Case Summary (G.R. No. 38515-16)
Factual Background
The association’s by-laws as adopted in 1968 provided for annual election by plurality and secret ballot of an eleven-member Board of Directors. On December 20, 1975, a board committee drafted an amended by-law provision that would (among other changes) expand the number of directors to fourteen and declare the “GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.” That draft was never formally presented to or approved by the general membership, nor was it registered with the relevant government agency. Nonetheless, from 1975 through 1989 the association allowed the petitioner’s representative to sit on the board without formal election. In early 1990 the association’s election committee informed the school that it would reexamine and discontinue the practice, restoring application of the 1968 by-laws. The school sought to compel recognition of a permanent seat by filing a mandamus action before the Home Insurance and Guaranty Corporation (HIGC).
Procedural History
- HIGC hearing officer dismissed the school’s mandamus action (June 20, 1990), finding the 1975 draft was merely proposed and unratified and that tolerance of the practice did not create a vested right.
- HIGC Appeals Board affirmed (September 13, 1990), referencing SEC guidance and statutory provisions on election and terms of trustees/directors.
- Court of Appeals affirmed the HIGC on February 9, 1993, holding the draft amendment was never validly adopted in accordance with the association’s by-laws and governing corporation law.
- The Supreme Court affirmed the Court of Appeals’ decision (final disposition), sustaining the conclusion that the petitioner had no vested right to an unelected permanent board seat.
Issues Presented
- Whether the petitioner acquired a vested right to a permanent, unelected seat on the association’s Board of Directors through long practice.
- Whether the 1975 draft amendment to the association’s by-laws that purported to create a permanent seat for the petitioner is valid and binding.
- Whether the long-standing practice of tolerating the automatic inclusion of the petitioner’s representative as a permanent director is permissible under law.
Petitioner’s Contentions
The petitioner argued that (a) the committee that drafted the 1975 amendment was duly authorized to draft such amendments and that the acts implementing the draft thereafter constituted lawful and binding conduct by the association; (b) the long practice (1975–1989) of seating the school’s representative operated as ratification, vesting the school with a permanent right to that seat; (c) there is no absolute statutory prohibition against providing an unelected director in the by-laws because the cited statutory provisions (A92, A23, A22, A28, A29) govern manner and terms of election but do not explicitly prohibit exceptions; and (d) examples exist where corporations treat holders of certain offices (e.g., Archbishop of Manila) as ex officio directors, indicating such arrangements are permissible where provided by by-laws.
Respondents’ Contentions and Administrative Guidance
The association maintained that the 1975 draft was never approved by the membership and therefore never became part of the by-laws; the 1968 by-laws that had been registered with the SEC in 1969 remained controlling. The association relied on an SEC opinion concluding that the practice of allowing an unelected member to sit on the board contravened the registered by-laws and pertinent provisions of the Corporation Code (A92) governing election and terms of trustees/directors. The HIGC and its appeals board likewise treated the 1975 draft as unratified and invalid until properly adopted and filed.
Court’s Legal Analysis — Validity of the 1975 Draft Amendment
The Court focused on governing corporate formalities: the association’s Article XIX required a majority affirmative vote of members at a regular or special meeting called for that purpose to alter or adopt by-laws. This requirement implements the prior Corporations Law provision A22 and aligns with the Corporation Code’s provisions requiring that by-laws be adopted or amended pursuant to the corporation’s internal rules and statutory commands. Because the 1975 draft was never submitted to and ratified by the membership in the manner required by the registered by-laws and applicable corporation law, it did not become part of the association’s bylaws and could not validly confer the purported permanent director status.
Court’s Legal Analysis — Effect of Long Practice, Acquiescence, and Vesting of Rights
The Court rejected petitioner’s argument that long practice or tolerance could confer a vested right to sit as a permanent, unelected director. The Court held that practice, however long continued, cannot create a vested right when the practice contravenes the registered by-laws or statutory provisions. The Court distinguished the petitioner’s situation from instances of ex officio membership (where a person occupies the board by virtue of holding some other office) because petitioner’s representative did not hold any office that would logically justify an automatic board seat. The Court observed that, even if members were unaware of the legal defect, ignorance does not validate an otherwise unlawful or procedurally invalid provision. The Court also emphasized that members cannot waive or ratify actions that are contrary to law; any purported ratification of an illegal by-law provision would be ineffective.
Reliance on SEC Opinion and Statutory Provisions
The Court found the SEC opinion persuasive in concluding that the practice allowing an unelected member was inconsistent with the registered by-laws and with A92 (and related provisions) of the Corporation Code. The Court cited the statutory framework that, unless otherwise provided in the articles or by-laws, directors/trustees of non-stock corporations are to be elect
Case Syllabus (G.R. No. 38515-16)
Case Caption and Decision
- Decision reported at 346 Phil. 114, Second Division, G.R. No. 108905, dated October 23, 1997.
- Ponencia by Justice Mendoza; concurrence by Justices Puno and Torres, Jr.; Justice Regalado (Chairman) on leave.
- The Supreme Court affirmed the decision of the Court of Appeals.
Core Question Presented
- Whether petitioner Grace Christian High School, through its representative, has a right to sit as a permanent, unelected member of the Board of Directors of respondent Grace Village Association, Inc.
Parties and Relevant Actors
- Petitioner: Grace Christian High School — an educational institution offering preparatory, kindergarten and secondary courses at Grace Village in Quezon City.
- Private respondent: Grace Village Association, Inc. — an organization of lot and/or building owners, lessees and residents at Grace Village.
- Individual respondents: Alejandro G. Beltran (president of the Association in 1990) and Ernesto L. Go (chairman of the Association’s committee on election in 1990).
- James Tan: Principal of Grace Christian High School and addressee of the February 13, 1990 letter from the Association’s committee on election.
- Administrative bodies invoked in the proceedings: Home Insurance and Guaranty Corporation (HIGC), HIGC hearing officer and appeals board, Securities and Exchange Commission (SEC) opinion cited by respondents, and the Court of Appeals.
Pertinent Historical Facts and By-laws Background
- Original by-laws (adopted 1968) Article IV provided:
- Annual meeting on the first Sunday of January at the principal office.
- Election by plurality and secret ballot of a Board of Directors composed of eleven (11) members to serve one (1) year until successors are elected and qualified.
- On December 20, 1975, a board committee prepared a draft amendment (never presented to the general membership for approval) that, among other things, contained:
- Annual meeting to be held on the second Thursday of January.
- Vote entitlement based on monthly membership fees at P10.00 per vote.
- Election of Directors such that the first fourteen (14) highest vote-getters would be declared elected.
- An explicit provision: “GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.”
- From approximately 1975 to 1990 (fifteen years) petitioner’s representative had been “recognized” and given a permanent seat in the Association’s board despite the 1975 draft never being approved by the membership or registered/approved by competent authorities.
- On February 13, 1990, the Association’s committee on election informed James Tan that it was the sentiment that all directors should be elected by members, and that making a person or entity a permanent director “would deprive the right of voters to vote for fifteen (15) members of the Board” and is “undemocratic.” The committee recommended reexamining the tolerated practice of automatic inclusion of petitioner’s representative as a permanent director.
- Notices were sent that the Association would observe the 1968 by-laws’ provisions on election. Petitioner requested the chairman of the election committee to follow the prior (tolerated) procedure and claimed the new notice violated the amended by-laws (1975 draft) and unlawfully deprived the school of a vested right to a permanent board seat.
- The Association denied the request. Petitioner filed an action for mandamus in the HIGC to compel recognition of its claimed right to a permanent board seat.
Procedural History
- HIGC hearing officer: Held a preliminary conference (March 29, 1990). After further proceedings, on June 20, 1990, the hearing officer dismissed petitioner's action.
- HIGC appeals board: Affirmed the hearing officer’s dismissal in a resolution dated September 13, 1990, citing SEC opinion and statutory authority.
- Court of Appeals: On February 9, 1993, affirmed the HIGC decision.
- Supreme Court: Petition for review; Supreme Court affirmed the decision of the Court of Appeals on October 23, 1997.
Petitioner’s Contentions (as presented)
- Petitioner asserted that it had acquired a vested right to a permanent seat in the Board of Directors of Grace Village Association by virtue of:
- The amended by-laws drafted and promulgated by the December 20, 1975 committee, which petitioner claimed was valid and binding.
- Long continued practice — petitioner contended that the implementation of the 1975 provision for fifteen years amounted to ratification and conferred a vested right.
- Estoppel — the association was estopped from questioning the by-laws after tolerating the practice.
- Absence of a legal prohibition — petitioner argued that neither the Corporation Code nor other law expressly prohibits unelected members of boards, and cited purported analogous practices (e.g., Pius XII Catholic Center, Inc. and Cardinal Santos Memorial Hospital, Inc.) where the Archbishop of Manila sits as an unelected trustee or chairman.
- Argument that the legislative provisions cited (A92 of the Corporation Code; A28/A29 of former law; A23 of current Code) do not bar or are not mandatory to prohibit the grant of a permanent seat if provided in the articles of incorporation or by-laws.
Respondents’ Contentions and Administrative Opinion
- Association contended:
- The 1975 draft was merely proposed by-laws, never approved by the competent authority nor registered with the SEC or HIGC, and therefore not binding.
- The by-laws registered with the SEC on January 16, 1969 (i.e., the 1968 by-laws) are the prevailing by-laws.
- Cited the SEC opinion advising that the practice of allowing unelected members on the board was contrary to the existing by-laws and to A92 of the Corporation Code (B.P. Blg. 68).
- HIGC appeals board relied on SEC opinion and statutory provisions to conclude that past tolerated prac