Seguion Reyna Montecillo & Ongsiako

December 9, 1988 Seguion Reyna Montecillo & Ongsiako A. Soriano Building Ayala Avenue Makati, Metro Manila Gentlemen : This refers to your letter, dated December 7, 1988, requesting for opinion of this Commission on the query posed therein. prcd As represented in your letter, Polymedic General Hospital Inc. by resolution of its stockholders, dated August 16, 1988, proposes to increase its authorized capital stock from the present P10,000,000.00 divided into 1,000 shares of the par value of P10,000.00 per share to P40,000,000.00 divided into 4,000 shares of the par value of P10,000.00 each. The increase will be fully subscribed and paid-up to enable the Hospital to buy back from the GSIS for a total consideration of P50M the land, building, and other assets of the Hospital which were previously conveyed to the GSIS by way of dacion en pago. The amount raised through subscriptions of stockholders of record will be further amplified by loans to be secured from selected financial institutions. All stockholders of record of the Hospital were given the pre-emptive right to subscribe to 20 shares at P10,000.00 per share; all were specifically given a deadline within which to indicate whether or not they were subscribing to the increase in the authorized capital stock, and upon failure thereof, they would be deemed to have waived their pre-emptive right to such increase. Quite a number of medical stockholders indicated their willingness to subscribe; some unequivocably waived their pre-emptive right, while still others chose to ignore the request for subscription or express waiver. It was likewise manifested in your letter, that the buy-back arrangement with the GSIS is conditioned upon the ability or the Hospital to come up with the required amount within a given period. Hence, in view of the time constraint and the importance of the buy-back arrangement which assures the survival of the Hospital, the board of directors subsequently adopted a resolution to the effect that medical stockholders who subscribe for and fully pay up the P200,000.00 worth of shares allotted to each of them would be allowed to maintain their respective clinics within the area reserved for doctor's offices in the Hospital; conversely, medical stockholders who fail to do so or who waive their pre-emptive right to subscribe to the capital increase will forthwith lose their right to maintain their medical clinics within the Hospital premises. They may however continue to bring in patients for confinement at the Hospital as visiting physicians. Accordingly, some medical stockholders who currently hold clinic within the Hospital premises will be adversely affected by the board resolution above adverted to. At this point, it was emphasized however that all the medical stockholders holding respective clinics at the Hospital do not have any formal or written lease contracts with the Hospital covering the space(s) occupied by them. The aggregate amount of P1,000.00 a month jointly paid for each room by the doctors who share clinic in a particular room was just enough to cover the monthly expenses incurred for light, water and air-conditioning facilities, and said amount was not intended as rentals. It is, therefore, inferred from your letter that no lessor-lessee relationship exists between the Hospital and the medical stockholders. Hence, your query is: whether or not the board resolution limiting the use of Hospital premises for medical clinics exclusively to medical stockholders who subscribe and pay in full the shares allotted to them out of the increase in the authorized capital stock is legally feasible. On the basis or the facts above presented the following information may be imparted: Section 23 of the Corporation Code of the Philippines reads as follows: "Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporation controlled and held by the board of directors or trustees . . .". In general, courts will not undertake to review the expediency of the business transactions authorized by the directors. A large discretion is lodged in them. Hence, questions of value and policy are for their business judgment and under the so called "business judgment rule",it is sufficient that reasonable diligence and care have been exercised in the management of corporate affairs. (Ballantine on Corporations, rev. ed.,p. 160-161).The business judgment rule exists to protect and promote the full and free exercise of the power of management given to the directors. (3A Fletcher Cyc. Corp.,1986 rev. vol.,sec. 1039).Thus, in Auerbach V . Bennett, 47 NY2d 619, 419 NYS2d 920, 393 NE2d 994, (cited in Fletcher, Supra.,p. 49),the Court held: "Business judgment rule bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in lawful and legitimate furtherance of corporate purposes." Likewise, in Fields v . Sax, 123 Ill app 3d 460, 462 NE2d 983, (cited in Fletcher, Supra.,p. 50),"absent bad faith, fraud or illegality, or gross overreaching, the courts are not at liberty to interfere with the exercise of business judgment by directors. Also, in Helfman v . American Light & Traction Co .,121 NJEq. 1, 187 A 540, "Courts will not substitute its judgment for that of directors in matters of purely business and economic problems." In Lewis v . S . L . & E . Inc .,629 F2d, 764, (CA2, 1980),citing Fletcher Cyc. Corp.,sec. 1239 (perm. ed.),it was further held that "Business judgment rule places heavy burden on shareholders who would attack corporate transactions." It appears that the resolution of the board of directors of Polymedic General Hospital, Inc.,which has been put issue, was passed by the Board in an honest and reasonable exercise of business judgment to save the substantial assets of the hospital from dissipation. It is, therefore, opined that said resolution of the board limiting the use of Hospital premises for medical clinics only to medical stockholders who subscribed and pay in full the shares allotted to them out of the increase in the authorized capital stock is legally justifiable provided that the following conditions are met: "(1) management acts in a good faith belief that its decision is in the company's best interests; (2) it exercises due care in ascertaining relevant facts and law before making the decision; and (3) it has no personal interest in the transaction".(3A Fletcher Cyc. Corp.,1986 rev. vol.,sec. 1040, p. 58). prcd Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman