Corporation Law: RCCP Sec 22 Problems

 Problems:

Q: Three out of five directors of X Corporation resolved to assign the corporation's right of redemption over its remaining assets, the lots mortgaged to a bank. A deed of assignment was subsequently executed in favor of M who then redeemed the said properties. However, R, who was the highest bidder at the public auction, assailed the validity of the deed of assignment for being an ultra vires act of the Board of Directors contending that the three directors who made the resolution were not among those listed as stockholders of X Corporation in the stock and transfer book and thus they cannot execute any transaction for the corporation. Is the argument of R tenable? Explain your answer. 

A: Yes, R's argument is tenable. Under Section 22 of the Revised Corporation Code, only persons who own at least one share of the capital stock of the corporation can be directors. Ownership of shares is determined by the books of the corporation. Since the three directors are not stockholders in the corporate books, they are automatically disqualified to be directors. The three directors ceased to be directors when they ceased to be stockholders of X Corporation. Hence, they cannot validly approve and execute transactions in behalf of the corporation.

Q: A claim was filed by Ms. CO against the National Irrigation Administration (NIA) for the latter to pay compensation for the portion of her property used in the construction of the canal. The Regional Trial Court rendered a decision in favor of CO. On appeal, the decision was affirmed by the Court of Appeals. SE, as Project Manager of the NIA, filed a petition for certiorari. The verification and certification against forum shopping were signed by CG, the administrator of the agency. It was contended that said petition must be dismissed because of failure to comply with the provisions of Section 5, Rule 7 of the Revised' Rules on Civil Procedure on certification against forum shopping. No Board resolution was attached to the petition. Can SE or CG sign the certificate against forum shopping accompanying the petition? 

A: No. The defendant in this case is NIA, which is a corporation organized under the law. Hence, all actions shall be done only through the Board of Directors of NIA. Without being duly authorized by resolution of the Board of the corporation, neither SE nor CG is authorized to sign the certificate against forum shopping accompanying the petition for review.

Q: PAW is a domestic corporation organized to operate a customs bonded warehouse. To obtain a license for the operation of a bonded warehouse from the Bureau of Customs; Mr. AP, the corporation president, solicited a proposal from Mr. SS for the preparation of a feasibility study. The initial proposal of SS was accepted by AP. Later, upon AP's request, SS sent another proposal to PAW for an operations manual and seminar/ workshop for its employees. The manual was sent to the Bureau of Customs which thereafter issued a license in favor of PAW to operate a bonded warehouse. SS likewise conducted a three-day training seminar for the employees of the corporation. Alleging non-payment, SS subsequently filed a collection suit against the corporation. PAW resisted the claim on the ground that the second contract for services did not bind it because it was entered into by its president without authority of the Board of Directors. Is the contention of the corporation valid?

 A: No, the facts show that the president was duly authorized. AP, the president of PAW appears to be authorized. The conduct of the president shows that he had been in the habit of acting in similar matters on behalf of the company and that the company had authorized him to act and had recognized, approved and ratified his former and similar actions. Furthermore, a party dealing with the president of a corporation is entitled to assume that he has the authority to enter, on behalf of the corporation, into contracts that are within the scope of the powers of said corporation and that do not violate any statute or rule on public policy. In this case, AP was the one dealing with SS from the very beginning. Besides, SS has reason to believe that AP's conformity to the contract in dispute was also binding on the corporation. It is well-settled that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent's authority.

Q: The Board of Directors of X Corporation issued a resolution authorizing its Treasurer and General Manager, Mr. A, to secure a loan from Y Corporation, a financing company, and to sign all papers, documents or promissory notes necessary to secure the loan. Another resolution was later approved by the Board authorizing Mr. A to act as the signatory in securing a discounting line with Y Corporation. Mr. A was authorized to sign all instruments, documents and checks necessary to secure the discounting line. Later, Mr. A signed Deeds of Assignment and assigned postdated checks of X Corporation to Y Corporation. A endorsed the checks by signing his name at the back of the checks. The checks were all dishonored prompting Y Corporation to demand payment from X Corporation. X Corporation denied liability on the checks raising the defense of lack of authority of A to sign the Deeds of Assignment and asserting that A signed the deeds and indorsed the checks in his personal capacity. Can the defense be validly raised by X Corporation?

A: No. The corporation cannot validly raise such defense. A corporation has the power to borrow funds and dispose of assets in the ordinary course of business. In the exercise of such power the Board authorizes one or more corporate officers to sign loan document or deeds of assignment for the corporation. The Board is the one empowered to do so because Section 22 of the Revised Corporation Code (Section 23 of the Corporation Code) provides that 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 corporation held by the Board of Directors or Trustees. In this case, Mr. A was duly authorized by the Board of X Corporation to sign the Deeds of Assignment and to endorse the checks. A signed the Deeds of Assignment as agent and authorized signatory of X Corporation under an authority expressly granted by Board resolutions. Hence, the signature of A on the Deeds of Assignment binds the Board of Directors and X Corporation itself. 

Q: X Corporation sold its ice plant to Y Corporation who in return executed a mortgage over a property to secure payment of the purchase price. As a result of the sale, X Corporation terminated all its employees and paid their separation pay. Y Corporation thereafter, sold the same ice plant to Z Corporation, Mr. Q, the General Manager of Z Corporation owns one half interest in said corporation. Due to failure to pay the balance, X Corporation extrajudicially foreclosed the property and was the highest bidder in the public auction. Subsequently the latter sold the ice plant, subject to the right of redemption by Y Corporation, to Mr. T who rehired X Corporation's previous employees. Thereafter, the ice plant was redeemed and possession was obtained by virtue of the mandatory injunction. However, Z Corporation did not re-employ the re-hired employees and through Mr. Q terminated their services. Can the corporate officers like the general manager be held personally liable for damages on account of termination of services of the employees? 

A: No. An officer acting in good faith within the scope of his authority to terminate the services of the employees cannot be personally liable for damages. In the absence of evidence that one acted maliciously or in bad faith in terminating the services of the employees, his act shall be deemed to be within the scope of his authority and as such was a corporate act. Hence, he cannot be made personally liable. 

Q: Billy Bomba had been employed by DAD Realty Corporation as a pump operator in 1990 and had since performed such work at it Maharlika Subdivision. In 1999, Bomba filed a complaint with the Labor Arbiter against DAD Realty Corporation and its Vice President Tita Gloria, for wage differentials, overtime pay, incentive leave pay, 13th month pay, holiday pay and rest day pay. The Labor Arbiter found that Bomba was indeed entitled to such sought amounts. Is Vice President Gloria solidarily obligated with DAD Realty Corporation for the corporate liability?

A: No. A corporation acts through its directors, officers, and employees. While acting for the corporation, the directors, officers and employees are not liable to persons with whom they are transacting. Obligations incurred by them while they were acting as such corporate agents are corporate obligations. Although there may be exceptional circumstances that may justify solidary liability, there is nothing in the problem that indicates that solidary liability should be imposed on the officers.

Q: Where the board of directors of a corporation consists of 9 members, two having died during their term of office, 1 being abroad, what would be the quorum? How many affirmative votes would be necessary to pass a resolution? Explain. 

A: Five members constitute the quorum. The Revised Corporation Code (and previously, the Corporation Code) provides that a majority of the number of directors as fixed in the Articles of Incorporation shall constitute a quorum for the transaction of corporate business. Vacancy does not reduce the quorum. If five members are present, the majority thereof or three may pass a resolution unless a greater number is required under the RCCP (previously, the Corporation Code). 

Q: On December 9, 1985, Matatag Corporation revalued its assets. On the basis of reappraisal, the Board of Directors also declared cash dividends for all stockholders. On December 16, 1985, Matatag Corp. amassed substantial profits in a highly lucrative transaction. Some minority stockholders, however, did not want to complicate their income tax problems for 1985 and refused to accept the cash dividends. They also filed suit to compel the other stockholders to return to Matatag Corp. the money received as dividends. Not one of the stockholders who formed the majority joined in the suit since they were happy with the money they received. When a case was filed against the Board, the Board of Directors raised the "Business Judgment Rule." What is the business judgment rule and does it have any relevance to this case? 

A: Under the Business Judgment Rule, the acts of the Board within the powers conferred upon them cannot be reviewed by courts. They are generally binding on the stockholders and the courts. The Board of Directors is authorized to exercise absolute but sound discretion on matters regarding the operation of the Corporation. Declaration of dividends is one of those actions that are within the discretion of the Board. Thus, the Business Judgment Rule is relevant because declaration of dividends is usually binding and cannot be reviewed by courts.

✨

Q: "A", as owner of a certain number shares of stock in X Corporation, entered into a voting trust agreement with B. On the basis of the voting trust agreement, B announced his desire to run for a seat in the Board of Directors of X Corporation. C, another stockholder, objected and questioned the eligibility of B to be a director of X Corporation. Is C's contention correct? Why?

A: No. The contention of C is not correct. A trustee in a voting trust agreement has legal title over the shares. Section 58 of the Revised Corporation Code provides that the stock certificate of the trustor shall be cancelled and a new certificate shall be issued in the name of the trustee. The books of the corporation shall state that the transfer in the name of the trustee or trustees is made pursuant to the voting trust agreement. Since legal title is all that is required, Mr. B is eligible to run for a position in the Board of Directors.

Q: The Board of Directors of Seiko Corporation, acting on a standing authority of the stockholders to amend the by-laws, so amended the by-laws disqualifying any of its stockholders, who is also a stockholder and director of a competitor, from being elected to the board of directors. Assunta Estrada, a stockholder holding shares sufficient to assure her of a seat in the board, filed a petition with the Securities and Exchange Commission for the declaration of nullity of the amended by-laws. She alleged, among other things, that as a stockholder she had acquired rights inherent in stock ownership such as the right to vote and be voted for in the election of directors. Is her petition tenable? 

A: No, her petition is not tenable. It is true that a 'stockholder has the right to vote and be voted for in the election of directors. However, such right does not mean that a stockholder has vested right to be elected to the board of directors. The election process prescribed under the Revised Corporation Code should be followed and a stockholder cannot force other stockholders to elect her as director. Her contention that the by-laws is null and void is not tenable either. Corporations have the power to make by-laws declaring a person employed in the service of a rival company ineligible for election to its board of directors. It is well-settled that a director who is ineligible cannot be elected as such. In addition, a director is subject to removal if a ground for disqualification exists. One such ground is a provision that a stockholder is disqualified if his business is in competition with or antagonistic to the other corporation.

Q: At the annual meeting of ABC Corporation for the election of five directors as provided for in the articles of incorporation, A, B, C, D, E, F, and G were nominated. A, B, C, D, and E received the highest number of votes and were proclaimed elected. F received ten votes less than E. Subsequently, E sold all his shares to F. At the next Board of Directors' meeting following the transfer of shares in the books of the Corporation, both E and F appeared. E claimed that notwithstanding the sale of his shares to F, he remained a director since the Corporation Code provides that directors "shall hold office for one year and until their successors are elected and qualified." On the other hand, F claimed that since he would have been elected as director had it not been for E's nomination and election, he (F) should now be considered as a director as he had acquired the shares of E. Decide with reasons.

A: E is disqualified to continue as director. Section 22 of the Revised Corporation Code (previously Section 23, Corporation Code) provides that every director must own at least one share of the capital stock of the corporation of which he is a director, which share shall stand in his name in the books of the corporation. Any director who ceases to be the owner of at least one share in the capital stock of the corporation of which he is a director shall thereby cease to be a director. The requirement of owning at least one share is a continuing requirement. E became disqualified when he sold all his shares of the corporation; he thus ceased to be a director. F's claim is also untenable because a director should be duly elected as such and he was not elected to be a director in the annual meeting of ABC Corporation.