Facts:

The case involves a Petition for Review on Certiorari filed by Angeles P. Balinghasay and 15 other petitioners against Cecilia Castillo and other respondents, including Medical Center ParaAque, Inc. (MCPI). The petition was initiated following a decision by the Court of Appeals dated May 23, 2008, which overturned a ruling from the Regional Trial Court (RTC) of ParaAque City, Branch 258, in Civil Case No. 01-0140. The RTC had previously dismissed an amended complaint for injunction, accounting, and damages filed by the respondents against the petitioners.

MCPI, incorporated in 1977, operates a medical facility located in ParaAque City. The respondents, who are minority shareholders of MCPI holding Class B shares, were involved in a project concerning ultrasound services. Initially, in 1997, MCPI's Board of Directors awarded the operation of an ultrasound unit to a group of investors among whom were several petitioners who also served as Board Directors. A significant contro

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Facts:

Parties and Institutional Background

• Respondents: Cecilia Castillo, Oscar del Rosario, Arturo Flores, Xerxes Navarro, Maria Antonia Templo, and Medical Center ParaAaque, Inc. (MCPI).
• Petitioners: A group composed of stockholders and directors of MCPI, including Angeles Balinghasay, Renato Bernabe, Alodia Del Rosario, Teresita Gayanilo, Rustico Jimenez, Arceli Jo, Esmeralda Medina, Cecilia Montalban, Virgilio Oblepias, Carmencita Parreao, Emma Reyes, Reynaldo Savet, Serapio Taccad, Vicente Valdez, Salvacion Villamora, and Dionisia Villareal.
• Institutional Background:
• MCPI, a domestic corporation established in 1977, operates the Medical Center ParaAaque.
• The hospital initially used concessions for various services until transitioning to in-house operations (with the exception of ultrasound) in 1997.

Emergence of the Ultrasound Controversy

• Context for Service Provision:
• Prior to 1997, services including laboratory, physical therapy, and ultrasound were delivered by independent entities under concession.
• With the expiration of concessions in 1997, MCPI assumed direct responsibility for most services, except the ultrasound service.
• Entry of Ultrasound Investors:
• In 1997, the MCPI Board of Directors awarded the operation of the ultrasound unit to a group constituted mainly by Obstetrics-Gynecology (Ob-gyne) doctors, who were also MCPI stockholders (both Class A and Class B).
• The group purchased a Hitachi model EUB-200 C ultrasound machine costing P850,000.00 to operate the unit.

Development and Implementation of the Memorandum of Agreement (MOA)

• Board Dynamics and Informality of the Agreement:
• Several Board meetings (notably on August 14, 1998, and February 5, 1999) showed heavy participation by ultrasound investors.
• During the August 14, 1998 meeting, only a counter-offer was made regarding the ultrasound operation, without final approval.
• On February 5, 1999, a MOA was executed between MCPI (represented by its President, Bernabe) and the ultrasound investors (represented by Oblepias).
• Key Provisions of the MOA:
• Income Distribution: Initially, the gross income (less professional fees) was to be shared with 60% for ultrasound investors and 40% for MCPI, later adjusted to 55% (ultrasound investors) and 45% (MCPI).
• Future Transfer: The ultrasound equipment was to eventually be transferred to MCPI.
• Objections and Reservations:
• Arturo Flores and other respondents challenged the MOA, stating it was prejudicial to MCPI’s interests.
• In subsequent Board meetings and communications, doubts were raised regarding the legality and procedural validity of the MOA.

Initiation of the Derivative Suit and Subsequent Procedural History

• Derivative Suit Filing:
• On March 22, 2001, the respondents filed a derivative suit at the RTC for violation of Section 31 of the Corporation Code.
• The suit sought annulment of the MOA, accounting for and refund of profits derived therefrom, along with damages and attorney fees.
• RTC and Court of Appeals (CA) Decisions:
• The RTC, on March 22, 2005, dismissed the respondents’ complaint finding that MCPI had impliedly ratified the MOA by accepting the benefits and through inaction.
• On May 23, 2008, the CA reversed the RTC decision, declaring the MOA invalid due to procedural and quorum deficiencies, and ordered the petitioners to account for profits along with jointly and severally paying P200,000.00 as attorney fees.
• Underlying Factual Findings:
• Evidence indicated that valid quorum requirements were not met during the critical Board meetings (August 14, 1998 and February 5, 1999).
• The MOA lacked proper ratification by a two-thirds vote of the outstanding capital stock, as required under the Corporation Code.
• MCPI’s financial records for the years 1996–2000 showed sufficient funds, challenging the claim of an urgent hospital necessity.

Additional Context and Mitigating Circumstances

• Ultrasound Equipment Acquisition Rationale:
• Petitioners contended that the purchase was driven by the need to equip the hospital’s Ob-gyne department under a policy mandated by the Philippine Board of Obstetrics and Gynecology.
• The absence of in-house ultrasound capabilities risked loss of patients and damage to the hospital’s reputation.
• Allegations of Bad Faith and Conflict of Interest:
• Several petitioners, as directors and ultrasound investors, were accused of acquiring an interest adverse to that of the corporation.
• Their participation in both decision-making and operational roles raised conflicts of interest and allegations of unjust enrichment.

Issue:

• Whether the CA erred by ignoring the circumstances under which the MOA was conceived and implemented, including its informal nature and the alleged urgent hospital necessity.
• Whether the CA improperly dismissed the application of the business judgment rule by failing to give deference to the Board’s decisions, despite the claim of good faith on the part of the petitioners.
• Whether the CA committed an error of law in finding that the MOA was not validly approved due to the lack of a quorum and absence of proper ratification by two-thirds of the outstanding capital stock.
• Whether the assessment and imposition of P200,000.00 as attorney fees against the petitioners was erroneous, considering the allegations that the acts performed were in good faith and motivated by urgent hospital needs.

Ruling:

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Ratio:

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Doctrine:

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