CHARLES W. MEAD vs. E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING AND CONSTRUCTION COMPANY

CHARLES W. MEAD vs. E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING AND CONSTRUCTION COMPANY

G.R. No. 6217 December 26, 1911

Facts:

1.      On March 15, 1902, the plaintiff and the defendant organized the "Philippine Engineering and Construction Company," the incorporators being the only stockholders and also the directors of said company, with general ordinary powers.

2.      After the plaintiff left the Philippine Islands for China, the other directors, the defendants in this case, held a meeting on December 24, 1903, for the purpose of discussing the condition of the company at that time anddetermining what course to pursue.

3.      They did on that date enter into wrecking contract with the naval authorities with the defendant McCullough.

4.      When the sale or transfer took place, there were present four directors, all of whom gave their consent to that sale or transfer. The plaintiff was then about and his express consent to make this transfer or sale was not obtained. He was, before leaving, one of the directors in this corporation, and although he had resigned as manager, he had not resigned as a director.

Issue:

Did a majority of the stockholders, who were at the same time a majority of the directors of this corporation, have the power under the law and its articles of agreement, to sell or transfer to one of its members the assets of said corporation?

Ruling:

He accepted the position of engineer of the Canton and Shanghai Railway Company, knowing that his duties as such engineer would require his whole time and attention and prevent his returning to the Philippine Islands for at least a year or more. The new position which he accepted in China was incompatible with his position as director in the Philippine Engineering and Construction Company, a corporation whose sphere of operations was limited to the Philippine Islands. These facts are sufficient to constitute an abandoning or vacating of his position as director in said corporation.

Consequently, the transfer orsale of the corporation's assets to one of its members was made by the unanimous consent of all the directors in the corporation at that time.

There were only five stockholders in this corporation at any time, four of whom were the directors who made thesale, and the other the plaintiff, who was absent in China when the said sale took place. The sale was, therefore, made by the unanimous consent of four-fifths of all the stockholders. Under the articles of incorporation, the stockholders and directors had general ordinary powers. There is nothing in said articles which expressly prohibitsthe sale or transfer of the corporate property to one of the stockholders of said corporation.

Articles 1700 to 1708 of the Civil Code deal with the manner of dissolving a corporation. There is nothing in thesearticles which expressly or impliedly prohibits the sale of corporate property to one of its members, nor a dissolutionof a corporation in this manner. Neither is there anything in articles 151 to 174 of the Code of Commerce which prohibits the dissolution of a corporation by such sale or transfer.

Article XIII of the corporation's statutes expressly provides that "in all the meetings of the stockholders, a majorityvote of the stockholders present shall be necessary to determine any question discussed."

The sale or transfer to one of its members was a matter which a majority of the stockholders could very properlyconsider. But it i said that if the acts and resolutions of a majority of the stockholders in a corporation are binding in every case upon the minority, the minority would be completely wiped out and their rights would be wholly at the mercy of the abuses of the majority.

Generally speaking, the voice of a majority of the stockholders is the law of the corporation, but there are exceptionsto this rule. There must necessarily be a limit upon the power of the majority. Without such a limit the will of the majority would be absolute and irresistible and might easily degenerate into an arbitrary tyranny. The reason for these limitations is that in every contract of partnership and a corporation can be something fundamental and unalterable which is beyond the power of the majority of the stockholders, and which constitutes the rule controlling their actions. This rule which must be observed is to be found in the essential compacts of such partnership, which gave served as a basis upon which the members have united, and without which it is not probable that they would have entered the corporation. Notwithstanding these limitations upon the power of the majority of the stockholders, their (the majority's) resolutions, when passed in good faith and for a just cause, deserve careful consideration and are generally binding upon the minority.

Itis well settled, first, that a private corporation, which owes no special duty tothe public and which has not been given the right of eminent domain, has the absolute right and power as against the whole world except the state, to sell and dispose of all of its property; second, that the board of directors, has the power, without reference to the assent or authority of the stockholders, when the corporation is in failing circumstances or insolvent or when it can no longer continue the business with profit, and when it is regarded as an imperative necessity; third, that a majority of the stockholders or directors, even against the protest of the minority, have this power where, from any cause, the business is a failure and the best interest of the corporation and all the stockholders require it

We therefore conclude that the sale or transfer made by the quorum of the board of directors — a majority of the stockholders — is valid and binding upon the majority-the plaintiff. This conclusion is not in violation of the articles of incorporation of the Philippine Engineering and Construction Company.