that it is not subject to the Commission’s jurisdiction on the grounds that RA No. 7278 eliminated the substantial government participation in the National Executive Board by removing: (i) the President of the Philippines and executive secretaries, with the exception of the Secretary of Education, as members thereof; and (ii) the appointment and confirmation power of the President of the Philippines, as Chief Scout, over the members of the said Board. Also, the Government, like in other GOCCs, does not have funds invested in the BSP. Also the BSP believes that the BSP is not appropriately regarded as a government instrumentality under the 1987 Administrative Code. As defined by Section 2(10) of the said code, instrumentality refers to any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. The BSP is not an entity administering special funds. It is not even included in the DECS National Budget. Issue: Whether the BSP is a public corporation under the audit jurisdiction of the COA Held: The BSP is a public corporation and its funds are subject to the COA’s audit jurisdiction. The BSP Charter created the BSP as a public corporation to serve the public interest or purpose. There are three classes of juridical persons under Article 44 of the Civil Code and the BSP, as presently constituted under Republic Act No. 7278, falls under the second classification. Article 44 reads: Art. 44. The following are juridical persons: (1) The State and its political subdivisions; (2) Other corporations, institutions and entities for public interest or purpose created by law; their personality begins as soon as they have been constituted according to law; (3) Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member. Evidently, the BSP, which was created by a special law to serve a public purpose in pursuit of a constitutional mandate, comes within the class of public corporations defined by paragraph 2, Article 44 of the Civil Code and governed by the law which creates it, pursuant to Article 45 of the same Code. The public, rather than private, character of the BSP is recognized by the fact that, along with the Girl Scouts of the Philippines, it is classified as an attached agency of the DECS under Executive Order No. 292, or the Administrative Code of 1987. As an attached agency, the BSP enjoys operational autonomy, as long as policy and program coordination is achieved by having at least one representative of government in its governing board, which in the case of the BSP is the DECS Secretary. In this sense, the BSP is not under government control or supervision and control. Still this characteristic does not make the attached chartered agency a private corporation covered by the constitutional proscription in question. The BSP is a public corporation or a government agency or instrumentality with juridical personality. Not all corporations, which are not government owned or controlled, are ipso facto to be considered private corporations as there exists another distinct class of corporations or chartered institutions which are otherwise known as public corporations. These corporations are treated by law as agencies or instrumentalities of the government which are not subject to the tests of ownership or control and economic viability but to different criteria relating to their public purposes/interests or constitutional policies and objectives and their administrative relationship to the government or any of its Departments or Offices. As presently constituted, the BSP still remains an instrumentality of the national government. It is a public corporation created by law for a public purpose, attached to the DECS pursuant to its Charter and the Administrative Code of 1987. It is not a private corporation which is required to be owned or controlled by the government and be economically viable to justify its existence under a special law. The test of economic viability clearly does not apply to public corporations dealing with governmental functions, to which category the BSP belongs. The said test would only apply if the corporation is engaged in some economic activity or business function for the government. TOPIC: I. Formation and Organization of Corporations D. Corporate Juridical Personality 1. Theory of Concession A. Consequences/ Significance Case No 32 Donnina C. Halley vs. Printwell, Inc. GR No. 1576549, May 30, 2011 Facts: The petitioner was an incorporator and original director of Business Media Philippines, Inc. (BMPI). Printwell was engaged in commercial and industrial printing. BMPI commissioned Printwell for the printing of the magazine Philippines, Inc. that BMPI published and sold. BMPI placed with Printwell several orders on credit, evidenced by invoices and delivery receipts totalingP316,342.76. Considering that BMPI paidonlyP25,000.00, Printwell sued BMPI for the collection of the unpaid balance and impleaded as defendants all the original stockholders and incorporators to recover on their unpaid subscriptions. The petitioner submits that she had no participation in the transaction between BMPI and Printwell; that BMPI acted on its own; and that she had no hand in persuading BMPI to renege on its obligation to pay. Hence, she should not be personally liable. Issue: Whether the doctrine of separate juridical personality should be applied Held: Although a corporation has a personality separate and distinct from those of its stockholders, directors, or officers, such separate and distinct personality is merely a fiction created by law for the sake of convenience and to promote the ends of justice. The corporate personality may be disregarded, and the individuals composing the corporation will be treated as individuals, if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. As a general rule, a corporation is looked upon as a legal entity, unless and until sufficient reason to the contrary appears. Thus, the courts always presume good faith, and for that reason accord prime importance to the separate personality of the corporation, disregarding the corporate personality only after the wrongdoing is first clearly and convincingly established. It thus behooves the courts to be careful in assessing the milieu where the piercing of the corporate veil shall be done. Although nowhere in Printwell’s amended complaint or in the testimonies Printwell offered can it be read or inferred from that the petitioner was instrumental in persuading BMPI to renege on its obligation to pay; or that she induced Printwell to extend the credit accommodation by misrepresenting the solvency of BMPI to Printwell, her personal liability, together with that of her co-defendants, remained because the CA found her and the other defendant stockholders to be in charge of the operations of BMPI at the time the unpaid obligation was transacted and incurred. It was also during this time that appellants stockholders were in charge of the operation of BMPI despite the fact that they were not able to pay their unpaid subscriptions to BMPI yet greatly benefited from said transactions. In view of the unpaid subscriptions, BMPI failed to pay appellee of its liability, hence appellee in order to protect its right can collect from the appellants stockholders regarding their unpaid subscriptions. To deny appellee from recovering from appellants would place appellee in a limbo on where to assert their right to collect from BMPI since the stockholders who are appellants herein are availing the defense of corporate fiction to evade payment of its obligations. TOPIC: I. Formation and Organization of Corporations D. Corporate Juridical Personality 2. Doctrine of Piercing the Veil of Corporate Fiction a. Grounds for Application of Doctrine iii. Alter Ego/ Instrumentality Case No 51 Gold Line Tours vs. Heirs of Lacsa GR No. 159108, June 18, 2012 Facts: Ma. Concepcion Lacsa (Concepcion) and her sister, Miriam Lacsa (Miriam), boarded a Goldline passenger bus owned and operated by Travel &Tours Advisers, Inc. from Sorsogon to Cubao, Quezon City. The bus collided with a passenger jeepney and a result Concepcion died. Concepcion’s heirs filed a suit against Travel & Tours Advisers Inc. and Abania, the driver to recover damages arising from breach of contract of carriage. Petitioner submitted a third party claim, claiming that the tourist bus be returned to petitioner because it was the owner and that petitioner was a corporation entirely different from Travel & Tours Advisers, Inc., the defendant in the other case. The RTC dismissed petitioner’s verified third-party claim, observing that the identity of Travel & Tours Adivsers, Inc. could not be divorced from that of petitioner considering that William Cheng had claimed to be the operator as well as the President/Manager/ incorporator of both entities; and that Travel & Tours Advisers, Inc. had been known in Sorsogon as Goldline. Issue: Whether Travel & Tours Advises, Inc. and Gold Line Tours are two separate corporations with separate juridical personalities Held: The RTC had sufficient factual basis to find that petitioner and Travel and Tours Advisers, Inc. were one and the same entity, specifically: (a) documents submitted by petitioner in the RTC showing that William Cheng, who claimed to be the operator of Travel and Tours Advisers, Inc., was also the President/Manager and an incorporator of the petitioner; and (b) Travel and Tours Advisers, Inc. had been known in Sorsogon as Goldline. On its part, the CA cogently observed: William Ching disclosed during the trial of the case that defendant Travel & Tours Advisers, Inc. (Goldline), of which he is an officer, is operating sixty (60) units of Goldline buses. That the Goldline buses are used in the operations of defendant company is obvious from Mr. Cheng’s admission. The Amended Articles of Incorporation of Gold Line Tours, Inc. disclose that the following persons are the original incorporators thereof: Antonio O. Ching, Maribel Lim Ching, witness William Ching, Anita Dy Ching and Zosimo Ching. We see no reason why defendant company would be using Goldline buses in its operations unless the two companies are actually one and the same. Moreover, the name Goldline was added to defendants name in the Complaint. There was no objection from William Ching who could have raised the defense that Gold Line Tours, Inc. was in no way liable or involved. Indeed it appears to this Court that rather than Travel & Tours Advisers, Inc. it is Gold Line Tours, Inc., which should have been named party defendant. TOPIC: I. Formation and Organization of Corporations D. Corporate Juridical Personality 2. Doctrine of Piercing the Veil of Corporate Fiction a. Grounds for Application of Doctrine iii. Alter Ego/ Instrumentality Case No 70 Vlason Enterprises vs. CA 310 SCRA 26, July 6, 1999 Facts: Poro Point Shipping Services, then acting as the local agent of Omega Sea Transport Company of Honduras & Panama, a Panamanian company, (hereafter referred to as Omega), requested permission for its vessel M/V Star Ace, which had engine trouble, to unload its cargo and to store it at the Philippine Ports Authority (PPA) compound in San Fernando, La Union while awaiting transhipment to Hongkong. The request was approved by the Bureau of Customs. Despite the approval, the customs personnel boarded the vessel when it docked on January 7, 1989, on suspicion that it was the hijacked M/V Silver Med owned by Med Line Philippines Co., and that its cargo would be smuggled into the country. The district customs collector seized said vessel and its cargo pursuant to Section 2301, Tariff and Customs Code. While seizure proceedings were ongoing, La Union was hit by three typhoons, and the vessel ran aground and was abandoned. They entered into a salvage agreement with private respondent to secure and repair the vessel which was destroyed by the typhoons that hit the province at the agreed consideration of $1 million and “fifty percent (50%) of the cargo after all expenses, cost and taxes.” Subsequently, the seizure was lifted for want of fraud. To enforce its preferred salvor’s lien, herein Private Respondent Duraproof Services filed with the Regional Trial Court of Manila a Petition for Certiorari, Prohibition and Mandamus assailing the actions of Commissioner Mison and District Collector Sy. Issue: Whether the doctrine of piercing the corporate veil is applicable Held: NO. In the present case, Bebero was the secretary of Angliongto, who was president of both VSI and petitioner, but she was an employee of VSI, not of petitioner. The piercing of the corporate veil cannot be resorted to when serving summons. Doctrinally, a corporation is a legal entity distinct and separate from the members and stockholders who compose it. However, when the corporate fiction is used as a means of perpetrating a fraud, evading an existing obligation, circumventing a statute, achieving or perfecting a monopoly or, in generally perpetrating a crime, the veil will be lifted to expose the individuals composing it. None of the foregoing exceptions has been shown to exist in the present case. Quite the contrary, the piercing of the corporate veil in this case will result in manifest injustice. TOPIC: I. Formation and Organization of Corporations D. Corporate Juridical Personality 2. Doctrine of Piercing the Veil of Corporate Fiction a. Grounds for Application of Doctrine iii. Alter Ego/ Instrumentality Case No 89 Koppel (Phil) Inc., vs. Yatco 77 Phil 496, October 10, 1946 Facts: Plaintiff is a corporation organized and existing under the laws of the Philippines, the capital stock of which is divided into thousand (1,000) shares of P100 each. The Koppel Industrial Car and Equipment company, an American corporation, and not licensed to do business in the Philippines, owned nine hundred and ninety-five (995) shares out of the total capital stock of the plaintiff, and the remaining five (5) shares only were and are owned one each by officers of the plaintiff corporation. The shares of stock of plaintiff corporation were and are all owned by Koppel Industries Car and Equipment Company of Pennsylvania, U. S. A., exceptive which were necessary to qualify the Board of Directors of said plaintiff corporation; In the transactions involved, the plaintiff corporation acted as the representative of Koppel Industrial Car and Equipment Company only, and not as the agent of both the latter company and the respective local purchasers; plaintiff corporation bore alone incidental expenses — as, for instance, cable expenses-not only those of its own cables but also those of its "principal"; the plaintiff's "share in the profits" realized from the transactions in which it intervened was left virtually in the hands of Koppel Industrial Car and Equipment Company. Issue: Whether Koppel is a mere dummy or branch of Koppel industrial Car and Equipment Company Held: In looking through the corporate form to the ultimate person or corporation behind that form, in the particular transactions which were involved in the case submitted to its determination and judgment, the court did so in order to prevent the contravention of the local internal revenue laws, and the perpetration of what would amount to a tax evasion, inasmuch as it considered that appellant Koppel (Philippines), Inc. was a mere branch or agency or dummy ("hechura") of Koppel Industrial Car and Equipment Co. The court did not hold that the corporate personality of Koppel (Philippines), Inc., would also be disregarded in other cases or for other purposes. It would have had no power to so hold. The courts' action in this regard must be confined to the transactions involved in the case at bar "for the purpose of adjudging the rights and liabilities of the parties in the case. in so far as the sales involved herein are concerned, Koppel (Philippines), Inc., and Koppel Industrial Car and Equipment company are to all intents and purposes one and the same; or, to use another mode of expression, that, as regards those transactions, the former corporation is a mere branch, subsidiary or agency of the latter. To our mind, this is conclusively borne out by the fact, among others, that the amount of the so-called “shares in the profits" of Koppel (Philippines), Inc., was ultimately left to the sole, unbridled control of Koppel Industrial Car and Equipment Company. If, in their relations with each other, Koppel (Philippines), Inc., was considered and intended to function as a bona fide separate corporation, the court cannot conceive how this arrangement could have been adopted, for if there was any factor in its business as to which it would in that case naturally have been opposed to being thus controlled, it must have been precisely the amount of profit which it could endeavor and hope to earn. Evidently, Koppel Industrial Car and Equipment Company made use of its ownership of the overwhelming majority — 99.5% — of the capital stock of the local corporation to control the operations of the latter to such an extent that it had the final say even as to how much should be allotted to said local entity in the so-called sharing in the profits. The Court cannot overlook the fact that in the practical working of corporate organizations of the class to which these two entities belong, the holder or holders of the controlling part of the capital stock of the corporation, particularly where the control is determined by the virtual ownership of the totality of the shares, dominate not only the selection of the Board of Directors but, more often than not, also the action of that Board. If Koppel (Philippines), Inc., had been intended to operate as a regular domestic corporation in the Philippines, where it was formed, the record and the evidence do not disclose any reason why all its officers should not reside and perform their functions in the Philippines. TOPIC: I. Formation and Organization of Corporations E. Stages in the Formation/ Organization of a Corporations 1. Promotion Case No 108 Rizal Light vs. Municipality of Morong 25 SCRA 285, September 28, 1968 Facts: Before any certificate may be granted, authorizing the operation of a public service, three requisites must be complied with, namely: (1) the applicant must be a citizen of the Philippines or of the United States, or a corporation or co-partnership, association or joint-stock company constituted and organized under the laws of the Philippines, sixty per centum at least of the stock or paid-up capital of which belongs entirely to citizens of the Philippines or of the United States; (2) the applicant must be financially capable of undertaking the proposed service and meeting the responsibilities incident to its operation; and (3) the applicant must prove that the operation of the public service proposed and the authorization to do business will promote the public interest in a proper and suitable manner. The Public Service Commission found that Morong Electric is a corporation duly organized and existing under the laws of the Philippines, the stockholders of which are Filipino citizens, that it is financially capable of operating an electric light, heat and power service, and that at the time the decision was rendered there was absence of electric service in Morong, Rizal. While the petitioner does not dispute the need of an electric service in Morong, Rizal, it claims, in effect, that Morong Electric should not have been granted the certificate of public convenience and necessity because (1) it did not have a corporate personality at the time it was granted a franchise and when it applied for said certificate; (2) it is not financially capable of undertaking an electric service, and (3) petitioner was rendering efficient service before its electric plant was burned, and therefore, being a prior operator its investment should be protected and no new party should be granted a franchise and certificate of public convenience and necessity to operate an electric service in the same locality. The bulk of petitioner's arguments assailing the personality of Morong Electric dwells on the proposition that since a franchise is a contract, at least two competent parties are necessary to the execution thereof, and parties are not competent except when they are in being. Hence, it is contended that until a corporation has come into being, in this jurisdiction, by the issuance of a certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter into any contract as a corporation. The certificate of incorporation of the Morong Electric was issued by the SEC on October 17, 1962, so only from that date, not before, did it acquire juridical personality and legal existence. Petitioner concludes that the franchise granted to Morong Electric on May 6, 1962 when it was not yet in esse is null and void and cannot be the subject of the Commission's consideration. On the other hand, Morong Electric argues, and to which argument the Commission agrees, that it was a de facto corporation at the time the franchise was granted and, as such, it was not incapacitated to enter into any contract or to apply for and accept a franchise. Not having been incapacitated, Morong Electric maintains that the franchise granted to it is valid and the approval or disapproval thereof can be properly determined by the Commission. Issue: Whether the lack of corporate existence on the part of Morong rendered the franchise invalid Held: Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when a municipal franchise was granted to it is correct. The juridical personality and legal existence of Morong Electric began only on October 17, 1962 when its certificate of incorporation was issued by the SEC. 24 Before that date, or pending the issuance of said certificate of incorporation, the incorporators cannot be considered as de facto corporation. But the fact that Morong Electric had no corporate existence on the day the franchise was granted in its name does not render the franchise invalid, because later Morong Electric obtained its certificate of incorporation and then accepted the franchise in accordance with the terms and conditions thereof. The incorporation of Morong Electric on October 17, 1962 and its acceptance of the franchise as shown by its action in prosecuting the application filed with the Commission for the approval of said franchise, not only perfected a contract between the respondent municipality and Morong Electric but also cured the deficiency pointed out by the petitioner in the application of Morong EIectric. Topic: II. Incorporation and Organization Proper C. Articles of Incorporation. 1. Content a. Corporate Name Case No 127 P.C. Javier & Sons, Inc., et al vs. CA, et al GR No 129552, June 29, 2005 Facts: Plaintiff Corporation applied with First Summa Savings and Mortgage Bank, later on renamed as PAIC Savings and Mortgage Bank, Defendant Bank, for a loan accommodation under the Industrial Guarantee Loan Fund (IGLF) for P1.5 Million. Plaintiff Corporation, through Plaintiff Javier, was advised that its loan application was approved. The load was released by the CB in tranches. Plaintiff Javier opened a time deposit and executed a chattel mortgage over some machineries in favor of Defendant Bank. Plaintiff Corporation defaulted in the payment of its IGLF loan with Defendant Bank. Defendant Bank initiated extrajudicial foreclosure of the real estate mortgage executed by Plaintiff spouses and accordingly the auction sale of the property. The instant complaint was filed to forestall the extrajudicial foreclosure sale of a piece of land mortgaged by Petitioner Corporation in favor of First Summa Savings and Mortgage Bank which bank was later renamed as PAIC Savings and Mortgage Bank, Inc. Petitioners argue that they are legally justified to withhold their amortized payments to the respondent bank until such time they would have been properly notified of the change in the corporate name of First Summa Savings and Mortgage Bank. They claim that they have never received any formal notice of the alleged change of corporate name of First Summa Savings and Mortgage Bank to PAIC Savings & Mortgage Bank, Inc. Issue: Whether or not First Summa Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc. are one and the same entity Held: The plaintiff’s defense that they should first be formally notified of the change of corporate name of First Summa Savings and Mortgage Bank to PAIC Savings and Mortgage Bank, Inc., before they will continue paying their loan obligations to respondent bank presupposes that there exists a requirement under a law or regulation ordering a bank that changes its corporate name to formally notify all its debtors. After going over the Corporation Code and Banking Laws, as well as the regulations and circulars of both the SEC and the Bangko Sentral ng Pilipinas (BSP), the court finds that there is no such requirement. This being the case, this Court cannot impose on a bank that changes its corporate name to notify a debtor of such change absent any law, circular or regulation requiring it. Such act would be judicial legislation. The formal notification is, therefore, discretionary on the bank. Unless there is a law, regulation or circular from the SEC or BSP requiring the formal notification of all debtors of banks of any change in corporate name, such notification remains to be a mere internal policy that banks may or may not adopt. Topic: II. Incorporation and Organization Proper C. Articles of Incorporation. 1. Content g. Capital Structure iv. Classification of Shares, Voting vs. non-voting Case No 146 Castillo vs. Balinghasay GR No 150976, October 18, 2004 Facts: Petitioners are stockholders of MCPI holding Class “B” shares while the respondents are also stockholders owning Class “A” shares. In a 1992 amendment of the Articles of Incorporation of MCPI, the Articles of incorporation of the MCPI provides that, “except when otherwise provided by law, only holders of Class “A” shares are entitled to vote and to have the right to be elected as directors and corporate officers. During the 2001 meeting, petitioners raised an objection to the fact that only Class “A” shares are allowed to vote and to be elected. They contended that the Class “B” share holders’ right to vote is violated in violation of law. Issue: Whether or not holders of Class “B” shares of MCPI may be deprives of the right to vote and be voted for as directors Held: The 1992 amendment contains a proviso “except as otherwise provided for by law” the law being referred to by the proviso is that which is in force at the time of the amendment, in this case, was the Corporation Code. Under Sec. 6 of the Corporation Code, it provides that no share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares unless otherwise provided in this code. There is nothing in the articles of incorporation or an iota of evidence on record that shows that Class “B” shares were categorized as either preferred or redeemable shares. Topic: II. Incorporation and Organization Proper F. Adoption of By-Laws, OTHER CASES Case No 165 China Banking Corp. vs. CA 270 SCRA 503, March 26,1997 Facts: Galicano Calapatia, Jr., a stockholder of Valley Golf & Country Club, Inc. (VGCCI), pledged his Stock Certificate to China Banking Corporation (CBC)., CBC wrote VGCCI requesting that the pledge agreement be recorded in its books. VGCCI replied that the deed of pledge executed by Calapatia in CBC's favor was duly noted in its corporate books. On 1983, Calapatia obtained a loan of P20,000.00 from CBC, payment of which was secured by the pledge agreement still existing between Calapatia and CBC. Due to Calapatia's failure to pay his obligation, CBC, filed a petition for extrajudicial foreclosure of the pledged stock. CBC informed VGCCI of the foreclosure proceedings and requested that the pledged stock be transferred to its name and the same be recorded in the corporate books. However, VGCCI wrote CBC expressing its inability to accede to CBC's request in view of Calapatia's unsettled accounts with the club. Despite the foregoing, a public auction was held and CBC emerged as the highest bidder for the pledged stock. Consequently, CBC was issued the corresponding certificate of sale. In 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account. VGCCI eventually caused to be published a notice of auction sale of a number of its stock certificates. Included therein was Calapatia's own share of stock which is now owned by CBC. CBC advised VGCCI that it is the new owner of Calapatia's Stock Certificate and requested that a new certificate of stock be issued in its name., VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public auction. CBC protested the sale by VGCCI of the subject share of stock and thereafter filed a case for the nullification of the auction and for the issuance of a new stock certificate in its name. VGCCI insists that due to Calapatia's failure to settle his delinquent accounts, it had the right to sell the share in question in accordance with the express provision found in its by-laws. Issue: Whether CBC is bound by VGCCI's by-laws Held: 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. Herein, at the time the pledge agreement was executed. VGCCI could have easily informed CBC of its by-laws when it sent notice formally recognizing CBC as pledgee of one of its shares registered in Calapatia's name. CBC's belated notice of said by-laws at the time of foreclosure will not suffice. 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. The purpose of a by-law is to regulate the conduct and define the duties of the members towards the corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory authority, have no status as public law. Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except when they have knowledge of the provisions either actually or constructively. 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 VGCCI 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. Article 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. Further, VGCCI's contention that CBC is duty-bound to know its by-laws because of Article 2099 of the Civil Code which stipulates that the creditor must take care of the thing pledged with the diligence of a good father of a family, fails to convince. CBC was never informed of Calapatia's unpaid accounts and the restrictive provisions in VGCCI's by-laws. Furthermore, Section 63 of the Corporation Code which provides that "no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction." Herein, the subscription for the share in question has been fully paid as evidenced by the issuance of Membership Certificate 1219. What Calapatia owed the corporation were merely the monthly dues. Hence, Section 63 does not apply. Topic III. Corporate Powers A. In General 4. Other Cases Case No 184 SSS vs. COA 384 SCRA 548, July 11, 2002 Facts: The Social Security Commission (SSC), in behalf of the SS and the Concerned Employees for Better SSS (ACCESS) executed a collective negotiation agreement (CAN) that provides a P 5,000 contract signing bonus. The Department of Budget and Management (DBM) declared the CAN as illegal. The SSS Corporate Auditor also disallowed the release of the funds for the signing bonus since it was an allowance in the form of additional compensation prohibited by the Constitution. ACCESS appealed the disallowance but the COA affirmed it and ruled that the grant of the signing bonus was improper because it has no legal basis since Sec. 16 of RA 7658 had repealed the authority of the SSC to fix the compensation of its personnel. Petitioner SSS argues that a signing bonus may be granted upon the conclusion of negotiations leading the execution of a CAN under RA 1161, which allows the SSC to fix the compensation of its personnel. Issue: Whether the charter of SSS authorizes the SSC to fix the compensation of its employees and officers Held: When the signing bonus was bestowed upon each employee and officer of the SSS on 10 July 1996, which was earlier approved by the SSC on 3 July 1996, the governing charter of the SSS was RA 1161 as amended by Sec. 1, RA 2658, and Sec. 1, PD 735. Under this amended statute, the SSC was empowered to appoint an actuary and such other personnel as may be deemed necessary and to fix their compensation. The law also provided that the personnel of the SSS shall be selected only from civil service eligibles and be subject to civil service rules and regulations. On 9 August 1989 Congress passed RA 6758 which took effect on 1 July 1989. Its goal was to provide equal pay for substantially equal work and to base differences in pay upon substantive differences in duties and responsibilities, and qualification requirements of the positions. Towards this end, RA 6758 provided for the consolidation of allowances and compensation in the prescribed standardized salary rates except certain specified allowances and such other additional compensation as may be determined by the Department of Budget and Management. Although it was the clear policy intent of RA 6758 to standardize salary rates among government personnel, the Legislature under Secs. 12 and 17 of the law nonetheless saw the need for equity and justice in adopting the policy of non-diminution of pay when it authorized incumbents as of 1 July 1989 to receive salaries and/or allowances over and above those authorized by RA 6758. The consequential outcome, under sections 12 and 17, is that if the incumbent resigns or is promoted to a higher position, his successor is no longer entitled to his predecessors RATA privilege x x x or to the transition allowance x x x x After July 1, 1989, additional financial incentives such as RATA may no longer be given by GOCCs with the exception of those which were authorized to be continued under Section 12 of RA 6758. The Court has no doubt that RA 6758 modified, if not repealed, Sec. 3, par. (c), of RA 1161 as amended, at least insofar as it concerned the authority of SSC to fix the compensation of SSS employees and officers. This means that whatever salaries and other financial and non-financial inducements that the SSC was minded to fix for them, the compensation must comply with the terms of RA 6758. Consequently, only the remuneration which was being offered as of 1 July 1989, and which was then being enjoyed by incumbent SSS employees and officers, could be availed of exclusively by the same employees and officers separate from and independent of the prescribed standardized salary rates. Unfortunately, however, the signing bonus in question did not qualify under Secs. 12 and 17 of RA 6758. It was non-existent as of 1 July 1989 as it accrued only in 1996 when the CNA was entered into by and between SSC and ACCESS. The signing bonus therefore could not have been included in the salutary provisions of the statute nor would it be legal to disburse to the intended recipients. The Court has been very consistent in characterizing the funds being administered by SSS as a trust fund for the welfare and benefit of workers and employees in the private sector. In United Christian Missionary v. Social Security Commission we were unequivocal in declaring the funds contributed to the Social Security System by compulsion of law as funds belonging to the members which were merely held in trust by the government, and resolutely imposed the duty upon the trustee to desist from any and all acts which would diminish the property rights of owners and beneficiaries of the trust fund. Consistent with this declaration, it would indeed be very reasonable to construe the authority of the SSC to provide for the compensation of SSS personnel in accordance with the established rules governing the remuneration of trustees - x x x x the modern rule is to give the trustee a reasonable remuneration for his skill and industry x x x x In deciding what is a reasonable compensation for a trustee the court will consider the amount of income and capital received and disbursed, the pay customarily given to agents or servants for similar work, the success or failure of the work of the trustee, any unusual skill which the trustee had and used, the amount of risk and responsibility, the time consumed, the character of the work done (whether routine or of unusual difficulty) and any other factors which prove the worth of the trustees services to the cestuis x x x x The court has power to make extraordinary compensation allowances, but will not do so unless the trustee can prove that he has performed work beyond the ordinary duties of his office and has engaged in especially arduous work. On the basis of the foregoing pronouncement, we do not find the signing bonus to be a truly reasonable compensation. Topic III. Corporate Powers B. Specific Powers 6. Power to acquire own shares Case No 203 Boman Environmental vs. CA G.R. No. 77860 , November 22, 1988 Facts: Respondent Nilcar Y. Fajilan offered in writing to resign as President and Member of the Board of Directors of petitioner, Boman Environmental Development Corporation (BEDECO), and to sell to the company all his shares, rights, and interests for P300,000. At a meeting of the Board of Directors of BEDECO, Fajilan's resignation as president was accepted and new officers were elected. Fajilan's offer to sell his shares back to the corporation was approved, the Board promising to pay for them on a staggered basis. Fajilan accepted the offer. A promissory note dated July 3, 1984, was signed by BEDECO'S new president, Alfredo Pangilinan, in the presence of two directors, committing BEDECO to pay him P300,000 over a six-month period. However, BEDECO paid only P 100,000 and defaulted in paying the balance of P200,000. Issue: (1)Whether Fajilan is still a stockholder of the corporation (2)Whether the SEC has jurisdiction to hear and decide the case Held: (1)Fajilan's offer to resign as president and director "effective as soon as my shares and interests thereto are sold and fully paid" implied that he would remain a stockholder until his shares and interests were fully paid for, for one cannot be a director or president of a corporation unless he is also a stockholder thereof. The fact that he was replaced as president of the corporation did not necessaryily mean that he ceased to be a stockholder considering how the corporation failed to complete payment of the consideration for the purchase of his shares of stock and interests in the goodwill of the business. There has been no actual transfer of his shares to the corporation. In the books of the corporation he is still a stockholder. (2) Fajilan's suit against the corporation to enforce the latter's promissory note or compel the corporation to pay for his shareholdings is cognizable by the SEC alone which shall determine whether such payment will not constitute a distribution of corporate assets to a stockholder in preference over creditors of the corporation. The SEC has exclusive supervision, control and regulatory jurisdiction to investigate whether the corporation has unrestricted retained earnings to cover the payment for the shares, and whether the purchase is for a legitimate corporate purpose as provided in Sections 41 and 122 of the Corporation Code. These provisions of the Corporation Code should be deemed written into the agreement between the corporation and the stockholders even if there is no express reference to them in the promissory note. The principle is well settled that an existing law enters into and forms part of a valid contract without need for the parties' expressly making reference to it (Lakas ng Manggagawang Makabayan vs. Abiera, 36 SCRA 437). The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. "Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock ..." Topic III. Corporate Powers B. Specific Powers 11. Ultra Vires Acts Case No 222 Pirovano vs. Dela Rama Steamship 96 Phil 335, December 29, 1954 Facts: Plaintiffs herein are the minor children of the late Enrico Pirovano represented by their mother and judicial guardian Estefania R. Pirovano. They seek to enforce certain resolutions adopted by the Board of Directors and stockholders of the defendant company giving to said minor children of the proceeds of the insurance policies taken on the life of their deceased father Enrico Pirovano with the company as beneficiary. Defendant's main defense is: that said resolutions and the contract executed pursuant thereto are ultra vires, and, if valid, the obligation to pay the amount given is not yet due and demandable. Plaintiff-appellant Pirovano is the owner of 3424 shares of stocks in defendant-appellee Corporation which declared a dividend of P100 per share. Appellant wants to recover from appellee the sum of P221, 975 after deducting the sum of P120, 424 which she had withdrawn or received from appellee for advances she received after the death of her father, the late Esteban de la Rama. Appellant’s theory is that the cash advances to her for her personal use and that of her children were assumed by Esteban de la Rama. She claims that the advances made to her by appellees were debited from the account of Hijos de I. de la Rama, another corporation practically owned by Esteban de la Rama. She further claims that the appellee can only deduct from the amount of dividend she is entitled to, the amount of cash advances which was not assumed by her father. The withdrawals by the appellant were made during the period 1940 to 1949 during which the appellee made a deed of trust with Hijos. The deed of trust was made to circumvent the prohibition of declaring dividends during the period. Issue: Whether or not the donation made by the corporation of the proceeds of the insurance is an ultra vires act Held: Even assuming that the donation was ultra vires, still it cannot be invalidated or declared legally ineffective for that reason alone, it appearing that the donation represents not only the act of the Board but also that of the stockholders themselves since they expressly ratified the resolution. By this ratification, the infirmity of the corporate act, if any, has been obliterated thereby making the act perfectly valid and enforceable, especially so if the donation is not merely executory but consummated. The defense of ultra vires cannot be set up against completed or consummated transactions. An ultra vires act may either be an act performed merely outside the scope of the powers granted to the corporation by its AOI or one which is contrary to law or violative of any principle which would void any contract. A distinction has to be made with respect to corporate acts which are illegal and those merely ultra vires. The former are contrary to law, morals, public order or policy, while the latter are not void ab initio, but merely go beyond the scope of the powers in the AOI, and which renders the act merely voidable and thus can be ratified by the stockholders. The defendant corporation, therefore, is now prevented or estopped from contesting the validity of the donation. This is especially so in this case when the very directors who conceived the idea of granting said donation are practically the stockholders themselves, with few nominal exceptions. Topic IV. Board of Directors and Trustees B. Tenure 2. Disqualification Case No 241 Brias vs. Hord 24 Phil 286, February 5, 1906 Facts: John S. Hord has been the duly elected, qualified, and acting president of the Bank of the Philippine Islands, and that the remaining respondents are members of the board of directors of said corporation. Petitioner, acting as a member of the board of directors of said corporation made application to the respondent John S. Hord, as president, for authority and opportunity to examine and inspect the books of account of said corporation then and there in the possession and under the immediate control of Hord. The request was refused and denied, and, although repeatedly requested so to do, the said respondent and the remaining respondents failed, omitted, and refused, to permit petitioner to examine or inspect the books of account of said corporation or any part thereof. The respondents pretending a resignation on the part of the petitioner from the offices, conspired to remove petitioner the said offices to be vacant by reason of said pretended resignation. Issue: Whether or not the petitioner resigned as a member of the board of directors of the respondent bank Held: The petitioner obtained his right to act as a member of the board of directors of said bank from the stockholders thereof, at their annual meeting. There is nothing in the record which would justify said board of directors in depriving the petitioner of the rights and privileges belonging or pertaining to the membership of such board, unless and until he should have voluntarily relinquished such rights and privileges, or until his tenure of office should have expired. Based from the documentary and testimonial evidence there is no clear showing that the petitioner had actually resigned. The testimonies of the respondents posed several and fatal inconsistencies while the testimony of the petitioner more or less proves what really transpired during the meeting. With these, the petitioner is still entitled to his position and his request for examination of the corporate books must be granted. Topic IV. Board of Directors and Trustees I. Authority of the Board of Directors Case No 260 Montelibano vs. Bacolod Murcia 5 SCRA 36, May 18, 1962 Facts: Alfredo and Alejandro Montelibano, together with other planters, entered into contracts with Bacolod-Murcia Milling Co., Inc., for the milling of sugar cane at a sharing ratio of 55% for the planters and 45% for the miller. The contracts were to be in force for thirty (30) years starting with the 1920-21 crops. A proposal was made to amend the milling contracts by increasing the planters' share to 60% of the manufactured sugar and molasses and giving them other concessions besides, but the term of the contracts was extended to 45 years instead of 30. On August 30, 1936, the milling company's Board of Directors adopted a resolution granting further concessions to the planters over and above those contained in the amended milling contract. Subsequently, the Montelibanos sued the milling company alleging that the three other centrals in the province were granting increased participation to their planters; therefore, pursuant to paragraph 9 of the August 20, 1936 Resolution, Bacolod- Murcia Milling Co., Inc. was obligated to grant similar concessions to the Montelibanos. The milling company opposed the claim on the ground that, among others, it was a donation which was not within the power of the Board of Directors to grant. The trial court dismissed the action, but on appeal to the Supreme Court reversed the lower court. Issue: Whether or not the reversal was proper Held: The Court ruled that the August 20, 1936 resolution, passed in good faith by the board of directors, was valid and binding and formed an integral part of the amended milling contracts, the milling company having agreed to give concessions to the planters, precisely to induce them to agree to an extension of their contracts. There can be no doubt that the directors of the appellee company had authority to modify the proposed terms of the Amended Milling Contract for the purpose of making its terms more acceptable to the other contracting parties. The rule is that — It is a question, therefore, in each case of the logical relation of the act to the corporate purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote and fanciful sense, it may fairly be considered within charter powers. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation's business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not. As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them. They hold such office charged with the duty to act for the corporation according to their best judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of such duty. Whether the business of a corporation should be operated at a loss during depression, or close down at a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation and not by the court. It is a well-known rule of law that questions of policy or of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment of the board of directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts. Topic IV. Board of Directors and Trustees J. Delegation of Authority of Corporate Officers b. Qualifications and Disqualifications Case No 278 Vlason Enterprises vs. CA 310 SCRA 26, July 6, 1999 Facts: Poro Point Shipping Services, then acting as the local agent of Omega Sea Transport Company of Honduras & Panama, a Panamanian company, (hereafter referred to as Omega), requested permission for its vessel M/V Star Ace, which had engine trouble, to unload its cargo and to store it at the Philippine Ports Authority (PPA) compound in San Fernando, La Union while awaiting transhipment to Hongkong. The request was approved by the Bureau of Customs. Despite the approval, the customs personnel boarded the vessel when it docked on January 7, 1989, on suspicion that it was the hijacked M/V Silver Med owned by Med Line Philippines Co., and that its cargo would be smuggled into the country. The district customs collector seized said vessel and its cargo pursuant to Section 2301, Tariff and Customs Code. While seizure proceedings were ongoing, La Union was hit by three typhoons, and the vessel ran aground and was abandoned. They entered into a salvage agreement with private respondent to secure and repair the vessel which was destroyed by the typhoons that hit the province at the agreed consideration of $1 million and “fifty percent (50%) of the cargo after all expenses, cost and taxes.” Subsequently, the seizure was lifted for want of fraud. To enforce its preferred salvor’s lien, herein Private Respondent Duraproof Services filed with the Regional Trial Court of Manila a Petition for Certiorari, Prohibition and Mandamus assailing the actions of Commissioner Mison and District Collector Sy. Issue: Whether the receipt of the secretary of the corporation’s president is binding Held: A corporation may be served summons through its agents or officers who under the Rules are designated to accept service of process. A summons addressed to a corporation and served on the secretary of its president binds that corporation. This is based on the rationale that service must be made on a representative so integrated with the corporation sued, that it is safe to assume that said representative had sufficient responsibility and discretion to realize the importance of the legal papers served and to relay the same to the president or other responsible officer of the corporation being sued. The secretary of the president satisfies this criterion. This rule requires, however, that the secretary should be an employee of the corporation sought to be summoned. Only in this manner can there be an assurance that the secretary will bring home to the corporation the notice of the filing of the action against it. The sheriff’s return showed that the president of petitioner corporation was served summons through his secretary. A summons addressed to a corporation and served on the secretary of the President binds that corporation. The secretary however, should be an employee of the corporation sought to be summoned. In the case at bar, the secretary was not an employee of petitioner but of Vlasons Shipping, Inc. Acting under the impression that petitioner had been placed under its jurisdiction, the trial court dispensed with the service on petitioner of new summons for the subsequent amendments of the petition. But the first service of summons on petitioner was invalid. Thus, the trial court never acquired jurisdiction over the petitioner. Not having been validly served summons, it would be legally impossible to declare petitioner to be in default. A default judgment cannot affect the rights of a party who was never declared in default. Topic IV. Board of Directors and Trustees, OTHER CASES Case No 298 Candelario L. Verzosa, Jr. vs. Guillermo N. Carague, et al. GR No 157839, March 8, 2011 Facts: On two separate occasions, the Cooperative Development Authority (CDA) purchased from Tetra Corporation (Tetra) a total of forty-six units of computer equipment and peripherals in the total amount of P2,285,279.00. In the technical evaluation of the units to be supplied by the qualified bidders, CDA engaged the services of the Development Academy of the Philippines-Technical Evaluation Committee (DAP-TEC). The bidding was conducted. Petitioner who was then the Executive Director of the CDA approved the purchase. The Resident Auditor sought the assistance of the Technical Services Office (TSO), COA in the determination of the reasonableness of the prices of the purchased computers and it was found that the computers were overpriced by a total of P881,819.00. the COA declared that CDA should not have awarded the contract to Tetra but to the other competing bidders, whose bid is more advantageous to the government. Issue: Whether petitioner personally and solidarily liable for the disallowed sum of P881,819.00 Held: The petitioner is personally and solidarily liable for the disallowed amount. The doctrine of separate personality of a corporation finds no application because CDA is not a private entity but a government agency created by virtue of Republic Act No. 6939 in compliance with the provisions of Section 15, Article XII of the 1987 Constitution. Moreover, respondents satisfactorily established that petitioner acted in bad faith when he prevailed upon the DAP-TEC to modify the initial result of the technical evaluation of the computers by imposing an irrelevant grading system that was intended to favor one of the bidders, after the bids had been opened. Topic V. Three-Fold Duties of Directors and Officers C. Personal Liability of Directors and other Corporate Officers Case No 317 Soriano vs. People, BSP and PDIC GR 159517-18, 30 June 2009 Facts: Hilario P. Soriano (Soriano) and Rosalinda Ilagan (Ilagan) were the President and General Manager, respectively, of the Rural Bank of San Miguel (Bulacan), Inc. (RBSM). Allegedly, on June 27, 1997 and August 21, 1997, during their incumbency as president and manager of the bank, petitioners indirectly obtained loans from RBSM. They falsified the loan applications and other bank records, and made it appear that Virgilio J. Malang and Rogelio Mañaol obtained loans of P15,000,000.00 each, when in fact they did not. Criminal charges were filed against them. They sought for its dismissal because their action does not amount to any criminal action, and if it does, it will only render them liable civilly. Also, their single act could not amount to multiple offenses. Issue: Whether or not the petitions may be held liable for their actions. Held: They committed grave abuse of discretion in the exercise of their duties. As aptly pointed out by the BSP in its memorandum, there are differences between the two (2) offenses. A DOSRI violation consists in the failure to observe and comply with procedural, reportorial or ceiling requirements prescribed by law in the grant of a loan to a director, officer, stockholder and other related interests in the bank, i.e. lack of written approval of the majority of the directors of the bank and failure to enter such approval into corporate records and to transmit a copy thereof to the BSP supervising department. The elements of abuse of confidence, deceit, fraud or false pretenses, and damage, which are essential to the prosecution for estafa, are not elements of a DOSRI violation. The filing of several charges against Soriano was, therefore, proper. Topic V. Three-Fold Duties of Directors and Officers C. Personal Liability of Directors and other Corporate Officers Case No 336 Sia vs. People 121 SCRA 655, April 28, 1983 Facts: Jose O. Sia sometime prior to 24 May, 1963, was General Manager of the Metal Manufacturing Company of the Philippines, Inc. engaged in the manufacture of steel office equipment; on 31 May, 1963, because his company was in need of raw materials to be imported from abroad, he applied for a letter of credit to import steel sheets from Mitsui Bussan Kaisha, Ltd. of Tokyo, Japan, the application being directed to the Continental Bank, herein complainant, and his application having been approved, the letter of credit was opened on 5 June, 1963 in the amount of $18,300. The goods arrived sometime in July, 1963 according to accused himself, now from here on there is some debate on the evidence; according to Complainant Bank, there was permitted delivery of the steel sheets only upon execution of a trust receipt, while according to the accused, the goods were delivered to him sometime before he executed that trust receipt in fact they had already been converted into steel office equipment by the time he signed said trust receipt. But there is no question - and this is not debated — that the bill of exchange issued for the purpose of collecting the unpaid account thereon having fallen due neither accused nor his company having made payment thereon notwithstanding demands, and the accounts having reached the sum in pesos of P46,818.68 after deducting his deposit valued at P28,736.47. Issue: Whether or not Sia should be held liable Held: The bank is transacting with Metal Manufacturing and not with him. The case cited by the Court of Appeals in support of its stand - Tan Boon Kong case, supra - may however not be squarely applicable to the instant case in that the corporation was directly required by law to do an act in a given manner, and the same law makes the person who fails to perform the act in the prescribed manner expressly liable criminally. The performance of the act is an obligation directly imposed by the law on the corporation. Since it is a responsible officer or officers of the corporation who actually perform the act for the corporation, they must of necessity be the ones to assume the criminal liability; otherwise this liability as created by the law would be illusory, and the deterrent effect of the law, negated. In the present case, a distinction is to be found with the Tan Boon Kong case in that the act alleged to be a crime is not in the performance of an act directly ordained by law to be performed by the corporation. The act is imposed by agreement of parties, as a practice observed in the usual pursuit of a business or a commercial transaction. The offense may arise, if at all, from the peculiar terms and condition agreed upon by the parties to the transaction, not by direct provision of the law. The intention of the parties, therefore, is a factor determinant of whether a crime was committed or whether a civil obligation alone intended by the parties. With this explanation, the distinction adverted to between the Tan Boon Kong case and the case at bar should come out clear and meaningful. In the absence of an express provision of law making the petitioner liable for the criminal offense committed by the corporation of which he is a president as in fact there is no such provisions in the Revised Penal Code under which petitioner is being prosecuted, the existence of a criminal liability on his part may not be said to be beyond any doubt. In all criminal prosecutions, the existence of criminal liability for which the accused is made answerable must be clear and certain. The maxim that all doubts must be resolved in favor of the accused is always of compelling force in the prosecution of offenses. Topic V. Three-Fold Duties of Directors and Officers J. Special Fact Doctrine Case No 355 Strong vs. Repide 213 U.S. 419 (1909) Facts: Eleanor Strong was the owner of 800 shares of the capital stock of Philippine Sugar Estate Development Company. Gutierrez Rapide, owner of three-fourths shares of the company’s stock , 1 of the 5 directors of the company and was elected by the board as administrator general of such company, took steps to purchase the 800 shares owned by Strong, which he knew were in the possession of F. Stuart Jones, as her agent. Instead of seeing Jones, who had an office next door, Repide employed one Kauffman. Kaufmann, in turn, employed Mr. Sloan, a broker, to purchase the stock for him. Kauffman told Sloan that the stock to be purchased was for a member of his wife’s family. This action by Repide was due to the negotiations initiated by the government where the latter will purchase the company’s lands (together with other friar lands) at a price which greatly enhance the value of the stock. As a result of the negotiations, Jones, assuming he had the power and without consulting Strong, sold the 800 shares. Strong filed a case to recover the shares from Repide on the ground that the shares had been sold and delivered by Strong’s agent without authority to do so and on the ground that Repide fraudulently concealed from Strong’s agent the facts affecting the value of the stock so sold and delivered. ISSUE: Whether or not Repide, acting in good faith, has the duty to disclose to the agent of Strong the facts bearing upon or which might affect the value of the stocks RULING: Where a sale made through an agent of the vendor has been effected by the fraud and deceit of the vendee, the sale cannot stand whether or not the vendor's agent had power to sell. A director upon whose action the value of the shares depends cannot avail of his knowledge of what his own action will be to acquire shares from those whom he intentionally keeps in ignorance of his expected action and the resulting value of the shares. This is a rule of common law, and also of the Spanish law before the adoption of the Philippine Civil Code; and, under §§ 1261-1269 of that code, a contract obtained under such circumstances can be avoided by the party whose consent would not have been given had he known the facts within the knowledge of the other party. Even though a director may not be under the obligation of a fiduciary nature to disclose to a shareholder his knowledge affecting the value of the shares, that duty may exist in special cases, and did exist upon the facts in this case. In this case, the facts clearly indicate that a director of a corporation owning friar lands in the Philippine Islands, and who controlled the action of the corporation, had so concealed his exclusive knowledge of the impending sale to the government from a shareholder from whom he purchased, through an agent, shares in the corporation, that the concealment was in violation of his duty as a director to disclose such knowledge, and amounted to deceit sufficient to avoid the sale; and, under such circumstances, it was immaterial whether the shareholder's agent did or did not have power to sell the stock. While the method of payment cannot have induced the vendor's consent to a sale, where that method tended to conceal the identity of the purchaser and was part of a scheme to conceal facts, the knowledge of which would have resulted in vendor's refusal to sell, evidence as to the payment is admissible to show the fraudulent intent and scheme of the purchaser. The expressed prohibitions in § 1459 of the Spanish Civil Code against directors of corporations acquiring shares of stock entrusted to them do not apply to purchases from others. An expressed prohibition against directors acquiring shares held by themselves in a fiduciary capacity does not refer to purchases by directors of shares from others, or so limit the prohibitions against purchases of stock by directors that a sale to one cannot be avoided by his deceit in not disclosing material facts within his exclusive knowledge. Topic V. Three-Fold Duties of Directors and Officers OTHER CASES Case No 374 Polymer Rubber Corp and Ang vs. Salamuding GR No. 185160, July 24, 2013 Facts: In 1990, herein respondent Bayolo Salamuding (Salamuding), Mariano Gulanan and Rodolfo Raif (referred to as the complainants) were employees of petitioner Polymer Rubber Corporation (Polymer), who were dismissed after allegedly committing certain irregularities against Polymer. The three employees filed a complaint against Polymer and Ang (petitioners) for unfair labor practice, illegal dismissal, non-payment of overtime services, violation of Presidential Decree No. 851, with prayer for reinstatement and payment of back wages, among others. The Labor Arbiter dismissed the unfair labor practice complaint but order the reinstatement of the complainants with full back wages. In September 29, 1993 the Supreme Court affirmed the decision with modification. However, one day after or on September 30, 1993, Polymer ceased its operations. The Writ of Execution issued by the Labor Arbiter remained unsatisfied until, in 2004, Polymer with all its improvements in the premises was gutted by fire. The complainants continued to file petitions to enforce their rights against Polymer until the shares of stocks of Ang at USA Resources Corporation were levied. The petitioners moved to quash the 5th alias writ of execution and to lift the notice of garnishment. They alleged that Ang should not be held jointly and severally liable with Polymer since it was only the latter which was held liable in the decision of the LA, NLRC and the Supreme Court. The LA ordered the quashal and recall of the writ of execution, as well as the lifting of the notice of levy on Ang’s shares of stocks. The LA ruled that the Decision dated November 21, 1990 did not contain any pronouncement that Ang was also liable. To hold Ang liable at this stage when the decision had long become final and executory will vary the tenor of the judgment, or in excess of its terms. The NLRC affirmed the findings of the LA. The CA stated that there has to be a responsible person or persons working in the interest of Polymer who may also be considered as the employer. Since Ang as the director of Polymer was considered the highest ranking officer of Polymer, he was therefore properly impleaded and may be held jointly and severally liable for the obligations of Polymer to its dismissed employees. Issue: Whether the Officer of the Corporation cannot be personally held liable and be made to pay the liability of the corporation Held: “A corporation, as a juridical entity, may act only through its directors, officers and employees. Obligations incurred as a result of the directors’ and officers’ acts as corporate agents, are not their personal liability but the direct responsibility of the corporation they represent. As a rule, they are only solidarily liable with the corporation for the illegal termination of services of employees if they acted with malice or bad faith.” To hold a director or officer personally liable for corporate obligations, two requisites must concur: (1) it must be alleged in the complaint that the director or officer assented to patently unlawful acts of the corporation or that the officer was guilty of gross negligence or bad faith; and (2) there must be proof that the officer acted in bad faith. To hold Ang personally liable at this stage is quite unfair. The judgment of the LA, as affirmed by the NLRC and later by the SC had already long become final and executory. It has been held that a final and executory judgment can no longer be altered. The judgment may no longer be modified in any respect, even if the modification is meant to correct what is perceived to be an erroneous conclusion of fact or law, and regardless of whether the modification is attempted to be made by the court rendering it or by the highest Court of the land. “Since the alias writ of execution did not conform, is different from and thus went beyond or varied the tenor of the judgment which gave it life, it is a nullity. To maintain otherwise would be to ignore the constitutional provision against depriving a person of his property without due process of law.”