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Case digest · Directors’ contract with the corporation; quorum and ratification
Balinghasay vs. Castillo
A group of mostly Ob-gyne doctors, nine of them hospital directors, pooled money for an ultrasound machine, and the board approved an income-sharing agreement with them. Eight of the twelve directors at that meeting were investors.
Facts
1997
Medical Center Parañaque, Inc. (MCPI) operates the Medical Center Parañaque in Sucat, Parañaque City. When its concessions expired in 1997, it took over its laboratory, physical therapy and pulmonary services, but not ultrasound. Its board awarded the ultrasound operation to a group of investors composed mostly of Ob-gyne doctors; nine of them were MCPI directors. The group bought an ultrasound machine for P850,000.00 and ran it, at first without a written contract.
February 5, 1999
Twelve directors attended the board meeting, and eight of them were ultrasound investors. The board approved a Memorandum of Agreement (MOA) with the investors: the ultrasound income, minus the sonologists’ fees, would go 60% to the investors and 40% to MCPI, then 55% and 45% from April 1, 1999, and the machine would eventually be transferred to MCPI.
1999–2001
A minority stockholder challenged the MOA in a letter in October 1999 and again before the board in February 2000. On March 22, 2001, five minority stockholders filed a derivative suit against the investors, and later amended the complaint to add MCPI as a plaintiff.
March 22, 2005
The Regional Trial Court of Parañaque City dismissed the suit. It found that MCPI had impliedly ratified the MOA and was estopped, called the sharing fair, just and reasonable (for 1997 to 1999, MCPI’s net share was P1,567,699.78 and the investors’ P803,723.00), and invoked the business judgment rule.
May 23, 2008
The Court of Appeals reversed and declared the MOA invalid. It ordered eight of the investor-directors to account to MCPI for the profits that would otherwise have accrued to it, and to pay P200,000.00 in attorney’s fees.
Issue
Did the Court of Appeals err in declaring the ultrasound MOA invalid and ordering the investor-directors to account to the hospital?
Ruling
No. The Court denied the petition and affirmed the Court of Appeals, with clarifications and modifications: the MOA was invalid, but the investors keep the ultrasound machine.
The petition raised only questions of fact, and the Court found no reason to re-evaluate the evidence. The evidence showed that there was no quorum at the board meetings of August 14, 1998 and February 5, 1999 (the Court of Appeals had found that there could be none without the investor-directors), that the MOA was not ratified by a vote of two-thirds of MCPI’s outstanding capital stock, and that MCPI’s balance sheets for 1996 to 2000 showed it could have bought the machine itself. The petitioners’ claims of a lofty purpose were not evident in the records, and the stockholders were asked to ratify the deal only at the annual meetings of 2000 to 2003, years after the machine began operating. The Court upheld the P200,000.00 in attorney’s fees, and modified the decision to prevent unjust enrichment: eight petitioners must, within 60 days from notice, account for and return to MCPI all income it should have earned from the ultrasound unit from 1997 to the present; the net income to be returned and the P200,000.00 in attorney’s fees earn 6% interest a year from sixty days after notice until full payment; and they may seek reimbursement from the other investors; but the investors keep ownership of the equipment. The Court made no finding of bad faith or fraud.
“Nonetheless, it is only fair for the ultrasound investors to retain ownership of the equipment, which they may use or dispose of independently of MCPI.”
Doctrine
Directors whose presence is needed for the quorum, and whose votes are needed for the decision, cannot validly approve a contract with themselves unless it is properly ratified. The Supreme Court found the Court of Appeals’ ruling “amply supported by both evidence and jurisprudence,” in the face of evidence showing that “(a) there was no quorum when the Board meetings were held on August 14, 1998 and February 5, 1999; (b) the MOA was not ratified by a vote of two-thirds of MCPI's outstanding capital stock; and (c) the Balance Sheets for the years 1996 to 2000 indicated that MCPI was in a financial position to purchase the ultrasound equipment.” The first two points track the conditions of Sec. 32 of the Corporation Code, now Sec. 31 of the Revised Corporation Code. Equity still applies: the investors kept the machine they had paid for.
Compare: a quorum without him
In Mead vs. McCullough, G.R. No. 6217, December 26, 1911, the president’s purchase stood because the directors who approved it formed a quorum without him: “It was not necessary for the president, McCullough, to vote.”
Bar tip
Count the directors. If the interested directors were needed for the quorum or the vote, the contract is voidable unless stockholders representing at least two-thirds of the outstanding capital stock ratify it in a meeting called for the purpose, with full disclosure, and the contract is fair and reasonable. Here the trial court’s view that the split was fair did not save the agreement, though equity let the investors keep the machine.
Hear it explained
Self-Dealing Director, Podcast Ep. 7, at 7:24
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This digest is general legal information for education, not legal advice, and it is not a substitute for reading the decision. Quoted passages are taken word for word from the full text.