Government of the Phil. Islands v.

El Hogar Filipino
July 3, 1927| Street, J| By-laws
Digester: Mercado, Carlo Robert M.
SUMMARY: [The Campos book only included four out of
SEVENTEEN (17) causes of action 4,5,6, and 8.] The AttorneyGeneral of the Phil. Islands, on behalf of the Government, filed a
quo warrant petition seeking to revoke the franchise of El Hogar
Filipino on seventeen causes of action. Only one cause of action
(that EHF was also engaged in the business of management of real
estate not under mortgage to it, which is not authorized by its
franchise) was found to be of merit, but the same does not warrant
a revocation of the franchise, only an order to desist from said
unauthorized act. The rest were all dismissed for lack of merit.
DOCTRINE:
Rulings related to by-laws in the four causes of action discussed in
Campos
4th COA
There is no provision of law making it a misdemeanor to
incorporate an invalid provision in the by-laws of a corporation
5th COA
Upon failure of a quorum at any annual meeting the directorate
naturally holds over and continues to function until another
directorate is chosen and qualified.
Unless the law or the charter of a corporation expressly provides
that an office shall become vacant at the expiration of the term of
office for which the officer was elected, the general rule is to allow
the officer to hold over until his successor is duly qualified
Mere failure of a corporation to elect officers does not terminate
the terms of existing officers nor dissolve the corporation
6th COA
The Corporation Law does not undertake to prescribe the rate of
compensation for the directors of corporations. The power to fixed
the compensation they shall receive, if any, is left to the
corporation, to be determined in its by-laws (Act No. 1459, sec.
21).
7th COA
Section 21 of the Corporation Law expressly gives the power to
the corporation to provide in its by-laws for the qualifications of
directors.
FACTS
The SC decided this case 5-4

This is a quo warranto proceeding initiated by the Government

against El Hogar Filipino for the purpose of depriving it of its
corporate franchise, excluding it from all corporate rights and
privileges, and effecting a final dissolution of said corporation.
o El Hogar Filipino (EHF, literally translated to The
Filipino Home) is a building and loan association
o The complaint enumerates seventeen distinct
causes of action
On March 1, 1906, the Philippine Commission enacted what is
known as the Corporation Law (Act No. 1459) effective upon
April 1 of the same year. These provisions appear to be adopted
from American statutes governing building and loan
associations
o Sections 171 to 190, inclusive, of this Act are devoted to
the subject of building and loan associations.
EHF was the first corporation to be organized in the RP under
this law, and a powerful one at that
o It was quite successful, noting that its maximum
capitalization was pegged at 10 MILLION (Note that
this was 1920s)
o During the period of its existence prior to 1925 the
association paid to withdrawing stockholders the
amount of P7,618,257.72; and in the same period it
distributed in the form of dividends among its
stockholders the sum of P7,621,565.81

HELD The respondent is prevented in the future from

administering real property not owned by itself, except as may be
permitted to it by contract when a borrowing shareholder defaults
in his obligation. In all other respects the complaint is dismissed
In short, only one of the causes of action succeeded, and
even that did not warrant revocation of the franchise.
W/N the franchise of EHF should be revoked NO. It is only
prevented from managing real estate not mortgaged to it, as
that is beyond the authority in its franchise (it is only
authorized to managed those properties it bought in
foreclosure or mortgaged to it, since that is necessarily
implied to its business which is to lend money and foreclose
on the collateral in cases of default; this is found in the 3 rd
Cause of Action)
4th Cause of Action by-law provision that is contrary to law

The allegation here is that existence of an article among the

by-laws of the association that is contrary to law is a
misdemeanor on the part of the respondent which justifies its
dissolution.
In its by-laws, Art. 10 provides:
o The board of directors of the association, by the vote of
an absolute majority of its members, is empowered to
cancel shares and to return to the owner thereof the
balance resulting from the liquidation thereof whenever,
by reason of their conduct, or for any other motive, the
continuation as members of the owners of such shares
is not desirable
o It is agreed that this provision of the by-laws has never
been enforced, and in fact no attempt has ever been
made by the board of directors
This by-law is of course a patent nullity, since it is in direct
conflict with the latter part of section 187 of the Corporation
Law, which expressly declares that the board of directors shall
not have the power to force the surrender and withdrawal of
unmatured stock except in case of liquidation of the
corporation or of forfeiture of the stock for delinquency.
There is no provision of law making it a misdemeanor to
incorporate an invalid provision in the by-laws of a
corporation;
o And if there were such, the hazards incident to
corporate effort would certainly be largely increased.

5th Cause of Action failure to hold annual meetings and fill

in vacancies in the directorate
It is alleged that the failure of the corporation to hold annual
meetings and the filling of vacancies in the directorate in the
manner described constitute misdemeanors on the part of the
respondent which justify the resumption of the franchise by
the Government and dissolution of the corporation;
o and in this connection it is charged that the board of
directors of the respondent has become a permanent
and self-perpetuating body composed of wealthy men
instead of wage earners and persons of moderate
means.
In section 31 of the Corporation Law it is declared that, "at all
elections of directors there must be present, either in person
or by representative authorized to act by written proxy, the
owners of the majority of the subscribed capital stock entitled
to vote

Conformably with this requirement it is declared I article 61 of

the by-laws of EHF that, "the attendance in person or by proxy
of shareholders owning one-half plus one of the shareholders
shall be necessary to constitute a quorum for the election of
directors
For 1911 and 1912, and 1917 there was a quorum of
shareholders or their respective proxies.
But for the other years there was no quorum, despite efforts to
get the stockholders to attend
o In addition to the publication of notices in the
newspapers, as required by the by-laws, a letter of
notification was sent to every shareholder at his last
known address
o Notwithstanding these special efforts the meeting was
attended only by shareholders, in person and by proxy,
representing 3,889 shares, out of a total of 106,491
shares then outstanding and entitled to vote.
Owing to the failure of a quorum at most of the general
meetings since the respondent has been in existence, it has
been the practice of the directors to fill vacancies in the
directorate by choosing suitable persons from among the
stockholders.
o This custom finds its sanction in article 71 of the bylaws
"ART. 71. The directors shall elect from among
the shareholders members to fill the vacancies
that may occur in the board of directors until the
election at the general meeting."
o The persons thus chosen to fill vacancies in the
directorate have, it is admitted, uniformly been
experienced and successful business and professional
men of means
o Moreover, it appears that several of the individuals
constituting the original directorate and persons chosen
to supply vacancies therein belong to prominent Filipino
families, and that they are more or less related to each
other by blood or marriage.
o In addition to this it appears that it has been the policy
of the directorate to keep thereon some member or
another of a single prominent American law firm in the
city
We are unable to see the slightest merit in the charge. No fault
can be imputed to the corporation on account of the failure of
the shareholders to attend the annual meetings

Upon failure of a quorum at any annual meeting the

directorate naturally holds over and continues to
function until another directorate is chosen and
qualified.
o This is reiterated in Art. 66 of the EHF by-laws: that
directors shall hold office "for the term of one year or
until their successors shall have been elected and taken
possession of their offices."
Unless the law or the charter of a corporation expressly
provides that an office shall become vacant at the
expiration of the term of office for which the officer was
elected, the general rule is to allow the officer to hold
over until his successor is duly qualified
Mere failure of a corporation to elect officers does not
terminate the terms of existing officers nor dissolve the
corporation
Moreover, the practice of the directorate of filling vacancies by
the action of the directors themselves is valid. Nor can any
exception be taken to the personality of the individuals chosen
by the directors to fill vacancies in the body. The possession of
means does not disqualify a man for filling positions of
responsibility in corporate affairs.

6th Cause of Action excessive salary for directors

It is alleged that the directors of EHF have been receiving
large compensation, varying in amount from time to time, out
of its profits. It is insisted that the payment of the
compensation indicated is excessive and prejudicial to the
interests of the shareholders at large

Under section 92 of the by-laws of EHF 5 percent of the net

profit shown by the annual balance sheet is distributed to the
directors in proportion to their attendance at meetings of the
board.
The liberal policy adopted by the association with respect to
the compensation of the directors has had highly beneficial
results, not only in securing a constant attendance on the part
of the membership, but in obtaining their intelligent attention
to the affairs of the association.
o In so far as this court is concerned the question here
before us is not one concerning the propriety and

wisdom of the measure of compensation adopted by the

respondent but rather the question of the validity of the
measure.
The Corporation Law does not undertake to prescribe the
rate of compensation for the directors of corporations.
The power to fixed the compensation they shall receive, if
any, is left to the corporation, to be determined in its bylaws (Act No. 1459, sec. 21).
o The circumstance that the amount paid as compensation
to the directors has increased beyond what would
probably be necessary to secure adequate service from
them is a matter that cannot be corrected in this action;
nor can it properly be made a basis for depriving the
respondent of its franchise, or even for enjoining it from
compliance with the provisions of its own by-laws.
o The remedy, if any, seems to lie rather in publicity and
competition, rather than in a court proceeding.

8th Cause of Action property qualification for directors

It is alleged that another two articles of the by-laws are
inconsistent with law.
o Article 70 is objectionable in that, under the
requirement for security, a poor member, or wageearner, cannot serve as director, irrespective of other
qualifications, and that as a matter of fact only men of
means actually sit on the board.
o Article 76 is criticized on the ground that the provision
requiring directors to renounce their right to loans
unreasonably limits their rights and privileges as
members.
For Article 70: Section 21 of the Corporation Law
expressly gives the power to the corporation to provide in
its by-laws for the qualifications of directors.
o The requirement of security from them for the proper
discharge of the duties of their office, in the manner
prescribed in article 70, is highly prudent and in
conformity with good practice.
For Article 76: prohibiting directors from making loans to
themselves, is of course designed to prevent the possibility of
the looting of the corporation by unscrupulous directors