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Case digest · Director dealing with his corporation; quorum without the interested director
Mead vs. McCullough
A company organized in 1902, whose principal object was raising the Spanish ships sunk by Admiral Dewey, broke its contract with the Navy and fell into debt. The other directors then assigned its wrecking contract to the company’s own president.
Facts
March 15, 1902
Charles W. Mead and the four defendants organized the Philippine Engineering and Construction Company. The incorporators were its only stockholders and also its directors. Mead was elected general manager.
The venture
Among the company’s jobs was the wrecking contract with the Navy Department at Cavite to raise the Spanish ships sunk by Admiral Dewey, a venture the Court described as a risky one. After nine months, Mead resigned as manager to become engineer of the Canton and Shanghai Railway Company in China.
The failure
The company broke its contract with the naval authorities, and its $10,000 Mexican currency deposit was confiscated. It had no money and was considerably in debt. The naval authorities refused to have anything more to do with it, but agreed to give a new association an extension of time if McCullough, the company’s president, would organize one.
1903
Shortly after Mead left for China, the other directors met and assigned the wrecking contract to McCullough. He organized a new association, sold it five-sixths of the contract for $15,000 Mexican currency and kept one-sixth. The new association failed, and McCullough lost over $16,000 Mexican currency.
The suit
Mead sued McCullough and the three other directors for salary, a share of the profits, and the value of personal effects he had left behind. A default judgment was entered against all four, but it was set aside only as to McCullough. Mead died, and his administrator carried on the case. At the new trial, the court dismissed the claims for salary and profits and awarded $1,200 gold for the personal effects. Both sides appealed.
Issue
Was the transfer of the company’s wrecking contract to McCullough, its own president and director, valid against Mead, a minority stockholder?
Ruling
Yes. The transfer was valid and binding on the plaintiff. The Court affirmed the dismissal of the claims for salary and profits, and reduced the award for the personal effects to P49.97.
The Court held that the company, a civil partnership in mercantile form (a sociedad anónima), had become a juridical person, a corporation, governed principally by the Civil Code, with the Code of Commerce applying subsidiarily, and it drew on American authorities. It held that a director or officer may deal with his corporation. When the transfer was made, three directors were present and all voted for it, so McCullough’s vote was not needed; there was a quorum without him, and those directors were also a majority of the stockholders. McCullough did not represent the corporation in the transaction. The Court subjected the insiders’ conduct to the most severe scrutiny and found that it passed. The company was a losing concern, deeply in debt, and its broken contract with the Navy was of no value to it; McCullough bought in good faith and paid a valuable consideration. On the salary claim, the Court found that Mead’s pay as manager was contingent on the company making profits. Only McCullough’s liability was before the Court; the default judgment against the other three directors had not been set aside.
“It was not necessary for the president, McCullough, to vote. There was a quorum without him: a quorum of the directors, and at the same time a majority of the stockholders.”
Doctrine
A director or officer may deal with his corporation. “While a corporation remains solvent, we can see no reason why a director or officer, by the authority of a majority of the stockholders or board of managers, may not deal with the corporation, loan it money or buy property from it, in like manner as a stranger.” Even when the corporation is insolvent, “a director or officer may in good faith and for an adequate consideration purchase from a majority of the directors or stockholders the property even of an insolvent corporation, and a sale thus made to him is valid and binding upon the minority.” Such insiders must prove that they acted “with the utmost candor and fair dealing for the interest of the corporation.” The case predates the Corporation Code; today the conditions are in Sec. 31 of the Revised Corporation Code.
Compare: not valid
In Prime White Cement Corporation vs. Intermediate Appellate Court, G.R. No. 68555, March 19, 1993, a director’s dealership with his own corporation failed on fairness: “We believe that the fixed price of P9.70 per bag for a period of five years was not fair and reasonable.”
Bar tip
Dealing with one’s own corporation is not forbidden. Ask whether the interested director was needed for the quorum or the vote, whether he acted in good faith, and whether the corporation received a valuable consideration. Mead predates the Corporation Code, so cite Sec. 31 of the Revised Corporation Code for the rule today.
Hear it explained
Self-Dealing Director, Podcast Ep. 7, at 10:35
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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.