Grace Christian High School vs. Court of Appeals

A provision in corporate by-laws granting a permanent seat in the board of directors to a specific entity without election is invalid if it contravenes statutory requirements that directors must be elected from among the stockholders or members; long-standing practice cannot create a vested right in an illegal provision, and proposed amendments to by-laws do not become effective without ratification by the majority of members at a meeting duly called for the purpose.

Grace Village Association, Inc. is a non-stock corporation organized for the benefit of lot owners, lessees, and residents of Grace Village in Quezon City. The Association is governed by by-laws adopted in 1968 which provided for the election of eleven (11) directors by the members. In 1975, a committee prepared a draft amendment to increase the number of directors to fifteen (15) and to designate the representative of Grace Christian High School as a "permanent Director." This draft was implemented for fifteen years despite never being formally presented to or approved by the general membership.

• Grace Christian High School (petitioner) is an educational institution operating within Grace Village, Quezon City.
• Grace Village Association, Inc. (private respondent) is a non-stock corporation composed of lot owners, lessees, and residents of Grace Village.
• The Association's by-laws adopted in 1968 provided for the election of eleven (11) directors by the members through plurality vote and secret balloting.
• On December 20, 1975, a committee of the board prepared a draft amendment to the by-laws which increased the number of directors to fourteen (14) and provided that "GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION."
• This draft amendment was never presented to the general membership for approval or ratification.
• Despite the lack of formal approval, from 1975 to 1989, petitioner was allowed to sit as a permanent, unelected member of the board of directors.
• On February 13, 1990, the association's committee on election notified petitioner that it was reexamining the right of petitioner's representative to continue as an unelected member, stating that all directors should be elected by members.
• The association subsequently sent notices to members that the 1968 by-laws would be observed for the 1990 elections.
• Petitioner requested the election committee to revert to the previous practice, claiming a vested right to a permanent seat, but the association denied the request.
• On April 17, 1990, the board of directors adopted a resolution declaring the 1975 provision null and void for lack of approval by members and reinstating the 1968 by-laws.
• The Securities and Exchange Commission (SEC) rendered an opinion stating that the practice of allowing unelected members in the board was contrary to the existing by-laws and to §92 of the Corporation Code.

• Petitioner acquired a vested right to a permanent seat in the Board of Directors by virtue of the 1975 amended by-laws and the fifteen-year practice of allowing its representative to sit without election.
• The 1975 amended by-laws are valid and binding because the committee that drafted them was duly authorized, and the members' implementation of the provision for fifteen years constitutes ratification or express approval of the agents' acts.
• The provision granting a permanent seat is not contrary to law because §92 of the Corporation Code is merely directory, not mandatory, and there is no express prohibition against unelected members in the board.
• Petitioner cited examples of other corporations (Pius XII Catholic Center, Inc. and Cardinal Santos Memorial Hospital, Inc.) where the Archbishop of Manila sits as a permanent member of the board without election.
• The members of the association, not the current board, have the sole authority to remove petitioner's right to a permanent seat through a referendum.

• The 1975 provision was merely a proposed by-law that was never ratified by the majority of members nor approved by competent authority as required by Article XIX of the 1968 by-laws and §22 of the Corporation Law.
• The 1968 by-laws, which require the election of all directors, remain the valid and binding by-laws of the association.
• The provision for a permanent, unelected director is contrary to §92 of the Corporation Code and §§28 and 29 of the Corporation Law, which mandate that directors be elected from among the members.
• Past practice cannot create a vested right if it is contrary to law, and tolerance cannot be considered ratification.
• The association is not estopped from questioning the validity of the 1975 provision because no amount of acquiescence can validate a provision that is contrary to law.

• Procedural Issues: Whether the Securities and Exchange Commission had authority to render an opinion on the validity of the by-law provision when jurisdiction over the case was vested in the Home Insurance and Guaranty Corporation.
• Substantive Issues:
  • Whether the 1975 draft amendment to the by-laws, which granted petitioner a permanent seat in the board, was valid and binding despite lack of formal ratification by the general membership.
  • Whether petitioner acquired a vested right to a permanent seat in the board by virtue of long-standing practice.
  • Whether a provision in the by-laws granting a permanent seat to a specific entity without election is contrary to law.

• Procedural: The Supreme Court held that the case was decided by the HIGC, not the SEC. The HIGC merely cited the SEC opinion as authority for its ruling. The HIGC could have cited any other authority for the view that directors must be elected, and its decision would still be valid. Thus, there was no jurisdictional error.
• Substantive:
  • The 1975 draft amendment was invalid because it was never approved by the majority of the members of the association at a regular or special meeting called for the purpose, as required by Article XIX of the 1968 by-laws and §22 of the Corporation Law (now §48 of the Corporation Code).
  • The provision granting a permanent, unelected seat to petitioner is contrary to §§28 and 29 of the Corporation Law and §23 of the Corporation Code, which require directors to be elected from among the stockholders or members.
  • No vested right can arise from a practice that is contrary to law. Even if the members formally adopted the provision, their action would be of no avail because no by-law provision contrary to law can be valid.
  • The examples cited by petitioner (Pius XII Catholic Center and Cardinal Santos Memorial Hospital) involve ex officio members who sit by virtue of a specific office held, whereas petitioner claims no such office.
  • Tolerance of petitioner's presence in the board for fifteen years does not constitute ratification, and the association is not estopped from correcting a long-standing illegal practice.

• Election of Directors from Among Members — Statutory provisions (§§28-29 of the Corporation Law and §23 of the Corporation Code) mandate that directors or trustees of corporations must be elected from among the holders of stock or, in non-stock corporations, from among the members. This requirement is mandatory, not merely directory.
• Ratification of By-Law Amendments — Amendments to corporate by-laws must be approved by the affirmative vote of the majority of the members at a regular or special meeting duly called for the purpose. Mere implementation or tolerance of a proposed amendment without formal ratification does not validate it.
• Vested Rights and Illegal Practices — Practice, no matter how long continued, cannot give rise to any vested right if it is contrary to law. No amount of acquiescence or estoppel can validate a provision that violates statutory requirements.
• Ex Officio Membership vs. Permanent Membership — Membership in the board by virtue of holding a particular office (ex officio) is distinct from and legally permissible, whereas a permanent seat without election and without holding a specific qualifying office is prohibited.

• "Practice, no matter how long continued, cannot give rise to any vested right if it is contrary to law."
• "Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall a later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to law, it is beyond the power of the members of the association to waive its invalidity."
• "It is more accurate to say that the members merely tolerated petitioner’s representative and tolerance cannot be considered ratification."
• "These provisions of the former and present corporation law leave no room for doubt as to their meaning: the board of directors of corporations must be elected from among the stockholders or members."

• Viuda de Baretto v. La Previsora Filipina, 59 Phil. 212 (1933) — Cited for the principle that no waiver can validate a provision contrary to law.
• Fleischer v. Botica Nolasco, 47 Phil. 583 (1925) — Cited for the principle that no waiver can validate a provision contrary to law.

• §22 of Act No. 1459 (Corporation Law) — Requires that amendments to by-laws be approved by the majority of members at a regular or special meeting called for the purpose.
• §§28 and 29 of Act No. 1459 (Corporation Law) — Mandate that directors must be elected from among stockholders or members.
• §23 of Batas Pambansa Blg. 68 (Corporation Code) — Provides that corporate powers are exercised by a board of directors or trustees elected from among stockholders or members.
• §92 of Batas Pambansa Blg. 68 (Corporation Code) — Governs the election and term of trustees in non-stock corporations.
• Article XIX of the 1968 By-Laws of Grace Village Association, Inc. — Required affirmative vote of the majority of members to alter, amend, or adopt new by-laws.