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Case digest · Ultra vires; ratification by stockholders
Maria Carla Pirovano, et al. vs. The De la Rama Steamship Co.
A shipping company gave its late president’s children the proceeds of the insurance on his life. The stockholders ratified the gift, then voted to revoke it.
Facts
Before the war
Enrico Pirovano became president of the company, and under his management it grew into a multi-million corporation. He was executed by the Japanese during the occupation.
Early 1941
The company had insured Pirovano’s life for a total of ₱1,000,000, with itself as beneficiary.
January 6, 1947
Acting “out of gratitude to the late Enrico Pirovano” (the resolution’s words), the board renounced the company’s rights as beneficiary in favor of his four minor children. The proceeds stayed with the company as a loan at 5% a year. The representatives of the National Development Company (NDC) concurred.
July 25, 1949
The board approved Mrs. Pirovano’s proposal to buy a house in New Rochelle, New York, owned by a company subsidiary, to be paid from the funds held in trust for the children. The deal was carried out with court approval.
September 1949
The stockholders formally ratified the donation, with clarifying modifications: payment would wait until the company had liquidated its bonded indebtedness to the NDC, or fully redeemed the preferred shares to be issued to the NDC in its place.
June 20, 1950
Asked by the company’s president, the Securities and Exchange Commission gave the opinion that the donation was void because the corporation could not dispose of its assets by gift.
March 8, 1951
At a stockholders’ meeting, the majority of the stockholders voted to revoke the resolution approving the donation, citing the unmet condition and the SEC opinion.
The suit
The children, through their mother as guardian, sued in the Court of First Instance of Rizal, which held the donation valid and ordered the company to pay ₱583,813.59 with interest, plus 20% as attorney’s fees. The company appealed, arguing that the donation was ultra vires and, if valid, not yet due.
Issue
Was the company’s gift of the insurance proceeds ultra vires, and could the stockholders revoke it after ratifying it?
Ruling
The donation was held valid and binding on the corporation. But it was payable only after the corporation fully redeemed the preferred shares issued to the NDC, and attorney’s fees were cut from 20% to 10%.
The Court held that the donation was remunerative, given in recognition of Pirovano’s services, and had been perfected, so it could not be rescinded without legal grounds; the stockholders’ 1951 resolution could not nullify it. It was also within the company’s articles, which gave the corporation broad and almost unlimited powers, including the power to invest and deal with money not immediately required; the insurance proceeds were not immediately required when they were given away. Even if the donation were ultra vires, it was not illegal, not contrary to the express provisions of the articles, and not prejudicial to creditors, so it was merely voidable, and the stockholders’ ratification and the company’s later acts cured it. Having partly carried it out, the company was estopped from contesting it. The Court reversed the trial court, however, on when the money was due: the condition tied to the NDC redemption stood. (Quotations on this page follow the official Philippine Reports, 96 Phil. 335. The LawPhil text of this decision has transcription errors, including in the passage quoted here.)
“By this ratification, the infirmity of the corporate act, if any has been obliterated thereby making the act perfectly valid and enforceable.”
Doctrine
The Court distinguished illegal acts from acts that are merely ultra vires. Illegal acts are void: they cannot “acquire validity by performance, ratification, or estoppel.” Merely ultra vires acts are voidable and “may become binding and enforceable when ratified by the stockholders.” University of Mindanao, Inc. vs. Bangko Sentral ng Pilipinas (2016) later quoted this passage in full. The Court also applied “the well-settled doctrine that the defense of ultra vires cannot be set up or availed of in completed transactions” (citing Fletcher and Corpus Juris Secundum).
Compare: no ratification
In University of Mindanao, Inc. vs. Bangko Sentral ng Pilipinas, et al., G.R. Nos. 194964-65, January 11, 2016, the university received no loan proceeds and appeared unaware of the mortgages until the bank’s demand. The Court held: “No act by petitioner can be interpreted as anything close to ratification.”
Bar tip
Ratification can cure an act that is merely ultra vires, never one that is illegal. It is the stockholders who ratify, and their ratification cannot prejudice creditors; here the creditor concerned, the NDC, had concurred. Once the act is ratified or carried out, the corporation cannot set up ultra vires to undo it.
Hear it explained
Ultra Vires, Podcast Ep. 5, at 8:23
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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.