Filippinas Port Services, Inc. vs. Go

The Board of Directors has the sole authority to manage the business affairs of a corporation, including the creation of corporate offices and positions not expressly provided for in the by-laws (provided they are for the regular business operations), and the determination of reasonable compensation therefor; such management decisions constitute business judgments that are not reviewable by courts in the absence of proof that the board acted in bad faith, with malice, or with moral obliquity.

The case stems from an intra-corporate dispute within Filipinas Port Services, Inc., a domestic corporation engaged in stevedoring services in Davao City. The conflict arose after petitioner Eliodoro C. Cruz, who served as the corporation's president from 1968 until his defeat in the 1991 elections, questioned certain organizational decisions made by the new Board of Directors, including the creation of an executive committee and various executive positions occupied by board members with significant monthly compensation. The dispute escalated into a derivative suit that underwent prolonged adjudication, initially filed with the Securities and Exchange Commission (SEC) in 1993, then transferred to the Regional Trial Court (RTC) of Manila pursuant to Republic Act No. 8799 (the Securities Regulation Code), and subsequently to the RTC of Davao City.

• Petitioner Eliodoro C. Cruz served as President of Filipinas Port Services, Inc. (Filport) from 1968 until he lost his bid for reelection during the 1991 general stockholders' meeting.
• On September 4, 1992, Cruz wrote to the Board of Directors questioning the creation of positions including Assistant Vice-President for Corporate Planning, Operations, Finance, and Administration, and Special Assistants to the Chairman and President, each with monthly remuneration of P13,050.00, and the election of certain board members to these positions.
• On September 15, 1992, the board met to discuss Cruz's letter but no records show specific action taken.
• On June 14, 1993, Cruz, purportedly representing Filport and co-petitioner Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed a derivative suit with the SEC against the incumbent board members (respondents) for alleged acts of mismanagement.
• The specific acts complained of were: (1) creation of an executive committee in 1991 composed of seven board members with P500 per diem per meeting, allegedly not provided for in the by-laws and duplicating the President's functions; (2) disproportionate increases in emoluments of the Chairman, Vice-President, Treasurer, and Assistant General Manager; (3) re-creation of AVP positions and election of board members thereto; and (4) creation of Special Assistant positions with substantial remuneration.
• The case remained unresolved with the SEC for several years until the enactment of R.A. No. 8799, after which it was transferred to the RTC of Manila, then subsequently to the RTC of Davao City.
• The RTC of Davao City ruled in favor of petitioners, ordering the refund of salaries received by the AVP for Corporate Planning and the Special Assistants to the President and Board Chairman, finding these positions were created merely for accommodation.
• The Court of Appeals reversed the RTC decision, finding no evidence to support the "accommodation" theory and ruling that the board acted within its powers.

• The Board of Directors acted beyond its powers in creating the executive committee and the positions of Assistant Vice Presidents and Special Assistants, as well as in increasing the salaries of certain officers, constituting mismanagement detrimental to the corporation.
• The executive committee was not provided for in the corporate by-laws and merely duplicated the functions of the President and General Manager.
• The salary increases were greatly disproportionate to the volume and character of the work performed.
• The positions of AVP for Corporate Planning, Special Assistant to the President, and Special Assistant to the Board Chairman were created merely for accommodation purposes, considering Filport is not a large corporation requiring multiple executive positions.
• The Court of Appeals erred in finding that no evidence existed to prove the accommodation theory and that salaries were actually paid to and received by the directors appointed to the questioned positions.

• The creation of the executive committee and the grant of per diems were allowed under the corporate by-laws.
• The increases in salaries were within the financial capacity of the corporation and well-deserved by the officers.
• The AVP positions were already in existence during Cruz's tenure and were merely recreated, with appointees rendering services deserving of compensation.
• Cruz and Minterbro lacked authority and standing to bring a derivative suit; no demand to cease and desist was made upon the board; and Cruz failed to exhaust intra-corporate remedies.
• The suit was filed in bad faith and for harassment purposes due to Cruz's non-reelection as president.
• The petition for review raised questions of fact rather than questions of law, which is improper under Rule 45.
• No evidence was presented to prove that the questioned salaries were actually paid to the respondents.

• Procedural Issues:
  • Whether the petition for review on certiorari under Rule 45 properly raises questions of law given the variance between the factual findings of the Court of Appeals and the Regional Trial Court.
  • Whether the case qualifies as a valid derivative suit filed by petitioner Cruz on behalf of Filipinas Port Services, Inc.
• Substantive Issues:
  • Whether the Board of Directors acted within its powers under the Corporation Code and the corporate by-laws in creating an executive committee, the positions of Assistant Vice Presidents and Special Assistants, and in fixing their remuneration.
  • Whether the increases in salaries of the Chairman, Vice-President, Treasurer, and Assistant General Manager were reasonable and valid exercises of corporate management.
  • Whether the creation of specific corporate positions was done merely for accommodation purposes, warranting the refund of salaries received.
  • Whether respondents are liable for mismanagement and must refund the salaries received absent proof of bad faith or malice.

• Procedural:
  • The Supreme Court delved into the factual records despite the general rule that Rule 45 petitions only entertain questions of law, because the findings of fact of the Court of Appeals were at variance with those of the trial court, constituting an exception to the rule.
  • The Court sustained the characterization of the action as a derivative suit. The requisites for a derivative suit were satisfied: (a) Cruz was a shareholder at the time of the acts complained of; (b) he made demands on the board for appropriate relief which were unheeded, and further demand would have been futile as the board was under the complete control of the respondents; and (c) the cause of action devolved on the corporation, not the individual stockholders. Filport is the real party-in-interest while Cruz is merely a nominal party.
• Substantive:
  • The Board of Directors, as the governing body of the corporation under Section 23 of the Corporation Code, has the sole authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation. This includes the power to create corporate offices and fix compensation therefor as authorized by the by-laws.
  • The creation of the positions of Assistant Vice Presidents and Special Assistants was authorized by Section 25 of the Corporation Code and the corporate by-laws which allowed the board to elect "such other officers as may be provided for in the by-laws" and to "fix the compensation of the officers."
  • Regarding the executive committee, while Section 35 of the Corporation Code requires that the creation of an executive committee (with powers to act for the board) must be provided for in the by-laws, the Court held that the board's creation could not be deemed illegal because there was no showing of the true nature and functions of the committee, and the board has the inherent power as governing body to create positions not provided for in the by-laws for the regular business operations of the corporation.
  • Cruz was estopped from questioning the creation of the executive committee and the AVP positions because he himself created the executive committee during his presidency and moved for the creation of the AVP positions during his tenure.
  • The salary increases were found to be reasonable and fair based on the responsibilities assigned to the officers and the special knowledge required for their positions.
  • The Court applied the Business Judgment Rule, holding that directors and officers are not liable for losses resulting from error in business judgment absent bad faith, negligence, or malice. Bad faith requires a dishonest purpose, moral obliquity, or conscious doing of a wrong partaking of the nature of fraud. No such bad faith was proven.
  • The "accommodation" theory failed for lack of evidence. Bare allegations and self-serving testimony do not constitute proof by preponderance of evidence. The determination of the necessity for additional offices is a management prerogative that courts will not review in the absence of proof of bad faith or malice, as judicial intrusion into internal corporate affairs is improper.

• Business Judgment Rule — Directors and officers are not liable for losses caused by errors in business judgment provided they acted in good faith and in the honest exercise of their duties; courts cannot substitute their judgment for that of the board on matters of policy or management. The rule protects directors from liability for honest mistakes or errors in judgment, but not for acts constituting bad faith, fraud, or gross negligence.
• Derivative Suit Requisites — An individual stockholder may institute a derivative suit on behalf of the corporation to protect corporate rights when the board refuses to sue or when demand would be futile. The requisites are: (a) the plaintiff was a shareholder at the time of the act complained of; (b) intra-corporate remedies have been exhausted or demand would be futile; and (c) the cause of action belongs to the corporation, not the individual stockholder.
• Board of Directors as Governing Body — Under Section 23 of the Corporation Code, the corporate powers of all corporations are exercised, business conducted, and property controlled by the board of directors, except for those powers expressly vested in the stockholders. The board has the authority to create positions and fix compensation as part of its management prerogative.
• Executive Committee under Section 35 — An executive committee created under Section 35 of the Corporation Code must be provided for in the by-laws and may act on specific matters within the competence of the board as delegated to it. However, this is distinct from other committees which the board may create at any time and whose actions require ratification by the board.
• Estoppel/Ratification — A stockholder who acquiesces in or ratifies corporate acts during his tenure as an officer or director is estopped from later questioning the validity of such acts in a derivative suit.

• "The governing body of a corporation is its board of directors. Section 23 of the Corporation Code explicitly provides that unless otherwise provided therein, the corporate powers of all corporations formed under the Code shall be exercised, all business conducted and all property of the corporation shall be controlled and held by a board of directors."
• "If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors and/or officers are not liable. For them to be held accountable, the mismanagement and the resulting losses on account thereof are not the only matters to be proven; it is likewise necessary to show that the directors and/or officers acted in bad faith and with malice in doing the assailed acts."
• "Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or interest or ill-will partaking of the nature of fraud."
• "Questions of policy or of management are left solely to the honest decision of the board as the business manager of the corporation, and the court is without authority to substitute its judgment for that of the board, and as long as it acts in good faith and in the exercise of honest judgment in the interest of the corporation, its orders are not reviewable by the courts."
• "It is elementary in procedural law that bare allegations do not constitute evidence adequate to support a conclusion. It is basic in the rule of evidence that he who alleges a fact bears the burden of proving it by the quantum of proof required."

• Bank of the Philippine Islands v. Carlos Leobrero — Cited for the rule that petitions for review on certiorari under Rule 45 only raise questions of law, and the exceptions thereto when findings of fact of the CA are at variance with those of the trial court.
• Board of Liquidators v. Heirs of Maximo M. Kalaw — Cited for the principle that directors and officers are not liable for losses caused by error in business judgment absent bad faith or negligence.
• Philippine Stock Exchange, Inc. v. Court of Appeals — Cited for the Business Judgment Rule that courts cannot substitute their judgment for that of the board on matters of corporate policy and management, and for the definition of bad faith as importing a dishonest purpose or moral obliquity.
• Chua v. Court of Appeals — Cited for the definition of a derivative suit and the circumstances when a stockholder may institute such action.
• Asset Privatization Trust v. Court of Appeals — Cited for the distinction between the corporation as the real party-in-interest and the stockholder as a nominal party in a derivative suit.
• San Miguel Corporation v. Ernest Khan — Cited for enumerating the requisites before a stockholder can file a derivative suit.
• Garcia v. De Vera and Pastor v. PNB — Cited for the evidentiary principle that bare allegations do not constitute proof and that the party having the burden of proof must establish his case by preponderance of evidence.

• Section 23, Corporation Code (Batas Pambansa Blg. 68) — Provides that the corporate powers of all corporations shall be exercised, business conducted, and property controlled by the board of directors.
• Section 25, Corporation Code — Provides for the election of corporate officers including the president, treasurer, secretary, and "such other officers as may be provided for in the by-laws."
• Section 35, Corporation Code — Provides that the by-laws may create an executive committee composed of not less than three members of the board to act on specific matters delegated to it.
• Republic Act No. 8799 (Securities Regulation Code) — Enacted on July 19, 2000, which transferred jurisdiction over intra-corporate disputes from the SEC to the Regional Trial Courts sitting as commercial courts.