Lopez Realty vs. Florentina Fontecha

A corporation's board of directors has the express power under Section 36(10) of the Corporation Code to establish gratuity pay plans for employees, and such resolutions are not ultra vires even if passed without notice to all directors, provided the corporation ratifies such actions through subsequent conduct or acquiescence; furthermore, issues not raised in lower administrative proceedings cannot be raised for the first time on appeal.

The case involves a corporate dispute among shareholders of Lopez Realty, Inc., particularly between majority stockholder Asuncion Lopez Gonzales and fellow majority stockholder Arturo F. Lopez, which led to a derivative suit before the Securities and Exchange Commission. Amidst this internal power struggle, the board of directors passed resolutions granting gratuity pay to retained employees, which the corporation later refused to fully honor, leading to a labor dispute.

• Lopez Realty, Inc. is a corporation engaged in real estate business with Asuncion Lopez Gonzales as one of its majority shareholders holding 7,831 shares.
• In 1978, a proposal was made by Arturo F. Lopez regarding the distribution of corporate assets, including the reduction of employees with provision for gratuity pay, which was approved by the board on April 17, 1978.
• On September 8, 1980, the stockholders passed Resolution No. 6, Series of 1980, creating a Gratuity Fund for retiring employees, and on October 6, 1980, Resolution No. 10 set aside P157,750.00 for this fund covering 1950 to 1980.
• On August 17, 1981, while Asuncion Lopez Gonzales was abroad, the remaining board members passed a resolution providing that laid-off employees receive full gratuity while retained employees receive 25% on September 1, 1981, another 25% on January 1, 1982, with 50% retained by the office.
• On September 1, 1981, the board amended the schedule to provide for additional 25% payments on or before October 15, 1981 and November 1981.
• Asuncion Lopez Gonzales allegedly sent a cablegram objecting to certain board actions while abroad, and upon her return, filed a derivative suit against Arturo Lopez.
• The corporation paid the first two installments of gratuity to some employees (Florentina Fontecha, Mila Refuerzo, Marcial Mamaril, and Perfecto Bautista) but cancelled vouchers and checks for the third installment upon the order of Asuncion Lopez Gonzales.
• The corporation also prepared but cancelled all installments for other employees (Edward Mamaril, Marissa Pascual, and Allan Pimentel).
• Some employees resigned after filing the complaint on February 8, 1982.

• The board resolutions dated August 17, 1981 and September 1, 1981 are ultra vires because Asuncion Lopez Gonzales was not duly notified of the special meetings.
• The resolutions were not ratified by the stockholders during the Annual Stockholders' Meeting on March 1, 1982, as required by Section 28 1/2 of the Corporation Law (Section 40 of the Corporation Code).
• Gratuity pay should only be given to retiring employees, not to retained employees or those who voluntarily resigned, pursuant to Resolutions No. 6 and 10, Series of 1980.
• The payment of gratuity to some employees was a "mistake" on the part of the corporation.

• The issue of lack of notice was raised for the first time in the motion for reconsideration and cannot be raised on appeal as it was never passed upon by the Labor Arbiter or the NLRC in its initial decision.
• The resolutions were ratified in a subsequent special board meeting on September 29, 1981, where Asuncion Lopez Gonzales unanimously approved the resolution dated September 1, 1981.
• The corporation's course of conduct, including the payment of the first two installments and the preparation of checks, ratified the resolutions.
• The resolutions clearly provided for installment payments to retained employees, not just retiring employees, and the proposal by Arturo Lopez explicitly mentioned gratuity pay for employees who desire to resign.
• The resignations were not voluntary but pressurized due to the power struggle between Arturo Lopez and Asuncion Gonzales.

• Procedural: Whether petitioners can raise for the first time on appeal the issue that board resolutions are invalid for lack of notice to a director/stockholder.
• Substantive Issues:
  • Whether the board resolutions granting gratuity pay are ultra vires for lack of notice to all directors.
  • Whether the resolutions require ratification by stockholders under Section 40 of the Corporation Code.
  • Whether retained employees and those who resigned are entitled to gratuity pay under the assailed resolutions.

• Procedural: The Supreme Court held that petitioners cannot raise the issue of lack of notice for the first time on appeal. The issue was never raised before the Labor Arbiter or in the initial appeal to the NLRC, but only in the motion for reconsideration. Citing Anchuelo v. IAC, the Court ruled that questions not raised in the lower courts cannot be raised for the first time on appeal, as it would offend basic rules of fair play and justice and deprive respondents of the opportunity to present evidence on the matter.
• Substantive: The Court ruled that even assuming lack of notice, the resolutions were not ultra vires. Providing gratuity pay falls within the express corporate power under Section 36(10) of the Corporation Code to establish pension, retirement, and other plans for the benefit of employees. The Court held that actions of directors at an illegal meeting for want of notice may be ratified by subsequent legal meetings or by the corporation's course of conduct. Here, the corporation ratified the resolutions by paying the first two installments and preparing checks for the third, and Asuncion Lopez Gonzales acquiesced by signing cash vouchers for the second installment. The Court also held that Section 40 of the Corporation Code (Section 28 1/2 of the old Corporation Law) requiring stockholder approval applies only to the sale, lease, or disposition of substantially all corporate assets, not to gratuity pay resolutions. Furthermore, since the stockholders were also board members, requiring separate stockholder approval would be illogical. Finally, the Court held that the resigned employees were entitled to gratuity because the obligation had already vested at the time of resignation under the installment schedule provided in the resolutions.

• Ultra Vires Acts — An ultra vires act is one not within the corporate powers conferred by the Corporation Code or articles of incorporation, or not necessary or incidental to the exercise of such powers. The Court held that providing gratuity pay is within the express corporate powers under Section 36(10) of the Corporation Code, and thus cannot be considered ultra vires.
• Ratification of Corporate Acts — Acts of directors at a meeting illegal for want of notice may be ratified either expressly by action of directors in a subsequent legal meeting, or impliedly by the corporation's subsequent course of conduct, acceptance, or acquiescence. Ratification may be inferred from silence and inaction or from acceptance of benefits under the act.
• Estoppel — A corporation cannot accept the benefits of a resolution (such as paying gratuity installments) and later deny its validity or claim it was a mistake. The conduct of petitioners in partially implementing the resolutions estopped them from assailing the validity thereof.
• Issues Not Raised Below — Questions not raised in the lower courts cannot be raised for the first time on appeal. This rule ensures fair play and gives parties the opportunity to present evidence on all issues.

• "The general rule is that a corporation, through its board of directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law." — Emphasizes the requirement for boards to observe proper formalities but acknowledges that defects may be cured through ratification.
• "In legal parlance, 'ultra vires' act refers to one which is not within the corporate powers conferred by the Corporation Code or articles of incorporation or not necessary or incidental in the exercise of the powers so conferred." — Defines the scope of ultra vires acts in corporate law.
• "To stress, providing gratuity pay for its employees is one of the express powers of the corporation under the Corporation Code, hence, petitioners cannot invoke the doctrine of ultra vires to avoid any liability arising from the issuance the subject resolutions." — Affirms that employee benefit plans fall within express corporate powers.
• "We hold, therefore, that the conduct of petitioners after the passage of resolutions dated August, 17, 1951 and September 1, 1981, had estopped them from assailing the validity of said board resolutions." — Establishes that partial performance and acceptance of benefits under a resolution creates estoppel to deny its validity.
• "It will be observed that, except far Arturo Lopez, the stockholders of petitioner corporation also sit as members of the board of directors. Under the circumstances in field, it will be illogical and superfluous to require the stockholders' approval of the subject resolutions." — Holds that where stockholders are also directors, separate stockholder approval is unnecessary for ordinary business resolutions.

• Anchuelo v. IAC, G.R. No. 71391, January 29, 1987, 147 SCRA 434 — Cited for the principle that questions not raised in the lower courts cannot be raised for the first time on appeal.
• Johnson v. Community Development Corp., 222 N.W. 2d 847 — Cited for the doctrine that acts of directors at an illegal meeting for want of notice may be ratified by subsequent legal meetings or by corporate course of conduct.
• American Casualty Co. v. Dakota Tractor and Equipment Co., 234 F. Supp. 606 (D.N.D. 1964) — Cited for the principle that unauthorized acts of corporate officers may be ratified by conduct implying approval and adoption, and that ratification may be inferred from silence and inaction.

• Section 45 of the Corporation Code — Defines ultra vires acts as those not conferred by the Code or articles of incorporation, or not necessary or incidental to the exercise of such powers.
• Section 36(10) of the Corporation Code — Grants corporations the power and capacity to establish pension, retirement, and other plans for the benefit of directors, trustees, officers, and employees. The Court cited this to establish that gratuity pay falls within express corporate powers.
• Section 40 of the Corporation Code (formerly Section 28 1/2 of the Corporation Law) — Requires stockholder approval for the sale, lease, exchange, or disposition of all or substantially all of corporate assets. The Court held this inapplicable to gratuity pay resolutions.
• Section 53 of the Corporation Code — Referenced regarding the formalities required for board meetings and director actions.