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FILIPINAS PORT SERVICES

FACTS:

This case involves an intra-corporate dispute between petitioner Eliodoro C. Cruz and co-petitioner Filipinas Port Services, Inc. (Filport) and the respondents who were the incumbent members of Filport's Board of Directors. The case was initially filed with the Securities and Exchange Commission (SEC) but was later transferred to the Regional Trial Court (RTC) of Manila as a corporate court. Eventually, the case was transferred to the RTC of Davao City.

On September 4, 1992, Cruz, who was Filport's former president, wrote a letter to the corporation's Board of Directors questioning their creation of certain positions and the election of certain members of the board. On June 14, 1993, Cruz filed a derivative suit with the SEC against the respondents, alleging acts of mismanagement detrimental to the corporation and its shareholders. The alleged acts include the creation of an executive committee, increase in emoluments of certain officers, recreation of assistant vice-president positions, and creation of additional positions of special assistants. Cruz demanded that the respondents be held jointly and severally liable for these damages.

In their answer, the respondents denied the allegations of mismanagement and argued that their actions were within the by-laws of the corporation and that the increases in salaries were well-deserved. The respondents further argued that Cruz and co-petitioner Minterbro did not have the authority or standing to bring the derivative suit.

The case was transferred to the RTC of Davao City, which rendered a decision ordering certain directors to refund the salaries they received in their positions. However, the Court of Appeals reversed this decision and dismissed the derivative suit. The petitioners raised four errors allegedly committed by the CA, including whether the positions created within Filport's Board of Directors and the increases in salaries were lawful and whether evidence exists to prove that the positions were created for accommodation and that the salaries were actually paid to the directors appointed to those positions. The respondents also questioned the derivative nature of the main suit initiated by Cruz on behalf of Filport and its stockholders. The Supreme Court, however, held that the petition is without merit.

The Court emphasizes that the governing body of a corporation is its board of directors, who exercise the corporate powers, control all business, and hold all property. The board of directors has sole authority to determine policies, enter into contracts, and manage the regular business activities within the corporation's charter.

ISSUES:

  1. Whether the creation of the positions of Assistant Vice Presidents and Special Assistants by the board of directors of Filport is in accordance with the corporation's by-laws and the provisions of the Corporation Code.

  2. Whether the creation of the executive committee by the board of directors of Filport without provision in the corporation's by-laws is illegal or unlawful.

  3. Whether the increased emoluments of certain officers of the corporation are reasonable and fair

  4. Whether there was mismanagement by the board of directors

  5. Whether the creation of certain positions in the corporation was for accommodation purposes

  6. Did the Court of Appeals go beyond the issues raised in the trial court when it ruled on the absence of receipt of payment of salaries/emoluments of certain positions?

  7. Is the case filed by the petitioners before the SEC a derivative suit?

RULING:

  1. The creation of the positions of Assistant Vice Presidents and Special Assistants by the board of directors of Filport is in accordance with the corporation's by-laws and the provisions of the Corporation Code. The board of directors has the authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation within the scope of its charter, unless more extensive power is expressly conferred. The by-laws of Filport provide for the election of officers by the board of directors, as well as the fixing of their compensation. Therefore, the board's creation of the positions is deemed valid.

  2. The creation of the executive committee by the board of directors of Filport without provision in the corporation's by-laws is not illegal or unlawful. The absence of a showing as to the true nature and functions of the executive committee, and the fact that the board of directors has the power to create positions not provided for in the by-laws, upholds the board's prerogative in managing the business affairs of the corporation. The plaintiff's acquiescence and ratification of the creation of the executive committee during his incumbency as Filport president precludes him from suing to declare such acts of the board as invalid or illegal.

  3. The increased emoluments of the officers of the corporation are reasonable and fair.

  4. There was no mismanagement by the board of directors.

  5. The creation of certain positions in the corporation was not for accommodation purposes.

  6. The Court of Appeals did not go beyond the issues raised in the trial court. The issue of nonpayment of salaries was raised by the petitioners themselves when they claimed that the directors appointed to the positions did not deserve their compensation. The burden of proving that salaries were actually paid falls on the petitioners. The Court of Appeals correctly resolved the issue, finding that no evidence substantiating the actual payment of the salaries was presented.

  7. The case filed by the petitioners before the SEC is a derivative suit. Under the Corporation Code, a stockholder may institute a derivative suit on behalf of the corporation when the board of directors or trustees refuse to sue or when a demand to file the necessary action would be futile. In this case, the action filed primarily seeks damages resulting from alleged mismanagement of the corporation by its directors/officers, which is detrimental to the interests of the corporation. While the injury complained of primarily pertains to the corporation, it was the directors/officers themselves who are to be sued. The requisites for a derivative suit have been met, and the petitioners have the necessary legal standing to institute the suit.

PRINCIPLES:

  • The governing body of a corporation is its board of directors, which has the sole authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation within the scope of its charter, unless more extensive power is expressly conferred. (Section 23, Corporation Code)

  • The concentration of corporate powers in the board of directors is necessary for efficiency in any large organization, as stockholders are too numerous, scattered, and unfamiliar with the business of a corporation to conduct its business directly. (Rationale behind the conferment of corporate powers on the board of directors)

  • The election of officers of a corporation is provided for under Section 25 of the Corporation Code, and the specific officers are provided for in the corporation's by-laws. (Section 25, Corporation Code)

  • The board of directors has the power to create positions not provided for in the corporation's by-laws, as it is the corporation's governing body. (Filport case)

  • Directors and officers are not liable for losses resulting from error in business judgment, unless there is bad faith or negligence.

  • Bad faith implies a dishonest purpose or moral obliquity, and conscious doing of a wrong.

  • Factual findings of trial courts, especially when affirmed by the appellate court, are binding and conclusive.

  • The determination of the necessity for additional offices and/or positions in a corporation is a management prerogative.

  • Courts cannot interfere with corporate decisions in the absence of proof of bad faith or malice.

  • The burden of proving actual payment of salaries falls on the party claiming payment.

  • A derivative suit may be filed by a stockholder on behalf of the corporation when the board of directors or trustees refuse to sue or when a demand to file the necessary action would be futile.

  • A derivative suit is filed primarily to protect or vindicate corporate rights, with the corporation being the real party-in-interest while the stockholder is only a nominal party.