Corporate Governance Upholding By-Laws in Director Removal Disputes

The Supreme Court's 2015 decision in Bernas v. Cinco (G.R. Nos. 163356-57 and 163368-69) clarifies critical rules on removing corporate directors and the binding effect of by-laws. The case arose from a power struggle within Makati Sports Club, Inc. (MSC), where one faction attempted to remove sitting directors through a special stockholders' meeting called by an unauthorized body. The ruling reinforces that corporate by-laws are the fundamental law of the corporation, and violations of these rules cannot be cured by subsequent stockholder ratification.

The Dispute

The MSC Oversight Committee (MSCOC), composed of past club presidents, demanded the resignation of seven incumbent directors (the Bernas Group) amid allegations of financial irregularities. Stockholders holding at least 100 shares requested the MSCOC to call a special meeting to remove the sitting directors and elect replacements. The MSCOC obliged, and on 17 December 1997, a special meeting was held where the Bernas Group was removed and a new set of directors (the Cinco Group) was elected.

The Bernas Group challenged the meeting's validity before the Securities and Exchange Commission (SEC), arguing that under the Corporation Code, only the Corporate Secretary, upon order of the president or written demand of stockholders, could call such a meeting. The by-laws similarly vested the power to call special meetings only in the President or the Board of Directors.

The Issue

The central question was whether the 17 December 1997 special stockholders' meeting was validly called, and whether subsequent annual stockholders' meetings in 1998, 1999, and 2000 could ratify the actions taken during that invalid meeting.

The Ruling

The Supreme Court affirmed the Court of Appeals' decision, holding that the special meeting was void ab initio because it was called by the MSCOC, which had no authority under either the Corporation Code or the by-laws to call such a meeting. Only the President or the Board of Directors could call a special meeting under MSC's by-laws.

The Court emphasized that a corporation's by-laws are its "private laws" and form part of its fundamental law. Directors and officers must act in the manner and within the formalities prescribed by the by-laws. Actions taken in violation of these rules are void and cannot acquire validity through ratification, performance, or estoppel.

The Court distinguished between illegal acts and merely ultra vires acts. Illegal acts—those contrary to law, morals, or public policy—are void and cannot be ratified. The improperly called meeting fell into this category because the defect went to the very authority of the persons who made the call.

Key Principles Established

Ratification cannot cure void acts. The stockholders' ratification of the removal during the 1998, 1999, and 2000 annual meetings was ineffective. A void act cannot be the subject of ratification.

The proper remedy for a refused meeting call. The Court noted that if the Corporate Secretary refuses to call a meeting despite a valid demand, the aggrieved stockholders should petition the SEC, which may order the petitioning stockholder to call the meeting upon a showing of good cause. The decision cites the SEC's regulatory and administrative powers under the Corporation Code and Presidential Decree No. 902-A in this regard.

The de facto officer doctrine has limits. The Cinco Group could not invoke the de facto officer doctrine to justify their actions, including expelling Bernas and auctioning his shares. The doctrine applies only in limited circumstances, such as where directors assumed office in good faith through the voting of government-sequestered shares, as in Cojuangco v. Roxas.

Annual meetings remained valid. The subsequent annual stockholders' meetings were validly held because they complied with the by-laws on annual meetings. However, their ratification of the void removal and share sale was ineffective. The directors elected in those annual meetings were considered de jure officers, and the Bernas Group could not use the holdover principle to perpetuate themselves in office.

Practical Takeaways

• Follow by-laws strictly. Corporate by-laws are binding on all members, directors, and officers. Deviating from prescribed procedures for calling meetings can render actions void.
• Know who can call special meetings. Under the Corporation Code, special meetings for director removal must be called by the Corporate Secretary upon order of the president or written demand of stockholders representing at least a majority of outstanding capital stock.
• Seek SEC assistance when blocked. If the Corporate Secretary refuses to call a meeting despite a valid demand, petition the SEC rather than taking unilateral action through an unauthorized body.
• Ratification has limits. Stockholders cannot ratify actions that are void from the beginning. Only voidable acts—those merely beyond the corporation's powers but not illegal—can be ratified.
• De facto officer status is narrow. Directors who assume office through an invalid election cannot claim de facto officer protection for their actions, especially those prejudicial to other stockholders.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.