corpo - control and management

8/3/2019 Corpo - Control and Management

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Stockholders or Members

GR: all corporate powers are vested in the Board X: Code provides otherwise, e.g. Code expressly requires SH/members consent to certain matters before any

action can be taken. Usually when it covers changes affecting SH contracts SH/Members approval usually expressed in a meeting duly called for the particular purpose involveda. Regular annually,

- fixed date in by laws- if not fixed, April as determined by the Board- usually where elections are held

b. Special where Code requires SH action/approval (amendment of by laws, increase of K stock, removal of

directors, others compliance with requirements of the meeting for its validity

Sec. 50. Regular and Special meetings of SH or members.1. Regular.

- Held annually on a date fixed in the by laws OR if not so fixed, any date in April of every year asdetermined by the Board- Written notice of regular meetings shall be sent to all SH or members of record- Sent at least 2wks prior to the meeting OR unless different period required in by-laws

2. Special.

- any time deemed necessary OR as provided in by laws- notice sent to all SH or members, OR UNLESS provided in the by laws

3. Notice of any meeting may be waived, expressly or impliedly, by any SH or member

BOARD OF DIRECTORS v TAN

Action:- certiorari with prelim injunction.

1. Filed an action to declare null and void election of members of BOD of SMB Workers and members ofElection Committee

- compel Board to call for and hold another election in accordance with consti, by laws, and Law- restrain illegally elected members of BOD from exercising functions

2. Court: declared election null and void and ordered to call for and hold another election3. Mar 26, Election committee set the mtg of the members of the assoc to elect new members of the Board forMar 284. Plaintiffs filed another motion

stating that the same election committee were composed of members who conducted andsupervised the election that was declared null and void by the court. It would hence again beinequitable for them to supervise the elections.

Not in accordance with by laws requiring for notice sent 5 days prior to mtg prayer that court appoint its representatives

5. Court ordered the cancellation of the election and constituted and appointed a committee of three to conductand supervise elections6. The Corp's by laws and constitution provides that notice shall be sent either by posting ina postage prepaidenvelope in last known address or by personal delivery at least 5 days before date of mtg. IN lieu of serving or

addressing notices, notice may be given by posting copies at the diff depts and plants of SMB NLT 5days prior

WON meeting was validly called. NO

WON Court may create a committee to conduct the elections. YES1. The court may appoint, it having been shown that the Election Committee provided for in the by lawsthat conducted the election annulled by the court below if allowed to act as such may jeopardize the rights of therespondents2. A court of equity may on showing of good reason appint a mater to conduct and supervise an election ofdirectors, when it appears that a fair election cannot otherwise be had. But such court cannot make directorscontrary to statute and public policy with respect to the conduct of such elections


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Place of meeting

Quorum

Vote

Where all SH are present

LOGAN JOHNSTON v. LOUIS JOHNSTON

1. Logan (Chair) and Louis were SH of Johnston Lumber Corp2. Mtg was called to elect new set of directors, who would elect new officers3. Chair requested to make a report of the number of stocks represented to determine quorum (shares of corp:2,462)

a. Logan 305b. Proxy by mother 320c. Proxy by wife 5d. Logan, as admin of Albert Johnston - 307

4. Louis denied Logan's request to have the proxied shares be registered and listed in the books be counted forvoting purposes5. Logan sent for the original owners in order that they could vote shares in his favor

6. Louis also informed Logan that he could not vote the 307 shares of Albert Johnston which he had been votingin previous years as administrator of estate because admin. Case has already been terminated7. Logan representing 1242 shares and his companions walked out of the room where the mtg was being heldwhile respondents carried on with the mtg and elected themselves directors and officers of the corp8. Logan requested for a special mtg to take up matters not taken up during the regular mtg. Louis sent a noticefor a special mtg of SH (agenda: FR, report of the Pres of operations, recommendations and proposals)9. During the mtg, when quorum was declared, Logan moved for the election of a new BOD claiming there wasno valid mtg the last time for absence of quorum10. Chair Louis overruled all acts of Logan (motion for election, nomination, election/division of the house)11. New set of officers: Logan, wife, mother. Demanded turnover of records and functions

WON Louis, et al, were validly elected

WON Logan were validly elected in the subsequent meeting

1. By laws provide: a quorum consist of a majority of the voting stock represented in person orproxy.2. SH can, for justifiable reasons, break the quorum by withdrawing from the mtg3. Aside from express regulations, all that is necessary is that the mtg be conducted by propoer persons with

fairness and GF towards all those who are entitled to take part and in such a way as to enable them toexpress their vote upon questions coming before the meeting

Logan withdrew because of the persistent overruling of Louis, without reason, prohibiting Logan from voting denial of vote because of the reason that there was no time for them to register the sale in the books isunreasonable. Because the request was made prior to the mtg

4. If the election of the directors of BOD is void due to the withdrawal of Logan resulting to the absence ofquorum, then the mtg of BOD to elect officers is likewise void.


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PONCE v ENCARNACION

Action: Certiorari to annul order granting Potenciano Gapol authority to call SH mtg and preside thereat

1. at a mtg duly called for the SH of Daguhoy Enterprises, the voluntary dissolution of the copr and theappointment Gapol as receiver were agreed upon2. Instead of filing for the petition for the voluntary dissolution, filed instead a complaint to compel accounting ofthe funds and assets to reimburse the sum for the purchase of land or sum that may be found to have been

misappropriated and converted by Domingo Ponce3. Gapol filed a motion for the removal of Ponce in the BOD, which was denied by the Court and another motionfor the court to order him to call a mtg and to preside4. Court issued the order as prayed for without notice to other members of BOD, who only knew of the orderwhen Bank of America refused to recognize the members of the BOD

WON Court may direct the receiver to call a mtg and preside. YES

1. On the showing of good cause, the court may authorize a SH to call a meeting and to preside thereat until themajority SH representing a majority of stock present and permitted to be voted shall have chosen one amongthem to preside over it2. When notice not necessary. The requirement that on the showing of good cause, the court may grant to aSH the authority to call such mtg and to preside does not mean that the petition must be set for hearing with

notice served upon the BOD

Court found there was good cause for authorizing Gapol to call and preside. Failure/neglect/refusal of chair toperform duty, i.e. to call mtg of the SH and preside.

** the alleged illegality of the election of one of the Board members does not affect the legality or validity of theorder of the court ordering Gapol to call and preside. Remedy is a quo warranto proceeding.


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DETECTIVE v CLORIBEL

1. Complaint was filed by Detective Inc against Fausto Alberto for accounting with injunction and receivership.2. Alberto illegally seized and took control of all the assets, books, etc. and concealed them illegally and refusedany member of corp to examine them3. SH removed Alberto as managing director and appointed Jose de la Rosa, who did not own any share ofstock in the corporation4. Alberto refused to vacate his position, filed for injunction for de la Rosa to be refrained from exercising

functions as managing director and for Jose Barredo to be appointed as such instead.5. Injunction was denied.

WON de la Rosa may be elected as a managing director. NO

1. Corpo Law. Every director must own in his own right at least 1 share of capital stock of the stock corp ofwhich he is a director, which stock shall stand in his name in the books of the corporation

2. By laws: The manager shall be elected by the BOD from among its members.

De la Rosa could not be a director. If he could not be a director then he could not be a managing director.


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GOKONGWEI v SEC

1.


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ROXAS v DE LA ROSA

1. Present trustees (representing less than 3000/5500 shares) are desirous of ousting current officers withoutawaiting the termination of their term at the expiration of 1year from the date of election

a. Voting Trust composed of 3 members representing the possessors of the majority of shares inBinalbagan Estate Inc. Voting trust controlling 3000/5500b. Changes in the membership of the voting trust due to absence or vacancies

2. Trustees caused the secretary to issue to SH a notice calling for a special mtg for the election of Board, for the

amendment of by laws, and other business3. Coruna, member of the Board, filed for action enjoining the said mtg., judge issued restraining orderrestraining the conduct of the mtg, election, and sub of present incumbents

WON restraining order is valid. YES

1. Directors of the corporation can only be removed from office by a vote of the SH representing at least 2/3 ofthe subscribed capital stock entitled to vote; while vacancies in the Board when they exist can be filled by meremajority vote. Moreover, when special mtg is called for the removal of Board members, it should be stated in thenotice

Shares represented only constituted the majority and not 2/3 note that the notice only mentions as agenda election and not removal as if the Board is vacant

the civil action by Coruna asserts that they had been validly elected. The result of allowing another electionwhen another set is currently seating is the election of a rival set of directors who would again need theassistance of the court in another action of quo warranto to have them installed into office. hence, the judge had to forestall that setp and enjoin the contemplated election


8/33

ANGELES v SANTOS

1. Plaintiffs, minority SH of Paranaque Rice Mill, appointed an investigation committee to investigate anddetermine properties, operations, and losses of the corp but Santos, the President, denied access to theproperties, records, etc2. Allegations in the complaint:

a. Took possession of funds and income of the corp and appropriated to his own benefit the income ofcorporation

b. illegally controlling the corp and refused to sign and issued the cert of stock for the 600 fully paid upshares of Angeles worth P15000c. refused to call a meeting of the BOD despite written request by 1/3 subscribed K stock inaccordance with the by lawsd. other defendants/members of the BOD refused to hold the ordinary monthly mtgse. Santos disposed of properties and records without authority from the BODf. Corp gained 4K but because of the acts of defendants, in danger of disappearing

3. Prayer:a. detailed accounting of Santos of properties, funds, incomeb. Appointment of de Lara as receiverc. damagesd. order to sign certs of stock due to Angelese. members of the Board be removed

f. call for an extraordinary mtg for election4. Court ordered receivership de Lara, later appointing Agco, then again revoking, and appointing Figueroa

WON Court may entertain action by the minority of members of BOD against majority. YES

1. the BOD is a creation of the SH by delegation of the SH. But the BOD, or the majority thereof, in drawingthemselves the powers, occupies a position of trusteeship in relation to the minority of the stock in the sense thatthe BOD should exercise GF, care, and diligence in the admin.2. Instance when court may entertain suit by minority of the Board in behalf of the corp:

1. Guilty of breach of trust. Not merely error in judgementa. Where the majority of the Board waste funds or fraudulently disposes of propertiesb. When majority of the Board performs ultra vires acts,

2. upon showing that intracorp remedy is unavailing

3. purpose is to prevent waste and commission of illegal acts and redress injuries to the minority

WON Court may appoint receiver. YES

1. The argument against the appointment is that it has deprived the court of its property without due process oflaw. But the appoint of the receivership is topreserve the properties and prevent the wastage ofdefendantdirectors

WON court may order the removal of the directors. NO1. The Law does not expressly confer power to the courts for the removal of the directors. Jurisprudence instead

authorizes the appointment of a receiver to prevent mismanagement of directors.2. Hence, the assets of the corporation are already amply protected by the receiver and removal of the directors

is unnecessary and unwarranted.


9/33

DE LA RAMA v MAAO SUGAR CENTRAL, (and 4 directors)

Action by minority SH: Representative or Derivative suit against Ma-ao Sugar, 4 directors of corp for allegedmismanagement, self-dealing, forfeiture of corp rights, receivership

1. Defendants subscribed to 3M worth of K stock in Philippine Fiber which was not authorized by the Board thruboard resolutions. Ratification was made laterby the Board through 2 Resolutions.

2. Defendants allege that since Maao is engaged in the manufacture of sugar bags, it was legit for it to

manufacture sugar bags or invest in another corp for said manufacture3. Court held (which is being assailed by plaintiffs) that if the purpose of the corp in which investment is made in

a corp whose business is important to the investing corp and would aid in ts purpose, to require authority ofSH would be to unduly curtail the powers of the Board.... That the investment was made without the authorityof the Board, ratified later, had the effect of legitimizing the unauthorized act but it is an indication of themanner in which corp business is transacted by the Maao Sugar

4. Plaintiff argument: even if Resos valid, still wanting in legality for failure to secure approval by affirmative voteof SH holding shares in the corp entitling them to exercise at least 2/3 of voting power

- Corpo law, Sec 17-1/2. No corp shall invest in any other corporation or business, or for any pusposeother than the main purpose for which it is organized UNLESS its BOD has been so authorized in a resoby the affirmative vote of SH holding shares n the corp entitling them to exercise at least 2/3 of votingpower

5. Defendants:

- Sec 13. powers of the corporation.

WON act of investing in Philippine Fiber requires the affirmative vote of 2/3 SH

1. Power to acquire or dispose of shares of securities.a. Such act if done in performance of the corporate purpose, does not need the approval of SHb. BUT when the purchase of shares of another corp is done solely for investment and not to accomplish

purpose of its incorp. (not for purpose), the vote of approval of SH is necessary.2. Power to invest corporate funds.

a. a private corp has the power to invest its corp. funds in any other corp or for any purpose other thanthe main purpose PROVIDED that affirm vote of 2/3 is exercised AND no other mining or agri shall beinterested in any other mining or agri

b. When investment to accomplish purpose, approval of SH not necessary

::: Investment in Philippine Fiber does not fall under Sec 17 requiring 2/3 affirmative vote of SH


10/33

GOKONGWEI v SEC

1.Purchase of beer manufacturing faciltiies by SMC. The original investment was made in 1947 by SMBrewerywhen the latter purchase in HK the brewery for the manufacture and market of Smbeer

2. Gokongwei asserts that the investing corp funds in other corp outside the primary purpose in violation of sec17 and sought to have soriano and SMC declared guilty of such violation.

3. Defendant corporation, SEC and Soriano:a. submission of investment to the SH for ratification is sound practice and should be encouragedb. Gokongwei are engaged in business competitive and antagonistic to SMCc. amended by-laws adopted to preserve and protect SM C from the danger that business competitors id

allowed to become directors will illegally and unfairly utilize their direct access to secrets and plantsfor their private gain

d. by laws are valid and binding since corp has the inherent right to preserve and protect itseld byexcluding competitors

WON SEC abused its discretion in allowing SH of Corp to ratifiy the investment of corp funds in a foreign corp

1. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of itsinc that the vote of approval of SH holding shares entitling them to exercise at least 2/3 of voting power isnecessary

2. Maao Sugar Case. Bifurcate act: For Corp purpose and Not for corp purpose.

3. Even assuming that the Board had no autho to make the investment, the corporation may ratifyand therebyrender binding upon it the originally unauthorized acts of officers and agents.

4. Corpo may ratify previously unauthorized acts:a. When act is not contrary to law, PP, morals, PO.b. Within corp powers byt defective only as to failure to observe execution the requirement of the law

that the investment must be autho by affirmative vote of SH holding 2/3c. Mere ultra vires acts, not illegal, not void ab initio, are voidable and may become binding and

enforceable when ratified by SH

investment was for the purchase of been manufacturing and market facilities which is apparentlyrelevant to the corp purpose.

the mere fact that SMC submitted the investment of SH for ratification at the annual mtg cannot beconstrued as an admission that SMC had committed an ultra vires act considering this is a common

practice.


11/33

IN RE GIANT PORTLAND CEMENT

1. Election of 9 directors. 2 tickets: Management and Opposition2. 214,823/282,543 is represented at the meeting and were either voted in person or proxy.3. S17 of the law.

Sh shall be entitled to vote in person or proxy for each share No share of stock shall be voted on at any election which shall have been transferred on the books of

the corporation within 20days EXCEPT where the transfer books shall have been closed as a recorddate for the determination of its SH entitled to vote

the BOD shall have the power to close books for a period not exceeding 50days... only SH of record on the sate shall be entitled to notice and to vote

4. S29. Original/Duplicate stock ledger shall be the only evidence as to which SH are entitled to vote5. By laws: ...No share shall be voted on at any election which has been transferred on the books of corp within20days... BOD may close the books for a period not exceeding 30days...6. Books was closed 20days before meeting7. During that period, no stock was transferred on the corp records byt certain shares were sold by recordowners and the certs were duly assigned and delivered. Some of the shares were voted for each ticket onproxies given by the record owners.8. Alleged improper counting of votes:

a. 5472 ifo Oppositionb. 1384 ifo Management

9. Controversy as to the validity of the counted votes which were votes representing shares transferred on thebooks within 20days after corp has closed its records.

WON stock transferred on the books within 20days prior to meeting for the election is temporarilydisenfranchised and cannot be voted by the transferor or transferee.

1. The right to vote shares of corp stock, having voting powers has always been an incident to its legalownership

2. The record owner must be regarded as the real owner of the stock with the consequent general right to vote itby proxy or otherwise.

3. Until that time that the transfer it recorded, the legal rights of the transferee are of an inchoate nature4. the record owner is nominal owneror a trustee for the holder of the certificate. Legally, he is still the owner as

far as the corp is concerned and ordinarily has the right to vote the stock standing in his name

5. A mere nominal owner naturally owes some duties to the real beneficial or equitable owner of the stock andeven if the right to demand a proxy is not exercised, if the vendor exercises his legal right to cote in such amanner as to materially and injuriously affect the rights of the vendee, he is, perhaps answerable in damagesin some cases

because corporate transfer of books were closed at the time of the assignments, they could compel recordowners to give them proxies to vote the stock standing in their names.

::: persons nominated on the Opposition are legally elected


12/33

EVERETT TRUST v PACIFIC WAXED

1. Jordan owned all of the capital stock of Paine Mitchell except few qualifying shares2. Engle was the owner of PS and CS of Pacific Waxed3. Paine-Mitchell owner of CS of Pacific Waxed4. All stocks involved had voting power5. Combined shares of Engle and Paine in Pacific constituted more than majority

Jordan Paine-Mitchel

Engle Pacific Wax

Engle + Paine > Majority6. Engle -Paine Agreement: promise that before either party sold or caused to be transferred any part of portion

of the stock then owned and held by him, either would notify the other in writing of the intention stating theamount, price, conditions, etc. In force for 25 years

7. Engle-Paine-Jordan Agreement:a. in the event of the death of Engle, if Paine-Mitchel owner any of the stocks of Pacific Wax, it should be

entitled to vote any stock owned by Engle in Pacific in all meetings for so long as Paine owned anystock in Pacific (i.e. Paine proxy for Engle). It should be deemed irrevocable proxy of Engle's heirs and

legal rep to Paine with full power of substitution to vote the Engle stock at all mts of Pacificb. In the event of the death of Jordan, Engle should have the same voting right as to the stock of pacific

owned by Paine-Mitchel, and Jordan or either of them, and contained same irrevocable proxy ifo Englebinding upon the heirs and legal reps of Joran and Paine-Mitchel.

8. Jordan died testate. In the will he assigned Everest as executor, who caused the dissolution of Pain andas a result the stock owned by it in Pacific was transferred to the executor.

9. The executor sought to vote the stock at a SH mtg at Pacific but was denied because of the proxy heldby Engle.

WON proxy to vote the stock of Pacific owned by Paine and Jordan was revocable.

1. GR: Proxy to vote at a mtg IS REVOCABLE.2. Exceptions:

a. where the power / authority is coupled with an interest- power or auth to do an act, accompanied with an interest in the subject or thing upon which the power is tobe exercised, the power and interest united in the same person

- interest to the thing upon which power is to be exercised + subject upon which power is to be exercised- thing = tangible shares or certificates + SM = intangible voting of a power of atty and incidental control of

corpb. where the authority is given as a part of a security or is necessary to effectuate such security

- authority is given as part of the security or is necessary to effectuate such security. Interest of the agentis something more than an interest in being permitted to exercise the power yet something less than anestate in the SM or thing upon which the power is to be exercised.

- protect or further the interest of the proxy holder the authority given is regarded as part of the security orsomething necessary to effectuate such a security

Proxy was not revocable:1. agreed that proxy should exist and continue until Engle decides to dispose of stocks. The proxy was for thecontrol of the corporation and mutual proxy was important in order to effectuate the purpose.


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14/33

ALEJANDRINO v DE LEON +8.

Action: Quo warranto to annul election of all or any of the De Leon,and 8 others as members of the BOD anddeclare Alejandrino elected.

10. In the election for BOD of the Pampanga Sugar Development Co1. Deleon+8 received 19000+each2. Alejandrino received 14205 votes + held proxies given to him by 18SH representing 6,084 shares =

20389 votes11. Chairman and Sec refused to register and refused his vote on shares he held as proxies; the basis of

refusal being that the 18 SH who gave the proxies executed contracts of pledge ifo of Pabdul stipulating thatduring the existence of the pledge, the pledgor (18SH) grants irrevocably ifo President of the pledgee (Pabdul) orwhoever shall be acting in his place, the right to vote shares pledged in any mtg of the Pasudeco

12. Alejandrino contends:1. Pambdul merely an agency or alter ego of Pasudeco and its principal SH, de leon; irrevocable proxy

will allow the use of corp fiction of separate entity to work a fraud2. enables principal SH to monopolize directorships and perpetuate themselves in office

1. Pasudeco est. Pabdul and pasudeco purchased all shares of stock of Pambul and distributedamong SH resulting in the situation where SH of Pasudeco also SH of Pabdul

2. Only SH of Pasudeco are allowed to obtain loans, security being the shares in Pasudeco3. Pambul offers the most lenient terms in loans at as low a rate of interest as 7% per annum on

the security of their shares of stock, the amount of the loans being as high as 90% of the par value ofthe shares, thereby inducing the SHs to avail themselves of the loan and thereby enabling themanagement of Pampanga Sugar through Pambul to secure sufficient proxies for their purpose, andas a result the pledgors-stockholders could do nothing even if they should make use of their right tovote when and if the management should commit corporate abuses, excesses, and mistakes.

4. 2 families have practically monopolized the directorship and exec positions

WON the irrevocable proxy is contrary to morals and public policy and hence, void or at least revocable.

3. Private right of the property. The right of the SH to vote his shares is inherent and incidental to his

ownership of the stock, just as wth the ownership of any other kind of property goes the right to manage andcontrol it.

1. If the owner can dispose of the property itself then it is apparent that he can also dispose of the right

to manage it.2. If it is not against morals to loan money on shares of stock, neither is it against morals for pledgee to

demand (as part of the consideration for the loan) the right to protect his investment by exercising theright to vote the stock or manage the property delivered to his as security as long as the loan is unpaid.

-> What is immoral is giving a pledgee and irrevocable proxy then later revoking it without paying for theloan

4. The design and desire of a majority of SHs of a corporation to control its management and operation islegitimate per se, and is in fact the universal practice in the business world.

The SH who own a majority of the stock of a corporation may elect themselves directors or appointthemselves its agents, or form and carry into effect policies of management as freely as if thebusiness were their own, so long as they act honestly and do not devote the corporate assets or

business to their own private gain or to the prejudice of other stockholders, and no one can questiontheir acts, which are surely intra vires.Monopoly of positions without fraud or irregularity is not actionable per se.

-> ownership of 30% by two families is not enough to secure control without the cooperation of other SH

i. organization of Pambul was accomplished by majority and not only 30%ii. Proxies could not have existed before Pambul was organized (hence it cannot be said that the

families holding 30% and which assigned the proxy to Alejandrino and Pabdul ....

iii.de Leon merely holds 20% and cannot be said to control the corporation


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The allegations of monopoly positions in a corporation, without any allegation of fraud or irregularity resultingtherefrom to the prejudice of any stockholder, is not actionable per se. The SH owning 30% of the outstandingstock of a corporation cannot secure its control without the willingness, adherence, cooperation, or support ofother SHs. Assuming that the two families owning 30% of the capital stock have been able to procure suchsupport by organizing Pambul for the purposes above indicated, it would be admitted that the organization ofPambul was accomplished by vote of the majority and not of only 30% of capital stock of Pampanga Sugar. Itcannot be assumed that the meeting in which the organization of Pambul was agreed upon the SHs other thanthe two families referred to were deprived of their vote by means of the proxies now assailed, because said

proxies could not have existed before Pambul was organized. Even now the SHs of Pambul are also the SHs ofPampanga Sugar, the former cannot be said to be under the control of the said two families because the latterare not alleged from the facts. In other words, Pambul SHs are free to vote their stock and elect the directorsthey want; and the board of directors of Pambul is at liberty to change any or all of the onditions of the contract ofpledge in question. Even assuming that respondent de Leon controls Pampanga Sugar, it would not necessarilyfollow that he or the company also hold voting proxies on the shares of stock of Pambul. Therefore the SHs ofPambul are free to vote their shares at the election of its directors. It is thus clear that if the alleged minority SHsof Pampanga Sugar cannot or do not elect even one candidate to represent them in its BOD, nothing appears toprevent them from doing so except their own volition. Nobody forces them to pledge their stock to Pambul. Theymust either be satisfied with the management or indifferent with regard to voting. Only Alejandrino, as one of theminority SHs, owning 112 shares, has come before the court to assail the contracts of pledged entered into by18 other SHs and in which he is not even a party.

To vote at a meeting of the SHs of a corporation is, unlike a political franchise, but an exercise of the right ofownership involving no public interest. To call the transfer of such right bribery is to distort the meaning of theword; it can no more be called bribery than the payment by the purchaser of the price of goods bought by himmay be considered a bribe to the seller

Would it not, rather, be morally wrong to permit a SH to obtain a liberal loan of pledging and transferring hisstock and the right to vote it and then repudiate the proxy to vote without paying the loan? Would it be fair toconvert the pledgee or its representative into a mere voting puppet of the pledgor when the former accepted thepledge from the latter in GF and in the belief that the security for its investment could be protected by it byexercising the right to manage the property through the voting proxy.

Campbell v Leows Inc. Action to restrain Loews Inc from using corporate funds, employees, and facilities forsolicitation of proxies for the Vogel group and from voting proxies so solicited. Campbell contends that the Vogel

Group, by calling the meeting and by using corporate funds and facilities, are usurping the authority of the BOD,and that the president is in effect in using his corporate authority and the corporate resources to deny the will ofthe BOD and to maintain himself in office. The by-laws provide for 13 directors. 7 is a quorum. Due to 4resignations there are now 9 directors in office. 5 of 9 are of the Tomlinson Faction while the remaining 4 are ofthe Vogel Faction. Since the Vogel Group will not attend directors meetings, it follows that the Tomlinson Groupis unable to muster a quorum of the BOD and is thus unable to take action on behalf of the Board.

H: The BOD acting as a board must be recognized as the only group authorized to speak for management in thesense that under the statute they are responsible for the management of the corporation. Since the Vogel Group,being in physical possession of the records and facilities of the corporation, treated the request of the directorsfor a stockholders list as though it were to be judged by standards applicable to a mere SHs request, theyviolated the duty owed such directors as directors. The fact the Vogel, as president, had the power to call a SHmeeting to elect directors and is so to speak, in physical control of the corporation, cannot obscure the fact thatthe possible proxy fight is between two sets of directors. Vogel has no legal standing to make his faction theexclusive voice of Loews in the forthcoming election.

On the issue of how the two groups should be classified for purposes of determining the rights of the VogelGroup in connection with the use of corporate money and facilities for proxy solicitation at the SH meetingw/nthe SH approve of a record made by one group and opposed by another group. While the Tomlinson Group has5 of 9 directors, it would be most misleading to have them represent to the SH that they are management in thesense that they have been responsible for corporate policy and administration. It is apparent that the VogelGroup is entitled to solicit proxies, not as representing a majority of the board, but as representing those whohave been and are now responsible for corporate policy and administration. Whereas the Tomlinson Group,while not management in the sense that it is able to take effective director action, is representative of themajority of the incumbent directors and is entitled to so represent to the SHs if it decides to solicit proxies. Since


16/33

Vogel is entitled to expend reasonable sums of corporate funds in the solicitation of proxies, it follows that therequest for an injunction against such us will be denied.

On the issue of the entitlement of the Vogel group to use corporate facilities and employees, because suchaction would carry the intracorporate strife even deeper within the corporation and there is no practical way toensure equal treatment for both factions where only one group (Vogel) is in control of the physical facilities,Vogel should thus by enjoined from using corporate facilities and personnel in soliciting proxies.

On the issue of w/n Vogel, in soliciting proxies, misrepresented himself as management and thus the proxiesshould not be voted, the evidence presented by Tomlinson Group are not so misleading as to void the proxies.Since the meeting was validly called by the president, there was nothing misleading in the creation of theimpression that the meeting and the material were initiated by the company. The whole impact of the proxymaterial conveyed to the average reader the impression that there is a bitter fight between the president and hisfaction and another faction on the board. The overall result is no so misleading as to justify the nullification of theproxies for any purpose.

2. voting trust agreement

Defn: a trust agreement whereby a stockholder transfers his shares to a trustee who will exercise his

voting rights. Under this arrangement, the stockholder remains the beneficial or equitable owner of the shares,but legal ownership is transferred to the trustee. Essence of voting trust: real ownership is separated from the voting rights Involves the complete surrender by the SH of his voting rights to a trustee or trustees Voting trustee is only a share owner vested with colorable and fictitious title for the sole purpose of votingupon stocks that he does not own Transferring SH ceases to become SH of record but retains the right of inspection of corporate books During the period of the agreement, it is irrevocable for as long as the trustee has not violated the trustby his misconduct or fraud. Conditions for the use of voting trustsSec 59:


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Section 59. Voting trusts. -

One or more stockholders of a stock corporation may create a voting trust for the purpose of conferringupon a trustee or trustees the right to vote and other rights pertaining to the shares for a period notexceeding five (5) years at any time:

Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said

voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment ofthe loan.

A VTA must be in

writing and

notarized, and shall

specify the terms and conditions thereof.

A certified copy of such agreement shall be filed with the corporation and with the SEC;

otherwise, said agreement is ineffective and unenforceable.

The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and newones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to saidagreement.

In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees ismade pursuant to said voting trust agreement.

The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall betransferable in the same manner and with the same effect as certificates of stock.

The VTA filed with the corporation shall be subject to examination by any stockholder of the corporation inthe same manner as any other corporate book or record:Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of allcorporate books and records in accordance with the provisions of this Code.Any other stockholder may transfer his shares to the same trustee or trustees upon the terms andconditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of saidagreement.No voting trust agreement shall be entered into for the purpose of circumventing the law againstmonopolies and illegal combinations in restraint of trade or used for purposes of fraud.Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at theend of the agreed period, and the voting trust certificates as well as the certificates of stock in the name ofthe trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued inthe name of the transferors.The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. (36a)

Requisites of a valid voting trust: (59)

In writing and notarizedCertified copy filed with the corporation and the SECPeriod not longer than 5 years, but renewable each time for not more than 5 years

Exception: where the voting trust is a condition of a loan agreement, in which case it may be fora longer period but not beyond the time when the loan is fully paid

Certificates of stock is to be cancelled, and new ones issued to the trustee stating that it is issued inpursuance of a voting trust agreementTransfer must be entered in the corporate booksTrustee should issue voting trust certificates in favor of transferring SHsNot for an illegal purpose, or for the benefit only of the trustee without any obligation to perform anyuseful service for the protection of the stockholders or creditors of the corporation


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it must have a legitimate business purpose to promote the best interest of the corporation oreven to protect the legitimate interests of others in the corporation

creation of voting trust: transferring SHs receive transferable voting trust certificates as evidence of their rights

rights other than voting rights may also be transferred to the trusteebut the SH ceases to be a SH and his rights are now against the trustee in accordance with theagreementSH has the express right to inspect corporate books and records

Trustee is also qualified to become a director, since he is the registered owner of the shares and fulfillsthe qualifications of the Code that at least one share is owned to become qualified as directorNo voting trust agreement may be kept secret among the parties thereto; it must be open to examinationNo voting trust agreement may be exclusive, since the law gives a SH the right to transfer his shares tothe trustee upon the same terms and conditions in the agreement


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ABERCROMBIE v DAVIES.

1. 6 stockholders, led by Davies (president) of the American Independent Oil Company took steps to form acoalition, in order to ensure the smooth functioning of its board considering that not one SH holds a majority ofthe stock of the corp, and no one SH is represented by more than four directors.

a. The Davies 6 hold 54.5% of the corporate sharesb. They are represented on the board by 8 of 15 directors.c. Agreement between the Davies 6 and 8 Directors/Agents.

i. to achieve effective control of the board and control of corporate policy and prevent acquisition ofcontrol by Philipps, the largest single SH holding 1/3 of the stock.

ii. transfer of voting control of Davies 6 to the 8 Agent-Directors for 10 years.iii.An agreement of 7 of the 8 agents is required to vote the stock and in case of disagreement an

arbitrator will be designated.

2. The agreement was not filed with the corp and and shares were not transferred in the books of thecorporation

3. Contentions of Abercrombie (one of the organizers of the company), Philips et al sued Davies and the Agent-Directors, claiming that the agreement is invalid. In substance it is a voting trust but since it did not comply withthe voting trust statute it should be void.

4. Contention of Davies: Not VTA but a mere pooling agreement. title did not pass to Agents and Agents areagents and subject to directors of principals

WON agreement is a voting trust.If VT, whether void for failing to comply with statutory requirements of a VTA.

1. Voting trust:

a. definition. a device whereby two or more persons owning stock with voting powers, divorce the voting

rights thereof from the ownership, retaining to all intents and purposes the latter in themselves andtransferring the former to trustees in whom the voting rights of all depositors in the trust are pooled.

b. principal object of such trust is voting control.

c. essential feature: separation of voting rights of the stock from other attributes of ownership

-> voting rights of the pooled stock are divorced from beneficial ownership

-> voting rights have been transferred to fiduciaries ie Agent-Directors-> transfer of rights made through irrevocable proxies effective for 10years-> all voting rights in respect of all stock are pooled in the Agent-Directors as a group through proxiesrunning to the agents jointly and severally an not Sh retains the right to vote his shares-> on its face, the agreement was really for the control of American Indep. Oil Comp.-> the only element lacking short of it being called a voting trust are provisions formalizing the trust.Provision gives 7 of 8 Agents the right to transform the agreement from escrow into a formal VT. changingname from Agents to Trustees, stock being registered in their names as Trustees and issuance of trustcerts instead of receipts

::: Voting Trust::: Substance already existed

2. The provision requiring compliance with formalities was for the benefit of all SH and all beneficiaries of thetrust which are entitled to know, where voting control of a corporation resides.

-> The effect of non-compliance with formalities was to create a secret VT

3. It is the transfer of voting rights that is the characteristic feature of a VT. Transfer of the stock on the books is

not essential to effect an irrevocable transfer of voting rights to fiduciaries, divorced from other attributes of thestock, in order to securing voting control, as the Agents agreement demonstrates. It is immaterial that Agents arecontrolled by the SH.

a.stock is voted by the Agents as a group


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b.no one SH retains complete control over the votingc. SH cannot vote on stock directlyd.stock of SH may be voted against by 7 Agents

4. A pooling agreement may not escape the statutory control by calling trustees agents and giving to the SHreceipts instead of VT certs.


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EVERETT v ASIA BANKING CORP (ABC)

1. Teal&Comp (of which Everett was an SH) has done its business transactions exclusively with Bank.2. Creditors agreement. Bank persuaded Teal, and 2 other corporations, creditors of Teal, Peabody and Smith to

enter into a Creditors Agreement with the Bank where it is mutually agreed that neither of the parties should takeaction to collect debts from Teal for 2 years. (Teal has no copy of the agreement; original is allegedly with theBank)

a. Teal & Company is indebted to HW Peabody & Co. for P300K for tractors, plows, and parts delivered, ofwhich it has paid P150K. Asia Banking Corp held drafts accepted by Teal under the HW Peabodysguarantee.

b. Tractors were returned to HW Peabody due to its being unsellable due to financial and agriculturaldepression in the RP.

c. Teal ordered another lot of tractors from Smith Kirkpatrick, but shipment was delayed until the rescissionof the credit of Teal with Asia Bank. Yet Smith still delivered the order, and Teal at the request and adviceof the Bank accepted the drafts and stored the same.

3. Teal soon became indebted to Asia Bank for P750,000, secured by mortgage.4. Voting Trust Agreement.

a.The Bank then suggested that, for the mutual protection of Teal and itself, it was advisable that theBank should temporarily obtain control of the management and affairs of the company.

b. It was necessary for the SHs to place their shares in a voting trust to be held by the Bank, then theBank would finance Teal under its own supervision.c. At the time the Bank decides to discontinue operation under the trust, stocks would be returnedd.The Teal SHs were thus induced to enter into the Voting Trust Agreement, with the purpose that the

agreement will be intended for the protection of all parties from outside creditors. And suchagreement was made with the knowledge of the creditors.

e.Shortly after the execution and delivery of the voting trust and the MOA, Mullen as GM of the Bank,caused the displacement and removal SH representatives in the Board and the substitution in theirplace of the Banks employees or representatives.

f. The new Board, who have not purchased any share of stock of Teal, proceeded to remove the CorpSecretary, discharge all the old managers and displace them with creatures of their own choosingwhose interest consisted wholly in pleasing themselves and the Bank, and who were wholly foreign tothe stockholders.

g.Conducted the business of the Company without consulting the SH and denied to the SH anyknowledge as to their actions, business of the company, and management as if they and the Bankwere the real SH and owners

h.They constituted mortgages upon the Corp properties, gave pledges and mortgages from Company tothe Bank and caused the foreclosure and sale of properties for the interest of the Bank without regardto interest of property

i. Defendants created a new corporation, Phil Motors Corp to which assets and properties of Teal weretransferred to

5. The SH could not implead Teal as a plaintiff in this case because defendants were in complete control of Teal

HELD: Right of transferring SHs to set aside the trust agreement when their rights are trampled upon by thetrustee. Corpo Code now provides that no VTA will be used for purposes of fraud.


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MACKIN v NICOLLET HOTEL

1. Dixon was the owner of a leasehold interest in a tract of land in Minneapolis upon which stood what wasknown as the Nicollet Hotel.

a. Nicollet Hotel Inc was organized for the purpose of adding to the hotel accommodation of that city.2. Arrangements were made to have Dixon take 2500 shares (of Nicollete Hotel Inc) for his lease and to erect an

new Nicollet Hotel upon this property.

a.Cost was $3M, to be raised by the sale of $1M mortgage bonds and $1.25M of preferred stock.b.The Minnesota Loan and Trust Co approved the loan application of Nicollet for $1.8M secured by the

said mortgaged bond.

c. The loan agreement stipulates that a VTA is entered covering the common stock of Nicollet. The StateSecurities Commission approved Nicollets application for the license to sell its preferred stock,provided that the common stock is to be trusted with three trustees for 10 years for the protection ofpreferred SHs. Thereafter a voting trust agreement was entered with Dixon et al as voting trustees.Mackin is the owner of a trust certificate representing 80 shares of common stock, alleging that thevoting trust is void and that the trustees and directors appointed have mismanaged the company andhave caused large losses. The agreement also allegedly denied them the right to inspect the books,and they ask the court to declare the same null and void and appoint a receiver until the beneficialowners can elect a new set of directors.

I: W/N the voting trust is valid

H: Voting trusts are not illegal per se. In the instances where the voting trust has been held void, there existedinvalidating circumstances such as want of consideration, voting power not coupled with an interest, fraud, illegalpurpose, and so on. In this case there was no charge of illegality or fraud, nor of any invalidating circumstance.The voting power of the three trustees is coupled with an interest because of one of the trustees is a substantialowner of the common stock, and all are charged with the duty of protecting and conserving property for thebenefit of those who became purchasers of preferred stock and bonds. The whole purpose of the agreement islegitimate and wholesome. It was a matter of civic pride and to make this possible, it involved the invitation ofcombinations of capital in substantial amounts, which could only be secured by having those who invested theirmoney assured of the fact that there would be a continuity of management during a period of years until suchtime that the new enterprise would have an opportunity to justify a successful financial future. It would be amanifest injustice to the large number of holders of bonds and preferred stocks, not to the parties to the suit, to

adjudge and hold illegal a trust agreement upon the strength of which they had invested their money in theenterprise. It also appears that Mackin purchase the certificates of trust after the creation of the trust agreementand are presumed to have full knowledge of the limitation of their rights.


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NIDC v AQUINO.

1. Batjak, a manufacturer of coco oil and copra cake for export, is on the brink of bankruptcy.2. Batjak-PNB Financial Agreement.

a. for additional operating capital for its 3 processing mills and for payment of debts to other banksb. NIDC, a wholly-owned subsidiary of PNB, would invest P6.7M worth of PS convertible within 5 years into

CS to pay off the other debts and the balance to pay off its own due with PNB.

c. PNB also granted various credit accommodations.

d. Batjak as part of the deal, mortgaged all its properties in the province.3. VTA. ifo NIDC by the SHs representing 60% outstanding stock of Batjak for 5years.

4. Years later, PNB instituted foreclosure proceedings against the mortgaged properties due to Batjaksinsolvency, and soon became owner of the properties.

a. Batjak failed to exercise its right to redeem so PNB as owner subsequently transferred ownership of the 2oil mills to NIDC.

5. 3 years later, Batjak represented by majority SHs, inquired with NIDC if it was still interested in negotiating therenewal of the voting trust agreement and that for its non-reply, Batjak could assume that it is no longerinterested and therefor requested for the turn-over and transfer of all assets, properties, mgt and ops

6. Batjak demanded an accounting of all assets and properties and operations but NIDC refused to comply.7. Complaint by Batjak.

a. action for mandamus and appointment of receiver.b. NIDC was constituted as Trustee by virtue of VTA and that NIDC should turn over assets upon expirationof VTA

8. CFI issued a TRO prohibiting NIDC from removing any record, report, or document or disposing all of theproperties of Batjak, and allowed Batjak to inspect the same.

WON NIDC as trustee, after expiration of VTA, had the obligation to turnover the foreclosed properties (3 mills,acquired by PNB as highest bidder in foreclosure sale then transferred to NIDC)NO.

1. Voting trust transfers only voting and other rights pertaining to the shares subject to the agreement or controlover the stock.

-> What was assigned to NIDC was the power to vote the shares of stock representing 60% of SHs, whoare signatories to the agreement. Nowhere in the agreement is mention made of any transfer orassignment to NIDC of Batjaks assets operations and management. NIDC was constituted as trustee onlyof the voting rights of 60% of outstanding shares.

-> What was to be returned by NIDC as trustee to Batjaks SHs upon termination of the agreement, wasthe certificates of stock, not the properties or assets which were never delivered to NIDC in the first place.The acquisition of PNB and NIDC of the properties was not in its capacity as trustee but as a creditor inaccordance with the financing agreement.

-> the acquisition of PNB-NIDC was not made under the capacity as trustee but as a foreclosing creditor

WON appointment of receiver is proper. NO

1. A receiver of real or personal property which is the subject of the action may be appointed by the court when itappears from the pleadings that the party applying for the appointment of receiver has an interest in saidproperty. The right interest, or claim in property, to entitle to one to a receiver over it, must be present andexisting.

-> PNB acquired ownership of 2 of 3 mills by virtue of mortgage foreclosure sales-> NIDC acquired ownership of 1 of 3 mills by virtue of mortgage foreclosure sale-> title were issued to PNB and NIDC after failure of Batjak to redeem within prescribed period.-> PNB later transferred to NIDC the 2 mills::: NIDC had title to the 3 mills


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::: interest of Batjak ceased upon the issuance of the certs of title to PNB and NIDC confirming theirrespective ownership

-> In this case, the VTA was part and parcel of the loan arrangement, and should have been considered bythe Court as a means by which the lending institution obtains control over the management or operation of theborrowing corporation, and not merely as a transfer only of voting or other rights pertaining to the shares-> SC failed to appreciate the fact that the voting trust was obtained from the SHs of the borrowing corporationprecisely to allow PNB-NIDC to have management and undertake control in the operations of the borrowing

corporation

VTA as part of Loan Agreement VTA as part of loan agreement can exceed 5 years as an exception to the rule that VTAs cannot be formore than 5 years VTA as part of loan agreement ensures that the lending institution would have a controlling interest incorporate votes Constitutes further security to the lending institution In reality, the lending institution would have very little interest in the operations of the corporation as torequire a voting trust

3. Pooling and Voting agreements

Definition: an agreement between two or more SHs to vote their shares the same way. Through this kind of agreement, SHs who individually own only a minority of the shares but togetherrepresent the majority, can obtain control of the management of the corporation. Usually relates to the election of directors, which may either specify the name of the nominees to bevoted for, or the number shares to be voted as a unit In case of disagreement: arbitration Since pooling agreements personal obligations to do, then although valid it cannot be enforced by actionfor specific performance These agreements have been upheld as valid provided they do not limit the discretion of the board orwork fraud against the other SHs

Ex. An agreement that directors once elected must vote for certain persons as officers would be void,since the choice of officers is vested in law in the board

Voting agreement vs. voting trust: VA does not involve a transfer of stocks but is merely a private

agreement between and among SHs to vote the same way. Breach would therefore give rise to liability fordamages. In close corporations: Sec 100:


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Section 100. Agreements by stockholders. -

1. Agreements by and among stockholders executed before the formation and organization of a close corporation,signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid andbinding between and among such stockholders, if such be their intent, to the extent that such agreements are notinconsistent with the articles of incorporation, irrespective of where the provisions of such agreements arecontained, except those required by this Title to be embodied in said articles of incorporation.

2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may providethat in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they mayagree, or as determined in accordance with a procedure agreed upon by them.

3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs,shall be invalidated as between the parties on the ground that its effect is to make them partners amongthemselves.

4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on theground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere withthe discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholderswho are parties thereto the liabilities for managerial acts imposed by this Code on directors.

5. To the extent that the stockholders are actively engaged in the management or operation of the business andaffairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and amongthemselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtainedreasonably adequate liability insurance.

Para 1: SH agreements in general. Pre-incorporation agreements among SHs remains effective evenafter incorporation if so intended and even if not reflected in AOI, except matters required by the Code to appearin AOI Para 2: refers to pooling and voting agreements in particular. There is no reason for denying SHs otherthan those in close corporations the right to enter into voting or pooling agreements to protect their interest, as

long as no wrong or fraud is committed or intended to be committed on other SHs not parties Para 3: gives close corps freedom to operate as a partnership between and among the SHs, but

remaining a corp with respect to 3rd

persons. Note: SHs who are parties assume liabilities of directors

Ringling v Ringling Bros. Involves an action contesting the validity of the election of directors and officers ofRingling Bros-Barnum & Bailey Combined Shows Inc. Edith Ringling and Aubrey Haley, two of three majoritySHs, entered into an agreement (valid for 10 years) that neither party will sell any shares or VTCs without firstmaking a written offer to the other for the same price and under the same conditions, allowing a period of within180 days to accept the offer. Each party will consult with the other and act jointly in exercising voting rights, andin case of disagreement, an arbitrator (Loos) will intervene, and his decision shall be binding on the parties. Italso provides that each will enter into VTAs or other agreements as deemed advisable. From 1943-45 bothparties voted together in accordance with the agreement and elected 5 of 7 directors in each occasion. JamesHaley, as proxy for Mrs Haley, refused to follow the instructions of the arbitrator Loos on a particular manner of

voting the shares (i.e. vote for adjournment and vote for 5 named nominees for director) by voting all his wifesshares for the election of Aubrey Haley and James Haley.

I: W/N the contested agreement is an agreement to agree thus not having any binding obligations

H: The mutual promises in the agreement certainly constitute sufficient consideration to support it. But did theparties agree to agree? Certainly the parties agree as to how they would vote their stock, but they also providedthat they shall be bound by the decision of the arbitrator. The agreement to agree therefore has provisions whichare capable of being enforced with respect to particular facts. The very nature and object of the agreementrender it impossible to do more than agree to agree, and is sufficiently definite in terms of the duties andobligations imposed on the parties to be legally enforceable.


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I: W/N the agreement is a voting trust agreement. If not, does it violate any public policy?

H: The SHs under the present agreement vote their own stock at all times, which is the antithesis of a votingtrust because the latter has for its chief attribute the severance of the voting rights from the other attributes ofownership. In cases where the parties cannot reach an accord as to how they will vote, and are directed by thearbitrator to vote in a certain way, the substance of the matter may be said not to differ in effect from a votingtrust agreement, however, there is this substantial distinctionthe right of the arbitrator to direct the vote is

limited to those particular cases where a SHs vote is called for and the parties cannot agree. In a voting trust, thetrustees in the first instance determine policy and implement it by their votes, and have continuous voting controlfor the period stipulated in the voting trust. The agreement in question is actually a variation of the stock poolingagreement and the voting trust.

Generally agreements and combinations to vote stock or control corporate action and policy are valid, if theyseek without fraud to accomplish only what the parties might do as SHs and do not attempt it by illegal proxies,trust, or other means. The objects and purposes in the agreement are lawful and constitute no constitutional orpublic policy infirmity, and thus the stock held thereunder should have been voted pursuant to the direction of thearbitrator. When a party refuse to comply with the arbitrator, then the agreement constitutes the willing party tothe agreement an implied agent possessing the irrevocable proxy of the recalcitrant party for the purpose ofcasting the particular vote. Here an implied agency based on an irrevocable proxy is fully justified to implementthe agreement without doing violence to its terms. The provisions make it clear that the proxy may be treated as

one coupled with an interest so as to render it irrevocable under the circumstances.

The nature of the Agreement also does not preclude the granting of specific performance, because to deny itwould be tantamount to declaring the agreement invalid.

E K Buck Retail Store v Harkert.

Issue: Validity of a corporation control agreement entered into by the parties in their capacities as SH of HarkertHouses

Facts:

1. Harkert is the sole owner of chain of restos/hamburger stands2. Finances became impaired to the extent that he was compelled to seek financial aid from sources other than

banking institutions3. Purchase and resale. He engaged in a plan of selling the fixtures and equipment at a designated eating house

or stand to the investor for cash and entering into an agreement to buy back after 5 years for a higher price.

4. Agreement with Buck. 4 purchase and resale agreement.

5. Incorporation of the Harkert Houses with the expectation that Buck would be interested in advancing moremoney to further interest of the corp

6. Net worth of the business was $47K without treating as liability the payments on the repurchase agreements

which was due in a year worth $41K. When deducted, net worth is $6K.

7. Eventually, indebtedness to persons other than Buck reached 44.7K and to Buck 55.6K

8. Agreement with Buck. Buck to cancel the 55K debt and pay 53K in cash into the business for which he was to

receive as a consideration therefor 40% of the stock of Harkert and equal representation in the BOD

a.90K was actually invested by Buck, 53.6, 44.7 to pay obligations and 8.8 to pay for the stock transactions

b. reduction of members of the BOD from 5 to 4 - Harkert, wife, Buck, and Devorc. number shall be maintained at all timesd. 2 shall be persons nominated by Harkert or heirs, other 2 shall be persons nominated or designated by

the party of the second party

e. Mutual agreement that all shares of stock of parties shall be voted in such a manner9. Harkert - 1437 shares; Wife - 300; Buck - 119810. Buck: agreement violates Consti and contravenes pub policy and is void

a. Consti provision: Legislature shall provide by law that in all elections for directors or managers of

incorporated companies every SH shall have the right to vote in person or proxy for the number of


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shares for hims, for as many persons as there are directors or managers to be elected or to cumulatesaid shares and give one candiadate as many votes as the number of directors multiplied by thenumber of his shares shall equal or distributed them upon the same principle among as manycandidates... i.e. cumulative voting. not to elect in any other manner.

b.

Trial court: agreement calid; defendants ordered to restrain fro violating it and ordered to perform obligationsthereof

Clark v Dodge. Action for specific performance between Clark and Dodge, SHs of two New Jersey corporations,Bell & Co and Hollings-Smith Co, engaged in the business of manufacturing medicinal preparations by secretformulae. Clark owned 25% and Dodge 75% of each corporation. Dodge, a director, took no active part in thebusiness but controlled the other directors of both corporations. Clark was a director, treasurer and GM of Bellbut was in charge of a major part of the business of Hollings-Smith. The secret formulae were known to Clarkalone. Both entered into an agreement that Clark should continue in the management and control of Bell so longas he remained faithful and competent, and that he should not be the sole custodian of the formulae but sharehis knowledge with Dodges son. The agreement also provides that Dodge during his lifetime and after death, atrustee to be appointed by him in his will would vote his stock and so vote as director that Clark would continueto be a director and GM and receive of the net income of the corporations, among others. Clark agreed toshare the formula to Dodges son and instruct him on the methods of manufacturing. Clark accuses Dodge ofbreach and his failure to use his control of the stock to continue Clark as director and GM, and even prevented

Clark from receiving a proportion of the income as stipulated in the agreement.

I: W/N the contract in question is illegal as against public policy

H: GR: the business of the corporation shall be managed by its board. If the enforcement of a particular contractdamages nobodynot even the publicone sees no reason for holding it illegal, even though it impinges on thegeneral rule stated above. Damage suffered or threatened is a logical and practical test. Where the directors arethe sole SHs, there seems to be no objection to enforcing an agreement among them to vote for certain peopleas officers. The rule that all SHs by their universal consent may do as they choose with corporate concerns andassets, provided the interests of creditors are not affected, because they are the complete owners of thecorporation, cannot apply in a case where the SHs are not parties to the agreement in question. So when thepublic is not affected, the parties in interest might, by their original agreement of incorporation, limit theirrespective rights and powers. As the parties are the complete owners of the corporation, there is no reason why

the exercise of power and discretion of the directors cannot be controlled by valid agreement betweenthemselves, provided that the interests of creditors are not affected.

The agreement here in question was legal and that the complaint states a cause of action. The only restrictionson Dodge were that he should vote for Clark as director, and that as director he should continue Clark as GM, solong he proved faithful, efficient and competent, and entitlement to of the income. These are all perfectly legalcontractual stipulations. If there was an invasion of powers of the board, it is so slight as to be negligible; andcertainly there is no damage suffered or threatened to anybody.

NOTE: Although the GR is that pooling or voting agreement cannot limit the discretion of directors, this principlehas not been applied strictly to close corporations, as illustrated by the Clark case. This variation is incorporatedin sec 100. The Clark case also illustrates that the remedy of specific performance is available in case ofviolation of a voting agreement.

4. cumulative voting

the system of cumulative voting gives the minority an opportunity to elect a representative to the board it is vital to both the majority and the minority to cumulate their votes so that they can get as many seatsas possible

5. classification of shares (Sec 6 supra; cf Financing Corporate Capital Structure)

device of classification of shares can be used to achieve the allocation of control desired by the parties


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if shares are classified into common voting and preferred non-voting shares, the management ofcorporate affairs will be controlled by whoever owns the majority of the common voting, even though it may onlybe a minority of the total number of shares (voting and non-voting) control would depend not on the amount of investment, but on the number of voting shares acquired if non-voting shares are non-redeemable, the prospect that the investor may get back his investment atsome future time before dissolution would be a compensating factor SEC: to prevent abuses, it requires where no dividends are declared for 3 consecutive years despiteavailable profits, that preferred stocks be given the right to vote for directors until dividends are declared

In a close corporation, it is allowed to classify its directors into one or more classes, each of whom maybe voted for and elected solely by a particular class of stock

Gottschalk v Avalon Realty.

S182.15. Each SH entitled to 1vote for each share unless a provision to the contrary is inserted in the AOI andrecited in each certificate for any share issued by the corporationS182.13. A corp may in its AOI authorize PS and that it may provide for denying or restricting voting power of PS.It is required that the PS certs shall state all privileges and restrictions

WON provisions authorizing PS to vote whenever there is default in the payment of dividends after July1 1951 constitute a denial of right to vote prior to that time.

The AOI deny to the PS the right to vote prior to the happening of specified contingencies. Hence, PSmay not vote until contingencies occur.

WON PS has the right to vote prior to July 1 1951/WON denial of the right should exist only upon specifieddefaults

not permissible construction of the language,

WON denial of the right is expressly denied (if this is the case, PS entitled to vote unless the right is expresslydenied)

Right may be denied by implication such as by a provision that the sole voting power shall reside in theholders of the CS

Denial may exist express or by necessary implication. A denial may exist under an express provisioneven though the denial may not be express


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6. restriction on transfer of shares (cf Transfer of Shares)

common example: a restriction which gives a first option to other SHs and/or the corporation toacquire the shares of a SH who wishes to sell

peculiar to close corps

7. prescribing qualifications for directors; founders shares

definition of the qualifications of directors or trustees may be provided in the by-laws

Section 24. Election of directors or trustees. - At all elections of directors or trustees, there must be present,either in person or by representative authorized to act by written proxy, the owners of a majority of theoutstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The electionmust be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholderentitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at thetime fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent,at the time of the election; and said stockholder may vote such number of shares for as many persons as thereare directors to be elected or he may cumulate said shares and give one candidate as many votes as thenumber of directors to be elected multiplied by the number of his shares shall equal, or he may distribute themon the same principle among as many candidates as he shall see fit: Provided, That the total number of votescast by him shall not exceed the number of shares owned by him as shown in the books of the corporation

multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall bevoted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporationswhich have no capital stock may cast as many votes as there are trustees to be elected but may not cast morethan one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected.Any meeting of the stockholders or members called for an election may adjourn from day to day or from time totime but not sine die or indefinitely if, for any reason, no election is held, or if there are not present orrepresented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be nocapital stock, a majority of the member entitled to vote. (31a)

examples: a by-law provision that only SHs with a stated minimum number of shares fully paid up maybe elected as directors is valid (Govt v El Hogar) a by-law that disqualify a SH who is competing with the corporation, as the corporation has

the right to protect itself from persons who may use inside information to its prejudice(Gokongwei v SEC) a by-law that only holders of founders shares may qualify for directorship (Sec 7)

exception to Sec 6 that non-voting shares shall be limited to preferred andredeemable shares 5 year period non-extendible SEC approval

8. management contracts

BOD may decide to enter into mgt contracts with another corporation The managing corporation will then perform all the managerial functions usually pertaining to aGM BOD must still retain control of the basic corporate policies and power to recall the contractwhere the corporations interest would greatly suffer from its continuance

Section 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation may be givencertain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right tovote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5)years subject to the approval of the Securities and Exchange Commission. The five-year period shall commencefrom the date of the aforesaid approval by the Securities and Exchange Commission. (n)

Section 44. Power to enter into management contract. - No corporation shall conclude a managementcontract with another corporation unless such contract shall have been approved by the board of directors and


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by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of themembers in the case of a non-stock corporation, of both the managing and the managed corporation, at ameeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing thesame interest of both the managing and the managed corporations own or control more than one-third (1/3) ofthe total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of themembers of the board of directors of the managing corporation also constitute a majority of the members of theboard of directors of the managed corporation, then the management contract must be approved by thestockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock

entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. Nomanagement contract shall be entered into for a period longer than five years for any one term.

The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes tomanage or operate all or substantially all of the business of another corporation, whether such contracts arecalled service contracts, operating agreements or otherwise: Provided, however, That such service contracts oroperating agreements which relate to the exploration, development, exploitation or utilization of naturalresources may be entered into for such periods as may be provided by the pertinent laws or regulations. (n)

Not an exception to Sec 23 which lays down the fundamental principle that all corporate powers shall beexercised by the BOD BOD cannot abdicate its responsibility to act as a governing body by giving absolute powers to offices orothers by way of management contracts The management contract is therefore a mere contract to manage the day-to-day affairs of the corporation

just like a GM It is one for lease of services and is not of agency

Sherman & Ellis v Indiana Mutual Casualty Co.

Action: appeal from a decree which allowed Sherman a small part of it claim against Indiana Mutual CasualtyCompOriginal Action: Specific performance of a contract and accounting; but a receiver was appointed for the compwhile action is pending

1. Indiana Mutual Casualty Co organized to take over the business of an unincorporated association engaged inwriting policies covering risks created by the Indiana Workmens Compensation Law.

2. When it was organized, it ratified the agreement (management contract) the unincorporated associ and

Sherman & Ellis- Sherman to manage the casualty company for 20 years.- for 20years, Sherman will supply without compensation other than the payment under the agreement,

underwriting and executive management for the Mutual Company in the person of its President Ellis or otherdesignated officers to perform the services of chief exec head and underwriting manager

- sherman will cause to be elected an underwriting manager who shall have general supervision and charge ofthe underwriting affairs of the corp. The Underwriting Manager shall be an Officer of the Management Comp(Sherman) designated by Sherman's BOD in writing

3. Casualty comp terminated contract after the difficulties between Sherman and the Indiana State Dept and

because of the unsuccessful attempt made by the state to appoint a receiver for the casualty comp.

4. Sherman sues for specific performance to enforce the contract.

Underwritin - large financial service provider (bank, insurer, investment house) uses to assess the eligibility of acustomer to receive their products (equity capital, insurance, mortgage, or credit). The name derives fromtheLloyd's of Londoninsurance market. Financial bankers, who would accept some of the risk on a givenventure (historically a sea voyage with associated risks of shipwreck) in exchange for apremium, would literallywrite their names under the risk information that was written on a Lloyd's slip created for this purpose.

WON managerial duties may be designated to a stranger.

1. There are duties which may be delegated to outsiders

period of control is 20years (5years only in previous cases when delegation to outsider was allowed)
http://en.wikipedia.org/wiki/Mortgage_loanhttp://en.wikipedia.org/wiki/Mortgage_loanhttp://en.wikipedia.org/wiki/Lloyd's_of_Londonhttp://en.wikipedia.org/wiki/Lloyd's_of_Londonhttp://en.wikipedia.org/wiki/Lloyd's_of_Londonhttp://en.wikipedia.org/wiki/Five_for_Onehttp://en.wikipedia.org/wiki/Insurance_premiumhttp://en.wikipedia.org/wiki/Insurance_premiumhttp://en.wikipedia.org/wiki/Insurance_premiumhttp://en.wikipedia.org/wiki/Lloyd's_of_Londonhttp://en.wikipedia.org/wiki/Five_for_Onehttp://en.wikipedia.org/wiki/Insurance_premiumhttp://en.wikipedia.org/wiki/Mortgage_loan


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nothing was left for Board but only unimportant, ministerial ones.

2. The duties prescribed to the official are not merely formalities or directory. In the insurance companies,

policy-holders rely upon conservative management and financial responsibility. The state granted corporatepower to insurance companies based on the hypothesis that these powers shall be exercised by thecorporation's officers , annually elected, by the SH and not by the officers of another corporation's

3.

9. unusual voting and quorum requirements

a device which in effect increases the veto power of the minority usually involves the formation of a corporation which has clearly efined majority and minorityblocks.

In exchange for the numerical majority in the board, the minority might bargain for aprovision in the AOI giving them strong veto power in mjor corporate decisions

In close corps, a requirement in the AOI that unanimous vote of all SHs is necessary would onlyhave the effect of maintaining the status quo.

Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide:

1. For a classification of shares or rights and the qualifications for owning or holding the same andrestrictions on their transfers as may be stated therein, subject to the provisions of the following section;

2. For a classification of directors into one or more classes, each of whom may be voted for andelected solely by a particular class of stock; and

3. For a greater quorum or voting requirements in meetings of stockholders or directors than thoseprovided in this Code.

A provision requiring a higher quorum or voting requirement cannot be amended except by thevote of SHs representing such higher voting requirement, whether voting or non-voting

Section 103. Amendment of articles of incorporation. - Any amendment to the articles of incorporation whichseeks to delete or remove any provision required by this Title to be contained in the articles of incorporation or toreduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effectiveunless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether withor without voting rights, or of such greater proportion of shares as may be specifically provided in the articles ofincorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for thepurpose.

Benintendi v Kenton Hotel.

- 2 men owned in equal amounts all the stock of a domestic business corporation, made an agreement to votefor and adopt the by-laws of the corporation providing that

1. no action should be taken by the SHs except by unanimous vote of the SH present in person or by proxyshould be sufficient,

2. that the directors of the corporation should be the 3 person receiving the unanimous vote of all SHs,3. no action shall be taken by the directors except by unanimous vote of all directors.

- The minority SHs sued to have the by-laws adjudged valid and to enjoin the majority from doing anythinginconsistent therewith.

WON by law provision valid/lawful. NO


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1. that there shall be no election of directors unless every single vote be cast for the same nominees is indirect opposition to the rule that the receipt of plurality of votes entitles a nominee to election.

2. The by-law which requires unanimous action of SHs to pass any resolution or take action of any kind, isequally obnoxious to the statutory scheme of stock corporation management. The whole concept of arepresentative government in a corporation, with voting conducted conformably to statute, and with thepower of decision lodged in certain fractions of the stock, is destroyed when the SHs by agreement orby-law or AOI provision as to unanimous action, give the minority interest an absolute, permanent andall-inclusive power of veto.

3. The last by-law makes it impossible for the directors to act on any matter except by unanimous vote ofall of them. Such a by-law is almost unworkable and unenforceable because, prima facie in all acts doneby a corporation, the major number must bind the lesser, or else differences could never be determined.Every corporation is given the privilege of enacting a by-law fixing its own quorum requirement at afraction not less than that mandated by law. But the very idea of a quorum is that when that requirednumber of persons goes into session as a body, the votes of a majority thereof are sufficient of bindingaction.

Dissent: While the 2 by-laws are indeed invalid because it is violative of the statutes, the courts shouldnonetheless enforce against either SH the agreement made by both of them which finds expression in those by-laws.

BOD: Majority to convene mtg Majority of majority to vote for binding corporate act SHs ratification

GR: 2/3 vote; Exceptions: 50%+1Removal of directors: difficult t

corpo - control and management

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