G.R. No. L-17504 & L-17506; February 28, 1969
RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA SALAS, PAZ SALAS and PATRIA SALAS, heirs of Magdalena Salas, as stockholders on their own behalf and for the benefit of the Ma-ao Sugar Central Co., Inc., and other stockholders thereof who may wish to join in this action, plaintiffs-appellants,

vs.
MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS. RAMON S. ARANETA, ROMUALDO M. ARANETA, and RAMON A. YULO, defendants-appellants.

FACTS

This is a derivative suit filed on October 20, 1953, by minority stockholders against the Ma-ao Sugar Central Co., Inc. and four of its directors. The complaint alleged five causes of action covering November 1946 to October 1952: (1) illegal and ultra vires acts involving self-dealing, irregular loans, and unauthorized investments; (2) gross mismanagement; (3) forfeiture of corporate rights warranting dissolution; (4) damages and attorney’s fees; and (5) receivership. Plaintiffs prayed for an accounting, recovery of diverted funds, payment of amounts from another case, return of discretionary funds, dissolution of the corporation, damages, and receivership. Defendants denied the allegations, asserting the suit was premature for failure to exhaust intra-corporate remedies, that no loss was suffered, and that payments by debtors provided adequate remedy. They also filed a counterclaim for damages. The trial court dismissed the petition for dissolution and the counterclaim but condemned defendant J. Amado Araneta to pay the corporation P46,270.00 with interest. It also issued a permanent injunction against making loans to officers and against making investments in companies not connected with the sugar central business. Both parties appealed.

ISSUE

The main issues raised on appeal were: (1) whether the investment in Philippine Fiber Processing Co., Inc. violated Section 17-½ of the Corporation Law; (2) whether the corporation was insolvent; (3) whether discriminatory acts against planters constituted mismanagement; (4) whether the corporate acts were sufficient for dissolution; (5) whether the trial court erred in dismissing the defendants’ counterclaim; and (6) whether the trial court erred in finding J. Amado Araneta liable for P46,270.00.

RULING

The Supreme Court affirmed the trial court’s judgment in part and reversed it in part. It upheld the trial court’s findings, which were not questioned by defendants, of corporate irregularities: failure to hold regular stockholders’ meetings, irregularities in bookkeeping, illegal investments in Mabuhay Printing and Acoje Mining without the required stockholder authorization, unauthorized loans to J. Amado Araneta in violation of the by-laws, and diversion of corporate funds to affiliated companies without board approval. The Court agreed with the trial court that the investment in Philippine Fiber Processing Co., Inc. (a manufacturer of sugar bags) did not violate Section 17-½ of the Corporation Law as it was connected to the corporation’s main purpose, despite the investment being ratified only after the fact. The Court found no clear proof of insolvency. It also agreed that alleged discriminatory acts regarding crop loans were a grievance of plaintiffs as planters, not as stockholders, and were insufficient for the derivative suit. The Court affirmed the dismissal of the petition for dissolution. It also affirmed the dismissal of the defendants’ counterclaim, finding no proof of malice or bad faith by plaintiffs. The Court affirmed the order for J. Amado Araneta to pay P46,270.00, finding the evidence of payment insufficient. However, the Court reversed that portion of the judgment that permanently enjoined the corporation from making investments in companies “whose purpose is not connected with the sugar central business,” holding that Section 17-½ of the Corporation Law allows such investments if properly authorized by the required vote of stockholders.