130. Aurbach v Sanitary Wares December 15, ASI group, however, conducted a separate election.

1989 - Wolfgang Aurbach, John Griffin, David Whittingham , Charles Chamsay,

TOPIC: Consent and Capacity of the Contracting Parties and Luciano E. Salazar were certified as elected directors, with the
Summary: explanation that there was a tie among the other 6 nominees for the 4
American Standard Inc (ASI), a foreign corporation in US entered into an remaining positions of directors and that the body decided not to break the
Agreement with Saniwares and some Filipino investors whereby ASI and tie.
the Filipino investors agreed to participate in the ownership of an SEC uphold the election of the Lagdameo Group.
enterprise which would engage primarily in the business of manufacturing
in the Philippines and selling here and abroad vitreous china and sanitary CA affirmed the decision w/ modification - It directed that in all subsequent
wares. elections for directors of Saniwares, ASI cannot nominate more than 3
directors; that the Filipino stockholders shall not interfere in ASI's choice of
ASI agreed to accept the role of minority vis-a-vis the Filipino investors, on its 3 nominees; that, on the other hand, the Filipino stockholders can
the condition that the Agreement should contain provisions to protect ASI nominate only 6 candidates and in the event they cannot agree on the 6
as the minority. One such provision is: As long as American-Standard shall nominees, they shall vote only among themselves to determine who the 6
own at least 30% of the outstanding stock of the Corporation, three of the nominees will be, with cumulative voting1 (pursuant to Section 3(a)(1) of
nine directors shall be designated by American-Standard, and the other the Agreement) to be allowed but without interference from ASI.
six shall be designated by the other stockholders of the Corporation. ----------------------
(Section 5(a) of the Agreement). ASI's Main Contention: The business established by the parties is a
corporation, and pursuant to Section 24 of the Corporation Code, ASI has
The 30% capital stock of ASI was later increased to 40%. the right to vote its additional 10% equity during the election of Saniwares'
board of directors.
On Mar 8, 1983, the election of the members of the board of directors was ----------------------
held. SC affirmed the CA decision.
- The ASI group nominated 3 persons namely: Wolfgang Aurbach, John - The Agreement as well as the testimonial evidence presented shows that
Griffin and David P. Whittingham. the parties agreed to establish a joint venture and not a corporation.
- The Philippine investors nominated 6, namely; Ernesto Lagdameo, Sr., Section 24, therefore, is not applicable.
Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin - Under Philippine law, a joint venture is a form of partnership and should
Young. thus be governed by the law of partnerships. A distinction between the two
Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, business forms, however, is that although a corporation cannot enter into a
who in turn nominated Mr. Charles Chamsay. partnership contract, it may however engage in a joint venture with others.

The chairman ruled the last two nominations out of order. ASI protested 1. Cumulative voting is a type of voting system that helps strengthen the ability of minority
the decision, but the election proceeded. shareholders to elect a director. This method allows shareholders to cast all of their votes for a single
- Wolfgang Aurbach, John Griffin, David Whittingham, Ernesto Lagdameo, nominee for the board of directors when the company has multiple openings on its board. In contrast,
in "regular" or "statutory" voting, shareholders may not give more than one vote per share to any single
Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul A. nominee. For example, if the election is for four directors and you hold 500 shares (with one vote per
Boncan, and Baldwin Young were elected and certified as elected share), under the regular method you could vote a maximum of 500 shares for each one candidate
directors. (giving you 2,000 votes total500 votes per each of the four candidates). With cumulative voting, you
are afforded the 2,000 votes from the start and could choose to vote all 2,000 votes for one candidate,
1,000 each to two candidates, or otherwise divide your votes whichever way you wanted
- Also, Section 5 (a) of the Agreement relates to the manner of nominating board of directors.
the members of the board of directors while Section 3 (a) (1) relates to the - The ASI group nominated 3 persons namely; Wolfgang Aurbach, John
manner of voting for these nominees. This is the proper interpretation of Griffin and David P. Whittingham.
the Agreement of the parties as regards the election of members of the - The Philippine investors nominated 6, namely; Ernesto Lagdameo, Sr.,
board of directors. To allow the ASI Group to vote their additional equity to Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin
help elect even a Filipino director who would be beholden to them would Young.
obliterate their minority status as agreed upon by the parties. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar,
GUTIERREZ, JR., J. who in turn nominated Mr. Charles Chamsay.
FACTS The chairman, Baldwin Young ruled the last two nominations out of order
Aug 15, 1962, American Standard Inc (ASI), a foreign corporation in US on the basis of Section 5 (a) of the Agreement, the consistent practice of
entered into an Agreement with Saniwares and some Filipino investors the parties during the past annual stockholders' meetings to nominate only
whereby ASI and the Filipino investors agreed to participate in the nine persons as nominees for the nine-member board of directors, and the
ownership of an enterprise which would engage primarily in the business legal advice of Saniwares' legal counsel.
of manufacturing in the Philippines and selling here and abroad vitreous
china and sanitary wares. The parties agreed that the business operations ASI representative appealed to the body of stockholders present that a
in the Philippines shall be carried on by an incorporated enterprise and vote be taken on the ruling of the Chairman. The Chairman, Baldwin
that the name of the corporation shall initially be "Sanitary Wares Young, declared the appeal out of order and no vote on the ruling was
Manufacturing Corporation." taken.

The Agreement has the following provisions:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be
substantially in the form annexed hereto as Exhibit A and, insofar as
permitted under Philippine law, shall specifically provide for
(1) Cumulative voting for directors:
xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of
Directors, which shall consist of nine individuals. As long as American-
Standard shall own at least 30% of the outstanding stock of the
Corporation, three of the nine directors shall be designated by American-
Standard, and the other six shall be designated by the other stockholders
of the Corporation.
Later, the 30% capital stock of ASI was increased to 40%.
Mar 8, 1983, the annual stockholders' meeting was held. The meeting was
presided by Baldwin Young. AGENDA: election of the members of the The representative of ASI then moved to recess the meeting which was
The ASI representative, Mr. Jaqua protested the decision of the Chairman
and announced that all votes accruing to ASI shares, a total of 1,329,695
were being cumulatively voted for the three ASI nominees and Charles
Chamsay, and instructed the Secretary to so vote. Luciano E. Salazar and
other proxy holders announced that all the votes owned by and or
represented by them 467,197 shares were being voted cumulatively in
favor of Luciano E. Salazar.
The Chairman, Baldwin Young, nevertheless instructed the Secretary to
cast all votes equally in favor of the three ASI nominees, namely, Wolfgang
Aurbach, John Griffin and David Whittingham and the six originally
nominated by Rogelio Vinluan, namely, Ernesto Lagdameo, Sr., Raul
Boncan, Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, and
Baldwin Young. The Secretary then certified for the election of the
following Wolfgang Aurbach, John Griffin, David Whittingham, Ernesto
Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo, George F.
Lee, Raul A. Boncan, Baldwin Young.
duly seconded. There was also a motion to adjourn. This motion to adjourn directors of Saniwares, ASI cannot nominate more than 3 directors; that
was accepted by the Chairman, Baldwin Young, who announced that the the Filipino stockholders shall not interfere in ASI's choice of its 3
motion was carried and declared the meeting adjourned. nominees; that, on the other hand, the Filipino stockholders can nominate
only 6 candidates and in the event they cannot agree on the 6 nominees,
Protests against the adjournment were registered and having been they shall vote only among themselves to determine who the 6 nominees
ignored, Mr. Jaqua the ASI representative, stated that the meeting was not will be, with cumulative voting to be allowed but without interference from
adjourned but only recessed and that the meeting would be reconvened in ASI.
the next room. The Chairman then threatened to have the stockholders -----------------------------------
who did not agree to the decision of the Chairman on the casting of votes The ASI Group and Luciano Salazar's Contention:
bodily thrown out. The ASI Group, Luciano E. Salazar and other - the actual intention of the parties should be viewed strictly on the
stockholders, allegedly representing 53 or 54% of the shares of "Agreement" dated August 15,1962 wherein it is clearly stated that the
Saniwares, decided to continue the meeting at the elevator lobby of the parties' intention was to form a corporation and not a joint venture. Number
American Standard Building. The continued meeting was presided by 16 under the Agreement's Miscellaneous Provisions states:
Luciano E. Salazar. On the basis of the cumulative votes cast earlier in the c) nothing herein contained shall be construed to constitute any of the
meeting, the ASI Group nominated its four nominees; Wolfgang Aurbach, parties hereto partners or joint venturers in respect of any transaction
John Griffin, David Whittingham and Charles Chamsay. Luciano E. Salazar hereunder.
voted for himself, thus the said five directors were certified as elected
directors, with the explanation that there was a tie among the other 6 -Also, ASI Group has the right to vote their additional 10% equity pursuant
nominees for the 4 remaining positions of directors and that the body to Section 24 of the Corporation Code which gives the stockholders of a
decided not to break the tie. corporation the right to cumulate their votes in electing directors.

These incidents triggered off the filing of separate petitions by the parties Lagdameo and Young Group's Contention:
with SEC. - While certain provisions of the Agreement would make it appear that the
- The first petition filed was for preliminary injunction by Saniwares, parties thereto disclaim being partners or joint venturers such disclaimer is
Emesto V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. directed at third parties and is not inconsistent with, and does not
Lagdameo, Jr., Enrique Lagdameo and George F. Lee against Luciano preclude, the existence of two distinct groups of stockholders in Saniwares
Salazar and Charles Chamsay. one of which (the Philippine Investors) shall constitute the majority, and the
- The second petition was for quo warranto and application for receivership other ASI shall constitute the minority stockholder. In any event, the
by Wolfgang Aurbach, John Griffin, David Whittingham, Luciano E. Salazar evident intention of the Philippine Investors and ASI in entering into the
and Charles Chamsay against the group of Young and Lagdameo and Agreement is to enter into a joint venture enterprise, and if some words in
Avelino F. Cruz. the Agreement appear to be contrary to the evident intention of the parties,
the latter shall prevail over the former (A1370, NCC). The various
The two petitions were consolidated and tried jointly. stipulations of a contract shall be interpreted together attributing to the
doubtful ones that sense which may result from all of them taken jointly
SEC uphold the election of the Lagdameo Group and dismissed the quo (A1374).
warranto petition of the ASI Group and Salazar. - Moreover, in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered.
CA amended the decision. It directed that in all subsequent elections for (A1371).
------------------------------------------
Who were the duly elected directors of Saniwares for the year 1983
during its annual stockholders' meeting held on March 8, 1983.
Held: the Lagdameo Group
(1) What is the nature of the business established by the parties - a joint
venture or a corporation
Held: Joint Venture
The rule is that whether the parties to a particular contract have thereby
established among themselves a joint venture or some other relation
depends upon their actual intention which is determined in accordance
with the rules governing the interpretation and construction of contracts.
and the latter paid royalties for the same.
It is pertinent to note that the provisions of the Agreement requiring a 7 out
of 9 votes of the board of directors for certain actions, in effect gave ASI
(which designates 3 directors under the Agreement) an effective veto
power.
Section 5 (a) of the agreement uses the word "designated" and not
"nominated" or "elected" in the selection of the nine directors on a six to
three ratio. Each group is assured of a fixed number of directors in the
board.

The Agreement as well as the testimonial evidence presented shows that Moreover, ASI in its communications referred to the enterprise as joint
the parties agreed to establish a joint venture and not a corporation. The venture. Baldwin Young also testified that Section 16(c) of the Agreement
history of the organization of Saniwares and the unusual arrangements that "Nothing herein contained shall be construed to constitute any of the
which govern its policy making body are all consistent with a joint venture parties hereto partners or joint venturers in respect of any transaction
and not with an ordinary corporation. As stated by the SEC: hereunder" was merely to obviate the possibility of the enterprise being
treated as partnership for tax purposes and liabilities to third parties.
According to the unrebutted testimony of Mr. Baldwin Young, ASI agreed
to accept the role of minority vis-a-vis the Philippine National group of Quite often, Filipino entrepreneurs in their desire to develop the industrial
investors, on the condition that the Agreement should contain provisions to and manufacturing capacities of a local firm are constrained to seek the
protect ASI as the minority. technology and marketing assistance of huge multinational corporations of
the developed world. Arrangements are formalized where a foreign group
An examination of the Agreement shows that certain provisions were becomes a minority owner of a firm in exchange for its manufacturing
included to protect the interests of ASI as the minority. For example, the expertise, use of its brand names, and other such assistance. However,
vote of 7 out of 9 directors is required in certain enumerated corporate there is always a danger from such arrangements. The foreign group may,
acts [Sec. 3 (b) (ii) (a) of the Agreement]. ASI is contractually entitled to from the start, intend to establish its own sole or monopolistic operations
designate a member of the Executive Committee and the vote of this and merely uses the joint venture arrangement to gain a foothold or test
member is required for certain transactions [Sec. 3 (b) (i)]. the Philippine waters, so to speak. Or the covetousness may come later.
As the Philippine firm enlarges its operations and becomes profitable, the
The Agreement also requires a 75% super-majority vote for the foreign group undermines the local majority ownership and actively tries to
amendment of the articles and by-laws of Saniwares [Sec. 3 (a) (iv) and completely or predominantly take over the entire company. This
(b) (iii)]. ASI is also given the right to designate the president and plant undermining of joint ventures is not consistent with fair dealing to say the
manager [Sec. 5 (6)]. The Agreement further provides that the sales policy least. To the extent that such subversive actions can be lawfully prevented,
of Saniwares shall be that which is normally followed by ASI [Sec. 13 (a)] the courts should extend protection especially in industries where
and that Saniwares should not export "Standard" products otherwise than constitutional and legal requirements reserve controlling ownership to
through ASI's Export Marketing Services [Sec. 13 (6)]. Under the Filipino citizens.
Agreement, ASI agreed to provide technology and know-how to Saniwares
(2) WON the ASI Group may vote their additional 10% equity during SEC, Section 5 (a) of the Agreement relates to the manner of nominating
elections of Saniwares' board of directors. the members of the board of directors while Section 3 (a) (1) relates to the
Held: No manner of voting for these nominees.
The ASI Group's argument is correct within the context of Section 24 of the
Corporation Code. The point of query, however, is whether or not that This is the proper interpretation of the Agreement of the parties as regards
provision is applicable to a joint venture with clearly defined agreements. the election of members of the board of directors.

The legal concept of a joint venture is of common law origin. It has no To allow the ASI Group to vote their additional equity to help elect even a
precise legal definition but it has been generally understood to mean an Filipino director who would be beholden to them would obliterate their
organization formed for some temporary purpose It is in fact hardly minority status as agreed upon by the parties. As aptly stated by the
distinguishable from the partnership, since their elements are similar appellate court:
community of interest in the business, sharing of profits and losses, and a ... ASI, however, should not be allowed to interfere in the voting within the
mutual right of control. The main distinction cited by most opinions in Filipino group. Otherwise, ASI would be able to designate more than the
common law jurisdictions is that the partnership contemplates a general three directors it is allowed to designate under the Agreement, and may
business with some degree of continuity, while the joint venture is formed even be able to get a majority of the board seats, a result which is clearly
for the execution of a single transaction, and is thus of a temporary nature. contrary to the contractual intent of the parties.
This observation is not entirely accurate in this jurisdiction, since under the
Civil Code, a partnership may be particular or universal, and a particular Equally important as the consideration of the contractual intent of the
partnership may have for its object a specific undertaking. (A1783, NCC). parties is the consideration as regards the possible domination by the
It would seem therefore that under Philippine law, a joint venture is a form foreign investors of the enterprise in violation of the nationalization
of partnership and should thus be governed by the law of partnerships. requirements enshrined in the Constitution and circumvention of the Anti-
The Supreme Court has however recognized a distinction between these Dummy Act. In this regard, petitioner Salazar's position is that the Anti-
two business forms, and has held that although a corporation cannot enter Dummy Act allows the ASI group to elect board directors in proportion to
into a partnership contract, it may however engage in a joint venture with their share in the capital of the entity. It is to be noted, however, that the
others. same law also limits the election of aliens as members of the board of
directors in proportion to their allowance participation of said entity. In the
Moreover, the usual rules as regards the construction and operations of instant case, the foreign Group ASI was limited to designate three
contracts generally apply to a contract of joint venture. directors. This is the allowable participation of the ASI Group. Hence, in
future dealings, this limitation of six to three board seats should always be
Bearing these principles in mind, the correct view would be that the maintained as long as the joint venture agreement exists considering that
resolution of the question of whether or not the ASI Group may vote their in limiting 3 board seats in the 9-man board of directors there are
additional equity lies in the agreement of the parties. provisions already agreed upon and embodied in the parties' Agreement to
protect the interests arising from the minority status of the foreign
Necessarily, the appellate court was correct in upholding the agreement of investors.
the parties as regards the allocation of director seats under Section 5 (a)
of the "Agreement," and the right of each group of stockholders to
cumulative voting in the process of determining who the group's nominees
would be under Section 3 (a) (1) of the "Agreement." As pointed out by