DE LA RAMA VS MA-AO SUGAR CENTRAL CO., CASE DIGEST
vs.
MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS. RAMON S. ARANETA, ROMUALDO M. ARANETA, and RAMON A. YULO, defendants-appellants.
CORPORATION LAW; POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR BUSINESS OR FOR ANY OTHER PURPOSE
FACTS:
- This suit is brought by four minority stockholders against the Ma-ao Sugar Central Co., Inc. and J. Amado Araneta and three other directors of the corporation.
The complaint stated five causes of action, to wit: (1) for alleged illegal and ultra-vires acts consisting of self-dealing irregular loans, and unauthorized investments; (2) for alleged gross mismanagement; (3) for alleged forfeiture of corporate rights warranting dissolution; (4) for alleged damages and attorney's fees; and (5) for receivership.
After trial, the Lower Court rendered its decision and dismisses the petition for dissolution, reiterates the preliminary injunction restraining the Ma-ao Sugar Central Co., Inc. management to give any loans or advances to its officers and orders and orders it to refrain from making investments in Acoje Mining.
Both parties appealed directly to the Supreme Court raising errors one of which is that the lower court erred in holding that the investment of corporate funds of the MA-AO SUGAR CENTRAL was not in violation of Sec. 17-1/2 of the Corporation Law.
Sec. 17-1/2 of the Corporation Law provides that:
No corporation organized under this act shall invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized unless its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such proposal at the stockholders' meeting called for the purpose.
Defendants contend that since said company was engaged in the manufacture of sugar bags it was perfectly legitimate for Ma-ao Sugar either to manufacture sugar bags or invest in another corporation engaged in said manufacture.
ISSUE:
Whether the investment of corporate funds by the Ma-ao Sugar Co., Inc., does not fall under Sec. 17-½ of the Corporation Law.
HELD:
- YES. The investment in question does not fall under the purview of Sec. 17- ½ of the Corporation Law.
Plaintiffs-appellants contend that Ma-ao Sugar Central Co., Inc., through its President, J. Amado Araneta,, subscribed for P300,000.00 worth of capital stock of the Philippine Fiber Processing Co. Inc., that payments on the subscription were made and at the time the first two payments were made there was no board resolution authorizing the investment; and that it was only later that the President of Ma-ao Sugar Central Co., Inc., was so authorized by the Board of Directors. In addition, shares of stock of the same Philippine Fiber Processing Co., Inc., owned by Luzon Industrial, corporation were transferred to the defendant Ma-ao Sugar Central Co., Inc., Again the "investment" was made without prior board resolution, the authorizing resolution having been subsequentIy approved.
- Plaintiffs-appellants also contend that even assuming, that the said Board Resolutions are valid, the transaction, is still wanting in legality, no resolution having been approved by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power, as required in Sec. 17-½ of the Corporation Law.The legal provision invoked by the plaintiffs, as appellants, Sec. 17-½ of the Corporation Law, provides:
No corporation organized under this act shall invest its funds in any other corporation or business, or for any purpose other than the main purpose for which it was organized, unless its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such proposal at a stockholders' meeting called for the purpose ....
On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10 of the Corporation Law, which provides:
SEC. 13. — Every corporation has the power:
x x x x x x x x x
(9) To enter into any obligation or contract essential to the proper administration of its corporate affairs or necessary for the proper transaction of the business or accomplishment of the purpose for which the corporation was organized;
(10) Except as in this section otherwise provided, and in order to accomplish its purpose as stated in the articles of incorporation, to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities and other evidences of indebtedness of any domestic or foreign corporation.
Professor Sulpicio S. Guevara reconciled the two apparently conflicting legal provisions, as follows:
j. Power to acquire or dispose of shares or securities. — A private corporation, in order to accomplish its purpose as stated in its articles of incorporation, and subject to the limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of the stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary. In any case, the purchase of such shares or securities must be subject to the limitations established by the Corporation Law; namely, (a) that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation; or (b) that a non-agricultural or non-mining corporation shall be restricted to own not more than 15% of the voting stock of any agricultural or mining corporation; and (c) that such holdings shall be solely for investment and not for the purpose of bringing about a monopoly in any line of commerce or combination in restraint of trade.
40. Power to invest corporate funds. — A private corporation has the power to invest its corporate funds in any other corporation or business, or for any purpose other than the main purpose for which it was organized, provided that 'its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a proposal at a stockholders' meeting called for that purpose,' and provided further, that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation. When the investment is necessary to accomplish its purpose or purposes as stated in it articles of incorporation, the approval of the stockholders is not necessary.
The lower court ordered the management of the Ma-ao Sugar Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing and any other company whose purpose is not connected with the sugar central business." This portion of the decision should be reversed because, Sec. 17-½ of the Corporation Law allows a corporation to "invest its fund in any other corporation or business, or for any purpose other than the main purpose for which it was organized," provided that its board of directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power.